Civil Law - Obligations & Contracts - Soriano Notes (Uribe Civil Law Review)

CIVIL LAW REVIEW 2 I.

OBLIGATIONS

A.

IN GENERAL

1.

Definition

guardian, after the annulment of the contract voluntarily returns the whole thing or price received, notwithstanding the fact the he has not been benefited thereby, there is no right to demand the thing or price thus returned.

Article 1156. An obligation is a juridical necessity to give, to do or not to do. JURIDICAL NECESSITY: Art. 1423 provides that obligations are either natural or civil. Art. 1156 provides the definition of civil obligations. Under Art. 1423, civil obligations give a right of action to compel their performance or fulfillment. In this sense, there is juridical necessity. 2.

Kinds of Obligations as to basis and enforceability

Art. 1423. Obligations are civil or natural. Civil obligations give a right of action to compel their performance. Natural obligations, not being based on positive law but on equity and natural law, do not grant a right of action to enforce their performance, but after voluntary fulfillment by the obligor, they authorize the retention of what has been delivered or rendered by reason thereof. Some natural obligations are set forth in the following articles. CIVIL OBLIGATIONS VS. NATURAL OBLIGATIONS:

Basis Enforceability

CIVIL Positive, manmade law Grants a right of action to compel performance or fulfillment

NATURAL Equity and natural law Does not grant a right of action for fulfillment. However, it can still be enforced: 1. If the plaintiff required fulfillment before a court and there is no objection; or 2. if voluntarily fulfilled, creditor can still retain the benefits of fulfillment.

EXAMPLE: If the action for the payment of a debt has already prescribed, the obligation is converted from civil to natural (See Art. 1139 to 1155 for Prescription). Note that what prescribed is the “action” and not the obligation. If still fulfilled after the period has expired, debtor can no longer demand the return of what has been delivered. Art. 1428 provides:

Art. 1427. When a minor between eighteen and twenty-one years of age, who has entered into a contract without the consent of the parent or guardian, voluntarily pays a sum of money or delivers a fungible thing in fulfillment of the obligation, there shall be no right to recover the same from the obligee who has spent or consumed it in good faith. (1160A) NOT APPLICABLE ANYMORE: since the congress already changed the age of majority from 21 to 18 under RA No. 6809. Art. 1429. When a testate or intestate heir voluntarily pays a debt of the decedent exceeding the value of the property which he received by will or by the law of intestacy from the estate of the deceased, the payment is valid and cannot be rescinded by the payer. EXAMPLE: D owes C P10M. Upon the death of D, A and B, heirs of D, paid the full P10M. Later on, they discovered that the value of the estate is only P3M. a. b. c.

Is there a natural obligation? Yes. For the P7M; Can A and B compel D to return the P10M? No. voluntary obligation is only upto P7M? Can A and B compel D to return the P7M? Yes. The law requires “voluntary” payment, which means not merely the absence of fraud, violence or intimidation, but also that the payor knew that under the law they cannot be compelled to pay, but they paid. Under. Art. 1311, last par. “the heir is not liable beyond the value of the property he received from the decedent”. In this case, payment was not voluntary, since A and B paid at the time that they had no knowledge that the value of the estate was only P3M.

Art. 1430. When a will is declared void because it has not been executed in accordance with the formalities required by law, but one of the intestate heirs, after the settlement of the debts of the deceased, pays a legacy in compliance with a clause in the defective will, the payment is effective and irrevocable. CASES:

Art. 1428. When, after an action to enforce a civil obligation has failed the defendant voluntarily performs the obligation, he cannot demand the return of what he has delivered or the payment of the value of the service he has rendered.

JUAN F. VILLAROEL vs. BERNARDINO ESTRADA

“RETENTION” of the benefits is premised on the fulfillment being voluntary, i.e., the debtor knew that he had no obligation to fulfill the said obligation, but still chose to do so.

FACTS: On May 1912, Alexandra Callao, mother of Villaroel, obtained from the Spouses Mariano Estrada and Severina a loan of P1,000 payable after 7 years. Alexandra died, leaving Villaroel as the only heir. Severina and Mariano died as well, leaving Estrda as the only heir.

Other provisions dealing with natural obligations:

G.R. No. L-47362 December 19, 1940

Art. 1424. When a right to sue upon a civil obligation has lapsed by extinctive prescription, the obligor who voluntarily performs the contract cannot recover what he has delivered or the value of the service he has rendered.

On August 30, 1930, Villaroel signed a document which states that he owed Estrada P1,000 with an interest of 12% per year, which pertains to the original debt. When the obligation became due, Villaroel failed to pay. An action was brought in the CFI Laguna to collect the amount. CFI ordered Villaroel to pay the claimed amount with interest from August 30, 1930 until full payment.

Art. 1425. When without the knowledge or against the will of the debtor, a third person pays a debt which the obligor is not legally bound to pay because the action thereon has prescribed, but the debtor later voluntarily reimburses the third person, the obligor cannot recover what he has paid.

ISSUE: WON the obligation arising from the original contract of loan, having been prescribed, would still be demandable from the only heir of the original debtor?

Art. 1426. When a minor between eighteen and twenty-one years of age who has entered into a contract without the consent of the parent or

HELD: YES. The prescribed debt of the mother of the debtor was held to be sufficient consideration to make valid and effective the promise of the son to pay the same. Although the action to recover the

1

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 Civil Law Review 2 under the class of Atty. Uribe

original debt has prescribed when the lawsuit was filed, the question that arises in this appeal is whether, notwithstanding such prescription, the debtor is liable to pay.

vs. HON. ADIL and SPOUSES PATRICIO CONFESSOR

This action is based on the original obligation contracted by the mother of Villaroel, which has prescribed, but in which the defendant assumed liability to fulfil that obligation. Being the only heir of the debtor, that debt legally contracted by his mother, is now a moral obligation of him which is enough to create and make effective and enforceable his obligation which he contracted on August 9, 1930.

FACTS: On February 10, 1940 spouses Patricio Confesor and Jovita Villafuerte obtained an agricultural loan from the Agricultural and Industrial Bank (AIB), now the Development of the Philippines (DBP), in the sum of P2,000.00, as evidenced by a promissory note of said date whereby they bound themselves jointly and severally to pay the account in ten (10) equal yearly amortizations. As the obligation remained outstanding and unpaid even after the lapse of the aforesaid ten-year period, Confesor, who was by then a member of the Congress of the Philippines, executed a second promissory note on April 11, 1961 expressly acknowledging said loan and promising to pay the same on or before June 15, 1961. The new promissory note reads as follows —

A promise to perform a natural obligation is as effective as performance itself and converts the obligation into a civil one. The natural obligation is a valid cause for a civil obligation. PRIMITIVO ANSAY vs. NATIONAL DEVELOPMENT COMPANY

G.R. No. L-13667 April 29, 1960

FACTS: On July 25, 1956, appellants filed against appellees in the CFI Manila an action praying for a 20% Christmas Bonus for the years 1954 and 1955. CFI held that they are not entitled to such because: (a) A bonus is an act of liberality and the court takes it that it is not within its judicial powers to command respondents to be liberal; (b) Petitioners admit that respondents are not under legal duty to give such bonus but that they had only ask that such bonus be given to them because it is a moral obligation of respondents to give that but as this Court understands, it has no power to compel a party to comply with a moral obligation (Art. 142, New Civil Code.). ISSUE: WON the appellees have the legal obligation to give the claimed bonus despite the fact that the same has been granted from a moral obligation or the natural obligation to do the same? HELD: NO. Article 1423 of the New Civil Code classifies obligations into civil or natural. "Civil obligations are a right of action to compel their performance. Natural obligations, not being based on positive law but on equity and natural law, do not grant a right of action to enforce their performance, but after voluntary fulfillment by the obligor, they authorize the retention of what has been delivered or rendered by reason thereof". It is thus readily seen that an element of natural obligation before it can be cognizable by the court is voluntary fulfillment by the obligor. Certainly retention can be ordered but only after there has been voluntary performance. But here there has been no voluntary performance. In fact, the court cannot order the performance. At this point, we would like to reiterate what we said in the case of Philippine Education Co. vs. CIR and the Union of Philippine Education Co., Employees: From the legal point of view a bonus is not a demandable and enforceable obligation. It is so when it is made a part of the wage or salary compensation. And while it is true that the subsequent case of H. E. Heacock vs. National Labor Union, et al, we stated that: Even if a bonus is not demandable for not forming part of the wage, salary or compensation of an employee, the same may nevertheless, be granted on equitable consideration as when it was given in the past, though withheld in succeeding two years from low salaried employees due to salary increases. Still the facts in said Heacock case are not the same as in the instant one, and hence the ruling applied in said case cannot be considered in the present action. DEVELOPMENT BANK OF THE PHILIPPINES

2


G.R. No. L-48889 May 11, 1989

I hereby promise to pay the amount covered by my promissory note on or before June 15, 1961. Upon my failure to do so, I hereby agree to the foreclosure of my mortgage. It is understood that if I can secure a certificate of indebtedness from the government of my back pay I will be allowed to pay the amount out of it. Said spouses not having paid the obligation on the specified date, the DBP filed a complaint against the spouses for the payment of the loan. City Court ruled in favor of DBP, ordering the spouses to pay the loan. CFI reversed this order. Hence, this appeal. ISSUE: WON the validity of a promissory note which was executed in consideration of a previous promissory note, the enforcement of which is barred by prescription, may still be demandable? HELD: YES. The right to prescription may be waived or renounced. Article 1112 of Civil Code provides: Art. 1112. Persons with capacity to alienate property may renounce prescription already obtained, but not the right to prescribe in the future. Prescription is deemed to have been tacitly renounced when the renunciation results from acts which imply the abandonment of the right acquired. There is no doubt that prescription has set in as to the first promissory note of February 10, 1940. However, when respondent Confesor executed the second promissory note on April 11, 1961 whereby he promised to pay the amount covered by the previous promissory note on or before June 15, 1961, and upon failure to do so, agreed to the foreclosure of the mortgage, said respondent thereby effectively and expressly renounced and waived his right to the prescription of the action covering the first promissory note. This Court had ruled in a similar case that – ... when a debt is already barred by prescription, it cannot be enforced by the creditor. But a new contract recognizing and assuming the prescribed debt would be valid and enforceable ... . Thus, it has been held — Where, therefore, a party acknowledges the correctness of a debt and promises to pay it after the same has prescribed and with full knowledge of the prescription he thereby waives the benefit of prescription. This is not a mere case of acknowledgment of a debt that has prescribed but a new promise to pay the debt. The consideration of the new promissory note is the pre-existing obligation under the first promissory note. The statutory limitation bars the remedy but does not discharge the debt. A new express promise to pay a debt barred ... will take the case from the operation of the statute of limitations as this proceeds upon the ground that as a statutory limitation merely bars the remedy and does not discharge the debt, there is something more than a mere moral

obligation to support a promise, to wit a – pre-existing debt which is a sufficient consideration for the new the new promise; upon this sufficient consideration constitutes, in fact, a new cause of action.

Art. 1305. A contract is a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service.

... It is this new promise, either made in express terms or deduced from an acknowledgement as a legal implication, which is to be regarded as reanimating the old promise, or as imparting vitality to the remedy (which by lapse of time had become extinct) and thus enabling the creditor to recover upon his original contract.

3.

3.

ESSENTIAL ELEMENTS OF OBLIGATION

1. 2. 3. 4.

Active subject (creditor) - obligee Passive subject (debtor) - obligor Prestation – subject matter of the obligation – object. Vinculum (Efficient Cause) – the reason why the obligation exists. – juridical tie.

IN A CONTRACT OF SALE, WHO IS THE PASSIVE SUBJECT? Depending on which obligation you’re referring to. Pay the price – debtor is the buyer. Deliver and transfer ownership – seller.

Art. 1160. Obligations derived from quasi-contracts shall be subject to the provisions of Chapter 1, Title XVII, of this Book. Art. 2142. Certain lawful, voluntary and unilateral acts give rise to the juridical relation of quasi-contract to the end that no one shall be unjustly enriched or benefited at the expense of another. PROBLEM: A, resident of an island struck by a storm, found a decaying body and buried the same without intention for it to be a gratuitous act. Finding C, aunt of the deceased, demanded reimbursement for the cost of burial. Is there an obligation to reimburse? Yes. Obligation arose from Art. 2165, which provides: Art. 2165. When funeral expenses are borne by a third person, without the knowledge of those relatives who were obliged to give support to the deceased, said relatives shall reimburse the third person, should the latter claim reimbursement.

“OBJECT” not the same as “thing”. As to obligations, it is the prestation ([3] above: to give, to do or not to do); sometimes, it is the purpose, which is not necessarily the subject matter, but in obligations, it is a prestation, not a thing, it is a conduct. “VINCULUM” – juridical tie, vinculum juris is that which binds the parties to an obligation, without which, no obligation may exists (at least civil). This is the element lacking in natural obligations.

Can A demand reimbursement from C? No. A can only demand reimbursement from those who are obliged to give support to the deceased. An aunt is not required to support nephew/niece. Art. 105 of the Family Code provides: Art. 105. Subject to the provisions of the succeeding articles, the following are obliged to support each other to the whole extent set forth in the preceding article: (1) The spouses; (2) Legitimate ascendants and descendants; (3) Parents and their legitimate children and the legitimate and illegitimate children of the latter; (4) Parents and their illegitimate children and the legitimate and illegitimate children of the latter; and (5) Legitimate brothers and sisters, whether of full or half-blood.

“obligation” is from the root word in latin: obligacio/ obligare/obligamus – tying/binding; at least one person would be bound. “CONSIDERATION” is not an element of an obligation, it is an essential element of contracts. Obligations may arise from contracts, but they are not contracts. Contracts are not obligations, but is a source of obligation. BAR QUESTION: what is an obligation without agreement? Answer: Obligations without an agreement are those which would arise even without consent of one of the parties or both parties, which may arise from four sources: law (pay taxes), quasi-contract, quasi-delict, acts or omissions punished by law. Note that only in contracts are consent of both parties are required. What are those that bind? The sources. B.

SOURCES OF OBLIGATIONS:

Art. 1157. Obligations arise from: (1) (2) (3) (4) (5) 1.

Law; Contracts; Quasi-contracts; Acts or omissions punished by law; and Quasi-delicts. LAW: never presumed:

Art. 1158. Obligations derived from law are not presumed. Only those expressly determined in this Code or in special laws are demandable, and shall be regulated by the precepts of the law which establishes them; and as to what has not been foreseen, by the provisions of this Book. 2.

CONTRACTS:

Art. 1159. Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith.

3


QUASI-CONTRACTS:

NEGOTIORUM GESTIO Art. 2144. Whoever voluntarily takes charge of the agency or management of the business or property of another, without any power from the latter, is obliged to continue the same until the termination of the affair and its incidents, or to require the person concerned to substitute him, if the owner is in a position to do so. This juridical relation does not arise in either of these instances: (1) When the property or business is not neglected or abandoned; (2) If in fact the manager has been tacitly authorized by the owner. In the first case, the provisions of Articles 1317, 1403, No. 1, and 1404 regarding unauthorized contracts shall govern. In the second case, the rules on agency in Title X of this Book shall be applicable. PROBLEM: In fear of reprisals, X left his fishpond and went to Europe. Y seeing the fishes ready for harvest, harvested the same, and sold them to Z. Y borrowed from W to prepare the fishpond for the next batch. a. b.

What is the juridical relation between X and Y? Negotiorum gestio: X is owner. Y is gestor or negotiorum gestor. Upon return of X, what are the obligations of Y or X, as regards Y’s contract with: i. Z: contract of sale – to account for the sale and remit the proceeds

ii. c.

W: loan – X is bound by the contract since it is a contract which refers to the thing pertaining to the owner of the business. (Art. 2152[2]) If the owner ratifies the contracts, the rules on agency would apply under Art. 2149, which may include, among others, compensation of the agent.

BAD EXAMPLE OF NEGOTIORUM GESTIO: members of the family went out of town for vacation. On the very night they left the house, the house was burned. The neighbors, however, were able to prevent the total destruction of the house. Why? 1. A gestor takes charge of a business or property of another. In this case, the neighbors did not take charge of the management of the house, only saved it from total destruction. “Management” may connote repainting, repairs, etc.; 2. House was not “abandoned” since the family went out only for a vacation. In the Family Code, “abandonment” of the father arises only after 90 days, and that’s only a disputable presumption. 3. It is not negotiorum gestin, at most, Art. 2168 of the Civil Code (i.e., Other Quasi Contracts): Art. 2168. When during a fire, flood, storm, or other calamity, property is saved from destruction by another person without the knowledge of the owner, the latter is bound to pay the former just compensation. SOLUTIO INDEBITI Art. 2154. If something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligation to return it arises. PROBLEM: BPO asked RRA to go to a store to buy a pack of cigarettes which costs P225, BPO gave RRA P500. Store owner gave RRA the cigarette and P375 as change. How is this relationship denominated? a. Solutio indebiti - BPO received something which he does not have the right to demand, i.e., P100. Change should have been P275 only. (Art. 2154) b. Donation – if the delivery of the excess P100 was not made through mistake. PROBLEM: A bus accident happened, X tried to help by carrying Z, one of the passengers of the bus and brought her to the hospital. X incurred costs in cleaning the car which was stained by the blood of Z. a.

Is there a quasi-contract between X and Z? Yes. Z is liable to reimburse for the gasoline expense and cleaning of the car.

b.

Can Z, when asked to pay the bill of the hospital, refuse payment on the ground that she did not give her consent? No. Quasi-contract. If she is not allowed to pay, she would be unjustly enriched.

OTHER QUASI-CONTRACTS: see Arts. 2164 to 2175.

also incurred expenses in the amount of P7,781.74, and since defendantsappellees are being benefited by said improvements, he is entitled to reimbursement from them of said amounts and (2) that in 1952, defendants availed of plaintiff's services as an intermediary with the Deudors to work for the amicable settlement of Civil Case No. Q135, then pending also in the Court of First Instance of Quezon City, and involving 50 quinones of land, of Which the 20 quinones aforementioned form part, and notwithstanding his having performed his services, as in fact, a compromise agreement entered into on March 16, 1963 between the Deudors and the defendants was approved by the court, the latter have refused to convey to him the 3,000 square meters of land occupied by him, (a part of the 20 quinones above) which said defendants had promised to do "within ten years from and after date of signing of the compromise agreement", as consideration for his services. CFI of Quezon City dismissed the complaint on the grounds of unenforceability, lack of cause of action, and prescription. ISSUE: WON Faustino Cruz can claim reimbursement for the expenses and services rendered? HELD: No. We hold that the allegations in his complaint do not sufficiently Appellants' reliance on Article 2142 of Civil Code is misplaced. Said article provides: Certain lawful, voluntary and unilateral acts give rise to the juridical relation of quasi-contract to the end that no one shall be unjustly enriched or benefited at the expense of another. From the very language of this provision, it is obvious that a presumed quasi-contract cannot emerge as against one party when the subject matter thereof is already covered by an existing contract with another party. Predicated on the principle that no one should be allowed to unjustly enrich himself at the expense of another, Article 2124 creates the legal fiction of a quasi-contract precisely because of the absence of any actual agreement between the parties concerned. Corollarily, if the one who claims having enriched somebody has done so pursuant to a contract with a third party, his cause of action should be against the latter, who in turn may, if there is any ground therefor, seek relief against the party benefited. It is essential that the act by which the defendant is benefited must have been voluntary and unilateral on the part of the plaintiff. As one distinguished civilian puts it, "The act is voluntary. because the actor in quasi-contracts is not bound by any pre-existing obligation to act. It is unilateral, because it arises from the sole will of the actor who is not previously bound by any reciprocal or bilateral agreement. The reason why the law creates a juridical relations and imposes certain obligation is to prevent a situation where a person is able to benefit or take advantage of such lawful, voluntary and unilateral acts at the expense of said actor." (Ambrosio Padilla, Civil Law, Vol. VI, p. 748, 1969 ed.) In the case at bar, since appellant has a clearer and more direct recourse against the Deudors with whom he had entered into an agreement regarding the improvements and expenditures made by him on the land of appellees. it Cannot be said, in the sense contemplated in Article 2142, that appellees have been enriched at the expense of appellant. GUTIEREZ HERMANOS vs. ENGRACIO ORENSE

CASES:

G.R. No. L-9188 December 4, 1914

FAUSTINO CRUZ vs. J.M. TUASON & COMPANY, INC. vs. GREGORIO ARANETA, INC.

FACTS: Engracio Orense is the owner of a parcel of land, which nephew, Jose Duran, with the former’s consent and knowledge, sold and conveyed the same to Hermano’s company for P1,500 with the reservation of the right to repurchase it for the same price within a period of 4 years. But the same land was not repurchased by Jose Duran due to insolvency. Despite repeated demand upon Duran, the latter never vacated the land.

G.R. No. L-23749 April 29, 1977

FACTS: Faustino Cruz’ complaint alleged two causes of action, namely: (1) that upon request of the Deudors (the family of Telesforo Deudor who laid claim on the land in question on the strength of an "informacion posesoria" ) plaintiff made permanent improvements valued at P30,400.00 on said land having an area of more or less 20 quinones and for which he

4


His refusal was based on allegations that he did not know of said sale and that he remains the owner of the land.

Petitioner filed a complaint for estafa against Jose Duran. However, at the trial of the case Engracio Orense, called as a witness, being interrogated by the fiscal as to whether he had consented to Duran's selling the said property under right of redemption to the firm of Gutierrez Hermanos, replied that he had. In view of this statement by the defendant, the court acquitted Jose Duran of the charge of estafa. As a result of the acquittal of Jose Duran, based on the explicit testimony of his uncle, Engacio Orense, the owner of the property, to the effect that he had consented to his nephew Duran's selling the property under right of repurchase to Gutierrez Hermanos, counsel for this firm filed a complainant praying, among other remedies, that the defendant Orense be compelled to execute a deed for the transfer and conveyance to the plaintiff company of all the right, title and interest with Orense had in the property sold, and to pay to the same the rental of the property due from February 14, 1911. ISSUE: WON Orense can be compelled to deliver the property to Hermanos as premised above? HELD: YES. It having been proven at the trial that he gave his consent to the said sale, it follows that the defendant conferred verbal, or at least implied, power of agency upon his nephew Duran, who accepted it in the same way by selling the said property. The principal must therefore fulfill all the obligations contracted by the agent, who acted within the scope of his authority. Even should it be held that the said consent was granted subsequently to the sale, it is unquestionable that the defendant, the owner of the property, approved the action of his nephew, who in this case acted as the manager of his uncle's business, and Orense's ratification produced the effect of an express authorization to make the said sale. Article 1259 of the Civil Code prescribes: "No one can contract in the name of another without being authorized by him or without his legal representation according to law. A contract executed in the name of another by one who has neither his authorization nor legal representation shall be void, unless it should be ratified by the person in whose name it was executed before being revoked by the other contracting party. The sworn statement made by the defendant, Orense, while testifying as a witness at the trial of Duran for estafa, virtually confirms and ratifies the sale of his property effected by his nephew, Duran, and, pursuant to article 1313 of the Civil Code, remedies all defects which the contract may have contained from the moment of its execution. On the testimony given by Engacio Orense at the trial of Duran for estafa, the latter was acquitted, and it would not be just that the said testimony, expressive of his consent to the sale of his property, which determined the acquittal of his nephew, Jose Duran, who then acted as his business manager, and which testimony wiped out the deception that in the beginning appeared to have been practiced by the said Duran, should not now serve in passing upon the conduct of Engracio Orense in relation to the firm of Gutierrez Hermanos in order to prove his consent to the sale of his property, for, had it not been for the consent admitted by the defendant Orense, the plaintiff would have been the victim of estafa. If the defendant Orense acknowledged and admitted under oath that he had consented to Jose Duran's selling the property in litigation to Gutierrez Hermanos, it is not just nor is it permissible for him afterward to deny that admission, to the prejudice of the purchaser, who gave P1,500 for the said property. The contract of sale of the said property contained in the notarial instrument of February 14, 1907, is alleged to be invalid, null and void under the provisions of paragraph 5 of section 335 of the Code of Civil Procedure, because the authority which Orense may have given to Duran to make the said contract of sale is not shown to have been in writing and signed by Orense, but the record discloses satisfactory and conclusive proof that the defendant Orense gave his consent to the contract of sale executed in a public instrument by his nephew Jose Duran. Such consent was proven

5


in a criminal action by the sworn testimony of the principal and presented in this civil suit by other sworn testimony of the same principal and by other evidence to which the defendant made no objection. Therefore the principal is bound to abide by the consequences of his agency as though it had actually been given in writing. The repeated and successive statements made by the defendant Orense in two actions, wherein he affirmed that he had given his consent to the sale of his property, meet the requirements of the law and legally excuse the lack of written authority, and, as they are a full ratification of the acts executed by his nephew Jose Duran, they produce the effects of an express power of agency. RUSTICO ADILLE vs. COURT OF APPEALS, EMETRIA ASEJO, et. al.

G.R. No. L-44546 January 29, 1988

FACTS: Feliza Azul owns a parcel of land. She married twice in her lifetime: the first, with Bernabe Adille, with whom she had a child, Rustico Adille; the second marriage with Procopio Asejo, her children were Emetria Asejo, et. al. Sometime in 1939, said Felisa sold the property in pacto de retro to certain 3rd persons, period of repurchase being 3 years, but she died in 1942 without being able to redeem and after her death, but during the period of redemption, herein defendant repurchased, by himself alone, and after that, he executed a deed of extra-judicial partition representing himself to be the only heir and child of his mother Felisa with the consequence that he was able to secure title in his name alone also, so that OCT. No. 21137 in the name of his mother was transferred to his name, that was in 1955; that was why after some efforts of compromise had failed, his half-brothers and sisters, herein plaintiffs, filed present case for partition with accounting on the position that he was only a trustee on an implied trust when he redeemed,-and this is the evidence, but as it also turned out that one of plaintiffs, Emeteria Asejo was occupying a portion, defendant counterclaimed for her to vacate that. ISSUE: WON Adille can acquire exclusive ownership over the land? HELD: NO. It is the view of the respondent Court that the petitioner, in taking over the property, did so either on behalf of his co-heirs, in which event, he had constituted himself a negotiorum gestor under Article 2144 of the Civil Code, or for his exclusive benefit, in which case, he is guilty of fraud, and must act as trustee, the private respondents being the beneficiaries, under the Article 1456. The evidence, of course, points to the second alternative the petitioner having asserted claims of exclusive ownership over the property and having acted in fraud of his co-heirs. He cannot therefore be said to have assume the mere management of the property abandoned by his co-heirs, the situation Article 2144 of the Code contemplates. In any case, as the respondent Court itself affirms, the result would be the same whether it is one or the other. The petitioner would remain liable to the Private respondents, his co-heirs. Andres vs. Mantrust

G.R. No. 82670

September 15, 1989

Art. 2154 of the Civil Code, which embodies the doctrine of solutio indebiti This legal provision, which determines the quasi-contract of solution indebiti, is one of the concrete manifestations of the ancient principle that no one shall enrich himself unjustly at the expense of another. FACTS: Petitioner Andres, using the business name “Irene’s Wearing Apparel”, transacts with Facets Funwear, Inc (Facets), one of its foreign buyers. In one transaction, Facets instructed the First National State Bank of New Jersey (FNSB) to transfer to herein petitioner, via Philippine National Bank (PNB), the amount of $10,000.00. Acting on the instruction, FNSB instructed

herein private respondent Manufacturers Hanover and Trust Corporation (Mantrust) to effect the above-mentioned transfer through its facilities and to charge the amount to the account of FNSB with private respondent. However, due to communication problems, delay and unawareness that herein petitioner already received the amount remitted, effectuated another delivery to herein petitioner for the same amount. Thereafter, upon discovery that herein petitioner received the same amount twice, private respondent demanded herein petitioner the return of the second remittance, but the latter refused to do so. As such, private respondent filed an action against herein petitioner for the recovery of the said amount. The trial Court rendered its decision in favor of herein petitioner. On appeal, respondent appellate Court reversed the decision of the trial Court, hence this petition. ISSUE: WON private respondent Mantrust has the right to recover the second $10,000.00 remittance it had delivered to herein petitioner, on the ground of Article 2154 of the Civil Code? HELD: Yes, the Court held that herein petitioner has the right to recover the second remittance, as provided for under Article 2154 of the Civil Code. The resolution of this issue would hinge on the applicability of Art. 2154 of the New Civil Code which provides that:

The contract of petitioner, as regards the sale of garments and other textile products, was with FACETS. It was the latter and not private respondent which was indebted to petitioner. On the other hand, the contract for the transmittal of dollars from the United States to petitioner was entered into by private respondent with FNSB. Petitioner, although named as the payee was not privy to the contract of remittance of dollars. Neither was private respondent a party to the contract of sale between petitioner and FACETS. There being no contractual relation between them, petitioner has no right to apply the second $10,000.00 remittance delivered by mistake by private respondent to the outstanding account of FACETS. Petitioner invokes the equitable principle that when one of two innocent persons must suffer by the wrongful act of a third person, the loss must be borne by the one whose negligence was the proximate cause of the loss. The rule is that principles of equity cannot be applied if there is a provision of law specifically applicable to a case [Phil. Rabbit Bus Lines, Inc. v. Arciaga, G.R. No. L-29701, March 16, 1987,148 SCRA 433; Zabat, Jr. v. Court of Appeals, G.R. No. L36958, July 10, 1986, 142 SCRA 587; Rural Bank of Paranaque, Inc. v. Remolado, G.R. No. 62051, March 18, 1985, 135 SCRA 409; Cruz v. Pahati, 98 Phil. 788 (1956)]. Hence, the Court in the case of De Garcia v. Court of Appeals, G.R. No. L-20264, January 30, 1971, 37 SCRA 129, citing Aznar v. Yapdiangco, G.R. No. L-18536, March 31, 1965, 13 SCRA 486, held:

This provision is taken from Art. 1895 of the Spanish Civil Code which provided that:

The common law principle that where one of two innocent persons must suffer by a fraud perpetrated by another, the law imposes the loss upon the party who, by his misplaced confidence, has enabled the fraud to be committed, cannot be applied in a case which is covered by an express provision of the new Civil Code, specifically Article 559. Between a common law principle and a statutory provision, the latter must prevail in this jurisdiction. [at p. 135.]

Art. 1895. If a thing is received when there was no right to claim it and which, through an error, has been unduly delivered, an obligation to restore it arises.

Puyat & Sons vs. City of Manila

Art. 2154. If something received when there is no right to demand it, and it was unduly delivered through mistake, the obligation to return it arises.

In Velez v. Balzarza, 73 Phil. 630 (1942), the Court, speaking through Mr. Justice Bocobo explained the nature of this article thus: Article 1895 [now Article 2154] of the Civil Code abovequoted, is therefore applicable. This legal provision, which determines the quasi-contract of solution indebiti, is one of the concrete manifestations of the ancient principle that no one shall enrich himself unjustly at the expense of another. In the Roman Law Digest the maxim was formulated thus: "Jure naturae acquum est, neminem cum alterius detrimento et injuria fieri locupletiorem." And the Partidas declared: "Ninguno non deue enriquecerse tortizeramente con dano de otro." Such axiom has grown through the centuries in legislation, in the science of law and in court decisions. The lawmaker has found it one of the helpful guides in framing statutes and codes. Thus, it is unfolded in many articles scattered in the Spanish Civil Code. (See for example, articles, 360, 361, 464, 647, 648, 797, 1158, 1163, 1295, 1303, 1304, 1893 and 1895, Civil Code.) This time-honored aphorism has also been adopted by jurists in their study of the conflict of rights. It has been accepted by the courts, which have not hesitated to apply it when the exigencies of right and equity demanded its assertion. It is a part of that affluent reservoir of justice upon which judicial discretion draws whenever the statutory laws are inadequate because they do not speak or do so with a confused voice. [at p. 632.] For this article to apply the following requisites must concur: "(1) that he who paid was not under obligation to do so; and (2) that payment was made by reason of an essential mistake of fact". It is undisputed that private respondent delivered the second $10,000.00 remittance. However, petitioner contends that the doctrine of solutio indebiti, does not apply because its requisites are absent. The contention is without merit.

6


G. R. No. L-17447 April 30, 1963 It is too well settled in this state to need the citation of authority that if money be paid through a clear mistake of law or fact, essentially affecting the rights of the parties, and which in law or conscience was not payable, and should not be retained by the party receiving it, it may be recovered. Both law and sound morality so dictate. FACTS: Appellee Puyat & Sons requested for refund of Retail Dealer’s Taxes it paid to appellant City of Manila, on the ground that it is tax exempt on the sale of the various kinds of furniture manufactured by it pursuant to the provisions of Sec. 18(n) of Republic Act No. 409 (Revised Charter of Manila), as restated in Section 1 of Ordinance No.3816. However, such request was denied by herein appellant. Appellee filed an action for refund with the Court of First Instance, which ruled in its favor, hence this appeal. ISSUE: Whether or not appellee Puyat & Sons are entitled to the refund of the taxes paid erroneosly, on the ground that it is tax exempt, pursuant to the Revised Charter of Manila. HELD: Yes, the Court held that appellee Puyat & Sons are entitled to the refund of the taxes paid erroneously. If something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligationto retun it arises. There is no gainsaying the fact that the payments made by appellee was due to a mistake in the construction of a doubtful question of law. The reason underlying similar provisions, as applied to illegal taxation, in the United States, is expressed in the case of Newport v. Ringo, 37 Ky. 635, 636; 10 S.W. 2, in the following manner: "It is too well settled in this state to need the citation of authority that if money be paid through a clear mistake of law or fact, essentially affecting

the rights of the parties, and which in law or conscience was not payable, and should not be retained by the party receiving it, it may be recovered. Both law and sound morality so dictate. Especially should this be the rule as to illegal taxation. The taxpayer has no voice in the impositionof the burden. He has the right to presume that the taxing power has been lawfully exercised. He should not be required to know more than those in authority over him, nor should he suffer loss by complying with what he bona fide believe to be his duty as a good citizen. Upon the contrary, he should be promoted to its ready performance by refunding to him any legal exaction paid by him in ignorance of its illegality; and, certainly, in such a case, if be subject to a penalty for nonpayment, his compliance under belief of its legality, and without awaitinga resort to judicial proceedings should not be regrded in law as so far voluntary as to affect his right of recovery.".

QUESTION: If an act is punishable by law, can there be a basis of a claim under quasi-contract?

Every person who through an act or performance by another, or any other means, acquires or comes into possession of something at the expense of the latter without just or legal grounds, shall return the same to him"(Art. 22, Civil Code). It would seems unedifying for the government, (here the City of Manila), that knowing it has no right at all to collect or to receive money for alleged taxes paid by mistake, it would be reluctant to return the same. No one should enrich itself unjustly at the expense of another (Art. 2125, Civil Code)

When an academic institution accepts students for enrollment, there is established a contract between them, resulting in bilateral obligations which both parties are bound to comply with.

4.

ACTS OR OMISSIONS PUNISHABLE BY LAW; DELICT

Art. 1167. If a person obliged to do something fails to do it, the same shall be executed at his cost. This same rule shall be observed if he does it in contravention of the tenor of the obligation. Furthermore, it may be decreed that what has been poorly done be undone.

Revised Penal Code:

ANSWER: NEVER. Art. 2142, quasi contract may only be from acts which are voluntary, lawful and unilateral (all three are required to be present). Absence of one, not a basis of a claim under quasi contract. CASES: Saludaga vs. Far Eastern University

G.R. No. 179337 April 30, 2008

It is settled that in culpa contractual, the mere proof of the existence of the contract and the failure of its compliance justify, prima facie, a corresponding right of relief. FACTS: Petitioner Saludaga was a sophomore student at private respondent Far Eastern University (FEU), in which private respondent De Jesus was the President. He was shot by Alejandro Rosete (Rosete), one of the security guards on duty at the school premises. He was hospitalized due to the wound he sustained. Thereafter, herein petitioner filed a complaint for damages against private respondents on the ground that they breached their obligation to provide students with a safe and secure environment and an atmosphere conducive to learning. In turn, private respondent filed a third-party complaint against the Galaxy, the security agency of Rosete.

Art. 100. Civil liability of a person guilty of felony. — Every person criminally liable for a felony is also civilly liable

The trial Court rendered its decision in favor of herein petitioner. On appeal, the appellate Court reversed the decision of the trial Court, hence this petition.

Art. 104. What is included in civil liability. — The civil liability established in Articles 100, 101, 102, and 103 of this Code includes: 1. Restitution; 2. Reparation of the damage caused; 3. Indemnification for consequential damages.

ISSUE: Whether or not the appellate Court erred when it reversed the decision of the trial Court and held that private respondent is not liable for the damages on the ground that the Rosete is not a party to the contract to which the petitioner is suing.

5.

HELD: Yes, the Court held that the appellate Court did err when it reversed the decision of the trial Court.

QUASI-DELICTS

Art. 1162. Obligations derived from quasi-delicts shall be governed by the provisions of Chapter 2, Title XVII of this Book, and by special laws. Art. 2176. Whoever by act or omission causes damage to another, there being fault or negligence, is obliged to pay for the damage done. Such fault or negligence, if there is no pre-existing contractual relation between the parties, is called a quasi-delict and is governed by the provisions of this Chapter QUESTION: From a single act, can there be a basis of a claim under more than one source? ANSWER: Yes, from delict, quasi-delict and contract. Note that these require ifferent procedures, requirements, quantim of evidence. Note still, that no recovery from more than one source is allowed. Example: Art. 2177 “double recovery rule”: Art. 2177. Responsibility for fault or negligence under the preceding article is entirely separate and distinct from the civil liability arising from negligence under the Penal Code. But the plaintiff cannot recover damages twice for the same act or omission of the defendant.

See case of Saludaga vs. FEU

7


In Philippine School of Business Administration v. Court of Appeals, we held that: When an academic institution accepts students for enrollment, there is established a contract between them, resulting in bilateral obligations which both parties are bound to comply with. For its part, the school undertakes to provide the student with an education that would presumably suffice to equip him with the necessary tools and skills to pursue higher education or a profession. On the other hand, the student covenants to abide by the school's academic requirements and observe its rules and regulations. Institutions of learning must also meet the implicit or "built-in" obligation of providing their students with an atmosphere that promotes or assists in attaining its primary undertaking of imparting knowledge. Certainly, no student can absorb the intricacies of physics or higher mathematics or explore the realm of the arts and other sciences when bullets are flying or grenades exploding in the air or where there looms around the school premises a constant threat to life and limb. Necessarily, the school must ensure that adequate steps are taken to maintain peace and order within the campus premises and to prevent the breakdown thereof. It is undisputed that petitioner was enrolled as a sophomore law student in respondent FEU. As such, there was created a contractual obligation between the two parties. On petitioner's part, he was obliged to comply with the rules and regulations of the school. On the other hand, respondent FEU, as a learning institution is mandated to impart knowledge and equip its

students with the necessary skills to pursue higher education or a profession. At the same time, it is obliged to ensure and take adequate steps to maintain peace and order within the campus. It is settled that in culpa contractual, the mere proof of the existence of the contract and the failure of its compliance justify, prima facie, a corresponding right of relief. In the instant case, we find that, when petitioner was shot inside the campus by no less the security guard who was hired to maintain peace and secure the premises, there is a prima facie showing that respondents failed to comply with its obligation to provide a safe and secure environment to its students. In order to avoid liability, however, respondents aver that the shooting incident was a fortuitous event because they could not have reasonably foreseen nor avoided the accident caused by Rosete as he was not their employee; and that they complied with their obligation to ensure a safe learning environment for their students by having exercised due diligence in selecting the security services of Galaxy. After a thorough review of the records, we find that respondents failed to discharge the burden of proving that they exercised due diligence in providing a safe learning environment for their students. They failed to prove that they ensured that the guards assigned in the campus met the requirements stipulated in the Security Service Agreement. Indeed, certain documents about Galaxy were presented during trial; however, no evidence as to the qualifications of Rosete as a security guard for the university was offered. Respondents also failed to show that they undertook steps to ascertain and confirm that the security guards assigned to them actually possess the qualifications required in the Security Service Agreement. It was not proven that they examined the clearances, psychiatric test results, 201 files, and other vital documents enumerated in its contract with Galaxy. Total reliance on the security agency about these matters or failure to check the papers stating the qualifications of the guards is negligence on the part of respondents. A learning institution should not be allowed to completely relinquish or abdicate security matters in its premises to the security agency it hired. To do so would result to contracting away its inherent obligation to ensure a safe learning environment for its students. Consequently, respondents' defense of force majeure must fail. In order for force majeure to be considered, respondents must show that no negligence or misconduct was committed that may have occasioned the loss. An act of God cannot be invoked to protect a person who has failed to take steps to forestall the possible adverse consequences of such a loss. One's negligence may have concurred with an act of God in producing damage and injury to another; nonetheless, showing that the immediate or proximate cause of the damage or injury was a fortuitous event would not exempt one from liability. When the effect is found to be partly the result of a person's participation - whether by active intervention, neglect or failure to act - the whole occurrence is humanized and removed from the rules applicable to acts of God. Article 1170 of the Civil Code provides that those who are negligent in the performance of their obligations are liable for damages. Accordingly, for breach of contract due to negligence in providing a safe learning environment, respondent FEU is liable to petitioner for damages. It is essential in the award of damages that the claimant must have satisfactorily proven during the trial the existence of the factual basis of the damages and its causal connection to defendant's acts. In the instant case, it was established that petitioner spent P35,298.25 for his hospitalization and other medical expenses. While the trial court correctly imposed interest on said amount, however, the case at bar involves an obligation arising from a contract and not a loan or forbearance of money. As such, the proper rate of legal interest is six percent (6%) per annum of the amount demanded. Such interest shall continue to run from the filing of the complaint until the finality of this Decision. After this Decision becomes final and executory, the applicable rate shall be twelve percent (12%) per annum until its satisfaction.

8


The other expenses being claimed by petitioner, such as transportation expenses and those incurred in hiring a personal assistant while recuperating were however not duly supported by receipts. In the absence thereof, no actual damages may be awarded. Nonetheless, temperate damages under Art. 2224 of the Civil Code may be recovered where it has been shown that the claimant suffered some pecuniary loss but the amount thereof cannot be proved with certainty. Hence, the amount of P20,000.00 as temperate damages is awarded to petitioner. As regards the award of moral damages, there is no hard and fast rule in the determination of what would be a fair amount of moral damages since each case must be governed by its own peculiar circumstances. The testimony of petitioner about his physical suffering, mental anguish, fright, serious anxiety, and moral shock resulting from the shooting incident justify the award of moral damages. However, moral damages are in the category of an award designed to compensate the claimant for actual injury suffered and not to impose a penalty on the wrongdoer. The award is not meant to enrich the complainant at the expense of the defendant, but to enable the injured party to obtain means, diversion, or amusements that will serve to obviate the moral suffering he has undergone. It is aimed at the restoration, within the limits of the possible, of the spiritual status quo ante, and should be proportionate to the suffering inflicted. Trial courts must then guard against the award of exorbitant damages; they should exercise balanced restrained and measured objectivity to avoid suspicion that it was due to passion, prejudice, or corruption on the part of the trial court. We deem it just and reasonable under the circumstances to award petitioner moral damages in the amount of P100,000.00. Likewise, attorney's fees and litigation expenses in the amount of P50,000.00 as part of damages is reasonable in view of Article 2208 of the Civil Code. However, the award of exemplary damages is deleted considering the absence of proof that respondents acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner. We note that the trial court held respondent De Jesus solidarily liable with respondent FEU. In Powton Conglomerate, Inc. v. Agcolicol, we held that: [A] corporation is invested by law with a personality separate and distinct from those of the persons composing it, such that, save for certain exceptions, corporate officers who entered into contracts in behalf of the corporation cannot be held personally liable for the liabilities of the latter. Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation may so validly attach, as a rule, only when - (1) he assents to a patently unlawful act of the corporation, or when he is guilty of bad faith or gross negligence in directing its affairs, or when there is a conflict of interest resulting in damages to the corporation, its stockholders or other persons; (2) he consents to the issuance of watered down stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto; (3) he agrees to hold himself personally and solidarily liable with the corporation; or (4) he is made by a specific provision of law personally answerable for his corporate action. None of the foregoing exceptions was established in the instant case; hence, respondent De Jesus should not be held solidarily liable with respondent FEU. Incidentally, although the main cause of action in the instant case is the breach of the school-student contract, petitioner, in the alternative, also holds respondents vicariously liable under Article 2180 of the Civil Code, which provides: Art. 2180. The obligation imposed by Article 2176 is demandable not only for one's own acts or omissions, but also for those of persons for whom one is responsible. xxxx Employers shall be liable for the damages caused by their employees and household helpers acting within the scope of their assigned tasks, even though the former are not engaged in any business or industry.

xxxx The responsibility treated of in this article shall cease when the persons herein mentioned prove that they observed all the diligence of a good father of a family to prevent damage. We agree with the findings of the Court of Appeals that respondents cannot be held liable for damages under Art. 2180 of the Civil Code because respondents are not the employers of Rosete. The latter was employed by Galaxy. The instructions issued by respondents' Security Consultant to Galaxy and its security guards are ordinarily no more than requests commonly envisaged in the contract for services entered into by a principal and a security agency. They cannot be construed as the element of control as to treat respondents as the employers of Rosete. As held in Mercury Drug Corporation v. Libunao: In Soliman, Jr. v. Tuazon, we held that where the security agency recruits, hires and assigns the works of its watchmen or security guards to a client, the employer of such guards or watchmen is such agency, and not the client, since the latter has no hand in selecting the security guards. Thus, the duty to observe the diligence of a good father of a family cannot be demanded from the said client: … [I]t is settled in our jurisdiction that where the security agency, as here, recruits, hires and assigns the work of its watchmen or security guards, the agency is the employer of such guards or watchmen. Liability for illegal or harmful acts committed by the security guards attaches to the employer agency, and not to the clients or customers of such agency. As a general rule, a client or customer of a security agency has no hand in selecting who among the pool of security guards or watchmen employed by the agency shall be assigned to it; the duty to observe the diligence of a good father of a family in the selection of the guards cannot, in the ordinary course of events, be demanded from the client whose premises or property are protected by the security guards. xxxx The fact that a client company may give instructions or directions to the security guards assigned to it, does not, by itself, render the client responsible as an employer of the security guards concerned and liable for their wrongful acts or omissions. Sagada Orden vs. National Coconut Corporation

G. R. No. L-3756 June 30, 1952

Defendant-appellant is not guilty of any offense at all, because it entered the premises and occupied it with the permission of the entity which had the legal control and administration thereof, the Allien Property Administration Lastly, the reservation of this action may not be considered as vesting a new right; if no right to claim for rentals existed at the time of the reservation, no rights can arise or accrue from such reservation alone. FACTS: A parcel of land belong to herein appellee Sagada Orden, registered before the war, was acquired by a Japanese Corporation during the period of Japanese Military occupation. After liberation, it was occupied by Copra Export Management Company under a custodianship agreement with United States Alien Property Custodian, and thereafter, occupied by herein appellant National Coconut Corporation. Aside from such occupation, the property in question was also subjected to a contract of sale, which was later on declared null. Appellee filed an action to recover rentals in arrearage for the use and occupation of its property by herein appellant. Appellant contends that it occupied the property in good faith, under no obligation whatsoever to pay rentals for the use and occupation of the warehouse.

9


The trial Court rendered its decision in favor of herein appellee, hence this appeal. ISSUE: WON appellant National Coconut Corporation is liable for rentals in arrearage for the use and occupation of the parcel of land. HELD: No, the Court held that herein appellant is not liable for rentals. We can not understand how the trial court, from the mere fact that plaintiffappellee was the owner of the property and the defendant-appellant the occupant, which used for its own benefit but by the express permission of the Alien Property Custodian of the United States, so easily jumped to the conclusion that the occupant is liable for the value of such use and occupation. If defendant-appellant is liable at all, its obligations, must arise from any of the four sources of obligations, namley, law, contract or quasicontract, crime, or negligence. (Article 1089, Spanish Civil Code.) Defendant-appellant is not guilty of any offense at all, because it entered the premises and occupied it with the permission of the entity which had the legal control and administration thereof, the Allien Property Administration. Neither was there any negligence on its part. There was also no privity (of contract or obligation) between the Alien Property Custodian and the Taiwan Tekkosho, which had secured the possession of the property from the plaintiff-appellee by the use of duress, such that the Alien Property Custodian or its permittee (defendant-appellant) may be held responsible for the supposed illegality of the occupation of the property by the said Taiwan Tekkosho. The Allien Property Administration had the control and administration of the property not as successor to the interests of the enemy holder of the title, the Taiwan Tekkosho, but by express provision of law (Trading with the Enemy Act of the United States, 40 Stat., 411; 50 U.S.C.A., 189). Neither is it a trustee of the former owner, the plaintiffappellee herein, but a trustee of then Government of the United States (32 Op. Atty. Gen. 249; 50 U.S.C.A. 283), in its own right, to the exclusion of, and against the claim or title of, the enemy owner. (Youghioheny & Ohio Coal Co. vs. Lasevich [1920], 179 N.W., 355; 171 Wis., 347; U.S.C.A., 282283.) From August, 1946, when defendant-appellant took possession, to the late of judgment on February 28, 1948, Allien Property Administration had the absolute control of the property as trustee of the Government of the United States, with power to dispose of it by sale or otherwise, as though it were the absolute owner. (U.S vs. Chemical Foundation [C.C.A. Del. 1925], 5 F. [2d], 191; 50 U.S.C.A., 283.) Therefore, even if defendant-appellant were liable to the Allien Property Administration for rentals, these would not accrue to the benefit of the plaintiff-appellee, the owner, but to the United States Government. But there is another ground why the claim or rentals cannot be made against defendant-appellant. There was no agreement between the Alien Property Custodian and the defendant-appellant for the latter to pay rentals on the property. The existence of an implied agreement to that effect is contrary to the circumstances. The copra Export Management Company, which preceded the defendant-appellant, in the possession and use of the property, does not appear to have paid rentals therefor, as it occupied it by what the parties denominated a "custodianship agreement," and there is no provision therein for the payment of rentals or of any compensation for its custody and or occupation and the use. The Trading with the Enemy Act, as originally enacted, was purely a measure of conversation, hence, it is very unlikely that rentals were demanded for the use of the property. When the National coconut Corporation succeeded the Copra Export Management Company in the possession and use of the property, it must have been also free from payment of rentals, especially as it was Government corporation, and steps where then being taken by the Philippine Government to secure the property for the National Coconut Corporation. So that the circumstances do not justify the finding that there was an implied agreement that the defendant-appellant was to pay for the use and occupation of the premises at all. The above considerations show that plaintiff-appellee's claim for rentals before it obtained the judgment annulling the sale of the Taiwan Tekkosho may not be predicated on any negligence or offense of the defendantappellant, or any contract, express or implied, because the Allien Property Administration was neither a trustee of plaintiff-appellee, nor a privy to the

obligations of the Taiwan Tekkosho, its title being based by legal provision of the seizure of enemy property. We have also tried in vain to find a law or provision thereof, or any principle in quasi contracts or equity, upon which the claim can be supported. On the contrary, as defendant-appellant entered into possession without any expectation of liability for such use and occupation, it is only fair and just that it may not be held liable therefor. And as to the rents it collected from its lessee, the same should accrue to it as a possessor in good faith, as this Court has already expressly held. (Resolution, National Coconut Corporation vs. Geronimo, 83 Phil. 467.) Lastly, the reservation of this action may not be considered as vesting a new right; if no right to claim for rentals existed at the time of the reservation, no rights can arise or accrue from such reservation alone. Cangco vs. Manila Railroad

G.R. No. L-12191 October 14, 1918 The opinion there expressed by this Court, to the effect that in case of extra-contractual culpa based upon negligence, it is necessary that there shall have been some fault attributable to the defendant personally, and that the last paragraph of article 1903 merely establishes a rebuttable presumption A brief review of the earlier decision of this court involving the liability of employers for damage done by the negligent acts of their servants will show that in no case has the court ever decided that the negligence of the defendant's servants has been held to constitute a defense to an action for damages for breach of contract. FACTS: Appellant Cango incurred injuries when he alighted from the train, by accidentally stepping of watermelon sacks placed all over the platform. Appellant filed a complaint against herein appellee Manila Railroad for the damages and medical expenses for such incident. Appellant contends that herein appellee is negligent in maintaining the safety of the train station, by allowing sacks of watermelon to be placed over the premises. The trial Court rendered its decision in favor of herein appellee, on the ground that herein appellant failed to use due caution in alighting from the train, hence this appeal. ISSUE: WON appellant is entitled to damages due to the sustained injuries caused by the negligence of herein appellee Manila Railroad. HELD: Yes, the Court held that herein appellant is entitled to damages due to the sustained injuries. It can not be doubted that the employees of the railroad company were guilty of negligence in piling these sacks on the platform in the manner above stated; that their presence caused the plaintiff to fall as he alighted from the train; and that they therefore constituted an effective legal cause of the injuries sustained by the plaintiff. It necessarily follows that the defendant company is liable for the damage thereby occasioned unless recovery is barred by the plaintiff's own contributory negligence. In resolving this problem it is necessary that each of these conceptions of liability, to-wit, the primary responsibility of the defendant company and the contributory negligence of the plaintiff should be separately examined. It is important to note that the foundation of the legal liability of the defendant is the contract of carriage, and that the obligation to respond for the damage which plaintiff has suffered arises, if at all, from the breach of that contract by reason of the failure of defendant to exercise due care in its performance. That is to say, its liability is direct and immediate, differing essentially, in legal viewpoint from that presumptive responsibility for the negligence of its servants, imposed by article 1903 of the Civil Code, which can be rebutted by proof of the exercise of due care in their selection and supervision. Article 1903 of the Civil Code is not applicable to obligations arising ex contractu, but only to extra-contractual obligations — or to use the technical form of expression, that article relates only to culpa aquiliana and not to culpa contractual.

10


In the Rakes case (supra) the decision of this court was made to rest squarely upon the proposition that article 1903 of the Civil Code is not applicable to acts of negligence which constitute the breach of a contract. Upon this point the Court said: The acts to which these articles [1902 and 1903 of the Civil Code] are applicable are understood to be those not growing out of pre-existing duties of the parties to one another. But where relations already formed give rise to duties, whether springing from contract or quasi-contract, then breaches of those duties are subject to article 1101, 1103, and 1104 of the same code. (Rakes vs. Atlantic, Gulf and Pacific Co., 7 Phil. Rep., 359 at 365.) his distinction is of the utmost importance. The liability, which, under the Spanish law, is, in certain cases imposed upon employers with respect to damages occasioned by the negligence of their employees to persons to whom they are not bound by contract, is not based, as in the English Common Law, upon the principle of respondeat superior — if it were, the master would be liable in every case and unconditionally — but upon the principle announced in article 1902 of the Civil Code, which imposes upon all persons who by their fault or negligence, do injury to another, the obligation of making good the damage caused. One who places a powerful automobile in the hands of a servant whom he knows to be ignorant of the method of managing such a vehicle, is himself guilty of an act of negligence which makes him liable for all the consequences of his imprudence. The obligation to make good the damage arises at the very instant that the unskillful servant, while acting within the scope of his employment causes the injury. The liability of the master is personal and direct. But, if the master has not been guilty of any negligence whatever in the selection and direction of the servant, he is not liable for the acts of the latter, whatever done within the scope of his employment or not, if the damage done by the servant does not amount to a breach of the contract between the master and the person injured. It is not accurate to say that proof of diligence and care in the selection and control of the servant relieves the master from liability for the latter's acts — on the contrary, that proof shows that the responsibility has never existed. As Manresa says (vol. 8, p. 68) the liability arising from extra-contractual culpa is always based upon a voluntary act or omission which, without willful intent, but by mere negligence or inattention, has caused damage to another. A master who exercises all possible care in the selection of his servant, taking into consideration the qualifications they should possess for the discharge of the duties which it is his purpose to confide to them, and directs them with equal diligence, thereby performs his duty to third persons to whom he is bound by no contractual ties, and he incurs no liability whatever if, by reason of the negligence of his servants, even within the scope of their employment, such third person suffer damage. True it is that under article 1903 of the Civil Code the law creates a presumption that he has been negligent in the selection or direction of his servant, but the presumption is rebuttable and yield to proof of due care and diligence in this respect. The supreme court of Porto Rico, in interpreting identical provisions, as found in the Porto Rico Code, has held that these articles are applicable to cases of extra-contractual culpa exclusively. (Carmona vs. Cuesta, 20 Porto Rico Reports, 215.) This distinction was again made patent by this Court in its decision in the case of Bahia vs. Litonjua and Leynes, (30 Phil. rep., 624), which was an action brought upon the theory of the extra-contractual liability of the defendant to respond for the damage caused by the carelessness of his employee while acting within the scope of his employment. The Court, after citing the last paragraph of article 1903 of the Civil Code, said: From this article two things are apparent: (1) That when an injury is caused by the negligence of a servant or employee there instantly arises a presumption of law that there was negligence on the part of the master or employer either in selection of the servant or employee, or in supervision over him after the selection, or both; and (2) that that presumption is juris tantum and not juris et de jure, and consequently, may be rebutted. It follows necessarily that if the employer shows to the satisfaction of the

court that in selection and supervision he has exercised the care and diligence of a good father of a family, the presumption is overcome and he is relieved from liability. This theory bases the responsibility of the master ultimately on his own negligence and not on that of his servant. This is the notable peculiarity of the Spanish law of negligence. It is, of course, in striking contrast to the American doctrine that, in relations with strangers, the negligence of the servant in conclusively the negligence of the master. The opinion there expressed by this Court, to the effect that in case of extra-contractual culpa based upon negligence, it is necessary that there shall have been some fault attributable to the defendant personally, and that the last paragraph of article 1903 merely establishes a rebuttable presumption, is in complete accord with the authoritative opinion of Manresa, who says (vol. 12, p. 611) that the liability created by article 1903 is imposed by reason of the breach of the duties inherent in the special relations of authority or superiority existing between the person called upon to repair the damage and the one who, by his act or omission, was the cause of it. On the other hand, the liability of masters and employers for the negligent acts or omissions of their servants or agents, when such acts or omissions cause damages which amount to the breach of a contact, is not based upon a mere presumption of the master's negligence in their selection or control, and proof of exercise of the utmost diligence and care in this regard does not relieve the master of his liability for the breach of his contract. Every legal obligation must of necessity be extra-contractual or contractual. Extra-contractual obligation has its source in the breach or omission of those mutual duties which civilized society imposes upon it members, or which arise from these relations, other than contractual, of certain members of society to others, generally embraced in the concept of status. The legal rights of each member of society constitute the measure of the corresponding legal duties, mainly negative in character, which the existence of those rights imposes upon all other members of society. The breach of these general duties whether due to willful intent or to mere inattention, if productive of injury, give rise to an obligation to indemnify the injured party. The fundamental distinction between obligations of this character and those which arise from contract, rests upon the fact that in cases of non-contractual obligation it is the wrongful or negligent act or omission itself which creates the vinculum juris, whereas in contractual relations the vinculum exists independently of the breach of the voluntary duty assumed by the parties when entering into the contractual relation. With respect to extra-contractual obligation arising from negligence, whether of act or omission, it is competent for the legislature to elect — and our Legislature has so elected — whom such an obligation is imposed is morally culpable, or, on the contrary, for reasons of public policy, to extend that liability, without regard to the lack of moral culpability, so as to include responsibility for the negligence of those person who acts or mission are imputable, by a legal fiction, to others who are in a position to exercise an absolute or limited control over them. The legislature which adopted our Civil Code has elected to limit extra-contractual liability — with certain welldefined exceptions — to cases in which moral culpability can be directly imputed to the persons to be charged. This moral responsibility may consist in having failed to exercise due care in the selection and control of one's agents or servants, or in the control of persons who, by reason of their status, occupy a position of dependency with respect to the person made liable for their conduct. As it is not necessary for the plaintiff in an action for the breach of a contract to show that the breach was due to the negligent conduct of defendant or of his servants, even though such be in fact the actual cause of the breach, it is obvious that proof on the part of defendant that the negligence or omission of his servants or agents caused the breach of the contract would not constitute a defense to the action. If the negligence of servants or agents could be invoked as a means of discharging the liability arising from contract, the anomalous result would be that person acting through the medium of agents or servants in the performance of their contracts, would be in a better position than those acting in person. If one delivers a valuable watch to watchmaker who contract to repair it, and the

11


bailee, by a personal negligent act causes its destruction, he is unquestionably liable. Would it be logical to free him from his liability for the breach of his contract, which involves the duty to exercise due care in the preservation of the watch, if he shows that it was his servant whose negligence caused the injury? If such a theory could be accepted, juridical persons would enjoy practically complete immunity from damages arising from the breach of their contracts if caused by negligent acts as such juridical persons can of necessity only act through agents or servants, and it would no doubt be true in most instances that reasonable care had been taken in selection and direction of such servants. If one delivers securities to a banking corporation as collateral, and they are lost by reason of the negligence of some clerk employed by the bank, would it be just and reasonable to permit the bank to relieve itself of liability for the breach of its contract to return the collateral upon the payment of the debt by proving that due care had been exercised in the selection and direction of the clerk? This distinction between culpa aquiliana, as the source of an obligation, and culpa contractual as a mere incident to the performance of a contract has frequently been recognized by the supreme court of Spain. (Sentencias of June 27, 1894; November 20, 1896; and December 13, 1896.) In the decisions of November 20, 1896, it appeared that plaintiff's action arose ex contractu, but that defendant sought to avail himself of the provisions of article 1902 of the Civil Code as a defense. The Spanish Supreme Court rejected defendant's contention, saying: These are not cases of injury caused, without any pre-existing obligation, by fault or negligence, such as those to which article 1902 of the Civil Code relates, but of damages caused by the defendant's failure to carry out the undertakings imposed by the contracts A brief review of the earlier decision of this court involving the liability of employers for damage done by the negligent acts of their servants will show that in no case has the court ever decided that the negligence of the defendant's servants has been held to constitute a defense to an action for damages for breach of contract. As the case now before us presents itself, the only fact from which a conclusion can be drawn to the effect that plaintiff was guilty of contributory negligence is that he stepped off the car without being able to discern clearly the condition of the platform and while the train was yet slowly moving. In considering the situation thus presented, it should not be overlooked that the plaintiff was, as we find, ignorant of the fact that the obstruction which was caused by the sacks of melons piled on the platform existed; and as the defendant was bound by reason of its duty as a public carrier to afford to its passengers facilities for safe egress from its trains, the plaintiff had a right to assume, in the absence of some circumstance to warn him to the contrary, that the platform was clear. The place, as we have already stated, was dark, or dimly lighted, and this also is proof of a failure upon the part of the defendant in the performance of a duty owing by it to the plaintiff; for if it were by any possibility concede that it had right to pile these sacks in the path of alighting passengers, the placing of them adequately so that their presence would be revealed. As pertinent to the question of contributory negligence on the part of the plaintiff in this case the following circumstances are to be noted: The company's platform was constructed upon a level higher than that of the roadbed and the surrounding ground. The distance from the steps of the car to the spot where the alighting passenger would place his feet on the platform was thus reduced, thereby decreasing the risk incident to stepping off. The nature of the platform, constructed as it was of cement material, also assured to the passenger a stable and even surface on which to alight. Furthermore, the plaintiff was possessed of the vigor and agility of young manhood, and it was by no means so risky for him to get off while the train was yet moving as the same act would have been in an aged or feeble person. In determining the question of contributory negligence in performing such act — that is to say, whether the passenger acted prudently or recklessly — the age, sex, and physical condition of the passenger are circumstances necessarily affecting the safety of the passenger, and should be considered. Women, it has been observed, as a general rule are less capable than men of alighting with safety under such conditions, as the nature of their wearing apparel obstructs the free movement of the limbs. Again, it may be noted that the place was perfectly

familiar to the plaintiff as it was his daily custom to get on and of the train at this station. There could, therefore, be no uncertainty in his mind with regard either to the length of the step which he was required to take or the character of the platform where he was alighting. Our conclusion is that the conduct of the plaintiff in undertaking to alight while the train was yet slightly under way was not characterized by imprudence and that therefore he was not guilty of contributory negligence. People’s Car Inc. vs. Commando Security

G.R. No. L-36840 May 22, 1973 FACTS: Appellant People’s Car Inc. filed a complaint against herein appellee Commando Security Agency, on the ground that the appellee’s security guard while on duty at the appellant’s premises, without any authority or consent, brought out of the compound a car belonging to the appellant’s customer. While driving said car, the security guard lost control, causing the same to fall into a ditch, resulting to damages. The trial Court rendered its decision and held, without an award for the actual damages incurred, that herein appellee is only liable for the sum of Php 1,000.00, pursuant to paragraph 4 of their contract, hence this appeal. ISSUE: WON the trial Court erred when it awarded the sum of Php 1,000.00 instead of the actual damages of P8,489.10, pursuant to their “Guard Service Contract. HELD: Yes, the trial Court did err when is merely awarded the sum of Php 1,000.00 to herein appellant.

Service Agency. But if Luy instituted the action against the plaintiff and the defendant, the plaintiff should have filed a crossclaim against the latter," 9 was unduly technical and unrealistic and untenable. Plaintiff was in law liable to its customer for the damages caused the customer's car, which had been entrusted into its custody. Plaintiff therefore was in law justified in making good such damages and relying in turn on defendant to honor its contract and indemnify it for such undisputed damages, which had been caused directly by the unlawful and wrongful acts of defendant's security guard in breach of their contract. As ordained in Article 1159, Civil Code, "obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith." Plaintiff in law could not tell its customer, as per the trial court's view, that "under the Guard Service Contract it was not liable for the damage but the defendant" — since the customer could not hold defendant to account for the damages as he had no privity of contract with defendant. Such an approach of telling the adverse party to go to court, notwithstanding his plainly valid claim, aside from its ethical deficiency among others, could hardly create any goodwill for plaintiff's business, in the same way that defendant's baseless attempt to evade fully discharging its contractual liability to plaintiff cannot be expected to have brought it more business. Worse, the administration of justice is prejudiced, since the court dockets are unduly burdened with unnecessary litigation. NARCISO GUTIERREZ, plaintiff-appellee, vs. BONIFACIO GUTIERREZ, MARIA V. DE GUTIERREZ, MANUEL GUTIERREZ, ABELARDO VELASCO, and SATURNINO CORTEZ, defendantsappellants.

G.R. No. 34840 | September 23, 1931

Paragraph 4 of the contract, which limits defendant's liability for the amount of loss or damage to any property of plaintiff to "P1,000.00 per guard post," is by its own terms applicable only for loss or damage 'through the negligence of its guards ... during the watch hours" provided that the same is duly reported by plaintiff within 24 hours of the occurrence and the guard's negligence is verified after proper investigation with the attendance of both contracting parties. Said paragraph is manifestly inapplicable to the stipulated facts of record, which involve neither property of plaintiff that has been lost or damaged at its premises nor mere negligence of defendant's security guard on duty.

FACTS: A passenger truck, driven by Velasco and Cortez, and an automobile owned by spouses-defendants Gutierrez and was being driven at that time by their son, Bonifacio who was 18 y/o, collided. At the time of the collision, the father was not in the car, but the mother, together will several other members of the Gutierrez family, seven in all, were accommodated therein. As a result of the said incident, herein plaintiff, a passenger in the autobus, suffered a fracture which required medical attendance, prompting him to sue herein defendants. It was found by the trial court that both the boy and the driver of the autobus were negligent by which neither of them were willing to slow up and give the right of way to the other.

Here, instead of defendant, through its assigned security guards, complying with its contractual undertaking 'to safeguard and protect the business premises of (plaintiff) from theft, robbery, vandalism and all other unlawful acts of any person or persons," defendant's own guard on duty unlawfully and wrongfully drove out of plaintiffs premises a customer's car, lost control of it on the highway causing it to fall into a ditch, thereby directly causing plaintiff to incur actual damages in the total amount of P8,489.10.

ISSUE: How should civil liability be imposed upon the parties in the present case?

Defendant is therefore undoubtedly liable to indemnify plaintiff for the entire damages thus incurred, since under paragraph 5 of their contract it "assumed the responsibility for the proper performance by the guards employed of their duties and (contracted to) be solely responsible for the acts done during their watch hours" and "specifically released (plaintiff) from any and all liabilities ... to the third parties arising from the acts or omissions done by the guards during their tour of duty." As plaintiff had duly discharged its liability to the third party, its customer, Joseph Luy, for the undisputed damages of P8,489.10 caused said customer, due to the wanton and unlawful act of defendant's guard, defendant in turn was clearly liable under the terms of paragraph 5 of their contract to indemnify plaintiff in the same amount. The trial court's approach that "had plaintiff understood the liability of the defendant to fall under paragraph 5, it should have told Joseph Luy, owner of the car, that under the Guard Service Contract, it was not liable for the damage but the defendant and had Luy insisted on the liability of the plaintiff, the latter should have challenged him to bring the matter to court. If Luy accepted the challenge and instituted an action against the plaintiff, it should have filed a third-party complaint against the Commando Security

12


HELD: In the United States, it is uniformly held that the head of a house, the owner of an automobile, who maintains it for the general use of his family is liable for its negligent operation by one of his children, whom he designates or permits to run it, where the car is occupied and being used at the time of the injury for the pleasure of other members of the owner's family than the child driving it. The theory of the law is that the running of the machine by a child to carry other members of the family is within the scope of the owner's business, so that he is liable for the negligence of the child because of the relationship of master and servant. The liability of Saturnino Cortez, the owner of the truck, and of his chauffeur Abelardo Velasco rests on a different basis, namely, that of contract which, we think, has been sufficiently demonstrated by the allegations of the complaint, not controverted, and the evidence. The reason for this conclusion reaches to the findings of the trial court concerning the position of the truck on the bridge, the speed in operating the machine, and the lack of care employed by the chauffeur. While these facts are not as clearly evidenced as are those which convict the other defendant, we nevertheless hesitate to disregard the points emphasized by the trial judge. In its broader aspects, the case is one of two drivers approaching a narrow bridge from opposite directions, with neither being willing to slow up and give the right of way to the other, with the inevitable result of a collision and an accident. The defendants Velasco and Cortez further contend that there existed contributory negligence on the part of the plaintiff, consisting principally of

his keeping his foot outside the truck, which occasioned his injury. In this connection, it is sufficient to state that, aside from the fact that the defense of contributory negligence was not pleaded, the evidence bearing out this theory of the case is contradictory in the extreme and leads us far afield into speculative matters. C.

COMPLIANCE WITH OBLIGATIONS

Art. 19. Every person must, in the exercise of his rights and the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith. Chapter 2: Nature of Obligations: Art. 1163. Every person obliged to give something is also obliged to take care of it with the proper diligence of a good father of a family, unless the law or the stipulation of the parties requires another standard of care Art. 1164. The creditor has a right to the fruits of the thing from the time the obligation to deliver it arises. However, he shall acquire no real right over it until the same has been delivered to him. Art. 1165. When what is to be delivered is a determinate thing, the creditor, in addition to the right granted him by Article 1170, may compel the debtor to make the delivery. If the thing is indeterminate or generic, he may ask that the obligation be complied with at the expense of the debtor. If the obligor delays, or has promised to deliver the same thing to two or more persons who do not have the same interest, he shall be responsible for any fortuitous event until he has effected the delivery. Art. 1166. The obligation to give a determinate thing includes that of delivering all its accessions and accessories, even though they may not have been mentioned. 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. Art. 1246. When the obligation consists in the delivery of an indeterminate or generic thing, whose quality and circumstances have not been stated, the creditor cannot demand a thing of superior quality. Neither can the debtor deliver a thing of inferior quality. The purpose of the obligation and other circumstances shall be taken into consideration. Art. 1460. A thing is determinate when it is particularly designated or physical segregated from all other of the same class. The requisite that a thing be determinate is satisfied if at the time the contract is entered into, the thing is capable of being made determinate without the necessity of a new or further agreement between the parties. D.

KINDS OF CIVIL OBLIGATIONS

1.

As to Perfection and Extinguishment

PURE OBLIGATIONS Art. 1179. Every obligation whose performance does not depend upon a future or uncertain event, or upon a past event unknown to the parties, is demandable at once. Every obligation which contains a resolutory condition shall also be demandable, without prejudice to the effects of the happening of the event.

Art. 1190. When the conditions have for their purpose the extinguishment of an obligation to give, the parties, upon the fulfillment of said conditions, shall return to each other what they have received. In case of the loss, deterioration or improvement of the thing, the provisions which, with respect to the debtor, are laid down in the preceding article shall be applied to the party who is bound to return. As for the obligations to do and not to do, the provisions of the second paragraph of Article 1187 shall be observed as regards the effect of the extinguishment of the obligation.

Kinds of Conditions as to when the obligation should be performed

suspensive

divisible indivisible conjunctive

happening of which gives rise to the obligation happening of which extinguishes the rights already existing depends on the will of the party to the juridical relation depends on chance partly depends on will of the party and partly on chance can be performed in parts cannot be performed in parts all must be performed

as to whom or where it depends

potestative

alternative

only one must be performed

resolutory

casual mixed as to capacity to be performed in parts as to number of obligations are to be performed when there are several of them as to nature as to how made known to the other party as to whether the obligation can be fulfilled

positive negative express implied possible impossible

act omission stated merely inferred can be fulfilled cannot be fulfilled either physically or legally

Potestative Condition: Art. 1182. When the fulfillment of the condition depends upon the sole will of the debtor, the conditional obligation shall be void. If it depends upon chance or upon the will of a third person, the obligation shall take effect in conformity with the provisions of this Code NOTE: Art. 1182 does not apply when there is a pre-existing debt. BAR-EXAM QUESTION: Pedro promised to give his grandson his car after the latter passed the bar. Upon passing the bar, Pedro refused to give the car claiming that the condition is purely potestative and is thus void. Is Pedro correct? ANSWER: No. Passing the bar is a condition not considered potestative since it is not dependent solely upon the will of one of the parties, therefore the obligation is not void. Likewise, Art. 1182 is not applicable, the fulfillment must be dependent upon the sole will of the debtor in order for the obligation to be void. In this case, the debtor is the grandfather, Pedro, and he is not the one taking the bar exam.

When debtor prevented the happening of the condition: Art. 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment.

CONDITIONAL Art. 1181. In conditional obligations, the acquisition of rights, as well as

13

the extinguishment or loss of those already acquired, shall depend upon the happening of the event which constitutes the condition.


QUESTION: In a conditional obligation and the condition was not fulfilled, may the creditor validly demand that the debtor perform his obligation? Answer: Generally, no. Exception: Art. 1186. If the debtor voluntarily prevented the happening of the condition, it is deemed fulfilled. EXAMPLE: In a contract for a piece of work, where A hired B as contractor to build his house where 50% of the contract price is payable as downpayment and 50% upon completion. If A voluntarily prevented the happening of the condition for the payment of the remaining 50%, i.e., the completion of the house, say by preventing the workers from entering the premises, is the condition deemed fulfilled? Answer: Yes. Applying Art. 1186, by preventing the workers from entering the premises, A, as debtor, prevented the happening of the condition, i.e., completion of the house. B is entitled to the remaining 50%. NOTE, HOWEVER: if prevention is pursuant to a valid right, say, workers are not following the plans, or the contractor uses inferior materials – the debtor is not compelled to pay. He can even ask for the demolition of the work already completed at the expense of the contractor.

Impossible Conditions: Art. 1183. Impossible conditions, those contrary to good customs or public policy and those prohibited by law shall annul the obligation which depends upon them. If the obligation is divisible, that part thereof which is not affected by the impossible or unlawful condition shall be valid. PROBLEM: A promised to pay P100 to B on the condition that B will go to the sun on the same day. What is the status of the obligation?

Art. 1187. The effects of a conditional obligation to give, once the condition has been fulfilled, shall retroact to the day of the constitution of the obligation. Nevertheless, when the obligation imposes reciprocal prestations upon the parties, the fruits and interests during the pendency of the condition shall be deemed to have been mutually compensated. If the obligation is unilateral, the debtor shall appropriate the fruits and interests received, unless from the nature and circumstances of the obligation it should be inferred that the intention of the person constituting the same was different. In obligations to do and not to do, the courts shall determine, in each case, the retroactive effect of the condition that has been complied with. Answer: No. Under Art. 1187, the happening of the condition, in an obligation to give, retroacts to the day of the constitution of the obligation. However, since there are reciprocal obligations, to pay on the part of Eva, and to deliver the house and lot on the part of Manuel, they are deemed mutually compensated for the rent and interests on the property and money, respectively. As such, the seller would just deliver and the buyer would pay the price. There will be no issue as to the amounts of rent, or interest on the purchase price.

What if unilateral only? Manuel shall be entitled to the rent. In the above example, if Manuel has the unilateral obligation to deliver the house and lot upon passing of Eva of the 1998 Bar Exams. Applying Art. 1187, Manuel, as the debtor, is entitled to the fruits (rent) of the property.

Rules as to improvement, loss or deterioration:

ANSWER: “annulled” in accordance with Art. 1183. This is not correct, because it would connote that the obligation was voidable. It is actually void, that’s why there are criticism with the word used in the above article.

Art. 1189. When the conditions have been imposed with the intention of suspending the efficacy of an obligation to give, the following rules shall be observed in case of the improvement, loss or deterioration of the thing during the pendency of the condition:

Compare with: testamentary conditions which are impossible, the condition

(1) If the thing is lost without the fault of the debtor, the obligation shall be extinguished; (2) If the thing is lost through the fault of the debtor, he shall be obliged to pay damages; it is understood that the thing is lost when it perishes, or goes out of commerce, or disappears in such a way that its existence is unknown or it cannot be recovered; (3) When the thing deteriorates without the fault of the debtor, the impairment is to be borne by the creditor; (4) If it deteriorates through the fault of the debtor, the creditor may choose between the rescission of the obligation and its fulfillment, with indemnity for damages in either case; (5) If the thing is improved by its nature, or by time, the improvement shall inure to the benefit of the creditor; (6) If it is improved at the expense of the debtor, he shall have no other right than that granted to the usufructuary.

(Uribe, 2015)

is deemed not written. This is because obligations are essentially onerous, while succession is unilaterally gratuitous. WITH A TERM OR PERIOD Art. 1180. When the debtor binds himself to pay when his means permit him to do so, the obligation shall be deemed to be one with a period, subject to the provisions of Article 1197. “MEANS TO PAY” – valid obligation with a period, because the remedy of the creditor is to go to court once the debtor has the means to pay. BAR EXAM QUESTION: Manuel promised to sell to Eva, his house and lot rented by another, if Eva passes the 1998 bar exams. Eva passed the said bar exams. a.

Suppose it was sold to another before Eva passed the bar exams – is such sale valid? Why? Yes. Three essential requisites are present. It can be a valid contract of sale. “can” because other information not given, it may be void for some other reason, e.g., if they are husband and wife, or Eva is a foreigner not allowed to own land in the Philippines. Note that in this case, the condition had not yet happened, as such, ownership remains with Manuel and he has the right to dispose of it.

b.

Assuming Eva is the one entitled to buy the house and lot, is she entitled to the rental before she passed the bar exams? No. because, the condition was fulfilled only in 1998, she is entitled to the fruits after she passed the bar. – defective answer.

14


QUESTION: A promised to deliver to B when the latter passes the bar exams. Before the happening of the condition, the A thought that the condition will no longer be fulfilled since B continuously failed the bar exams. As such, A had the car repainted and seat covers were changed.In the following bar exam, B passed and demanded that A deliver the car. B refused demanding reimbursement for the repainting and the new seat covers. Can he validly do so? Answer: No. Under Art. 1189, par. 6, A has no better right than a usufructuary. Accordingly, he has no right to demand reimbursement for the repainting and the new seat covers, he will only have the right to remove the improvements as long as it will not cause damage to the thing. Likewise, he does not have the right to retain the thing.

Suppose in the above question, the property was land which was increased by alluvion, who is entitled to the improvement? The creditor. As provided

under par. 5 above, improvement of the thing by nature inures to the benefit of the creditor. OBLIGATIONS WITH A TERM: *Use “arrival” of the term and “expiration” of the period. KINDS OF TERM: 1. Definite – specific date, e.g. Dec. 31, end of the year this year, within 6 months; 2. Indefinite – period may arrive upon the fulfilment of a certain event which is certain to happen. E.g., death. or 3. 4. 5.

Legal – imposed or provided by law, e.g. filing of taxes; obligation to give support – within the first 5 days of the month. Voluntary – agreed upon by the parties. Judicial – those fixed by courts.

When may the court fix the period? 1.

Under Art. 1191, par. 3:

Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him. The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible. The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period. This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with Articles 1385 and 1388 and the Mortgage Law. 2.

Under Art. 1197:

Art. 1197. If the obligation does not fix a period, but from its nature and the circumstances it can be inferred that a period was intended, the courts may fix the duration thereof. The courts shall also fix the duration of the period when it depends upon the will of the debtor. In every case, the courts shall determine such period as may under the circumstances have been probably contemplated by the parties. Once fixed by the courts, the period cannot be changed by them

a. b.

If the period intended has not yet expired, specific performance would be premature. If period had elapsed, will specific performance prosper? Generally, yes. Exception: if it would be violative of the right against involuntary servitude. (see Araneta, Inc. vs. Phil Sugar Estates)

Benefit of the period: Art. 1196. Whenever in an obligation a period is designated, it is presumed to have been established for the benefit of both the creditor and the debtor, unless from the tenor of the same or other circumstances it should appear that the period has been established in favor of one or of the other PRESUMPTION: is that the period was fixed for the benefit of both parties. EXCEPTION: when from the tenor of the obligation or other circumstances, it was only established for one or the other. QUESTION: Before arrival of the period: 1. Can the debtor be bound to perform? 2. Can the creditor can be bound/compelled to accept? ANSWER: determine for whose benefit the period was fixed. If fixed for the benefit of the debtor, then the debtor cannot be bound to perform, but the creditor can be compelled to accept. EXAMPLE OF EXCEPTION: use of the words ”on or before” – for the benefit of the debtor. As such, the it can be seen from the tenor of the condition that the benefit was for the debtor who can perform or fulfill the obligation even prior to the expiration of the term. PROBLEM: A borrowed money from B on Jan. 1 1983, payable Dec. 31, 1983. A pledged his car with the agreement that B can use it. Can A compel B to accept payment before due date? Answer: No, the presumption is that the period is established for the benefit of both parties. In this case, the period is actually for the benefit both, for the debtor to have time to pay, while the creditor to have time to use the car. As such, B cannot be compelled to accept payment prior to the arrival of the period agreed upon. Can B be compelled to deliver the car? It depends, pledge is an accessory contract, B accepts payment, then the principal obligation, the loan, is extinguished, thus with it the pledge.

Debtor’s loss of benefit of the period:

1.

If the obligation is one arising from a contract, Art. 1197 applies only if the contract was perfected.

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

2.

No period was fixed, but it was intended.

Insolvency – means the debtor is unable to fulfil his obligations as they fall

There are two instances when the court may fix a period as provided above: 1. The parties intended a period, but no period was fixed; 2. The period depends solely on the will of the debtor.

Rules for Applicability:

If there was a period agreed upon by the parties, Art. 1197 would not be applicable. (see Lim vs. People) 3.

Courts should determine from the nature and circumstances whether the parties intended a period and fix the same. Note: sometimes, action to fix a period is concurrent with specific performance.

15


due. As such, the creditor may not wait for the arrival of period because at that time, there may be insufficient assets to cover his claim. Exception: if debtor provides for sufficient security or guaranty. PROBLEM: A obtained from B a loan payable in a year, secured by a mortgage on A’s house. The said house was later on destroyed by fire. B collected from A before the arrival of the period. A countered that the period is for both their benefit and thus, he cannot be compelled to pay. Is A correct?

Answer: No. A lost the benefit of the period when the mortgaged house was destroyed by fire, as provided under Art. 1198 (3). Why should A bear the loss? 1. The lender would not have lent the money if there was no security; 2. Lender likewise did not cause the loss; 3. Borrower remains the owner of the property who should bear the loss. MULTIPLE CHOICE: On june 1, 1999, 15% loan A signed PM to pay X P100,000 on June 30, 1999. For whose benefit was the period fixed? a. b. c. d.

Can X demand payment before June 30, 1999? No. Presumption is that the benefit of both. Debtor cannot be compelled to pay. On June 30, 1999, can X refuse payment? No. The debt is already due regardless for whose benefit it is paid. Can X be compelled to accept before? No. Why would creditor would not like to accept? Because debtor may pay interest only upto time of payment. Benefit of both. – correct.

No. 2: 1:05 involving multiple prestations. CASES: HONGKONG AND SHANGHAI BANKING CORP., LTD. STAFF RETIREMENT PLAN (HSBCL-SRP), Retirement Trust Fund, Inc. Petitioner, vs. SPOUSES BIENVENIDO AND EDITHA BROQUEZA, Respondents.

[G.R. No. 178610 | November 17, 2010 | Second Division | J. Carpio]

FACTS: Fe Gerong and Editha Broqueza are employees of HSBC, and also, are members of HSBCL-SRP which is a retirement plan established by HSBC through its BOT for the benefit of the employees. Broqueza was granted a car loan and an appliance loan in the amount of P175,000 and P24,000, respectively. Gerong was granted an emergency loan in the amount of P35,780. These loans were paid through automatic salary deduction. As a result of a labor dispute, Broqueza and Gerong were among those terminated from employment by HSBC. Because of their dismissal, Gerong and Broqueza were not able to pay the monthly amortizations of their respective loans. HSBCL-SRP considered their accounts delinquent and demanded the payment of their respective obligations, but they failed to pay. HSBCL-SRP filed civil actions for recovery and collection of sums of money against the spouses Broqueza and Gerong before the MeTC. MeTC ruled that the nature of HSBCL-SRP’s demands for payment is civil and has no connection to the ongoing labor dispute. Gerong and Editha Broqueza’s termination from employment resulted in the loss of continued benefits under their retirement plans. Thus, the loans secured by their future retirement benefits to which they are no longer entitled are reduced to unsecured and pure civil obligations. As unsecured and pure obligations, the loans are immediately demandable. RTC affirmed the MeTC’s decision in toto. On appeal, the CA reversed the RTC. ISSUE: WON the obligations of Broqueza and Gerong are pure obligations which are immediately demandable? HELD: YES In ruling for HSBCL-SRP, we apply the first paragraph of Article 1179 of the Civil Code: Art. 1179. Every obligation whose performance does not depend upon a future or uncertain event, or upon a past event unknown to the parties, is demandable at once. x x x. We affirm the findings of the MeTC and the RTC that there is no date of payment indicated in the Promissory Notes. The RTC is correct in ruling that since the Promissory Notes do not contain a period, HSBCL-SRP has the right to demand immediate payment. Article

16


1179 of the Civil Code applies. The spouses Broqueza’s obligation to pay HSBCL-SRP is a pure obligation. The fact that HSBCL-SRP was content with the prior monthly check-off from Editha Broqueza’s salary is of no moment. Once Editha Broqueza defaulted in her monthly payment, HSBCL-SRP made a demand to enforce a pure obligation. In their Answer, the spouses Broqueza admitted that prior to Editha Broqueza’s dismissal from HSBC in December 1993, she "religiously paid the loan amortizations, which HSBC collected through payroll check-off."1 A definite amount is paid to HSBCL-SRP on a specific date. Editha Broqueza authorized HSBCL-SRP to make deductions from her payroll until her loans are fully paid. Editha Broqueza, however, defaulted in her monthly loan payment due to her dismissal. Despite the spouses Broqueza’s protestations, the payroll deduction is merely a convenient mode of payment and not the sole source of payment for the loans. HSBCLSRP never agreed that the loans will be paid only through salary deductions. Neither did HSBCL-SRP agree that if Editha Broqueza ceases to be an employee of HSBC, her obligation to pay the loans will be suspended. HSBCL-SRP can immediately demand payment of the loans at anytime because the obligation to pay has no period. Moreover, the spouses Broqueza have already incurred in default in paying the monthly installments. IN THE MATTER OF THE INTESTATE ESTATE OF JUSTO PALANCA, Deceased, GEORGE PAY, petitioner-appellant, vs. SEGUNDINA CHUA VDA. DE PALANCA, oppositor-appellee.

[G.R. No. L-29900 | June 28, 1974 | SECOND DIVISION | J. Fernando]

FACTS: January 30, 1952  The late Justo Palanca, together with Rosa Gonzales Vda. De Palanca executed a promissory note undertaking to pay the amount of P26,900 upon receipt by him of his share from a certain estate or upon demand. For value received from time to time since 1947, we [jointly and severally promise to] pay to Mr. [George Pay] at his office at the China Banking Corporation the sum of [Twenty Six Thousand Nine Hundred Pesos] (P26,900.00), with interest thereon at the rate of 12% per annum upon receipt by either of the undersigned of cash payment from the Estate of the late Don Carlos Palanca or upon demand'. . . . On August 26, 1967, George filed this action before the trial court, asking that Segundina Chua Vda. de Palanca, surviving spouse of the late Justo Palanca, be appointed as administratrix of a certain property in order that George Pay, as creditor, can file his claim against the administratrix. The lower court held that the ten-year period of limitation of actions did apply, the note being immediately due and demandable, the creditor admitting expressly that he was relying on the wording "upon demand." Petitioner appealed the lower court’s decision. ISSUE: WON a creditor is barred by prescription in his attempt to collect on a promissory note executed more than fifteen years earlier with the debtor sued promising to pay either upon receipt by him of his share from a certain estate or upon demand, the basis for the action being the latter alternative? HELD: Yes. Prescribed. From the manner in which the promissory note was executed, it would appear that petitioner was hopeful that the satisfaction of his credit could be realized either through the debtor sued receiving cash payment from the estate of the late Carlos Palanca presumptively as one of the heirs, or, as expressed therein, "upon demand." There is nothing in the record that would indicate whether or not the first alternative was fulfilled. What is undeniable is that on August 26, 1967, more than fifteen years after the execution of the promissory note on January 30, 1952, this petition was filed. The defense interposed was prescription. Its merit is rather obvious. Article 1179 of the Civil Code provides: "Every obligation whose performance does not depend upon a future or uncertain event, or upon a past event unknown to the parties, is demandable at once." This used to be Article 1113 of the Spanish Civil Code of 1889. As far back as Floriano v. Delgado, 5 a 1908 decision, it has been applied according to its express language. The well-known Spanish commentator, Manresa, on this point,

states: "Dejando con acierto, el caracter mas teorico y grafico del acto, o sea la perfeccion de este, se fija, para determinar el concepto de la obligacion pura, en el distinctive de esta, y que es consecuencia de aquel: la exigibilidad immediata." The obligation being due and demandable, it would appear that the filing of the suit after fifteen years was much too late. For again, according to the Civil Code, which is based on Section 43 of Act No. 190, the prescriptive period for a written contract is that of ten years. This is another instance where this Court has consistently adhered to the express language of the applicable norm. There is no necessity therefore of passing upon the other legal questions as to whether or not it did suffice for the petition to fail just because the surviving spouse refuses to be made administratrix, or just because the estate was left with no other property. The decision of the lower court cannot be overturned. SMITH, BELL & CO., LTD., plaintiff-appellant, vs. VICENTE SOTELO MATTI, defendant-appellant.

[G.R. No. L-16570 | March 9, 1922 | En Banc | J. Romualdez] FACTS: On August 1918, Plaintiff corporation and defendant entered into contracts whereby the former obligated itself to sell, and the latter to purchase from it, two steel tanks, for the total price of P21,000, the same to be shipped from New York and delivered at Manila "within three or four months;" two expellers at the price of P25,000 each, which were to be shipped from San Francisco in the month of September, 1918, or as soon as possible; and two electric motors at the price of P2,000 each, as to the delivery of which stipulation was made, couched in these words: "Approximate delivery within ninety days. — This is not guaranteed." The tanks arrived at Manila on the 27th of April, 1919: the expellers on the 26th of October, 1918; and the motors on the 27th of February, 1919. The plaintiff corporation immediately notified the defendant of the arrival of the goods, but the latter refused to receive them and to pay the prices stipulated. Consequently, the plaintiff filed an action against the defendant. The defendant, and the intervenor, the Manila Oil Refining and By-Products Co., Inc. claimed that the latter suffered damages for the non-delivery of the tanks, and on account of the expellers and the motors not having arrived in due time. The lower court absolved the defendants from the complaint insofar as the tanks and the electric motors were concerned, but rendered judgment against them and ordered them to receive and pay the plaintiff for the expellers. Both parties appealed to the SC. ISSUE: WON, under the contracts entered into and the circumstances established in the record, the plaintiff has fulfilled, in due time, its obligation to bring the goods in question to Manila? HELD: YES. As regards the tanks, the contracts A and B (pages 61 and 62 of the record) are similar, and in both of them we find this clause: To be delivered within 3 or 4 months — The promise or indication of shipment carries with it absolutely no obligation on our part — Government regulations, railroad embargoes, lack of vessel space, the exigencies of the requirement of the United States Government, or a number of causes may act to entirely vitiate the indication of shipment as stated. In other words, the order is accepted on the basis of shipment at Mill's convenience, time of shipment being merely an indication of what we hope to accomplish. In the contract Exhibit C (page 63 of the record), with reference to the expellers, the following stipulation appears: The following articles, hereinbelow more particularly described, to be shipped at San Francisco within the month of September /18, or as soon as possible. — Two Anderson oil expellers . . . .

17


And in the contract relative to the motors (Exhibit D, page 64, rec.) the following appears: Approximate delivery within ninety days. — This is not guaranteed. — This sale is subject to our being able to obtain Priority Certificate, subject to the United States Government requirements and also subject to confirmation of manufactures. In all these contracts, there is a final clause as follows: The sellers are not responsible for delays caused by fires, riots on land or on the sea, strikes or other causes known as "Force Majeure" entirely beyond the control of the sellers or their representatives. Under these stipulations, it cannot be said that any definite date was fixed for the delivery of the goods. As to the tanks, the agreement was that the delivery was to be made "within 3 or 4 months," but that period was subject to the contingencies referred to in a subsequent clause. With regard to the expellers, the contract says "within the month of September, 1918," but to this is added "or as soon as possible." And with reference to the motors, the contract contains this expression, "Approximate delivery within ninety days," but right after this, it is noted that "this is not guaranteed." The oral evidence falls short of fixing such period. From the record, it appears that these contracts were executed at the time of the world war when there existed rigid restrictions on the export from the United States of articles like the machinery in question, and maritime, as well as railroad, transportation was difficult, which fact was known to the parties; hence clauses were inserted in the contracts, regarding "Government regulations, railroad embargoes, lack of vessel space, the exigencies of the requirements of the United States Government," in connection with the tanks and "Priority Certificate, subject to the United State Government requirements," with respect to the motors. At the time of the execution of the contracts, the parties were not unmindful of the contingency of the United States Government not allowing the export of the goods, nor of the fact that the other foreseen circumstances therein stated might prevent it. Considering these contracts in the light of the civil law, we cannot but conclude that the term which the parties attempted to fix is so uncertain that one cannot tell just whether, as a matter of fact, those articles could be brought to Manila or not. If that is the case, as we think it is, the obligations must be regarded as conditional. Obligations for the performance of which a day certain has been fixed shall be demandable only when the day arrives. A day certain is understood to be one which must necessarily arrive, even though its date be unknown.

If the uncertainty should consist in the arrival or non-arrival of the day, the obligation is conditional and shall be governed by the rules of the next preceding section. (referring to pure and conditional obligations). (Art. 1125, Civ. Code.)

And as the export of the machinery in question was, as stated in the contract, contingent upon the sellers obtaining certificate of priority and permission of the United States Government, subject to the rules and regulations, as well as to railroad embargoes, then the delivery was subject to a condition the fulfillment of which depended not only upon the effort of the herein plaintiff, but upon the will of third persons who could in no way be compelled to fulfill the condition. In cases like this, which are not expressly provided for, but impliedly covered, by the Civil Code, the obligor will be deemed to have sufficiently performed his part of the obligation, if he has done all that was in his power, even if the condition has not been fulfilled in reality. In such cases, the decisions prior to the Civil Code have held that the obligee having done all that was in his power, was entitled to enforce

performance of the obligation. This performance, which is fictitious — not real — is not expressly authorized by the Code, which limits itself only to declare valid those conditions and the obligation thereby affected; but it is neither disallowed, and the Code being thus silent, the old view can be maintained as a doctrine. (Manresa's commentaries on the Civil Code [1907], vol. 8, page 132.) ROSENDO O. CHAVES, Plaintiff-Appellant, vs. FRUCTUOSO GONZALES, Defendant-Appellee.

[G.R. No. L-27454 | April 30, 1970. | En Banc | J. Reyes, J.B.L.]

serve no purpose than to delay (cf. Tiglao. Et. Al. V. Manila Railroad Co. 98 Phil. 18l). It is clear that the defendant-appellee contravened the tenor of his obligation because he not only did not repair the typewriter but returned it "in shambles", according to the appealed decision. For such contravention, as appellant contends, he is liable under Article 1167 of the Civil Code. jam quot, for the cost of executing the obligation in a proper manner. The cost of the execution of the obligation in this case should be the cost of the labor or service expended in the repair of the typewriter, which is in the amount of P58.75. because the obligation or contract was to repair it.

FACTS: Plaintiff delivered to the defendant, who is a typewriter repairer, a portable typewriter for routine cleaning and servicing. Despite repeated reminders made by the plaintiff, defendant was not able to finish the job after some time. Later, plaintiff gave to the defendant the sum of P6 asked by the latter for the purchase of spare parts. Exasperated due to the delay, plaintiff asked for the return of the typewriter. Upon examination by plaintiff, the typewriter was found to be in shambles, with the interior cover and some parts and screws missing. Plaintiff demanded from defendant the return of the missing parts, interior cover and the sum of P6. The defendant returned to the plaintiff some of the missing parts, the interior cover and the P6.

In addition, the defendant-appellee is likewise liable, under Article 1170 of the Code, for the cost of the missing parts, in the amount of P31.10, for in his obligation to repair the typewriter he was bound, but failed or neglected, to return it in the same condition it was when he received it.

Plaintiff had his typewriter repaired by another, and the repair job cost him a total of P89.85, including labor and materials.

[G.R. No. L-264 | October 4, 1946 | EN BANC | J. Hilado]

Plaintiff commenced this action before the City Court of Manila, demanding from the defendant the payment of P90 as actual and compensatory damages, P100 for temperate damages, P500 for moral damages, and P500 as attorney’s fees. Defendant claimed that the total cost of P89.95 should be fully chargeable against him since the repair invoice showed that the missing parts had total value of only P31.10. The court order the defendant to pay the sum of P31.10. Plaintiff directly appealed to the SC contending that the court a quo erred when it did not award the whole cost of labor and materials that went into the repair of the machine, as provided for in Article 1167 CC. Defendant countered that he is not liable at all, not even for the sum of P31.10, because his contract with plaintiff did not contain a period, so that plaintiff should have first filed a petition for the court to fix the period, under Article 1197 of the Civil Code. ISSUE: WON defendant can invoke Article 1197 CC on the ground that his contract with plaintiff did not contain a period? HELD: NO. The appealed judgment states that the "plaintiff delivered to the defendant . . . a portable typewriter for routine cleaning and servicing" ; that the defendant was not able to finish the job after some time despite repeated reminders made by the plaintiff" ; that the "defendant merely gave assurances, but failed to comply with the same" ; and that "after getting exasperated with the delay of the repair of the typewriter", the plaintiff went to the house of the defendant and asked for its return, which was done. The inferences derivable from these findings of fact are that the appellant and the appellee had a perfected contract for cleaning and servicing a typewriter; that they intended that the defendant was to finish it at some future time although such time was not specified; and that such time had passed without the work having been accomplished, far the defendant returned the typewriter cannibalized and unrepaired, which in itself is a breach of his obligation, without demanding that he should be given more time to finish the job, or compensation for the work he had already done. The time for compliance having evidently expired, and there being a breach of contract by non-performance, it was academic for the plaintiff to have first petitioned the court to fix a period for the performance of the contract before filing his complaint in this case. Defendant cannot invoke Article 1197 of the Civil Code for he virtually admitted nonperformance by returning the typewriter that he was obliged to repair in a non-working condition, with essential parts missing. The fixing of a period would thus be a mere formality and would

18


Appellant’s claims for moral and temperate damages and attorney’s fees were, however, correctly rejected by the trial court, for these were not alleged in his complaint (Record on Appeal, pages 1-5). VICENTE SINGSON ENCARNACION, plaintiff-appellee, vs. JACINTA BALDOMAR, ET AL., defendants-appellants. FACTS: Plaintiff leased his house to Jacinto Baldomar, and her son, Lefrado Fernando, upon a month-to-month basis. Subsequently, plaintiff notified defendants to vacate the said house because plaintiff needed it for his offices. Despite this demand, defendants insisted on continuing their occupancy. Plaintiff filed an action before the Municipal Court of Manila during which defendants were in arrears in the payment of the rental for that month. On appeal to the CFI, the defendants interposed that their lease contract with the plaintiff authorized them to continue occupying the house indefinitely as long as they faithfully pay their rentals. The CFI decided in favor of the plaintiff ratiocinating that the lease had always been upon a month-to-month basis. ISSUE: WON the lease contract entered into by the parties is for an indefinite period (as long as rentals are paid), or on a month-to-month basis? HELD: month-to-month. The defense thus set up by defendant Lefrado Fernando would leave to the sole and exclusive will of one of the contracting parties (defendants in this case) the validity and fulfillment of the contract of lease, within the meaning of article 1256 of the Civil Code, since the continuance and fulfillment of the contract would then depend solely and exclusively upon their free and uncontrolled choice between continuing paying the rentals or not, completely depriving the owner of all say in the matter. If this defense were to be allowed, so long as defendants elected to continue the lease by continuing the payment of the rentals, the owner would never be able to discontinue it; conversely, although the owner should desire the lease to continue, the lessees could effectively thwart his purpose if they should prefer to terminate the contract by the simple expedient of stopping payment of the rentals. This, of course, is prohibited by the aforesaid article of the Civil Code. (8 Manresa, 3d ed., pp. 626, 627; Cuyugan vs. Santos, 34 Phil., 100.) DARIO AND GAUDENCIO ELEIZEGUI, plaintiffs-appellees, vs. THE MANILA LAWN TENNIS CLUB, defendant-appellant.

G.R. No. 967

May 19, 1903

FACTS: This suit concerns the lease of a piece of land for a fixed consideration of P25 per month and to endure at the will of the lessee, by plaintiff-appellee to herein defendant-appellant.

As a result the plaintiff filed a case for unlawful detainer for the restitution of the land claiming that article 1569 of the Civil Code provided that a lessor may judicially dispossess the lessee upon the expiration of the conventional term or of the legal term; the conventional term — that is, the one agreed upon by the parties; the legal term, in defect of the conventional, fixed for leases by articles 1577 and 1581. The Plaintiffs argued that the duration of the lease depends upon the will of the lessor on the basis of Art. 1581 which provides that, "When the term has not been fixed for the lease, it is understood to be for years when an annual rental has been fixed, for months when the rent is monthly. . . ." The second clause of the contract provides as follows: "The rent of the said land is fixed at 25 pesos per month." The lower court ruled in favor of the plaintiff relying on Art. 1581. ISSUE: WON there was an agreement as to the term, and hence, Art. 1581 is inapplicable? HELD: Yes. The legal term cannot be applied, there being a conventional term, this destroys the assumption that the contract of lease was wholly terminated by the notice given by the plaintiffs, this notice being necessary only when it becomes necessary to have recourse to the legal term. Nor had the plaintiffs, under the contract, any right to give such notice. It is evident that they had no intention of stipulating that they reserved the right to give such notice. Clause 3 begins as follows: "Mr. Williamson, or whoever may succeed him as secretary of said club, may terminate this lease whenever desired without other formality than that of giving a month's notice. The owners of the land undertake to maintain the club as tenant as long as the latter shall see fit." The right of the one and the obligation of the others being thus placed in antithesis, there is something more, much more, than the inclusio unius, exclusio alterius. It is evident that the lessors did not intend to reserve to themselves the right to rescind that which they expressly conferred upon the lessee by establishing it exclusively in favor of the latter. It would be the greatest absurdity to conclude that in a contract by which the lessor has left the termination of the lease to the will of the lessee, such a lease can or should be terminated at the will of the lessor. ISSUE2: WON the lease can be considered as a life tenancy? HELD: No. It is not to be understood that we admit that the lease entered into was stipulated as a life tenancy, and still less as a perpetual lease. The terms of the contract express nothing to this effect. They do, whatever, imply this idea. If the lease could last during such time as the lessee might see fit, because it has been so stipulated by the lessor, it would last, first, as long as the will of the lessee — that is, all his life; second, during all the time that he may have succession, inasmuch as he who contracts does so for himself and his heirs. (Art. 1257 of the Civil Code.) The lease in question does not fall within any of the cases in which the rights and obligations arising from a contract cannot be transmitted to heirs, either by its nature, by agreement, or by provision of law. Furthermore, the lessee is an English association. Usufruct is a right of superior degree to that which arises from a lease. It is a real right and includes all the jus utendi and jus fruendi. Nevertheless, the utmost period for which a usufruct can endure, if constituted in favor a natural person, is the lifetime of the usufructuary (art. 513, sec. 1); and if in favor of juridical person, it cannot be created for more than thirty years. (Art. 515.) If the lease might be perpetual, in what would it be distinguished from an emphyteusis? Why should the lessee have a greater right than the usufructuary, as great as that of an emphyteuta, with respect to the duration of the enjoyment of the property of another? Why did they not contract for a usufruct or an emphyteusis? It was repeatedly stated in the document that it was a lease, and nothing but a lease, which was agreed upon: "Being in the full enjoyment of the necessary legal capacity to enter into this contract of lease . . . they have agreed upon the lease of said estate . . . They lease to Mr. Williamson, who receives it as such. . . . The rental is fixed at 25 pesos a month. . . . The owners bind themselves to

19


maintain the club as tenant. . . . Upon the foregoing conditions they make the present contract of lease. . . ." (Pp. 9, 11, and 12, bill of exceptions.) If it is a lease, then it must be for a determinate period. (Art. 1543.) By its very nature it must be temporary, just as by reason of its nature an emphyteusis must be perpetual, or for an unlimited period. (Art. 1608.) ISSUE3: WON the termination of the lease depends solely on the will of the lessee? HELD: No. The Civil Code has made provision for such a case in all kinds of obligations. In speaking in general of obligations with a term it has supplied the deficiency of the former law with respect to the "duration of the term when it has been left to the will of the debtor," and provides that in this case the term shall be fixed by the courts. (Art. 1128, sec. 2.) In every contract, as laid down by the authorities, there is always a creditor who is entitled to demand the performance, and a debtor upon whom rests the obligation to perform the undertaking. In bilateral contracts the contracting parties are mutually creditors and debtors. Thus, in this contract of lease, the lessee is the creditor with respect to the rights enumerated in article 1554, and is the debtor with respect to the obligations imposed by articles 1555 and 1561. The term within which performance of the latter obligation is due is what has been left to the will of the debtor. This term it is which must be fixed by the courts. The only action which can be maintained under the terms of the contract is that by which it is sought to obtain from the judge the determination of this period, and not the unlawful detainer action which has been brought — an action which presupposes the expiration of the term and makes it the duty of the judge to simply decree an eviction. To maintain the latter action it is sufficient to show the expiration of the term of the contract, whether conventional or legal; in order to decree the relief to be granted in the former action it is necessary for the judge to look into the character and conditions of the mutual undertakings with a view to supplying the lacking element of a time at which the lease is to expire. In the case of a loan of money or a commodatum of furniture, the payment or return to be made when the borrower "can conveniently do so" does not mean that he is to be allowed to enjoy the money or to make use of the thing indefinitely or perpetually. The courts will fix in each case, according to the circumstances, the time for the payment or return. This is the theory also maintained by the defendant in his demonstration of the fifth assignment of error. "Under article 1128 of the Civil Code," thus his proposition concludes, "contracts whose term is left to the will of one of the contracting parties must be fixed by the courts, . . . the conditions as to the term of this lease has a direct legislative sanction," and he cites articles 1128. "In place of the ruthless method of annihilating a solemn obligation, which the plaintiffs in this case have sought to pursue, the Code has provided a legitimate and easily available remedy. . . . The Code has provided for the proper disposition of those covenants, and a case can hardly arise more clearly demonstrating the usefulness of that provision than the case at bar." PHILIPPINE BANKING CORPORATION, representing the estate of JUSTINA SANTOS Y CANON FAUSTINO, deceased, plaintiff-appellant, vs. LUI SHE in her own behalf and as administratrix of the intestate estate of Wong Heng, deceased,defendant-appellant.

G.R. No. L-17587

September 12, 1967

FACTS: Justina Santos y Canon Faustino and her sister Lorenzo were the owners in common of a piece of land in Manila where two residential houses are built – one where the 2 sisters lived, and the other where Wong Heng had been a long-time lessee paying a monthly rental of P2,620. When Lorenzo died, Justina became the sole owner of the property, who being close to Wong Heng’s family, executed a contract of lease in favor of Wong, covering the portion already leased to him and another portion of the land, with a term of 50 years, although the lessee was given the right to withdraw at any time from the agreement; the monthy rental was P3,210. The contract was later on amended to cover the entire property, including the portion where the house of Justina stood. Eventually, she executed another contract giving Wong the option to buy the leased premises (in installments) conditioned upon Wong’s

naturalization which was already pending but eventually withdrawn. She then filed a petition to adopt Wong and his children but the same was abandoned. Later on, she executed two contracts, one extending the term of the lease to 99 years and the other fixing the term of the option to 50 years. In two will executed, she bade her legatees to respect the contracts she had entered into with Wong but in a later dated codicil, she appears to have a change of heart, directing the executor to secure annulment of the contracts on the ground of machinations and inducements practiced by Wong. A complaint was filed for the annulment of contracts alleging fraud, misrepresentation, inequitable conduct, undue influence and abuse of confidence and trust; and that the contracts were made to circumvent the constitutional prohibition on aliens acquiring lands and Philippine Naturalization Laws. In the meantime, Security Bank and Trust Co, was appointed guardian of the properties of Justina Santos, while Ephraim G. Gochangco was appointed guardian of her person. Except for the initial lease contract, all subsequent contracts were declared null and void. Among others, the plaintiff-appellant contends that the lease contract should likewise be annulled since Paragraph 5 thereof states that "The lessee may at any time withdraw from this agreement." It is claimed that this stipulation offends article 1308 of the Civil Code which provides that "the contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them." ISSUE: WON the above-cited provision of the lease contract makes it invalid? HELD: No. We have had occasion to delineate the scope and application of article 1308 in the early case of Taylor v. Uy Tieng Piao.1 We said in that case: Article 1256 [now art. 1308] of the Civil Code in our opinion creates no impediment to the insertion in a contract for personal service of a resolutory condition permitting the cancellation of the contract by one of the parties. Such a stipulation, as can be readily seen, does not make either the validity or the fulfillment of the contract dependent upon the will of the party to whom is conceded the privilege of cancellation; for where the contracting parties have agreed that such option shall exist, the exercise of the option is as much in the fulfillment of the contract as any other act which may have been the subject of agreement. Indeed, the cancellation of a contract in accordance with conditions agreed upon beforehand is fulfillment. And so it was held in Melencio v. Dy Tiao Lay that a "provision in a lease contract that the lessee, at any time before he erected any building on the land, might rescind the lease, can hardly be regarded as a violation of article 1256 [now art. 1308] of the Civil Code." The case of Singson Encarnacion v. Baldomar cannot be cited in support of the claim of want of mutuality, because of a difference in factual setting. In that case, the lessees argued that they could occupy the premises as long as they paid the rent. This is of course untenable, for as this Court said, "If this defense were to be allowed, so long as defendants elected to continue the lease by continuing the payment of the rentals, the owner would never be able to discontinue it; conversely, although the owner should desire the lease to continue the lessees could effectively thwart his purpose if they should prefer to terminate the contract by the simple expedient of stopping payment of the rentals." Here, in contrast, the right of the lessee to continue the lease or to terminate it is so circumscribed by the term of the contract that it cannot be said that the continuance of the lease depends upon his will. At any rate, even if no term had been fixed in the agreement, this case would at most justify the fixing of a period but not the annulment of the contract.

20


ISSUE2: WON the contracts are valid despite the absence of undue influence? HELD: No. This is not to say, however, that the contracts are valid. For the testimony just quoted, while dispelling doubt as to the intention of Justina Santos, at the same time gives the clue to what we view as a scheme to circumvent the Constitutional prohibition against the transfer of lands to aliens. "The illicit purpose then becomes the illegal causa" rendering the contracts void. Taken singly, the contracts show nothing that is necessarily illegal, but considered collectively, they reveal an insidious pattern to subvert by indirection what the Constitution directly prohibits. To be sure, a lease to an alien for a reasonable period is valid. So is an option giving an alien the right to buy real property on condition that he is granted Philippine citizenship. As this Court said in Krivenko v. Register of Deeds: [A]liens are not completely excluded by the Constitution from the use of lands for residential purposes. Since their residence in the Philippines is temporary, they may be granted temporary rights such as a lease contract which is not forbidden by the Constitution. Should they desire to remain here forever and share our fortunes and misfortunes, Filipino citizenship is not impossible to acquire. But if an alien is given not only a lease of, but also an option to buy, a piece of land, by virtue of which the Filipino owner cannot sell or otherwise dispose of his property,21 this to last for 50 years, then it becomes clear that the arrangement is a virtual transfer of ownership whereby the owner divests himself in stages not only of the right to enjoy the land ( jus possidendi, jus utendi, jus fruendi and jus abutendi) but also of the right to dispose of it ( jus disponendi) — rights the sum total of which make up ownership. It is just as if today the possession is transferred, tomorrow, the use, the next day, the disposition, and so on, until ultimately all the rights of which ownership is made up are consolidated in an alien. And yet this is just exactly what the parties in this case did within the space of one year, with the result that Justina Santos' ownership of her property was reduced to a hollow concept. If this can be done, then the Constitutional ban against alien landholding in the Philippines, as announced in Krivenko v. Register of Deeds, is indeed in grave peril. It does not follow from what has been said, however, that because the parties are in pari delicto they will be left where they are, without relief. For one thing, the original parties who were guilty of a violation of the fundamental charter have died and have since been substituted by their administrators to whom it would be unjust to impute their guilt. For another thing, and this is not only cogent but also important, article 1416 of the Civil Code provides, as an exception to the rule on pari delicto, that "When the agreement is not illegal per se but is merely prohibited, and the prohibition by law is designed for the protection of the plaintiff, he may, if public policy is thereby enhanced, recover what he has paid or delivered." The Constitutional provision that "Save in cases of hereditary succession, no private agricultural land shall be transferred or assigned except to individuals, corporations, or associations qualified to acquire or hold lands of the public domain in the Philippines" is an expression of public policy to conserve lands for the Filipinos. That policy would be defeated and its continued violation sanctioned if, instead of setting the contracts aside and ordering the restoration of the land to the estate of the deceased Justina Santos, this Court should apply the general rule of pari delicto. To the extent that our ruling in this case conflicts with that laid down in Rellosa v. Gaw Chee Hun and subsequent similar cases, the latter must be considered as pro tanto qualified. ACCORDINGLY, the contracts in question (Plff Exhs. 3-7) are annulled and set aside; the land subject-matter of the contracts is ordered returned to the estate of Justina Santos as represented by the Philippine Banking Corporation; Wong Heng (as substituted by the defendant-appellant Lui She) is ordered to pay the Philippine Banking Corporation the sum of P56,564.35, with legal interest from the date of the filing of the amended complaint; and the amounts consigned in court by Wong Heng shall be

applied to the payment of rental from November 15, 1959 until the premises shall have been vacated by his heirs. Costs against the defendant-appellant. LOURDES VALERIO LIM, petitioner, vs. PEOPLE OF THE PHILIPPINES, respondent.

G.R. No. L-34338 November 21, 1984

FACTS: Appellant and Maria Ayroso agreed that the former will sell the latter’s tobacco, embodied in a document, eventually marked Exhibit “A”, which reads: This is to certify that I have received from Mrs. Maria de Guzman Vda. de Ayroso. of Gapan, Nueva Ecija, six hundred fifteen kilos of leaf tobacco to be sold at Pl.30 per kilo. The proceed in the amount of Seven Hundred Ninety Nine Pesos and 50/100 (P 799.50) will be given to her as soon as it was sold. Appellant obtained the said tobacco leaves but paid only P240. Demands for payment were made upon appellant by Ayroso, through the latter’s sister Salud Bantug. After receiving some money orders which failed to cover the full amount, a complaint for estafa was filed. Peititioner was found guilty. On appeal, the CA affirmed the conviction. ISSUE: WON Exhibit A was for a “fixed period” and "the obligation was therefore, immediately demandable as soon as the tobacco was sold"? HELD: Yes. It is clear in the agreement, Exhibit "A", that the proceeds of the sale of the tobacco should be turned over to the complainant as soon as the same was sold, or, that the obligation was immediately demandable as soon as the tobacco was disposed of. Hence, Article 1197 of the New Civil Code, which provides that the courts may fix the duration of the obligation if it does not fix a period, does not apply. GREGORIO ARANETA, INC., petitioner, vs. THE PHILIPPINE SUGAR ESTATES LTD., respondent.

G.R. No. L-22558

DEVELOPMENT

CO.,

May 31, 1967

FACTS: JM Tuason & Co, Inc., through Gregorio Araneta, Inc., sold a portion of its parcel of land known as Sta. Mesa Heights Subdivision to respondent Philippine Sugar Estates Development Co., Ltd., with a stipulation, aside from the mortgage, that the buyer will build on the said parcel of land the Sto. Domingo Church and Convent, while the seller will clear the block surrounding the lot. The buyer complied, but the seller which began constructing the streets, is unable to finish the construction in the Northeast side because a third-party, by the name of Manuel Abundo, who is occupying the middle part thereof, refused to vacate the same. Respondent filed a complaint for specific performance against petitioner. In their answer, JM Tuason & Co., and petitioner Gregorio Araneta, Inc. alleged that the action was premature since its obligation was without a definite period which needs to be fixed first by ht ecourt in a proper suit. The trial court dismissed the complaint. Upon reconsideration, the trial court fixed the period to two years from notice. On appeal, the CA affirmed that the fixing of the period was well within the pleadings. ISSUE: WON the contract between the parties did not contain a period which justifies the trial and appellate court to fix the same? HELD: No. Neither of the courts below seems to have noticed that, on the hypothesis stated, what the answer put in issue was not whether the court should fix the time of performance, but whether or not the parties agreed that the petitioner should have reasonable time to perform its part of the bargain. If the contract so provided, then there was a period fixed, a

21


"reasonable time;" and all that the court should have done was to determine if that reasonable time had already elapsed when suit was filed if it had passed, then the court should declare that petitioner had breached the contract, as averred in the complaint, and fix the resulting damages. On the other hand, if the reasonable time had not yet elapsed, the court perforce was bound to dismiss the action for being premature. But in no case can it be logically held that under the plea above quoted, the intervention of the court to fix the period for performance was warranted, for Article 1197 is precisely predicated on the absence of any period fixed by the parties. Even on the assumption that the court should have found that no reasonable time or no period at all had been fixed (and the trial court's amended decision nowhere declared any such fact) still, the complaint not having sought that the Court should set a period, the court could not proceed to do so unless the complaint in as first amended; for the original decision is clear that the complaint proceeded on the theory that the period for performance had already elapsed, that the contract had been breached and defendant was already answerable in damages. Granting, however, that it lay within the Court's power to fix the period of performance, still the amended decision is defective in that no basis is stated to support the conclusion that the period should be set at two years after finality of the judgment. The list paragraph of Article 1197 is clear that the period cannot be set arbitrarily. The law expressly prescribes that — the Court shall determine such period as may under the circumstances been probably contemplated by the parties. All that the trial court's amended decision (Rec. on Appeal, p. 124) says in this respect is that "the proven facts precisely warrant the fixing of such a period," a statement manifestly insufficient to explain how the two period given to petitioner herein was arrived at. It must be recalled that Article 1197 of the Civil Code involves a two-step process. The Court must first determine that "the obligation does not fix a period" (or that the period is made to depend upon the will of the debtor)," but from the nature and the circumstances it can be inferred that a period was intended" (Art. 1197, pars. 1 and 2). This preliminary point settled, the Court must then proceed to the second step, and decide what period was "probably contemplated by the parties" (Do., par. 3). So that, ultimately, the Court cannot fix a period merely because in its opinion it is or should be reasonable, but must set the time that the parties are shown to have intended. As the record stands, the trial Court appears to have pulled the two-year period set in its decision out of thin air, since no circumstances are mentioned to support it. Plainly, this is not warranted by the Civil Code. In this connection, it is to be borne in mind that the contract shows that the parties were fully aware that the land described therein was occupied by squatters, because the fact is expressly mentioned therein (Rec. on Appeal, Petitioner's Appendix B, pp. 12-13). As the parties must have known that they could not take the law into their own hands, but must resort to legal processes in evicting the squatters, they must have realized that the duration of the suits to be brought would not be under their control nor could the same be determined in advance. The conclusion is thus forced that the parties must have intended to defer the performance of the obligations under the contract until the squatters were duly evicted, as contended by the petitioner Gregorio Araneta, Inc. The Court of Appeals objected to this conclusion that it would render the date of performance indefinite. Yet, the circumstances admit no other reasonable view; and this very indefiniteness is what explains why the agreement did not specify any exact periods or dates of performance. It follows that there is no justification in law for the setting the date of performance at any other time than that of the eviction of the squatters occupying the land in question; and in not so holding, both the trial Court and the Court of Appeals committed reversible error. It is not denied that the case against one of the squatters, Abundo, was still pending in the Court of Appeals when its decision in this case was rendered. PACIFICA MILLARE, petitioner,

vs. HON. HAROLD M. HERNANDO, In his capacity as Presiding Judge, Court of Instance of Abra, Second Judicial District, Branch I, ANTONIO CO and ELSA CO, respondents.

G.R. No. L-55480 June 30, 1987

FACTS: On June 1975, Pacifica Millare, as lessor, entered into a contract to lease to private respondent Elsa Co, married to Antonio Co, for P350 per month the “People’s Restaurant”, a commercial establishment in Abra. The present dispute arose from events which transpired during the months of May and July in 1980. According to the Co spouses, sometime during the last week of May 1980, the lessor informed them that they could continue leasing the People's Restaurant so long as they were amenable to paying creased rentals of P1,200.00 a month. In response, a counteroffer of P700.00 a month was made by the Co spouses. At this point, the lessor allegedly stated that the amount of monthly rentals could be resolved at a later time since "the matter is simple among us", which alleged remark was supposedly taken by the spouses Co to mean that the Contract of Lease had been renewed, prompting them to continue occupying the subject premises and to forego their search for a substitute place to rent. In contrast, the lessor flatly denied ever having considered, much less offered, a renewal of the Contract of Lease. The above notwithstanding, Mrs. Millare wrote the Co spouses to vacate the leased premises as she had no intention of renewing the contract. In reply, the Co spouses signified their unwillingness to pay the P1,200 monthly rentals. The Co spouses filed a complaint seeking reneweal of the lease contract at a rate of P700 a month. Later on, Mrs. Millare filed an ejectment case against the Co Spouses. The respondent judge ordered the renewal of the Contract of Lease holding that par. 13 of the Contract already is a consummated and finished mutual agreement of the parties to renew the contract of lease, what is left unsettled between the parties is the amount of monthly rental. Par. 13 reads: 13. This contract of lease is subject to the laws and regulations ofthe goverrunent; and that this contract of lease may be renewed after a period of five (5) years under the terms and conditions as will be mutually agreed upon by the parties at the time of renewal; ... (Emphasis supplied.) ISSUE: WON there was absence of period and the judge may fix the same? HELD: No. Clearly, the respondent judge's grasp of both the law and the Enghsh language is tenuous at best. We are otherwise unable to comprehend how he arrived at the reading set forth above. Paragraph 13 of the Contract of Lease can only mean that the lessor and lessee may agree to renew the contract upon their reaching agreement on the terms and conditions to be embodied in such renewal contract. Failure to reach agreement on the terms and conditions of the renewal contract will of course prevent the contract from being renewed at all. In the instant case, the lessor and the lessee conspicuously failed to reach agreement both on the amount of the rental to be payable during the renewal term, and on the term of the renewed contract. The respondent judge cited Articles 1197 and 1670 of the Civil Code to sustain the "Judgment by Default" by which he ordered the renewal of the lease for another term of five years and fixed monthly rentals thereunder at P700.00 a month. Article 1197 of the Civil Code provides as follows:

If the obligation does not fix a period, but from its nature and the circumstances it can be inferred that a period was intended, the courts may fix the duration thereof.

The courts shall also fix the duration of the period when it depends upon

the will of the debtor.

22


In every case, the courts shall determine such period as may, under the circumstances, have been probably contemplated by the parties. Once fixed by the courts, the period cannot be changed by them. (Emphasis supplied.) The first paragraph of Article 1197 is clearly inapplicable, since the Contract of Lease did in fact fix an original period of five years, which had expired. It is also clear from paragraph 13 of the Contract of Lease that the parties reserved to themselves the faculty of agreeing upon the period of the renewal contract. The second paragraph of Article 1197 is equally clearly inapplicable since the duration of the renewal period was not left to the will of the lessee alone, but rather to the will of both the lessor and the lessee. Most importantly, Article 1197 applies only where a contract of lease clearly exists. Here, the contract was not renewed at all, there was in fact no contract at all the period of which could have been fixed. Article 1670 of the Civil Code reads thus: If at the end of the contract the lessee should continue enjoying the thing left for 15 days with the acquiescence of the lessor and unless a notice to the contrary by either party has previously been given. It is understood that there is an implied new lease, not for the period of the original contract but for the time established in Articles 1682 and 1687. The ther terms of the original contract shall be revived. (Emphasis suplied.) The respondents themselves, public and private, do not pretend that the continued occupancy of the leased premises after 31 May 1980, the date of expiration of the contract, was with the acquiescence of the lessor. Even if it be assumed that tacite reconduccion had occurred, the implied new lease could not possibly have a period of five years, but rather would have been a month-to-month lease since the rentals (under the original contract) were payable on a monthly basis. At the latest, an implied new lease (had one arisen) would have expired as of the end of July 1980 in view of the written demands served by the petitioner upon the private respondents to vacate the previously leased premises. It follows that the respondent judge's decision requiring lease has no basis in law or in fact. Save in the limited situations envisaged in Articles 1197 and 1670 of the Civil not obtain here, courts have no authority to prescribe conditions of a contract for the parties.

renewal of the and exceptional Code, which do the terms and

Contractual terms and conditions created by a court for two parties are a contradiction in terms. If they are imposed by a judge who draws upon his own private notions of what morals, good customs, justice, equity and public policy" demand, the resulting "agreement" cannot, by definition, be consensual or contractual in nature. It would also follow that such coerced terms and conditions cannot be the law as between the parties themselves. Contracts spring from the volition of the parties. That volition cannot be supplied by a judge and a judge who pretends to do so, acts tyrannically, arbitrarily and in excess of his jurisdiction. 2.

As to Plurality of Prestation a. b.

Conjunctive usually use the word “and” compared to alternative obligations which use the word “or”. Alternative

Art. 1199. A person alternatively bound by different prestations shall completely perform one of them. The creditor cannot be compelled to receive part of one and part of the other undertaking.

Alternative Obligations: where several objects are due, the fulfillment of one is sufficient. (Tolentino) Art. 1200. The right of choice belongs to the debtor, unless it has been expressly granted to the creditor. The debtor shall have no right to choose those prestations which are impossible, unlawful or which could not have been the object of the obligation.

General Rule: the right of choice belongs to the debtor. Exceptions: (1) when EXPRESSLY granted to the creditor, i.e., it cannot be implied; or (2) when the right of choice is given to a third party.

Uribe: no limitation in the law. Even before the obligation becomes due and demandable.

Alternative vs. Facultative Obligation:

Art. 1201. The choice shall produce no effect except from the time it has been communicated.

Concentration: technical term of the act of making a choice in alternative obligations.

Choice is indivisible: the debtor cannot choose part of one prestation and

As to contents of the obligation

ALTERNATIVE OBLIGATION there are various prestations all of which constitute parts of the obligation

part of another.

Art. 1202. The debtor shall lose the right of choice when among the prestations whereby he is alternatively bound, only one is practicable. Art. 1203. If through the creditor's acts the debtor cannot make a choice according to the terms of the obligation, the latter may rescind the contract with damages. Art. 1204. The creditor shall have a right to indemnity for damages when, through the fault of the debtor, all the things which are alternatively the object of the obligation have been lost, or the compliance of the obligation has become impossible. The indemnity shall be fixed taking as a basis the value of the last thing which disappeared, or that of the service which last became impossible. Damages other than the value of the last thing or service may also be awarded. Art. 1205. When the choice has been expressly given to the creditor, the obligation shall cease to be alternative from the day when the selection has been communicated to the debtor. Until then the responsibility of the debtor shall be governed by the following rules: (1) If one of the things is lost through a fortuitous event, he shall perform the obligation by delivering that which the creditor should choose from among the remainder, or that which remains if only one subsists; (2) If the loss of one of the things occurs through the fault of the debtor, the creditor may claim any of those subsisting, or the price of that which, through the fault of the former, has disappeared, with a right to damages; (3) If all the things are lost through the fault of the debtor, the choice by the creditor shall fall upon the price of any one of them, also with indemnity for damages.

As to nullity

the nullity of one prestation does not invalidate the obligation, which is still in force with respect to those which have no vice

As to choice As to effect of loss

the right to choose may be given to the creditor only the impossibility of all the prestations due without fault of the debtor extinguishes the obligation

QUESTION: When one of the prestations become impossible to perform, will that result in the extinguishment of the obligation? 1. Conjunctive: Yes. 2. Alternative: Specific things. Depending on who has the right of choice. a. If there had already been a communication of choice: the obligation has already been simple. The lost of the chosen prestation extinguishes the obligation. b. Due to the fault of the debtor, if the right belongs to the debtor: i. Perform remaining obligations; ii. No liability for damages. c. Due to the fault of the debtor, if the right of choice belongs to the creditor: i. Demand value of thing lost plus damages; ii. Choose from the remaining plus damages (according to the provision, however, according to Jurado and Atty. Uribe, no damages, since creditor did not actually sustain any damage) *if due to fortuitous event, the debtor may perform the obligation as to the choice of the creditor from the remaining prestations. d.

The same rules shall be applied to obligations to do or not to do in case one, some or all of the prestations should become impossible. c.

Facultative

Art. 1206. When only one prestation has been agreed upon, but the obligor may render another in substitution, the obligation is called facultative. The loss or deterioration of the thing intended as a substitute, through the negligence of the obligor, does not render him liable. But once the substitution has been made, the obligor is liable for the loss of the substitute on account of his delay, negligence or fraud.

Facultative Obligations: there are more than one prestation, but only

one is demandable, unlike in alternative where any of the prestations may be demandable.

Debtor: always has the right to substitute. He cannot be compelled to

FACULTATIVE OBLIGATION only ONE principal prestation constitutes the obligation, the accessory being only a means to facilitate payment. the nullity of the principal prestation invalidates the obligation & the creditor cannot demand the substitute even when this is valid only the debtor can choose the substitute prestation. the impossibility of the principal prestation is sufficient to extinguish the obligation, even if the substitute is possible

3.

Due to the fault of the creditor, if the right of choice belongs to the debtor; i. He may rescind the obligation (option only, not automatic) plus damages; ii. Perform one of the remaining prestations + damages. (possible if the debtor is not the owner of the property, owner may go against the creditor for the loss of the thing) Facultative: It depends: a. If the loss happened BEFORE substitution, and i. the prestation lost is the SUBSTITUTE: not extinguished; ii. the prestation lost is the PRINCIPAL: extinguished. b. If the loss happened AFTER substitution, and i. The prestation lost is SUBSTITUTE: extinguished. ii. The prestation lost is PRINCIPAL: not extinguished.

QUESTION: IF ALL things lost: if right of choice is with the: a. Debtor: value of the last prestation lost (may be indicative of his choice. The value of the last prestation was intended to be the one to be delivered) b. Creditor: value of any of the prestation.

make the substitution.

3.

As to Rights & Obligations of Multiple Parties

When to make substitution: Professor Tolentino: if the obligation is

a.

Joint Obligations

already due and demandable. Professor Jurado: only if debtor is in delay.

23


A joint obligation is one in which each of the debtors is liable only for a proportionate part of the debt or each creditor is entitled only to a proportionate part of the credit. In joint OBLIGATIONS, there are as many OBLIGATIONS as there are debtors multiplied by the number of creditors.

Other Terms: mancomunada or mancomunada simple or pro rata. (Tolentino) EFFECTS: 1. 2.

3. 4. 5. b.

The demand by one creditor upon one debtor, produces the effects of default only with respect to the creditor who demanded & the debtor on whom the demand was made, but not with respect to the others; The interruption of prescription by the judicial demand of one creditor upon a debtor does not benefit the other creditors nor interrupt the prescription as to other debtors. On the same principle, a partial payment or acknowledgement made by one of several joint debtors does not stop the running of the statute of limitations as to the others; The vices of each obligation arising from the personal defect of a particular debtor or creditor does not affect the obligation or rights of the others; The insolvency of a debtor does not increase the responsibility of his co-debtors, nor does it authorize a creditor to demand anything from his co-creditors; In the joint divisible obligation, the defense of res judicata is not extended from one debtor to another. (Manresa) Solidary Obligation

A solidary obligation is one in which the debtor is liable for the entire obligation or each creditor is entitled to demand the whole obligation. If there is only one obligation, it is a solidary obligation. Art. 1207. The concurrence of two or more creditors or of two or more debtors in one and the same obligation does not imply that each one of the former has a right to demand, or that each one of the latter is bound to render, entire compliance with the prestation. There is a solidary liability only when the obligation expressly so states, or when the law or the nature of the obligation requires solidarity. (1137a) SOLIDRY OBLIGATION: arises when the obligation: 1. Expressly so states (stipulated); Terms which may indicate solidarity: mancomunada solidaria or joint & several; in solidum; juntos o separadamente; individually and collectively. “individually and jointly” ERNESTO V. RONQUILLO, petitioner, vs. HONORABLE COURT OF APPEALS AND ANTONIO P. SO, respondents.

G.R. No. L-55138 September 28, 1984

FACTS: Petitioner Ernesto V. Ronquillo was one of four (4) defendants in Civil Case No. 33958 filed by private respondent Antonio P. So, on July 23, 1979, for the collection of the sum of P17,498.98 plus attorney's fees and costs. The other defendants were Offshore Catertrade Inc., Johnny Tan and Pilar Tan, such amount representing the value of the checks issued by said defendants in payment for foodstuffs delivered to and received by them. The said checks were dishonored by the drawee bank.

six months from January 1980, or before June 30, 1980; (Emphasis supplied) xxx xxx xxx 4. That both parties agree that failure on the part of either party to comply with the foregoing terms and conditions, the innocent party will be entitled to an execution of the decision based on this compromise agreement and the defaulting party agrees and hold themselves to reimburse the innocent party for attorney's fees, execution fees and other fees related with the execution. xxx xxx xxx For failure of the defendants to make the initial payments as described above, moved for execution, which was opposed by herein petitioner contending that his inability to make the payment was due to private respondent’s own act of making himself scarce and inaccessible. Petitioner prayed that respondent be made to accept P13,750, as his pro-rata share in the P55,000. Another defendant Pilar Tan, offered to pay the same amount. Private respondent refused to accept their payments. As such, they deposited the same with the Clerk of Court which was subsequently withdrawn by private respondent. The trial court then issued an order of execution against the other two defendants who did not pay their shares. Upon reconsideration, the trial court ruled as follows: Regardless of whatever the compromise agreement has intended the payment whether jointly or individually, or jointly and severally, the fact is that only P27,500.00 has been paid. There appears to be a nonpayment in accordance with the compromise agreement of the amount of P27,500.00 on or before December 24, 1979. The parties are reminded that the payment is condition sine qua non to the lifting of the preliminary attachment and the execution of an affidavit of desistance. A writ of execution was eventually issued against the defendants including petitioner. Petitioner filed a petition for certiorari and prohibition which was denied. ISSUE: WON the petitioner is solidarily liable with the other defendants in accordance with the compromise agreement? HELD: Yes. Article 1207 and 1208 of the Civil Code provides — Art. 1207. The concurrence of two or more debtors in one and the same obligation does not imply that each one of the former has a right to demand, or that each one of the latter is bound to render, entire compliance with the prestation. Then is a solidary liability only when the obligation expressly so states, or when the law or the nature of the obligation requires solidarity. Art. 1208. If from the law,or the nature or the wording of the obligation to which the preceding article refers the contrary does not appear, the credit or debt shall be presumed to be divided into as many equal shares as there are creditors and debtors, the credits or debts being considered distinct from one another, subject to the Rules of Court governing the multiplicity of quits. By the express term of the compromise agreement and the decision based upon it, the defendants obligated themselves to pay their obligation "individually and jointly".

On December 13, 1979, the lower court rendered its Decision based on the compromise agreement submitted by the parties, the pertinent portion of which reads as follows:

The term "individually" has the same meaning as "collectively", "separately", "distinctively", respectively or "severally". An agreement to be "individually liable" undoubtedly creates a several obligation, and a "several obligation is one by which one individual binds himself to perform the whole obligation.

1. Plaintiff agrees to reduce its total claim of P117,498-95 to only P11,000 .00 and defendants agree to acknowledge the validity of such claim and further bind themselves to initially pay out of the total indebtedness of P10,000.00 the amount of P55,000.00 on or before December 24, 1979, the balance of P55,000.00, defendants individually and jointly agree to pay within a period of

In the case of Parot vs. Gemora We therein ruled that "the phrase juntos or separadamente or in the promissory note is an express statement making each of the persons who signed it individually liable for the payment of the full amount of the obligation contained therein." Likewise in Un Pak Leung vs. Negorra We held that

24


"in the absence of a finding of facts that the defendants made themselves individually liable for the debt incurred they are each liable only for one-half of said amount. The obligation in the case at bar being described as "individually and jointly", the same is therefore enforceable against one of the numerous obligors. 2.

When the law requires solidarity;

Revised Penal Code Art. 109. Share of each person civilly liable. — If there are two or more persons civilly liable for a felony, the courts shall determine the amount for which each must respond. Art. 110. Several and subsidiary liability of principals,

Succession Art. 927. If two or more heirs take possession of the estate, they shall be solidarily liable for the loss or destruction of a thing devised or bequeathed, even though only one of them should have been negligent. (n)

Partnership Art. 1824. All partners are liable solidarily with the partnership for everything chargeable to the partnership under Articles 1822 and 1823. (n)

Agency Art. 1911. Even when the agent has exceeded his authority, the principal is solidarily liable with the agent if the former allowed the latter to act as though he had full powers. (n) Art. 1915. If two or more persons have appointed an agent for a common transaction or undertaking, they shall be solidarily liable to the agent for all the consequences of the agency. (1731)

Loan Art. 1945. When there are two or more bailees to whom a thing is loaned in the same contract, they are liable solidarily. (1748a)

Solutio Indebiti Art. 2157. The responsibility of two or more payees, when there has been payment of what is not due, is solidary. (n)

Negotiorum Gestio Art. 2146. If the officious manager delegates to another person all or some of his duties, he shall be liable for the acts of the delegate, without prejudice to the direct obligation of the latter toward the owner of the business. The responsibility of two or more officious managers shall be solidary, unless the management was assumed to save the thing or business from imminent danger. (1890a)

Quasi-Delict Art. 2194. The responsibility of two or more persons who are liable for quasi-delict is solidary. (n)

Family Code Art. 94. The absolute community of property shall be liable for: xxx If the community property is insufficient to cover the foregoing liabilities, except those falling under paragraph (9), the spouses shall be solidarily liable for the unpaid balance with their separate properties. Art. 121. The conjugal partnership shall be liable for: xxx If the conjugal partnership is insufficient to cover the foregoing

25

liabilities, the spouses shall be solidarily liable for the unpaid balance with their separate properties.


accomplices and accessories of a felony; Preference in payment. — Notwithstanding the provisions of the next preceding article, the principals, accomplices, and accessories, each within their respective class, shall be liable severally (in solidum) among themselves for their quotas, and subsidiaries for those of the other persons liable. The subsidiary liability shall be enforced, first against the property of the principals; next, against that of the accomplices, and, lastly, against that of the accessories. Whenever the liability in solidum or the subsidiary liability has been enforced, the person by whom payment has been made shall have a right of action against the others for the amount of their respective shares. ROLITO CALANG and PHILTRANCO SERVICE INC., Petitioners, vs. PEOPLE OF THE PHILIPPINES, Respondent.

G.R. No. 190696

ENTERPRISES,

August 3, 2010

Since the cause of action against Calang arose from delict, Philtranco, whose liability arose from quasi-delict, cannot be made solidarily liable with Calang. Art. 2180 does not apply to civil liability arising from delict. FACTS: As a result of the collision of Philtranco Bus driven by one Rolito Calang to the left portion of a jeep coming from the opposite direction, Cresencio Pinohermoso, the driver of the jeep, lost control of the vehicle and bumped and killed Jose Mabansag, a bystander. The jeep turned turtle three times and two of the passengers thereof, Armando Nablo and an unidentified woman, were instantly killed, while the other passengers were sustained serious physical injuries. Calang was charged with multiple homicide, multiple serious physical injuries and damage to property through reckless imprudence and was found guilty. The RTC ordered Calang and Philtranco, jointly and severally to pay P50,000 as death indemnity to the heirs of Armando, P50,000 death indemnity to the heirs of Mabansag and P90,083.93 as actual damages to private complainants. On appeal, the CA affirmed the RTC in toto. The CA found that the RTC correctly held Philtranco jointly and severally liable with petitioner Calang, for failing to prove that it had exercised the diligence of a good father of the family to prevent the accident. The petitioners filed with this Court a petition for review on certiorari. In our Resolution dated February 17, 2010, we denied the petition for failure to sufficiently show any reversible error in the assailed decision to warrant the exercise of this Court’s discretionary appellate jurisdiction. ISSUE: WON Philtranco can be held jointly and severally liable with Calang even if it was not a party to the criminal case? HELD: No. Liability of Calang We see no reason to overturn the lower courts’ finding on Calang’s culpability. The finding of negligence on his part by the trial court, affirmed by the CA, is a question of fact that we cannot pass upon without going into factual matters touching on the finding of negligence. In petitions for review

on certiorari under Rule 45 of the Revised Rules of Court, this Court is limited to reviewing only errors of law, not of fact, unless the factual findings complained of are devoid of support by the evidence on record, or the assailed judgment is based on a misapprehension of facts. Liability of Philtranco We, however, hold that the RTC and the CA both erred in holding Philtranco jointly and severally liable with Calang. We emphasize that Calang was charged criminally before the RTC. Undisputedly, Philtranco was not a direct party in this case. Since the cause of action against Calang was based on delict, both the RTC and the CA erred in holding Philtranco jointly and severally liable with Calang, based on quasidelict under Articles 2176 and 2180 of the Civil Code. Articles 2176 and 2180 of the Civil Code pertain to the vicarious liability of an employer for quasi-delicts that an employee has committed. Such provision of law does not apply to civil liability arising from delict. If at all, Philtranco’s liability may only be subsidiary. Article 102 of the Revised Penal Code states the subsidiary civil liabilities of innkeepers, tavernkeepers and proprietors of establishments, as follows: In default of the persons criminally liable, innkeepers, tavernkeepers, and any other persons or corporations shall be civilly liable for crimes committed in their establishments, in all cases where a violation of municipal ordinances or some general or special police regulations shall have been committed by them or their employees. Innkeepers are also subsidiary liable for the restitution of goods taken by robbery or theft within their houses from guests lodging therein, or for the payment of the value thereof, provided that such guests shall have notified in advance the innkeeper himself, or the person representing him, of the deposit of such goods within the inn; and shall furthermore have followed the directions which such innkeeper or his representative may have given them with respect to the care of and vigilance over such goods. No liability shall attach in case of robbery with violence against or intimidation of persons unless committed by the innkeeper’s employees. The foregoing subsidiary liability applies to employers, according to Article 103 of the Revised Penal Code, which reads: The subsidiary liability established in the next preceding article shall also apply to employers, teachers, persons, and corporations engaged in any kind of industry for felonies committed by their servants, pupils, workmen, apprentices, or employees in the discharge of their duties. The provisions of the Revised Penal Code on subsidiary liability – Articles 102 and 103 – are deemed written into the judgments in cases to which they are applicable. Thus, in the dispositive portion of its decision, the trial court need not expressly pronounce the subsidiary liability of the employer. Nonetheless, before the employers’ subsidiary liability is enforced, adequate evidence must exist establishing that (1) they are indeed the employers of the convicted employees; (2) they are engaged in some kind of industry; (3) the crime was committed by the employees in the discharge of their duties; and (4) the execution against the latter has not been satisfied due to insolvency. The determination of these conditions may be done in the same criminal action in which the employee’s liability, criminal and civil, has been pronounced, in a hearing set for that precise purpose, with due notice to the employer, as part of the proceedings for the execution of the judgment. 3.

When the nature of the obligation requires solidarity.

Obligations arising from different sources: In Gutierrez vs. Gutierrez,

MALAYAN INSURANCE CO., INC., petitioner, vs. THE HON. COURT OF APPEALS (THIRD DIVISION) MARTIN C. VALLEJOS, SIO CHOY, SAN LEON RICE MILL, INC. and PANGASINAN TRANSPORTATION CO., INC., respondents. G.R. No. L-36413 September 26, 1988 FACTS: Petitioner issued in favor of private respondent Sui Choy Private Car a Comprehensive Policy coverying Willy’s jeep covering “own damage” not to exceed P600.00 and “third-party liability” in the amount of P20,000. During the effectivity of said insurance policy, the jeep, driven by Juan Campollo, an employee of respondent San Leon Rice Mill, Inc. collided with a passenger bus belonging to PANTRANCO causing damage to the insured vehicle and injuries to the driver, Campollo and the respondent Martin Vallejos, a passenger of the jeep. Vallejos filed an action for damages against Sio Choy, Mayan Insurance and PANTRANCO. In their answers:  PANTRANCO claimed that the jeep of Sio Choy was then operated at an excessive speed and bumped PANTRANCO which had moved to, and stopped at, the shoulder of the highway to avoid the jeep; and that it had observed the diligence of a good father of a family to prevent damage, especially in the selection and supervision of its employees and in the maintenance of its motor vehicles;  Sio Choy and the petitioner insurance company, in their answer, also denied liability to the plaintiff, claiming that the fault in the accident was solely imputable to the PANTRANCO.  Sio Choy, however, later filed a separate answer with a cross-claim against the herein petitioner wherein he alleged that he had actually paid the plaintiff, Martin C. Vallejos, the amount of P5,000.00 for hospitalization and other expenses, and claimed reimbursement for the damage to his motor vehicle, as well as for any liability to third persons arising out of any accident during the effectivity of such insurance contract.  Also later, the herein petitioner sought, and was granted, leave to file a third-party complaint against the San Leon Rice Mill, Inc. for the reason that the person driving the jeep of Sio Choy, at the time of the accident, was an employee of the San Leon Rice Mill, Inc. performing his duties within the scope of his assigned task, and not an employee of Sio Choy; and that, as the San Leon Rice Mill, Inc. is the employer of the deceased driver, Juan P. Campollo, it should be liable for the acts of its employee, pursuant to Art. 2180 of the Civil Code. The trial court rendered a decision in favor of the plaintiff and against Sio Choy, Malayan Insurance and San Leon Rice Mill. On appeal, the respondent Court of Appeals affirmed the judgment of the trial court that Sio Choy, the San Leon Rice Mill, Inc. and the Malayan Insurance Co., Inc. are jointly and severally liable for the damages awarded to the plaintiff Martin C. Vallejos. It ruled, however, that the San Leon Rice Mill, Inc. has no obligation to indemnify or reimburse the petitioner insurance company for whatever amount it has been ordered to pay on its policy, since the San Leon Rice Mill, Inc. is not a privy to the contract of insurance between Sio Choy and the insurance company. ISSUE: WON petitioner is solidarily liable with San Leon and Sio Choy? HELD: No. We do not agree with the aforesaid ruling. We hold instead that it is only respondents Sio Choy and San Leon Rice Mill, Inc, (to the exclusion of the petitioner) that are solidarily liable to respondent Vallejos for the damages awarded to Vallejos.

the driver of the bus, who is liable under quasi-delict, and the owner, liable under contract was held to be solidarily liable although no explanation was provided why their obligation was considered such.

It must be observed that respondent Sio Choy is made liable to said plaintiff as owner of the ill-fated Willys jeep, pursuant to Article 2184 of the Civil Code which provides:

However, in Malayan Insurance, the SC held that there is no solidarity since the obligation arose from different sources.

Art. 2184. In motor vehicle mishaps, the owner is solidarily liable with his driver, if the former, who was in the vehicle, could have, by the use of due

26


diligence, prevented the misfortune it is disputably presumed that a driver was negligent, if he had been found guilty of reckless driving or violating traffic regulations at least twice within the next preceding two months.

contract whereby one undertakes for a consideration to indemnify another against loss, damage, or liability arising from an unknown or contingent event."

If the owner was not in the motor vehicle, the provisions of article 2180 are applicable.

In the case at bar, the trial court held petitioner together with respondents Sio Choy and San Leon Rice Mills Inc. solidarily liable to respondent Vallejos for a total amount of P29,103.00, with the qualification that petitioner's liability is only up to P20,000.00. In the context of a solidary obligation, petitioner may be compelled by respondent Vallejos to pay the entire obligation of P29,013.00, notwithstanding the qualification made by the trial court. But, how can petitioner be obliged to pay the entire obligation when the amount stated in its insurance policy with respondent Sio Choy for indemnity against third party liability is only P20,000.00? Moreover, the qualification made in the decision of the trial court to the effect that petitioner is sentenced to pay up to P20,000.00 only when the obligation to pay P29,103.00 is made solidary, is an evident breach of the concept of a solidary obligation. Thus, We hold that the trial court, as upheld by the Court of Appeals, erred in holding petitioner, solidarily liable with respondents Sio Choy and San Leon Rice Mill, Inc. to respondent Vallejos.

On the other hand, it is noted that the basis of liability of respondent San Leon Rice Mill, Inc. to plaintiff Vallejos, the former being the employer of the driver of the Willys jeep at the time of the motor vehicle mishap, is Article 2180 of the Civil Code which reads: Art. 2180. The obligation imposed by article 2176 is demandable not only for one's own acts or omissions, but also for those of persons for whom one is responsible. xxx xxx xxx Employers shall be liable for the damages caused by their employees and household helpers acting within the scope of their assigned tasks, even though the former are not engaged ill any business or industry. xxx xxx xxx The responsibility treated in this article shall cease when the persons herein mentioned proved that they observed all the diligence of a good father of a family to prevent damage. It thus appears that respondents Sio Choy and San Leon Rice Mill, Inc. are the principal tortfeasors who are primarily liable to respondent Vallejos. The law states that the responsibility of two or more persons who are liable for a quasi-delict is solidarily. On the other hand, the basis of petitioner's liability is its insurance contract with respondent Sio Choy. If petitioner is adjudged to pay respondent Vallejos in the amount of not more than P20,000.00, this is on account of its being the insurer of respondent Sio Choy under the third party liability clause included in the private car comprehensive policy existing between petitioner and respondent Sio Choy at the time of the complained vehicular accident. In Guingon vs. Del Monte, `a passenger of a jeepney had just alighted therefrom, when he was bumped by another passenger jeepney. He died as a result thereof. In the damage suit filed by the heirs of said passenger against the driver and owner of the jeepney at fault as well as against the insurance company which insured the latter jeepney against third party liability, the trial court, affirmed by this Court, adjudged the owner and the driver of the jeepney at fault jointly and severally liable to the heirs of the victim in the total amount of P9,572.95 as damages and attorney's fees; while the insurance company was sentenced to pay the heirs the amount of P5,500.00 which was to be applied as partial satisfaction of the judgment rendered against said owner and driver of the jeepney. Thus, in said Guingon case, it was only the owner and the driver of the jeepney at fault, not including the insurance company, who were held solidarily liable to the heirs of the victim. While it is true that where the insurance contract provides for indemnity against liability to third persons, such third persons can directly sue the insurer, however, the direct liability of the insurer under indemnity contracts against third party liability does not mean that the insurer can be held solidarily liable with the insured and/or the other parties found at fault. The liability of the insurer is based on contract; that of the insured is based on tort. In the case at bar, petitioner as insurer of Sio Choy, is liable to respondent Vallejos, but it cannot, as incorrectly held by the trial court, be made "solidarily" liable with the two principal tortfeasors namely respondents Sio Choy and San Leon Rice Mill, Inc. For if petitioner-insurer were solidarily liable with said two (2) respondents by reason of the indemnity contract against third party liability-under which an insurer can be directly sued by a third party — this will result in a violation of the principles underlying solidary obligation and insurance contracts. In solidary obligation, the creditor may enforce the entire obligation against one of the solidary debtors. On the other hand, insurance is defined as "a

27


ISSUE2: WON petitioner can seek reimbursement from San Leon even though it is not a party to its contract with Sio Choi? HELD: Yes. Petitioner, upon paying respondent Vallejos the amount of riot exceeding P20,000.00, shall become the subrogee of the insured, the respondent Sio Choy; as such, it is subrogated to whatever rights the latter has against respondent San Leon Rice Mill, Inc. Article 1217 of the Civil Code gives to a solidary debtor who has paid the entire obligation the right to be reimbursed by his co-debtors for the share which corresponds to each. Art. 1217. Payment made by one of the solidary debtors extinguishes the obligation. If two or more solidary debtors offer to pay, the creditor may choose which offer to accept. He who made the payment may claim from his co-debtors only the share which corresponds to each, with the interest for the payment already made. If the payment is made before the debt is due, no interest for the intervening period may be demanded. xxx xxx xxx In accordance with Article 1217, petitioner, upon payment to respondent Vallejos and thereby becoming the subrogee of solidary debtor Sio Choy, is entitled to reimbursement from respondent San Leon Rice Mill, Inc. To recapitulate then: We hold that only respondents Sio Choy and San Leon Rice Mill, Inc. are solidarily liable to the respondent Martin C. Vallejos for the amount of P29,103.00. Vallejos may enforce the entire obligation on only one of said solidary debtors. If Sio Choy as solidary debtor is made to pay for the entire obligation (P29,103.00) and petitioner, as insurer of Sio Choy, is compelled to pay P20,000.00 of said entire obligation, petitioner would be entitled, as subrogee of Sio Choy as against San Leon Rice Mills, Inc., to be reimbursed by the latter in the amount of P14,551.50 (which is 1/2 of P29,103.00 ) Otherwise, if none of the above are present, which would give rise to solidarity, the obligation may be considered joint, as follows: Art. 1208. If from the law, or the nature or the wording of the obligations to which the preceding article refers the contrary does not appear, the credit or debt shall be presumed to be divided into as many shares as there are creditors or debtors, the credits or debts being considered distinct from one another, subject to the Rules of Court governing the multiplicity of suits. (1138a) PROBLEM: Four foreign medical students rented the apartment of Thelma for a period of one year. After one semester, three of them returned to their home country and the fourth transferred to a boarding house. Thelma discovered that they left unpaid telephone bills in the total amount of P80,000.00 The lease contract provided that the lessees shall pay for the telephone services in the leased premises. Thelma demanded that the

fourth student pay the entire amount of the unpaid telephone bills, but the latter is willing to pay only one fourth of it. Who is correct? Why? (5%) ANSWER: The student is correct. Since the obligation does not expressly provide for solidarity, nor does the law (on lease) provide for solidary liability, nor does the nature of the obligation require solidarity, the student is correct that the obligation is joint in accordance with Art. 1208. And since there is no designation as to their respective shares, it is presumed to be divided equally among the debtoes. As such, the student may only be made liable for ¼ or P20,000. PROBLEM: A and B sold 1,000 sacks of rice to X and Y, on X’s request, delivered them to him. X resold the rice, without turning over any part of it or its price to Y. May Y compel A and B deliver what he bought? If so, to what extent? ANSWER: Y can compel A and B to deliver 250 sacks each. Since there is no basis to hold that the obligation of A and B are solidary, i.e., it is not so stipulated and neither does the law or the nature of the obligation so require solidarity, the obligation of A and B are joint. As such, their delivery to X of the 1,000 sacks did no extinguish their obligations. Under Art. 1208, each of the credits or debits are considered distinct and separate. Accordingly, A is liable to X and Y for 250 sacks each, and B is liable to X and Y for 250 sacks each. There are four distinct obligations and only their obligation to X has been extinguished by their delivery. Moreover, nothing was turned over to Y, as such, no benefit redounded to him so as to render the payment to a wrong party (X) to have extinguished the obligation. Based on the foregoing, Y can compel A to deliver 250 sacks and B to deliver 250 sacks. Art. 1211. Solidarity may exist although the creditors and the debtors may not be bound in the same manner and by the same periods and conditions. (1140) Art. 1212. Each one of the solidary creditors may do whatever may be useful to the others, but not anything which may be prejudicial to the latter. (1141a) Art. 1213. A solidary creditor cannot assign his rights without the consent of the others. (n)

Enforcement of Solidary Obligations: Art. 1214. The debtor may pay any one of the solidary creditors; but if any demand, judicial or extrajudicial, has been made by one of them, payment should be made to him. (1142a) Art. 1215. Novation, compensation, confusion or remission of the debt, made by any of the solidary creditors or with any of the solidary debtors, shall extinguish the obligation, without prejudice to the provisions of Article 1219. The creditor who may have executed any of these acts, as well as he who collects the debt, shall be liable to the others for the share in the obligation corresponding to them. (1143)

Remission or condonation of the share of one of the debtors: Art. 1219. The remission made by the creditor of the share which affects one of the solidary debtors does not release the latter from his responsibility towards the co-debtors, in case the debt had been totally paid by anyone of them before the remission was effected. (1146a)

Defenses available to other debtors may be a partial defense as to the one from whom performance is demanded: Art. 1222. A solidary debtor may, in actions filed by the creditor, avail

28


himself of all defenses which are derived from the nature of the obligation and of those which are personal to him, or pertain to his own share. With respect to those which personally belong to the others, he may avail himself thereof only as regards that part of the debt for which the latter are responsible. (1148a) PROBLEM: Joey, Jovy and Jojo are solidary debtors under a loan obligation of P300,000.00 which has fallen due. The creditor has, however, condoned Jojo’s entire share in the debt. Since Jovy has become insolvent, the creditor makes a demand on Joey to pay the debt. 1. How much, if any, may Joey be compelled to pay? 2. To what extent, if at all, can Jojo be compelled by Joey to contribute to such payment? ANSWER: 1. Since there was condonation of the part of Joey, there was partial extinguishment of the obligation. However, only P100,000 was condoned, reducing the obligation from P200,000. The fact that Jovy became insolvent does not reduce the obligation further. As such, Joey can be compelled to pay the remaining P200,000. 2. As provided under Art. 1217, when one of the solidary debtors, cannot, because of his insolvency, reimburse his share to the debtor paying the obligation, such share shall be borne by all his co-debtors, in proportion to the debt of each. As such, Joey can seek reimbursement from Jojo, half of Jovy’s share in the obligation, or P50,000. The fact that Jojo was released of his obligation by virtue of the condonation does not release him from his liability for the share of Jovy.

Insolvency of one of the debtors: Art. 1217. Payment made by one of the solidary debtors extinguishes the obligation. If two or more solidary debtors offer to pay, the creditor may choose which offer to accept. He who made the payment may claim from his co-debtors only the share which corresponds to each, with the interest for the payment already made. If the payment is made before the debt is due, no interest for the intervening period may be demanded. When one of the solidary debtors cannot, because of his insolvency, reimburse his share to the debtor paying the obligation, such share shall be borne by all his co-debtors, in proportion to the debt of each. (1145a) PROBLEM: A, B and C solidarily promised to pay D the amount of P3,000.00. Unfortunately, C became insolvent. What recourse does D have against A and B? What are the rights of A and B as against each other? ANSWER: D can hold either A and/or B liable for P3,000. In solidary obligations, the insolvency of one of the debtors does not reduce the obligation. The share of the insolvent debtors will be shouldered by the other debtors who are not insolvent in accordance with the 3rd paragraph of Art. 1217. If A paid the whole obligation, he will have the right to seek reimbursement from B the amount of P1,500 in accordance with the 2 nd paragraph of Art. 1217. PROBLEM: A, B, C, D and E made themselves solidarily indebted to X for the amount of P50,000.00. When X demanded payment from A the latter refused to pay on the following grounds:  B is only 16 years old  C has already been condoned by X.  D is insolvent.  E was given by X an extension of 6 months without the consent of the other four co-debtors. ANSWER: 1. The minority is a defense of B. As invoked by A, it would reduce the obligation as to his share. Since no agreement as to the share is shown in the facts, 1/5 of the debt is annulled by B’s minority, since such

2. 3. 4.

minority is a partial defense. A can still be held liable for the remaining P40,000. A can still be made liable for P40,000; The insolvency of D does not reduce the obligation. As such, A can still be made liable for the whole P50,000; The extension given to E applies to A as well. As such, A cannot be made to pay prior to the expiration of the 6 months.

the latter, the decedent's liability being absolute and primary; and if the claim is not presented within the time provided by the rules, the same will be barred as against the estate. It is evident from the foregoing that Section 6 of Rule 87 (now Rule 86) provides the procedure should the creditor desire to go against the deceased debtor, but there is certainly nothing in the said provision making compliance with such procedure a condition precedent before an ordinary action against the surviving solidary debtors, should the creditor choose to demand payment from the latter, could be entertained to the extent that failure to observe the same would deprive the court jurisdiction to take cognizance of the action against the surviving debtors. Upon the other hand, the Civil Code expressly allows the creditor to proceed against any one of the solidary debtors or some or all of them simultaneously. There is, therefore, nothing improper in the creditor's filing of an action against the surviving solidary debtors alone, instead of instituting a proceeding for the settlement of the estate of the deceased debtor wherein his claim could be filed.

EXAMPLES OF TOTAL DEFENSE: 1. Payment by another co-debtor, as to a subsequent demand of a creditor; 2. If the contract is void; 3. If the obligation has prescribed. Art. 1216. The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand made against one of them shall not be an obstacle to those which may subsequently be directed against the others, so long as the debt has not been fully collected. (1144a) PHILIPPINE NATIONAL BANK, plaintiff-appellant, vs. INDEPENDENT PLANTERS ASSOCIATION, INC., ANTONIO DIMAYUGA, DELFIN FAJARDO, CEFERINO VALENCIA, MOISES CARANDANG, LUCIANO CASTILLO, AURELIO VALENCIA, LAURO LEVISTE, GAVINO GONZALES, LOPE GEVANA and BONIFACIO LAUREANA, defendants-appellees.

Similarly, in PNB vs. Asuncion, 80 SCRA 321 at 323-324, this Court, speaking thru Mr. Justice Makasiar, reiterated the doctrine. A cursory perusal of Section 6, Rule 86 of the Revised Rules of Court reveals that nothing therein prevents a creditor from proceeding against the surviving solidary debtors. Said provision merely sets up the procedure in enforcing collection in case a creditor chooses to pursue his claim against the estate of the deceased solidary, debtor.

G.R. No. L-28046 May 16, 1983

The CFI of Manila dismissed PNB’s complaint against several solidary debtors for collection of a sum of money on the ground that one of the defendants (Ceferino Valencia) died during the pendency of the case after the plaintiff had presented its evidence and therefore the complaint, being a money claim based on contract, should be prosecuted in the estate or intestate proceeding in accordance with Sec. 6 of Rule 86 of the Rules of Court, which provides:

It is crystal clear that Article 1216 of the New Civil Code is the applicable provision in this matter. Said provision gives the creditor the right to 'proceed against anyone of the solidary debtors or some or all of them simultaneously.' The choice is undoubtedly left to the solidary, creditor to determine against whom he will enforce collection. In case of the death of one of the solidary debtors, he (the creditor) may, if he so chooses, proceed against the surviving solidary debtors without necessity of filing a claim in the estate of the deceased debtors. It is

SEC. 6. Solidary obligation of decedent.— the obligation of the decedent is solidary with another debtor, the claim shall be filed against the decedent as if he were the only debtor, without prejudice to the right of the estate to recover contribution from the other debtor. In a joint obligation of the decedent, the claim shall be confined to the portion belonging to him.

not mandatory for him to have the case dismissed against the surviving debtors and file its claim in the estate of the deceased solidary debtor… As correctly argued by petitioner, if Section 6, Rule 86 of the Revised Rules of Court were applied literally, Article 1216 of the New Civil Code would, in effect, be repealed since under the Rules of Court, petitioner has no choice but to proceed against the estate of Manuel Barredo only. Obviously, this provision diminishes the Bank's right under the New Civil, Code to proceed against any one, some or all of the solidary debtors. Such a construction is not sanctioned by the principle, which is too well settled to require citation, that a substantive law cannot be amended by a procedural rule. Otherwise stared, Section 6, Rule 86 of the Revised Rules of Court cannot be made to prevail over Article 1216 of the New Civil Code, the former being merely procedural, while the latter, substantive.

The appellant assails the order of dismissal, invoking its right of recourse against one, some or all of its solidary debtors under Article 1216 of the Civil Code — ART. 1216. The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand made against one of them shall not be an obstacle to those which may subsequently be directed against the others, so long as the debt has not been fully collected. ISSUE: WON the action for collection of a sum of money based on contract against all the solidary debtors, the death of one defendant deprives the court of jurisdiction to proceed with the case against the surviving defendants? HELD: No. It is now settled that the quoted Article 1216 grants the creditor the substantive right to seek satisfaction of his credit from one, some or all of his solidary debtors, as he deems fit or convenient for the protection of his interests; and if, after instituting a collection suit based on contract against some or all of them and, during its pendency, one of the defendants dies, the court retains jurisdiction to continue the proceedings and decide the case in respect of the surviving defendants. Thus in Manila Surety & Fidelity Co., Inc. vs. Villarama et al., 107 Phil. 891 at 897, this Court ruled: Construing Section 698 of the Code of Civil Procedure from whence the aforequoted provision (Sec. 6, Rule 86) was taken, this Court held that where two persons are bound in solidum for the same debt and one of them dies, the whole indebtedness can be proved against the estate of

29


Art. 1218. Payment by a solidary debtor shall not entitle him to reimbursement from his co-debtors if such payment is made after the obligation has prescribed or become illegal. (n) Art. 1220. The remission of the whole obligation, obtained by one of the solidary debtors, does not entitle him to reimbursement from his co-debtors. (n) c.

Disjunctive

This is not covered by New Civil Code. In this case, there are 2 or more creditors and 2 or more debtors but they are named disjunctively as debtors and creditors in the alternative. The rules on solidary obligations must apply because if rules on alternative obligations will be applied then the debtor will generally be given the choice to whom shall he give payment.

Example: A binds himself to pay P100 either to X or Y. A or B will pay 100 to X. 4.

As to Performance of Prestation

Art. 1209. If the division is impossible, the right of the creditors may be prejudiced only by their collective acts, and the debt can be enforced only by proceeding against all the debtors. If one of the latter should be insolvent, the others shall not be liable for his share. (1139) Art. 1210. The indivisibility of an obligation does not necessarily give rise to solidarity. Nor does solidarity of itself imply indivisibility. (n) In determining whether an obligation is divisible or indivisible, the question asked should be: whether the obligation is capable of partial performance? GENERAL RULE: the creditor cannot be compelled to accept partial performance. EXCEPTIONS: 1. If stipulated; 2. If the obligation is divisible; 3. If the obligation is partially liquidated and partially unliquidated, the liquidated portion may already be performed; 4. An obligation which would require a number of days to be performed, it may be considered divisible by operation of law. a. b. c.

Divisible Indivisible Joint Indivisible

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

Solidary Indivisible

Art. 1221. If the thing has been lost or if the prestation has become impossible without the fault of the solidary debtors, the obligation shall be extinguished. If there was fault on the part of any one of them, all shall be responsible to the creditor, for the price and the payment of damages and interest, without prejudice to their action against the guilty or negligent debtor. If through a fortuitous event, the thing is lost or the performance has become impossible after one of the solidary debtors has incurred in delay through the judicial or extrajudicial demand upon him by the creditor, the provisions of the preceding paragraph shall apply. (1147a) Art. 1222. A solidary debtor may, in actions filed by the creditor, avail himself of all defenses which are derived from the nature of the obligation and of those which are personal to him, or pertain to his own share. With respect to those which personally belong to the others, he may avail himself thereof only as regards that part of the debt for which the latter are responsible. (1148a) Art. 1223. The divisibility or indivisibility of the things that are the object of obligations in which there is only one debtor and only one creditor does not alter or modify the provisions of Chapter 2 of this Title. (1149) Art. 1225. For the purposes of the preceding articles, obligations to give definite things and those which are not susceptible of partial performance shall be deemed to be indivisible. When the obligation has for its object the execution of a certain number of days of work, the accomplishment of work by metrical units, or analogous things which by their nature are susceptible of partial performance, it shall

30


be divisible. However, even though the object or service may be physically divisible, an obligation is indivisible if so provided by law or intended by the parties. In obligations not to do, divisibility or indivisibility shall be determined by the character of the prestation in each particular case. 5.

As to the Presence of an Accessory Undertaking in case of breach

a.

With a Penal Clause

Art. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of noncompliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation. The penalty may be enforced only when it is demandable in accordance with the provisions of this Code. (1152a) GENERAL RULE: the penalty shall substitute the indemnity for damages and payment of interests in case of non-compliance. EXCEPTIONS: 1. If there is stipulation to the contrary; 2. If the debtor refuses to pay the penalty; 3. If the debtor is guilty of fraud in the fulfilment of the obligation. PROBLEMT: The Betis Furniture Co. undertook to deliver to Mr. Bagongkasal specified pieces of living room, dining room and bedroom furniture, all mad of narra, for a price stated in the contract. The agreement had a penal clause that any violation of the contract would entitle the aggrieved party to damages in the amount of P100,000.00. The furniture delivered by Betis was made, not a narra, but of inferior wood. In a suit to recover damages, Bagongkasal was able to prove that the actual damages he sustained amounted to P200,000.00. He demanded the amount plus the P100,000.00 penalty or total of P300,000.00. Betis, however, countered that if it were liable for damages at all, the maximum award should not exceed P100,000.00 as stated in the penal clause of the contract. Whose claim would you sustain? Why? ANSWER: If Betis’ was guilty of fraud since those delivered were made of inferior materials, he would be liable for both the actual damages and the penalty. The exception under Art. 1226 would apply. *NOTE: fraud is not presumed. There should be proof that there is fraud. The fact that those delivered were made of inferior wood does not necessarily mean that there was fraud. There could have been mistake. Even assuming that there was fraud, Bagongkasal is wrong. He cannot recover both actual damages plus penalty. He can only recover damages only in excess of penalty. It cannot exceed actual damages unless other damages are awarded. (see Pamintuan) THE BACHRACH MOTOR CO., INC., plaintiff-appellee, vs. FAUSTINO ESPIRITU, defendant-appellant.

G.R. No. L-28497

November 6, 1928

-----------------------------THE BACHRACH MOTOR CO., INC., plaintiff-appellee, vs. FAUSTINO ESPIRITU, defendant-appellant, and ESPIRITU, intervenor-appellant.

G.R. No. L-28498

November 6, 1928

Since there was partial performance, the penalty was reduced.

ROSARIO

FACTS: Case 28497: Defendant Espiritu purchased a two-ton White truck paying P1,000 down and the rest to be paid within the periods agreed upon, securing the purchase was the same truck and two others which were also brought from petitioner and already fully paid. Case 28498: defendant bought a one-ton White truck from the plaintiff and paid P500 cash payment and the 12& annual interest on the unpaid principal, secured by the same truck and two others which also secured the earlier purchase. In both sales it was agreed that 12 per cent interest would be paid upon the unpaid portion of the price at the executon of the contracts, and in case of non-payment of the total debt upon its maturity, 25 per cent thereon, as penalty. In addition to the mortagage deeds referred to, which the defendant executed in favor of the plaintiff, the defendant at the same time also signed a promissory note solidarily with his brother Rosario Espiritu for the several sums secured by the two mortgages. Defendant failed to pay. Thus, petitioner executed the present action. Rosario Espiritu appeared in the two cases as intervenor alleging to be the exclusive owner of the two trucks mortgaged by defendants. The trial court ordered the defendants and the intervenor to pay the plaintiff the unpaid amount plus 12% interest and 25% thereof as penalty. Aside from the legality of the mortgage, the defendant and intervenor assails the validity of the 25% penalty. ISSUE: WON they are liable for the 25% penalty? HELD: Yes. But reduced due to partial performance. It is finally contended that the 25 per cent penalty upon the debt, in addition to the interest of 12 per cent per annum, makes the contract usurious. Such a contention is not well founded. Article 1152 of the Civil Code permits the agreement upon a penalty apart from the interest. Should there be such an agreemnet, the penalty, as was held in the case of Lopez vs. Hernaez (32 Phil., 631), does not include the interest, and which may be demamded separetely. According to this, the penalty is not to be added to the interest for the determination of whether the interest exceeds the rate fixed by the law, since said rate was fixed only for the interest. But considering that the obligation was partly performed, and making use of the power given to the court by article 1154 of the Civil Code, this penalty is reduced to 10 per cent of the unpaid debt. With the sole modification that instead of 25 per cent upon the sum owed, the defendants need pay only 10 per cent thereon as penalty, the judgment appealed from is affired in all other respects without special pronouncement as to costs. So ordered. ROBES-FRANCISCO REALTY & DEVELOPMENT CORPORATION, petitioner, vs. COURT OF FIRST INSTANCE OF RIZAL (BRANCH XXXIV), and LOLITA MILLAN, respondents.

G.R. No. L-41093 October 30, 1978

The clause providing for 4% interest liability does not purport to be a penalty since the legal rate (6%) is even more than such. It is therefore, inconceivable that the aforecited provision in the deed of sale is a penal clause. FACTS: Robes-Francisco Realty & Development Corporation, herein petitioner, agreed to sell to private respondent Lolita Millan a parcel of land with the obligation to execute a deed of sale and cause the issuance of the TCT upon full payment of the purchase price. Their contract embodied a provision, as follows: That the VENDOR further warrants that the transfer certificate of title of the above-described parcel of land shall be transferred in the name

31


of the VENDEE within the period of six (6) months from the date of full payment and in case the VENDOR fails to issue said transfer certificate of title, it shall bear the obligation to refund to the VENDEE the total amount already paid for, plus an interest at the rate of 4% per annum. (record on appeal, p. 9) After full payment of the purchase price, petitioner failed to comply with its obligations. As such, respondent filed a complaint for specific performance and damages. The trial court decided in favor of respondent and ordered petitioner to execute the deed and cause the issuance of the TCT, otherwise it will be liable for total amount paid plus 4% interest until fully paid. On top of which, the trial court awarded nominal damages of P20,000 and attorney’s fees of P5,000. ISSUE: WON the 4% interest is a penalty? HELD: No. Yes. We hold that the trial court did not err in awarding nominal damages; however, the circumstances of the case warrant a reduction of the amount of P20,000.00 granted to private respondent Millan. There can be no dispute in this case under the pleadings and the admitted facts that petitioner corporation was guilty of delay, amounting to nonperformance of its obligation, in issuing the transfer certificate of title to vendee Millan who had fully paid up her installments on the lot bought by her. Article 1170 of the Civil Code expressly provides that those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for damages. Petitioner contends that the deed of absolute sale executed between the parties stipulates that should the vendor fail to issue the transfer certificate of title within six months from the date of full payment, it shall refund to the vendee the total amount paid for with interest at the rate of 4% per annum, hence, the vendee is bound by the terms of the provision and cannot recover more than what is agreed upon. Presumably, petitioner in invoking Article 1226 of the Civil Code which provides that 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. The foregoing argument of petitioner is totally devoid of merit. We would agree with petitioner if the clause in question were to be considered as a penal clause. Nevertheless, for very obvious reasons, said clause does not convey any penalty, for even without it, pursuant to Article 2209 of the Civil Code, the vendee would be entitled to recover the amount paid by her with legal rate of interest which is even more than the 4% provided for in the clause. It is therefore inconceivable that the aforecited provision in the deed of sale is a penal clause which will preclude an award of damages to the vendee Millan. In fact the clause is so worded as to work to the advantage of petitioner corporation. Unfortunately, the vendee, now private respondent, submitted her case below without presenting evidence on the actual damages suffered by her as a result of the nonperformance of petitioner's obligation under the deed of sale. Nonetheless, the facts show that the right of the vendee to acquire title to the lot bought by her was violated by petitioner and this entitles her at the very least to nominal damages. ISSUE2: WON respondent is entitled to nominal damages? HELD: Yes. The pertinent provisions of our Civil Code follow: Art. 2221. Nominal damages are adjudicated in order that a right of the plaintiff, which has been violated or invaded by the defendant, may be vindicated or recognized, and not for the purpose of indemnifying the plaintiff for any loss suffered by him.

Art. 2222. The court may award nominal damages in every obligation arising from any source enumerated in article 1157, or in every case where any property right has been invaded. Under the foregoing provisions nominal damages are not intended for indemnification of loss suffered but for the vindication or recognition of a right violated or invaded. They are recoverable where some injury has been done the amount of which the evidence fails to show, the assessment of damages being left to the discretion of the court according to the circumstances of the case. It is true as petitioner claims that under American jurisprudence nominal damages by their very nature are small sums fixed by the court without regard to the extent of the harm done to the injured party. It is generally held that a nominal damage is a substantial claim, if based upon the violation of a legal right; in such case, the law presumes a damage, although actual or compensatory damages are not proven; in truth nominal damages are damages in name only and not in fact, and are allowed, not as an equivalent of a wrong inflicted, but simply in recogniton of the existence of a technical injury. In this jurisdiction, in Vda. de Medina, et al. v. Cresencia, et al. 1956, which was an action for damages arising out of a vehicular accident, this Court had occasion to eliminate an award of P10,000.00 imposed by way of nominal damages, the Court stating inter alia that the amount cannot, in common sense, be demeed "nominal". In a subsequent case, viz: Northwest Airlines, Inc. v. Nicolas L. Cuenca, 1965, this Court, however, through then Justice Roberto Concepcion who later became Chief Justice of this Court, sustained an award of P20,000.00 as nominal damages in favor of respnodent Cuenca. The Court there found special reasons for considering P20,000.00 as "nominal". Cuenca who was the holder of a first class ticket from Manila to Tokyo was rudely compelled by an agent of petitioner Airlines to move to the tourist class notwithstanding its knowledge that Cuenca as Commissioner of Public Highways of the Republic of the Philippines was travelling in his official capacity as a delegate of the country to a conference in Tokyo." Actually, as explained in the Court's decision in Northwest Airlines, there is no conflict between that case and Medina, for in the latter, the P10,000.00 award for nominal damages was eliminated principally because the aggrieved party had already been awarded P6,000.00 as compensatory damages, P30,000.00 as moral damages and P10,000.00 as exemplary damages, and "nominal damages cannot coexist with compensatory damages," while in the case of Commissioner Cuenca, no such compensatory, moral, or exemplary damages were granted to the latter. At any rate, the circumstances of a particular case will determine whether or not the amount assessed as nominal damages is within the scope or intent of the law, more particularly, Article 2221 of the Civil Code. In the situation now before Us, We are of the view that the amount of P20,000.00 is excessive. The admitted fact that petitioner corporation failed to convey a transfer certificate of title to respondent Millan because the subdivision property was mortgaged to the GSIS does not in itself show that there was bad faith or fraud. Bad faith is not to be presumed. Moreover, there was the expectation of the vendor that arrangements were possible for the GSIS to make partial releases of the subdivision lots from the overall real estate mortgage. It was simply unfortunate that petitioner did not succeed in that regard. For that reason We cannot agree with respondent Millan Chat the P20,000.00 award may be considered in the nature of exemplary damages. In case of breach of contract, exemplary damages may be awarded if the guilty party acted in wanton, fraudulent, reckless, oppressive or malevolent manner. Furthermore, exemplary or corrective damages are to be imposed by way of example or correction for the public good, only if the injured

32


party has shown that he is entitled to recover moral, temperate or compensatory damages." Here, respondent Millan did not submit below any evidence to prove that she suffered actual or compensatory damages. To conclude, We hold that the sum of Ten Thousand Pesos (P10,000.00) by way of nominal damages is fair and just under the following circumstances, viz: respondent Millan bought the lot from petitioner in May, 1962, and paid in full her installments on December 22, 1971, but it was only on March 2, 1973, that a deed of absolute sale was executed in her favor, and notwithstanding the lapse of almost three years since she made her last payment, petitioner still failed to convey the corresponding transfer certificate of title to Millan who accordingly was compelled to file the instant complaint in August of 1974. MARIANO C. PAMINTUAN, petitioner-appellant, vs. COURT OF APPEALS and YU PING KUN CO., INC., respondentappellees.

G.R. No. L-26339 December 14, 1979

In case of fraud the difference between the proven damages and the stipulated penalty may be recovered. The proven damages supersede the stipulated liquidated damages. FACTS: Paminuntuan entered into an agreement to ship white flint corn to Tokyo Menka Kaisah Ltd. of Osaka, Japan in exchange for plastic sheetings. He contracted to sell these to Yu Ping Kun Co., Inc. (respondent company) for P265,000. The Company undertook to open an irrevocable domestic letter of credit for that amount in favor of Pamintuan. It was further agreed that Pamintuan would deliver the plastic sheetings to the company at its bodegas in Manila or suburbs directly from the piers "within one month upon arrival of" the carrying vessels. Any violation of the contract of sale would entitle the aggreived party to collect from the offending party liquidated damages in the sum of ten thousand pesos (Exh. A). The plastic sheetings arrived in Manila and were received by Pamintuan. Out of the shipments, Pamintuan delivered to the company's warehouse only the following quantities of plastic sheetings: November 11, 1960 — 140 cases, size 48 inches by 50 yards. November 14, 1960 — 258 cases out of 352 cases. November 15, 1960 — 11 cases out of 352 cases. November 15, 1960 — 10 cases out of 100 cases. November 15, 1960 — 30 cases out of 100 cases. While the plastic sheetings were arriving in Manila, Pamintuan informed the president of Yu Ping Kun Co., Inc. that he was in dire need of cash with which to pay his obligations to the Philippine National Bank. Inasmuch as the computation of the prices of each delivery would allegedly be a long process, Pamintuan requested that he be paid immediately. Consequently, Pamintuan and the president of the company, Benito Y.C. Espiritu, agreed to fix the price of the plastic sheetings at P0.782 a yard, regardless of the kind, quality or actual invoice value thereof. After Pamintuan had delivered 224,150 yards of sheetings of interior quality valued at P163,.047.87, he refused to deliver the remainder of the shipments. As justification for his refusal, Pamintuan said that the company failed to comply with the conditions of the contract and that it was novated with respect to the price. The company filed a complaint for damages against Pamintuan. The trial court rendered judgment ordering Pamintuan to deliver certain plastic sheetings, and if he could not do so, to pay P100,559.28 as damages with 6% interest from the date of the filing of the complaint for damages with moral damages. On appeal, the CA modified the trial court’s decision by removing moral damages.

ISSUE: WON Pamintuan can be made liable only for liquidated damages by virtue of the above-cited (bold) provision and on account of the rule that the penalty shall substitute the indemnity for damages? HELD: No, for actual damages only. Pamintuan relies on the rule that a penalty and liquidated damages are the same (Lambert vs. Fox 26 Phil. 588); that "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 " (1st sentence of Art. 1226, Civil Code) and, it is argued, there is no such stipulation to the contrary in this case and that "liquidated damages are those agreed upon by the parties to a contract, to be paid in case of breach thereof" (Art. 2226, Civil Code). We hold that appellant's contention cannot be sustained because the second sentence of article 1226 itself provides that I nevertheless, damages shall be paid if the obligor ... is guilty of fraud in the fulfillment of the obligation". "Responsibility arising from fraud is demandable in all obligations" (Art. 1171, Civil Code). "In case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible for an damages which may be reasonably attributed to the non-performance of the obligation" (Ibid, art. 2201). The trial court and the Court of Appeals found that Pamintuan was guilty of fraud because he did not make a complete delivery of the plastic sheetings and he overpriced the same. That factual finding is conclusive upon this Court. There is no justification for the Civil Code to make an apparent distinction between penalty and liquidated damages because the settled rule is that there is no difference between penalty and liquidated damages insofar as legal results are concerned and that either may be recovered without the necessity of proving actual damages and both may be reduced when proper (Arts. 1229, 2216 and 2227, Civil Code. See observations of Justice J.B.L. Reyes, cited in 4 Tolentino's Civil Code, p. 251). The penalty clause is strictly penal or cumulative in character and does not partake of the nature of liquidated damages (pena sustitutiva) when the parties agree "que el acreedor podra pedir, en el supuesto incumplimiento o mero retardo de la obligacion principal, ademas de la pena, los danos y perjuicios. Se habla en este caso depena cumulativa, a differencia de aquellos otros ordinarios, en que la pena es sustitutiva de la reparacion ordinaria." (Ibid, Castan Tobenas, p. 130). After a conscientious consideration of the facts of the case, as found by Court of Appeals and the trial court, and after reflecting on the tenor of the stipulation for liquidated damages herein, the true nature of which is not easy to categorize, we further hold that justice would be adequately done in this case by allowing Yu Ping Kun Co., Inc. to recover only the actual damages proven and not to award to it the stipulated liquidated damages of ten thousand pesos for any breach of the contract. The proven damages supersede 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)

Expressly reserved: does not require that it be stipulated, it may be inferred from the nature of the obligation.

Art. 1228. Proof of actual damages suffered by the creditor is not necessary in order that the penalty may be demanded. (n) Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable. (1154a) Art. 1230. The nullity of the penal clause does not carry with it that of the principal obligation. The nullity of the principal obligation carries with it that of the penal clause. (1155) E.

BREACH OF OBLIGATIONS

Art. 19. Every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith.

Cardinal Rule: the above provision embodies the cardinal rule in performance of obligations.

MANNER OF BREACH Art. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for damages. (1101) a.

Fraud

Art. 1171. Responsibility arising from fraud is demandable in all obligations. Any waiver of an action for future fraud is void. (1102a) Art. 1338. There is fraud when, through insidious words or machinations of one of the contracting parties, the other is induced to enter into a contract which, without them, he would not have agreed to. (1269) Art. 1344. In order that fraud may make a contract voidable, it should be serious and should not have been employed by both contracting parties. Incidental fraud only obliges the person employing it to pay damages. (1270)

Kinds of Fraud:

stipulated liquidated damages.

1.

Dolo causante – or fraud in obtaining consent, is applicable only to contracts where consent is necessary and thus affects the validity of the contract, making it voidable.

This view finds support in the opinion of Manresa (whose comments were the bases of the new matter found in article 1226, not found in article 1152 of the old Civil Code) that in case of fraud the difference between the proven damages and the stipulated penalty may be recovered (Vol. 8, part. 1, Codigo Civil, 5th Ed., 1950, p. 483).

Under this kind of fraud, the party would not have entered into the contract were it not for the fraud; annulment is the remedy of the party who’s consent was obtained through fraud; 2.

Hence, the damages recoverable by the firm would amount to ninety thousand five hundred fifty-nine pesos and twenty-eight centavos (P90,559.28), with six percent interest a year from the filing of the complaint, Art. 1227. The debtor cannot exempt himself from the performance of the obligation by paying the penalty, save in the case where this right has been expressly reserved for him. Neither can the creditor demand the fulfillment of the obligation and the satisfaction of the penalty at the same time, unless this right has been clearly granted him. However, if after the

33


Dolo incidente – or fraud in the performance of the obligation and applicable to obligations arising from any source. This kind, however, does not affect the validity of the contract and makes the party guilty of fraud liable for damages. Under this kind, a party would have entered the obligation with or without the fraud. Remedy is damages.

b.

Negligence

Art. 1172. Responsibility arising from negligence in the performance of

every kind of obligation is also demandable, but such liability may be regulated by the courts, according to the circumstances. (1103)

(3) When demand would be useless, as when the obligor has rendered it beyond his power to perform.

Art. 1173. The fault or negligence of the obligor consists in the omission of that diligence which is required by the nature of the obligation and corresponds with the circumstances of the persons, of the time and of the place. When negligence shows bad faith, the provisions of Articles 1171 and 2201, paragraph 2, shall apply.

In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. From the moment one of the parties fulfills his obligation, delay by the other begins. (1100a)

If the law or contract does not state the diligence which is to be observed in the performance, that which is expected of a good father of a family shall be required. (1104a)

1. 2. 3.

Good Definition of Negligence or Fault: consists in the omission of that

When both parties are already in delay, there is no delay. Accordingly, debtor is not liable for interest from the moment payment was tendered was not accepted by the creditor for no justifiable reason, or when creditor fails to fulfill his part of the obligation. This could have been proper basis, instead of justice and equity, in Agcaoili vs. GSIS.

diligence which is required by the nature of the obligation and corresponds with the circumstances of the persons, of the time and of the place.

Circumstances of the persons, of the time and of the place: in the case of Cangco vs. MRR, where Cangco alighted a still moving train and

stepped on watermelons in the platform and was injured, sued MRR for damages. MRR countered that the act of Cangco was the cause of his injury and thus, it should not be held liable. However, the SC ruled that it is negligent considering the circumstances surrounding the incident, as follows:  Person – Cangco was at his prime (20s) and could’ve alighted safely, as he has done so in the past, even if the train was still moving. Moreover, there was a passenger who alighted earlier when the train was moving faster as compared to when Cangco alighted.  Time – it was nighttime, but the platform was poorly lit;  Place – Cangco was familiar with the place as it was his daily routine to take the train going home. Moreover, the employees of MRR were negligent when they allowed watermelons to be stacked on the platform which caused the fall of Cangco.

Standard of Care: 1. 2.

Ordinary: that which is expected of a good father of a family (bonus pater pamilyas); Extraordinary: utmost diligence. E.g., common carriers, banks, public utility companies (Meralco vs. Ramoy) and realty firms.

Stevedoring companies are required only to exercise ordinary diligence: a stevedoring company which was charged with the loading and stowing the cargoes of Del Monte Produce aboard M/V Mistrau, had acted merely as a labor provider in the case at bar. There is no specific provision of law that imposes a higher degree of diligence than ordinary diligence for a stevedoring company or one who is charged only with the loading and stowing of cargoes. It was neither alleged nor proven by Phoenix and McGee that Mindanao Terminal was bound by contractual stipulation to observe a higher degree of diligence than that required of a good father of a family. We therefore conclude that following Article 1173, Mindanao Terminal was required to observe ordinary diligence only in loading and stowing the cargoes of Del Monte Produce aboard M/V Mistrau. (Mindanao

Terminal and Brokerage Services, Inc. vs. Phoenix) Kinds of Negligence as to EXTENT:

Kinds of Delay:

Mora Solvendi – delay on the part of the debtor; Mora Accipiendi – delay on the part of the creditor; Compensatio Morae – delay on the part of both parties. the but the the

When in delay? As a rule, upon demand, exceptions: 1. 2.

When stipulated – e.g., credit card due dates; When the law so declares – examples:

Obligation to deliver a determinate thing: Art. 1165. When what is to be delivered is a determinate thing, the creditor, in addition to the right granted him by Article 1170, may compel the debtor to make the delivery. If the thing is indeterminate or generic, he may ask that the obligation be complied with at the expense of the debtor. If the obligor delays, or has promised to deliver the same thing to two or more persons who do not have the same interest, he shall be responsible for any fortuitous event until he has effected the delivery. (1096) Art. 1786. Every partner is a debtor of the partnership for whatever he may have promised to contribute thereto. He shall also be bound for warranty in case of eviction with regard to specific and determinate things which he may have contributed to the partnership, in the same cases and in the same manner as the vendor is bound with respect to the vendee. He shall also be liable for the fruits thereof from the time they should have been delivered, without the need of any demand. (1681a) Art. 1788. A partner who has undertaken to contribute a sum of money and fails to do so becomes a debtor for the interest and damages from the time he should have complied with his obligation. The same rule applies to any amount he may have taken from the partnership coffers, and his liability shall begin from the time he converted the amount to his own use. (1682)

1. 2.

Simple Negligence – failure to comply with the diligence required; Gross Negligence – amounts to bad faith and may thus be the source of moral damages. (Telefast vs. Castro)

Art. 1896. The agent owes interest on the sums he has applied to his own use from the day on which he did so, and on those which he still owes after the extinguishment of the agency. (1724a)

c.

Delay

Art. 1942. The bailee is liable for the loss of the thing, even if it should be through a fortuitous event: (1) If he devotes the thing to any purpose different from that for which it has been loaned; (2) If he keeps it longer than the period stipulated, or after the accomplishment of the use for which the commodatum has been constituted; (3) If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation exemption the bailee from responsibility in case of a fortuitous event; (4) If he lends or leases the thing to a third person, who is not a member of his household; (5) If, being able to save either the thing borrowed or his own thing,

Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands from them the fulfillment of their obligation. However, the demand by the creditor shall not be necessary in order that delay may exist: (1) When the obligation or the law expressly so declare; or (2) When from the nature and the circumstances of the obligation it appears that the designation of the time when the thing is to be delivered or the service is to be rendered was a controlling motive for the establishment of the contract; or

34


he chose to save the latter. (1744a and 1745) 3. 4.

When time was a controlling motive – e.g., a florist for a wedding; When demand would be useless.

BAR QUESTION: Kristina brought her diamond ring to a jewelry shop for cleaning. The jewelry shop undertook to return the ring by February 1, 1999. When the said date arrived, the jewelry shop informed Kristina that the job was not yet finished. They asked her to return five days after. On February 6, 1999, Kristina went to the shop to claim the ring, but she was informed that the same was stolen by a thief who entered the shop the night before. Kristina filed an action for damages against the jewelry shop which put up the defense of force majeure. Will the action prosper or not? (5%) ANSWER: Even if we consider the incident (stealing) as a fortuitous event, the action may still prosper since at the time of the loss, the debtor is already in delay as provided under Art. 1165.

Reciprocal Obligations: In reciprocal obligations, as in a contract of sale,

the general rule is that the fulfillment of the parties' respective obligations should be simultaneous. Hence, no demand is generally necessary because, once a party fulfills his obligation and the other party does not fulfill his, the latter automatically incurs in delay. But when different dates for performance of the obligations are fixed, the default for each obligation must be determined by the rules given in the first paragraph of the present article, that is, the other party would incur in delay only from the moment the other party demands fulfillment of the former's obligation. Thus, even in reciprocal obligations, if the period for the fulfillment of the obligation is fixed, demand upon the obligee is still necessary before the obligor can be considered in default and before a cause of action for rescission will accrue.

(Solar Harvest, Inc. vs. Davao Corrugated Carton Corporation) d.

Any other manner of contravention

Non-performance may fall under this category which may make the debtor liable for damages. In general, every debtor who fails in performance of his obligations is bound to indemnify for the losses and damages caused thereby. The phrase "any manner contravene the tenor" of the obligation includes any illicit act which impairs the strict and faithful fulfillment of the obligation or every kind or defective performance. (Arrieta vs. NARIC)

Excuse for non-performance: 1.

Fortuitous Event – Arts. 1174, 552,1165, 2147,2159

Art. 1174. Except in cases expressly specified by the law, or when it is otherwise declared by stipulation, or when the nature of the obligation requires the assumption of risk, no person shall be responsible for those events which could not be foreseen, or which, though foreseen, were inevitable. (1105a)

Fortuitous events by definition are extraordinary events not foreseeable

or avoidable. It is therefore, not enough that the event should not have been foreseen or anticipated, as is commonly believed but it must be one impossible to foresee or to avoid. The mere difficulty to foresee the happening is not impossibility to foresee the same. (Sicam vs. Jorge)

Elements: 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.

35


General Rule: is that no personal shall be responsible for those events which could not be foresee, or which, though foreseen, were inevitable.

Exceptions: 1. 2. 3.

Expressly specified by law: e.g., Art. 1165 and 1942; Declared by stipulation; When the nature of the obligation requires the assumption of risk: e.g., insurance contracts.

BAR QUESTION: Mr. Mekanico leased some automobile repair equipment to Mr. Masipag, who was opening his auto repair shop. The lease agreement was executed on February 15, 1985. It stipulated that the period was one month only, at the expiration of which Masipag was to return the equipment of Mekanico. The equipment was delivered on February 15, 1985. On March 15, 1985 Mekanico, in a telephone call, asked Masipag to return the leased property that same day. Because this truck broke down, Masipag was unable to comply. Early the next morning, the equipment was burned in an accidental fire that stated in a nearby restaurant and gutted Masipag’s auto repair shop. Mekanico seeks to hold Masipag liable for the value of the lost property plus damages on the ground that he did not return it as agreed upon. Is Mekanico’s claim tenable? Explain. ANSWER: No. The general rule provided under Art. 1774 is that no person shall be responsible for those events which could not be foreseen, or though foreseen, are inevitable. Except when the parties so stipulate, or if the law so provides, or if the nature of the obligation requires the assumption of risk. In the case at bar, there was no stipulation, nor did the obligation of Mekaniko entail assumption of risk. However, under Art. 1165, even if the loss was due to a fortuitous event, if the debtor was already in delay, he would be liable for damages. However still, to be considered in delay, there must have been a prior demand, except when stipulated, or the law so provides, or the time is the controlling motive or demand would be useless. In the case at bar, none of the exceptions are attendant. Accordingly, demand is necessary for the debtor to incur delay. The demand was made on March 15, 1985, at the time the obligation was not yet due. As such, there was no valid demand. Accordingly, Mekaniko would not yet be considered in delay. The general rule applies since the loss was due to accidental fire. Mekaniko’s claim is tenable.

Robbery in a pawnshop business is not a fortuitous event:

pawnshops are aware that robbery is a possibility which is foreseeable and can be anticipated, this is why pawnshops normally have security guards and vaults. Moreover, the concurrence of negligence, such as when there are no security measures adopted in the operation of the pawnshop, will not excuse a pawnshop owner from liability when the thing pledged is lost through robbery. (Sicam vs. Jorge) Art. 552. A possessor in good faith shall not be liable for the deterioration or loss of the thing possessed, except in cases in which it is proved that he has acted with fraudulent intent or negligence, after the judicial summons. A possessor in bad faith shall be liable for deterioration or loss in every case, even if caused by a fortuitous event. (457a) Art. 1165. When what is to be delivered is a determinate thing, the creditor, in addition to the right granted him by Article 1170, may compel the debtor to make the delivery. If the thing is indeterminate or generic, he may ask that the obligation be complied with at the expense of the debtor. If the obligor delays, or has promised to deliver the same thing to two or more persons who do not have the same interest, he shall be responsible for any fortuitous event until he has effected the delivery. (1096)

Art. 2147. The officious manager shall be liable for any fortuitous event: (1) If he undertakes risky operations which the owner was not accustomed to embark upon; (2) If he has preferred his own interest to that of the owner; (3) If he fails to return the property or business after demand by the owner; (4) If he assumed the management in bad faith. (1891a) Art. 2159. Whoever in bad faith accepts an undue payment, shall pay legal interest if a sum of money is involved, or shall be liable for fruits received or which should have been received if the thing produces fruits. He shall furthermore be answerable for any loss or impairment of the thing from any cause, and for damages to the person who delivered the thing, until it is recovered. (1896a) 2.

Act of creditor

Negligence, Delay or Fraud concurring with Fortuitous Event: if

Specific Performance: is not applicable since this would be violative of the debtor’s constitutional right against involuntary servitude.

Obligations not to do: and the obligor does it, the creditor may have it undone at the expense of the debtor.

Art. 1168. When the obligation consists in not doing, and the obligor does what has been forbidden him, it shall also be undone at his expense. (1099a) BAR QUESTION: A bound himself to deliver to B a 21-inch 1983 model TV set, and the 13 cubic feet White Westinghouse refrigerator, with Motor No. WERT-385, which B saw in A’s store, and to repair B’s piano. A did none of these things. May the court compel A to deliver the TV set and the refrigerator and repair the piano? Why? If not, what relief may the court grant B? Why?

upon the happening of a fortuitous event or an act of God, there concurs a corresponding fraud, negligence, delay or violation or contravention in any manner of the tenor of the obligation as provided for in Article 1170 of the Civil Code, which results in loss or damage, the obligor cannot escape liability.

ANSWER: TV set: generic. 1460: a thing is determinate only when: physically segregated or particularly designated. Specific performance is not a remedy. However, the creditor can have another person to have such kind of thing delivered at the cost of the debtor plus damages - substitute performance.

The principle embodied in the act of God doctrine strictly requires that the act must be one occasioned exclusively by the violence of nature and human agencies are to be excluded from creating or entering into the cause of the mischief. When the effect, the cause of which is to be considered, is found to be in part the result of the participation of man, whether it be from active intervention or neglect, or failure to act, the whole occurrence is thereby humanized, as it was, and removed from the rules applicable to the acts of God.

Refrigerator: determinate: physically segregated (store) and particularly designated (by motor number). Specific performance is an available remedy only if it is still possible (legal and physical) to have it delivered. Substitute performance is not a remedy. Specific performance –

Thus, it has been held that when the negligence of a person concurs with an act of God in producing a loss, such person is not exempt from liability by showing that the immediate cause of the damage was the act of God. To be exempt from liability for loss because of an act of God, he must be free from any previous negligence or misconduct by which the loss or damage may have been occasioned. (NPC vs. CA) F.

REMEDIES FOR BREACH OF OBLIGATIONS

Obligations to give:

Piano – the court can never compel anyone to do anything against his will as this would be violative of his right against involuntary servitude. The relief the court can give is that the debtor should’ve asked somebody else do the obligation at the cost of the debtor plus damages. – substitute performance. RESCISSION AS A REMEDY: TWO KINDS: 1. Rescission under Art. 1191, which should’ve been properly termed as “resolution” Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him.

Art. 1165. When what is to be delivered is a determinate thing, the creditor, in addition to the right granted him by Article 1170, may compel the debtor to make the delivery.

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.

If the thing is indeterminate or generic, he may ask that the obligation be complied with at the expense of the debtor.

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.

If the obligor delays, or has promised to deliver the same thing to two or more persons who do not have the same interest, he shall be responsible for any fortuitous event until he has effected the delivery. (1096)

This 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)

1.

2.

2.

Determinate thing – specific performance only if it is legally and physically possible. Substitute performance is not possible. Generic thing – substitute performance. The creditor can have another person to have such kind of thing be delivered at the cost of the debtor plus damages.

Obligations to do: the remedy of the creditor: Substitute performance – have somebody else perform the obligation at the debtor’s cost, including the costs of having to undo that which was poorly done. Art. 1167. If a person obliged to do something fails to do it, the same shall be executed at his cost. This same rule shall be observed if he does it in contravention of the tenor of the obligation. Furthermore, it may be decreed that what has been poorly done be undone. (1098)

36


Rescission under Art. 1301/1303

Differences: RESOLUTION (Art. 1911) Principal remedy – may be availed of even if the party has other remedies available. Cause of action is “substantial or fundamental breach”

RESCISSION (Art. 1301) Subsidiary remedy – can only be invoked if there is no other remedy (Art. 1303) Breach is not required. May be invoked even if both parties already complied with their obligation. Cause of action is lesion economic injury to a party.

or

Rescission under Art. 1911 not necessarily judicial: since it is implied

in reciprocal obligations. However, rescission shall take effect only at the time notice was given to the other party but without prejudice to the right of such party to question the validity of rescission. Court action here is only to determine the validity of the rescission, such as to determine if there was substantial breach. However still, the rescission takes effect from notice and not from court decision. (Magdalena Estate vs. Myrick and UP vs.

DLANDelos Angeles.

Effect of Rescission; Mutual restitution: in rescission under Art. 1301, it shall be the duty of both parties to return the things which were the object of the contract as provided under Art. 1385. This same article was likewise held applicable to Rescission under Art. 1911. In Unlad vs. Dragon, the SC held that “mutual restitution is required in cases involving rescission under Article 1191. This means bringing the parties back to their original status prior to the inception of the contract.” Rescission has the effect of "unmaking a contract, or its undoing from the beginning, and not merely its termination." Hence, rescission creates the obligation to return the object of the contract. It can be carried out only when the one who demands rescission can return whatever he may be obliged to restore. To rescind is to declare a contract void at its inception and to put an end to it as though it never was. It is not merely to terminate it and release the parties from further obligations to each other, but to abrogate it from the beginning and restore the parties to their relative positions as if no contract has been made. OTHER PROVISIONS: Art. 1166. The obligation to give a determinate thing includes that of delivering all its accessions and accessories, even though they may not have been mentioned. (1097a) Art. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for damages. (1101) Art. 1177. The creditors, after having pursued the property in possession of the debtor to satisfy their claims, may exercise all the rights and bring all the actions of the latter for the same purpose, save those which are inherent in his person; they may also impugn the acts which the debtor may have done to defraud them. (1111) Art. 1178. Subject to the laws, all rights acquired in virtue of an obligation are transmissible, if there has been no stipulation to the contrary. (1112) Art. 1192. In case both parties have committed a breach of the obligation, the liability of the first infractor shall be equitably tempered by the courts. If it cannot be determined which of the parties first violated the contract, the same shall be deemed extinguished, and each shall bear his own damages. (n) Art. 2236. The debtor is liable with all his property, present and future, for the fulfillment of his obligations, subject to the exemptions provided by law. (1911a) Art. 302. Neither the right to receive legal support nor any money or property obtained as such support or any pension or gratuity from the government is subject to attachment or execution. (n) Art. 1708. The laborer's wages shall not be subject to execution or attachment, except for debts incurred for food, shelter, clothing and medical attendance. Arts. 153 and 155, Family Code Art. 153. The family home is deemed constituted on a house and lot from the time it is occupied as a family residence. From the time of its constitution and so long as any of its beneficiaries actually resides therein, the family home continues to be such and is exempt from execution, forced

37


sale or attachment except as hereinafter provided and to the extent of the value allowed by law.(223a) Art. 155. The family home shall be exempt from execution, forced sale or attachment except: (1) For nonpayment of taxes; (2) For debts incurred prior to the constitution of the family home; (3) For debts secured by mortgages on the premises before or after such constitution; and (4) For debts due to laborers, mechanics, architects, builders, materialmen and others who have rendered service or furnished material for the construction of the building. (243a) Rule 39, Sec. 13, Rules of Court: Section 13. Property exempt from execution. — Except as otherwise expressly provided by law, the following property, and no other, shall be exempt from execution: (a) The judgment obligor's family home as provided by law, or the homestead in which he resides, and land necessarily used in connection therewith; (b) Ordinary tools and implements personally used by him in his trade, employment, or livelihood; (c) Three horses, or three cows, or three carabaos, or other beasts of burden, such as the judgment obligor may select necessarily used by him in his ordinary occupation; (d) His necessary clothing and articles for ordinary personal use, excluding jewelry; (e) Household furniture and utensils necessary for housekeeping, and used for that purpose by the judgment obligor and his family, such as the judgment obligor may select, of a value not exceeding one hundred thousand pesos; (f) Provisions for individual or family use sufficient for four months; (g) The professional libraries and equipment of judges, lawyers, physicians, pharmacists, dentists, engineers, surveyors, clergymen, teachers, and other professionals, not exceeding three hundred thousand pesos in value; (h) One fishing boat and accessories not exceeding the total value of one hundred thousand pesos owned by a fisherman and by the lawful use of which he earns his livelihood; (i) So much of the salaries, wages, or earnings of the judgment obligor for his personal services within the four months preceding the levy as are necessary for the support of his family; (j) Lettered gravestones; (k) Monies, benefits, privileges, or annuities accruing or in any manner growing out of any life insurance; (l) The right to receive legal support, or money or property obtained as such support, or any pension or gratuity from the Government; (m) Properties specially exempted by law. But no article or species of property mentioned in this section shall be exempt from execution issued upon a judgment recovered for its price or upon a judgment of foreclosure of a mortgage thereon. (12a) 1.

Extra-judicial remedies a. Expressly granted by law – Art. 1786, 1788, 1526

Art. 1786. Every partner is a debtor of the partnership for whatever he may have promised to contribute thereto. He shall also be bound for warranty in case of eviction with regard to specific and determinate things which he may have contributed to the partnership, in the same cases and in the same manner as the vendor is bound with respect to the vendee. He shall also be liable for the fruits thereof from the time they should have been delivered, without the need of any demand. (1681a) Art. 1788. A partner who has undertaken to contribute a sum of money and fails to do so becomes a debtor for the interest and damages from the time he should have complied with his obligation. The same rule applies to any amount he may have taken from the partnership coffers, and his liability shall begin from the time he converted

the amount to his own use. (1682)

the debtor. (1158a)

Art. 1526. Subject to the provisions of this Title, notwithstanding that the ownership in the goods may have passed to the buyer, the unpaid seller of goods, as such, has: (1) A lien on the goods or right to retain them for the price while he is in possession of them; (2) In case of the insolvency of the buyer, a right of stopping the goods in transitu after he has parted with the possession of them; (3) A right of resale as limited by this Title; (4) A right to rescind the sale as likewise limited by this Title.

Art. 1237. Whoever pays on behalf of the debtor without the knowledge or against the will of the latter, cannot compel the creditor to subrogate him in his rights, such as those arising from a mortgage, guaranty, or penalty. (1159a)

b. 2.

Payment made by a third person: a.

Effects: 1. The creditor can be compelled to receive payment 2. The third party payor may demand reimbursement for the full amount 3. Results in subrogation: As such, the 3rd party payor may exercise rights belonging to the creditor, such as going against the guarantor or foreclosure of mortgage.

Stipulated

Judicial remedies a. Principal remedies – 1191, 1170

Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him. The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible.

Person who has interest in the fulfillment of the obligation: include

those subsidiarily liable such as guarantors and mortgagors, and codebtors (including joint co-debtors). b.

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)

b.

Subsidiary remedies – 1380, 1177

In both instances, the payment shall extinguish the obligation.

Subrogation: when the 3rd party payor steps in the shoes of the creditor. There is legal subrogation when:

Art. 1302. It is presumed that there is legal subrogation: (1) When a creditor pays another creditor who is preferred, even without the debtor's knowledge; (2) When a third person, not interested in the obligation, pays with the express or tacit approval of the debtor; (3) When, even without the knowledge of the debtor, a person interested in the fulfillment of the obligation pays, without prejudice to the effects of confusion as to the latter's share. (1210a)

Art. 1380. Contracts validly agreed upon may be rescinded in the cases established by law. (1290) Art. 1177. The creditors, after having pursued the property in possession of the debtor to satisfy their claims, may exercise all the rights and bring all the actions of the latter for the same purpose, save those which are inherent in his person; they may also impugn the acts which the debtor may have done to defraud them. (1111) c. G.

Ancillary remedies – Rules of Court

MODES OF EXTINGUISHMENT OF OBLIGATIONS – Art. 1231

Art. 1231. Obligations are extinguished: (1) By payment or performance: (2) By the loss of the thing due: (3) By the condonation or remission of the debt; (4) By the confusion or merger of the rights of creditor and debtor; (5) By compensation; (6) By novation. 1.

Payment or performance

1.

Provisions as to the payor

Art. 1236. The creditor is not bound to accept payment or performance by a third person who has no interest in the fulfillment of the obligation, unless there is a stipulation to the contrary. Whoever pays for another may demand from the debtor what he has paid, except that if he paid without the knowledge or against the will of the debtor, he can recover only insofar as the payment has been beneficial to

38


One who has no interest in the fulfilment of the obligation or when the debtor had no knowledge of or did not consent (against his will). Effects: 1. The creditor cannot be compelled to receive payment. 2. If payment was made, 3rd party payor can only demand reimbursement upto the extent that has been beneficial to the debtor. 3. No subrogation. As such, the third party payor cannot go against guarantors or foreclose the mortgage.

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.

Art. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for damages. (1101)

Who has an interest in the fulfilment of the obligation or when the debtor consents.

When creditor may be bound to accept payment from a third person: 1. 2. 3.

When stipulated; When the 3rd party payor has an interest in the fulfilment of the obligation When the debtor gives his consent.

Art. 1238. Payment made by a third person who does not intend to be reimbursed by the debtor is deemed to be a donation, which requires the debtor's consent. But the payment is in any case valid as to the creditor who has accepted it. (n) Art. 1239. In obligations to give, payment made by one who does not have the free disposal of the thing due and capacity to alienate it shall not be valid, without prejudice to the provisions of Article 1427 under the Title on "Natural Obligations." (1160a)

Capacity and Free Disposal: the payor should have capacity to alienate

and the free disposal of the thing due for payment to be effective. Such that minors (who don’t have capacity) and those suffering the penalty of civil interdiction (no free disposal) cannot make a valid payment. c.

Provisions as to the payee

Art. 1240. Payment shall be made to the person in whose favor the obligation has been constituted, or his successor in interest, or any person authorized to receive it. (1162a)

Payment may be made to: 1. 2. 3.

Person in whose favour the obligation has been constituted – not necessarily a party to the constitution of the obligation; His successor in interest – who may not be creditors at the time of constitution, but may be creditors at the time of fulfilment. Any person authorized to receive it – agents are creditors because they have the right to collect, but not in their own right. (This is relevant as to Compensation as a mode of extinguishing obligation)

Payment to a wrong party: Art. 1241. Payment to a person who is incapacitated to administer his property shall be valid if he has kept the thing delivered, or insofar as the payment has been beneficial to him. Payment made to a third person shall also be valid insofar as it has redounded to the benefit of the creditor. Such benefit to the creditor need not be proved in the following cases: (1) If after the payment, the third person acquires the creditor's rights; (2) If the creditor ratifies the payment to the third person; (3) If by the creditor's conduct, the debtor has been led to believe that the third person had authority to receive the payment. (1163a) Payment to anyone not authorized as provided under Art. 1240 is considered a void payment. As such, the debtor may be compelled to pay again, his remedy being to run against the person he made payment to. Except in the following circumstances: 1. It redounded to the benefit of the creditor; 2. Such benefit need not be proven if: a. after the payment, the third person acquires the creditor's rights; b. the creditor ratifies the payment to the third person; c. by the creditor's conduct, the debtor has been led to believe that the third person had authority to receive the payment. 3.

Payment made in good faith to any person in possession of the credit.

(Art. 1242)

BAR QUESTION: A owes B P20,000 which became due and payable last October 1, 1983. On that date, A offered B P10,000 the only money he then had, but refused to accept the payment. A thereafter met C, B’s 22year old son, to whom he gave the P10,000 with the request that he turn the money over to B. The money was stolen while in C’s possession. Was B justified in refusing to accept the payment of A? May he still recover the full amount of his debt of P20,000? Why? ANSWER: Yes, B was justified in refusing to accept payment because as a rule, the creditor cannot be bound to accept partial payment. Yes, B may still recover the full amount regardless of payment to B’s son. B is not C. In this case there is payment to a wrong party and none of the exceptions provided under Art. 1241, i.e., there appears to be no assignment of right to B’s son, B did not ratify the payment, nor were there any conduct of B that would lead A to believe that C had authority to receive payment. Moreover, it was stated that the money was stolen, thus, it cannot be said that the payment redounded to the benefit of B. d.

Thing to be paid or delivered

Art. 1232. Payment means not only the delivery of money but also the performance, in any other manner, of an obligation. (n) Art. 1244. The debtor of a thing cannot compel the creditor to receive a different one, although the latter may be of the same value as, or more valuable than that which is due. In obligations to do or not to do, an act or forbearance cannot be substituted by another act or forbearance against the obligee's

39


will. (1166a) Art. 1246. When the obligation consists in the delivery of an indeterminate or generic thing, whose quality and circumstances have not been stated, the creditor cannot demand a thing of superior quality. Neither can the debtor deliver a thing of inferior quality. The purpose of the obligation and other circumstances shall be taken into consideration. (1167a) Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines. The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired. In the meantime, the action derived from the original obligation shall be held in the abeyance. (1170) Art. 1250. In case an extraordinary inflation or deflation of the currency stipulated should supervene, the value of the currency at the time of the establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary. (n)

Applicable only to contracts: since the provision deals with “currency stipulated”

Republic Act No. 8183 June 11, 1996 Repealing RA 529 AN ACT REPEALING REPUBLIC ACT NUMBERED FIVE HUNDRED TWENTY-NINE AS AMENDED, ENTITLED"AN ACT TO ASSURE THE UNIFORM VALUE OF PHILIPPINE COIN AND CURRENCY." Section 1. All monetary obligations shall be settled in the Philippine currency which is legal tender in the Philippines. However, the parties may agree that the obligation or transaction shall be settled in any other currency at the time of payment. xxx PRESIDENTIAL DECREE No. 72 November 29, 1972 AMENDING REPUBLIC ACT NUMBERED TWO HUNDRED AND SIXTY-FIVE, ENTITLED "THE CENTRAL BANK ACT" Section 31. Section fifty-four of the same Act is hereby amended to read as follows: "Sec. 54. Legal tender power. All notes and coins issued by the Central Bank shall fully guaranteed by the Government of the Republic of the Philippines and shall be legal tender in the Philippines for all debts, both public and private: Provided, however, That coins shall be legal tender in amounts not exceeding fifty pesos for denominations from ten centavos to one peso, and in amounts not exceeding twenty pesos for denominations of five centavos or less." Section 32. Section sixty-three of the same Act is hereby amended to read as follows: "Sec. 63. Legal character. Checks representing deposit money do not have legal tender power and their acceptance in the payment of debts, both public and private, is at the option of the creditor: Provided, however, That a check which has been cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor of cash in an amount equal to the amount credited to his account."

Legal Tender Power: 1.

P1, P5 and P10 coins shall be legal tender in amounts not exceeding P1,000;

2.

Coins below P1 – legal tender not exceeding P100.

Checks: creditors cannot be compelled to receive payment through checks, they may, however, accept the same if they want to.

Extinguishment: of the obligation through payment shall only be at the time the check or other mercantile documents have been encashed.

Stale Checks: when the check becomes stale, this does not result in extinguishment of the obligation, unless, by the fault of the creditor, the check’s value has been impaired.

The fact that the creditor is still in possession of the check gives rise to the presumption that the same has not been encashed and the obligation has not been extinguished. BAR QUESTION: Mr. Magaling obtained a judgment against Mr. Mayaman in the amount of P500,000.00. A writ of execution was issued pursuant to which various personal properties of Mayaman were levied upon by the sheriff. An auction sale was scheduled. Before the appointed day of the auction, Mayaman delivered to the sheriff a cashier’s check of Far East Bank in the amount of P200,000.00 and enough cash to cover the remainder of the total amount due. Magaling refused to accept the check and asked the sheriff to proceed with the auction sale. Did Magaling have the right to refuse the payment of part of the obligation with a cashier’s check? Explain.

There being no express stipulation and if the undertaking is to deliver a determinate thing, the payment shall be made wherever the thing might be at the moment the obligation was constituted. In any other case the place of payment shall be the domicile of the debtor. If the debtor changes his domicile in bad faith or after he has incurred in delay, the additional expenses shall be borne by him. These provisions are without prejudice to venue under the Rules of Court. (1171a) SPECIAL FORMS OF PAYMENT

Is the consent of the creditor necessary?    

Effect of delivery of the thing by the debtor to the creditor or the court: transfer of ownership? 

ANSWER: In 1986: No. The effective ruling of the SC in New Pacific Timber vs. Seneris is that manager’s check, certified check and cashier’s check are as good as cash. As such, the creditor does not have a right to refuse. Today: Yes. The SC reverted back to earlier decisions that checks of whatever kind do not have legal tender power. A creditor cannot be compelled to accept payment through checks.

  

As to the cash component of the payment: Yes. Magaling is not compelled to receive partial payment. Partial payment is no payment. e.

Place, date, time and manner of payment

 

Art. 1234. If the obligation has been substantially performed in good faith, the obligor may recover as though there had been a strict and complete fulfillment, less damages suffered by the obligee. (n)



Art. 1243. Payment made to the creditor by the debtor after the latter has been judicially ordered to retain the debt shall not be valid. (1165) Art. 1247. Unless it is otherwise stipulated, the extrajudicial expenses required by the payment shall be for the account of the debtor. With regard to judicial costs, the Rules of Court shall govern. (1168a)

Dation in payment – there has to be. Otherwise, it may be another transaction, e.g., mortgage, pledge, etc. In Filinvest vs. Philippine Acetyline, the SC held that after the letter was given representing the assignment of the car, a SPA was executed authorizing creditor to sell the thing. Thus, it is clear that there was no transfer of ownership. Thus, no dation in payment. Application of payment – yes. Question is to which debt shall it apply. Cession – none. Creditors are merely constituted as agents to sell the properties. Consignation – it depends. Only when the creditor accepts or the court determines that the consignation was proper. The effect retroacts to the date of delivery to the court.

Effect as to extinguishment:

Art. 1233. A debt shall not be understood to have been paid unless the thing or service in which the obligation consists has been completely delivered or rendered, as the case may be. (1157)

Art. 1235. When the obligee accepts the performance, knowing its incompleteness or irregularity, and without expressing any protest or objection, the obligation is deemed fully complied with. (n)

Dation in payment – absolutely, because the creditor has to accept the thing; Application – not necessarily. As a rule, the debtor can designate to which debt payment applies. Payment by cession – absolutely, because the creditors would accept these properties for them to sell. Consignation – not necessarily. two ways of extinguishment through consignation: (1) when the creditor accepts; (2) court determines the consignation proper (here, there is no consent from the creditor)



Dation in payment – total extinguishment UNLESS intention of the parties to the contrary is clear. Application of payments – no total extinguishment precisely because amount being paid is not sufficient to cover all the debts. Cession – to the extent of the net proceeds UNLESS the creditors would agree otherwise. Consignation – No, if creditor made reservation that payment is only partial.

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

Dation in payment is the delivery or transmission of ownership of a thing

by the debtor to the creditor as an accepted equivalent of the performance of the obligation. It may consists not only of a thing but also of rights, i.e., usufruct or credit.

Nature: there has to be delivery of the thing and prior acceptance and a

Art. 1248. Unless there is an express stipulation to that effect, the creditor cannot be compelled partially to receive the prestations in which the obligation consists. Neither may the debtor be required to make partial payments.

consequent transfer of ownership to consider it a dation in payment. A mere promise to deliver a thing in lieu of the originally constituted subject amounts to a novation.

However, when the debt is in part liquidated and in part unliquidated, the creditor may demand and the debtor may effect the payment of the former without waiting for the liquidation of the latter. (1169a)

as provided under Art. 1245, the warranties and the breach thereof under Art. 1155 are applicable.

Art. 1251. Payment shall be made in the place designated in the obligation.

40


Applicability of warranties in sales: since the law of sales is applicable

Article 1555. When the warranty has been agreed upon or nothing has been stipulated on this point, in case eviction occurs, the vendee shall have the right to demand of the vendor:

(1) The return of the value which the thing sold had at the time of the eviction, be it greater or less than the price of the sale; (2) The income or fruits, if he has been ordered to deliver them to the party who won the suit against him; (3) The costs of the suit which caused the eviction, and, in a proper case, those of the suit brought against the vendor for the warranty; (4) The expenses of the contract, if the vendee has paid them; (5) The damages and interests, and ornamental expenses. Hence, when the creditor is EVICTED from the thing delivered, HE may no longer revive because the first obligation has already been extinguished.

Extent of extinguishment: General rule: to the extent of the value of the

thing delivered as agreed upon or as may be proved. Exception: if the parties consider the thing as equivalent to the obligation through an express or implied agreement or by silence. FILINVEST CREDIT CORPORATION, plaintiff-appellee, vs. PHILIPPINE ACETYLENE, CO., INC., defendant-appellant. G.R. No. L-50449 | January 30, 1982 | Second Division | J. De Castro FACTS: On October 30, 1971, the Philippine Acetylene (appellant) purchased from one Alexander Lim, as evidenced by a Deed of Sale, a motor vehicle described as Chevorlet, 1969 model with Serial No. 136699Z303652 for P55,247.80 with a down payment of P20,000.00 and the balance of P35,247.80 payable, under the terms and conditions of the promissory note, at a monthly installment of P1,036.70 for 34 months, due and payable on the first day of each month starting December 1971 through and inclusive September 1, 1974 with 12 % interest per annum on each unpaid installment, and attorney's fees in the amount equivalent to 25% of the total of the outstanding unpaid amount. As security, the appellant executed a chattel mortgage over the same motor vehicle in favor of Lim. All rights, title, and interests in the PN and CHM were ultimately assigned to Filinvest Credit Corporation (appellee) by virtue of a Deed of Assignment. Since appellant defaulted in 9 successive installments, appellee sent the former a letter demanding "that you (appellant) remit the aforesaid amount in full in addition to stipulated interest and charges or return the mortgaged property to my client at its office at 2133 Taft Avenue, Malate, Manila within five (5) days from date of this letter during office hours." In reply, appellant advised appellee of its decision to "return the mortgaged property, which return shall be in full satisfaction of its indebtedness pursuant to Article 1484 of the New Civil Code." Accordingly, the mortgaged vehicle was returned to the appellee together with the document "Voluntary Surrender with Special Power of Attorney To Sell" executed by appellant on March 12, 1973 and confirmed to by appellee's vice-president. Unable to sell the motor vehicle due to unpaid taxes, appellee offered to deliver back the motor vehicle to the appellant but the latter refused to accept it, so appellee instituted an action for collection of a sum of money with damages in the CFI of Manila on September 14, 1973. CFI ruled in favor of the appellee Hence, Philippine Acetylene filed the instant appeal. Appellant maintained that when it opted to return, as in fact it did return, the mortgaged motor vehicle to the appellee, said return necessarily had the effect of extinguishing appellant's obligation for the unpaid price to the appellee, construing the return to and acceptance by the appellee of the mortgaged motor vehicle as a mode of payment, specifically, dation in payment or dacion en pago which according to appellant, virtually made appellee the owner of the mortgaged motor vehicle by the mere delivery thereof, citing Articles 1232, 1245, and 1497 of the Civil Code. ISSUE: Whether the return of the mortgaged motor vehicle to the appellee by virtue of its voluntary surrender by the appellant constituted dacion en pago, which totally extinguished and/or cancelled its obligation to the appellee.

41


HELD: NO. The mere return of the mortgaged motor vehicle by the mortgagor, the herein appellant, to the mortgagee, the herein appellee, does not constitute dation in payment or dacion en pago in the absence, express or implied of the true intention of the parties. Dacion en pago, according to Manresa, is the transmission of the ownership of a thing by the debtor to the creditor as an accepted equivalent of the performance of obligation. 4 In dacion en pago, as a special mode of payment, the debtor offers another thing to the creditor who accepts it as equivalent of payment of an outstanding debt. The undertaking really partakes in one sense of the nature of sale, that is, the creditor is really buying the thing or property of the debtor, payment for which is to be charged against the debtor's debt. As such, the essential elements of a contract of sale, namely, consent, object certain, and cause or consideration must be present. In its modern concept, what actually takes place in dacion en pago is an objective novation of the obligation where the thing offered as an accepted equivalent of the performance of an obligation is considered as the object of the contract of sale, while the debt is considered as the purchase price. 5 In any case, common consent is an essential prerequisite, be it sale or innovation to have the effect of totally extinguishing the debt or obligation. The evidence on the record fails to show that the mortgagee, the herein appellee, consented, or at least intended, that the mere delivery to, and acceptance by him, of the mortgaged motor vehicle be construed as actual payment, more specifically dation in payment or dacion en pago. The fact that the mortgaged motor vehicle was delivered to him does not necessarily mean that ownership thereof, as juridically contemplated by dacion en pago, was transferred from appellant to appellee. In the absence of clear consent of appellee to the proferred special mode of payment, there can be no transfer of ownership of the mortgaged motor vehicle from appellant to appellee. If at all, only transfer of possession of the mortgaged motor vehicle took place, for it is quite possible that appellee, as mortgagee, merely wanted to secure possession to forestall the loss, destruction, fraudulent transfer of the vehicle to third persons, or its being rendered valueless if left in the hands of the appellant. A more solid basis of the true intention of the parties is furnished by the document executed by appellant captioned "Voluntary Surrender with Special Power of Attorney To Sell" dated March 12, 1973, attached as Annex "C" of the appellant's answer to the complaint. An examination of the language of the document reveals that the possession of the mortgaged motor vehicle was voluntarily surrendered by the appellant to the appellee authorizing the latter to look for a buyer and sell the vehicle in behalf of the appellant who retains ownership thereof, and to apply the proceeds of the sale to the mortgage indebtedness, with the undertaking of the appellant to pay the difference, if any, between the selling price and the mortgage obligation. With the stipulated conditions as stated, the appellee, in essence was constituted as a mere agent to sell the motor vehicle which was delivered to the appellee, not as its property, for if it were, he would have full power of disposition of the property, not only to sell it as is the limited authority given him in the special power of attorney. Had appellee intended to completely release appellant of its mortgage obligation, there would be no necessity of executing the document captioned "Voluntary Surrender with Special Power of Attorney To Sell." Nowhere in the said document can We find that the mere surrender of the mortgaged motor vehicle to the appellee extinguished appellant's obligation for the unpaid price. Appellant would also argue that by accepting the delivery of the mortgaged motor vehicle, appellee is estopped from demanding payment of the unpaid obligation. Estoppel would not he since, as clearly set forth above, appellee never accepted the mortgaged motor vehicle in full satisfaction of the mortgaged debt. Under the law, the delivery of possession of the mortgaged property to the mortgagee, the herein appellee, can only operate to extinguish appellant's liability if the appellee had actually caused the foreclosure sale of the mortgaged property when it recovered possession thereof. 6 It is worth noting that it is the fact of foreclosure and actual sale of the mortgaged chattel that bar the recovery by the vendor of any balance of the purchaser's outstanding obligation not satisfied by the sale. 7 As held by this Court, if the vendor desisted, on his own initiative, from consummating the auction sale, such desistance was a timely disavowal of the remedy of

foreclosure, and the vendor can still sue for specific performance. 8 This is exactly what happened in the instant case. CITIZENS SURETY and INSURANCE COMPANY, INC., petitioner, vs. COURT OF APPEALS and PASCUAL M. PEREZ, respondents.

[G.R. No. L-48958 | June 28, 1988 | Third Division | J. Gutierrez Jr.]

FACTS: On December 4, 1959, the petitioner issued 2 surety bonds CSIC Nos. 2631 and 2632 to guarantee compliance by the principal Pascual M. Perez Enterprises of its obligation under a "Contract of Sale of Goods" entered into with the Singer Sewing Machine Co. In consideration of the issuance of the aforesaid bonds, Pascual M. Perez, in his personal capacity and as attorney-in-fact of his wife, Nicasia Sarmiento and in behalf of the Pascual M. Perez Enterprises executed on the same date 2 indemnity agreements wherein he obligated himself and the Enterprises to indemnify the petitioner jointly and severally, whatever payments advances and damage it may suffer or pay as a result of the issuance of the surety bonds. In addition to the two indemnity agreements, Pascual M. Perez therefore executed a deed of assignment, on the same day, December4, 1959, of his stock of lumber with a total value of P400,000. On April 12, 1960, a second real estate mortgage was further executed in favor of the petitioner to guarantee the fulfillment of said obligation. As Pascual M. Perez Enterprises failed to comply with its obligation, the petitioner was compelled to pay, as it did pay, the fair value of the two surety bonds in the total amount of P144,000. Except for partial payments in the total sum of P55,600 and notwithstanding several demands, Pascual M. Perez Enterprises failed to reimburse the petitioner for the losses it sustained under the said surety bonds. The petitioner filed before the CFI of Batanga a claim for sum of money against the estate of the late Nicasia Sarmiento which was being administered by Pascual M. Perez. CFI of Batangas  ordered the administrator Pascual M. Perez to pay the claimant P144,000.00 with interest, minus the payments already made in the amount of P55,600 considering that the estate of the late, Nicasia Sarmiento is jointly and severally liable to the petitioner for the amount the latter had paid the Singer Sewing Machine Company, Ltd. On appeal, the CA reversed and set aside the trial court’s decision; hence, petitioner filed a petition for review before the SC. ISSUE: WON the administrator's obligation under the surety bonds and indemnity agreements had been extinguished by reason of the execution of the deed of assignment? HELD: It is the general rule that when the words of a contract are plain and readily understandable, there is no room for construction thereof (San Mauricio Milling Co. v. Ancheta, 105 SCRA 371). However, this is only a general rule and it admits exceptions. Pascual M. Perez executed an instrument denominated as "Deed of Assignment." Pertinent portions of the deed read as follows: I, Pascual M. Perez, Filipino, of legal age, married, with residence and postal address at 115 D. Silang, Batangas, as the owner and operator of a business styled "PASCUAL M. PEREZ ENTERPRISES," with office at R-31 Madrigal Building, Escolta, Manila, hereinafter referred to as ASSIGNOR, for and in consideration of the issuance in my behalf and in favor of the SINGER SEWING MACHINE COMPANY, LTD., of two Surety Bonds (CSIC) Bond Nos. 2631 and 2632 each in the amount of SEVENTY TWO THOUSAND PESOS (P72,000.00), or with a total sum of ONE RED FORTY-FOUR THOUSAND PESOS (Pl44,000.00), Philippine Currency, by the CITIZENS' SURETY AND INSURANCE CO., INC., a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines, with principal office at R-306 Samanillo Building, Escolta, Manila, Philippines, and duly represented in the act by its Vice-President and General Manager, ARISTEO L. LAT, hereinafter referred to as ASSIGNEE, assign by these presents, unto said ASSIGNEE, its heirs, successors, administrators or assigns the

42


herein ASSIGNOR'S stock (Insured) of low grade lumber, class "No. 2 COMMON" kept and deposited at Tableria Tan Tao at Batangas, Batangas, with a total measurement of Two Million (2,000,000.00) board feet and valued of P0.20 per board feet or with a total value of P400,000.00 which lumber is intended by the ASSIGNOR for exportation under a Commodity Trade Permit, the condition being that in the event that the herein assignor exports said lumber and as soon as he gets the necessary export shipping and related and pertinent documents therefor, the ASSIGNOR will turn said papers over to the herein ASSIGNEE, conserving all of the latter's dominion, rights and interests in said exportation. The ASSIGNEE hereby agrees and accepts this assignment under the conditions above-mentioned. (pp. 77-79, Record on Appeal) On its face, the document speaks of an assignment where there seems to be a complete conveyance of the stocks of lumber to the petitioner, as assignee. However, in the light of the circumstances obtaining at the time of the execution of said deed of assignment, we can not regard the transaction as an absolute conveyance. As held in the case of Sy v. Court of Appeals, (131 SCRA 116,124): It is a basic and fundamental rule in the interpretation of contract that if the terms thereof are clear and leave no doubt as to the intention of the contracting parties, then the literal meaning of the stipulations shall control but when the words appear contrary to the evident intention of the parties, the latter shall prevail over the former. (Labasan v. Lacuesta, 86 SCRA 16) In order to judge the intention of the parties, their contemporaneous and subsequent acts shall be principally considered. (Emphasis supplied) The petitioner issued the two (2) surety bonds on December 4, 1959 in behalf of the Pascual M. Perez Enterprises to guaranty fullfillment of its obligation under the "Contract of Sale of Goods" entered into with the Singer Sewing Machine Co. In consideration of the two surety bonds, two indemnity agreements were executed by Pascual M. Perez followed by a Deed of Assignment which was also executed on the same date. In the case of Lopez v. Court of appeals (114 SCRA 673), we stated that: The indemnity agreement and the stock assignment must be considered together as related transactions because in order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered. (Article 1371, New Civil Code). Thus, considering that the indemnity agreement connotes a continuing obligation of Lopez towards Philamgen, while the stock assignment indicates a complete discharge of the same obligation, the existence of the indemnity agreement whereby Lopez had to pay a premium of P1,000.00 for a period of one year and agreed at all times to indemnify Philamgen of any and all kinds of losses which the latter might sustain by reason of it becoming a surety, is inconsistent with the theory of an absolute sale for and in consideration of the same undertaking of Philamgen. There would have been no necessity for the execution of the indemnity agreement if the stock assignment was really intended as an absolute conveyance. Hence, there are strong and cogent reasons to conclude that the parties intended said stock assignment to complement the indemnity agreement and thereby sufficiently guarantee the indemnification of Philamgen should it be required to pay Lopez" loan to Prudential Bank. (at pp. 682-683) The respondent court stated that "by virtue of the execution of the deed of assignment ownership of administrator-appellant's lumber materials had been transferred to the claimant-appellant and this amounted to dation in payment whereby the former is considered to have alienated his property in favor of the latter in satisfaction of a monetary debt (Artide 1245). As a consequence thereof, administrator-appellant's obligation under the surety bonds is thereby extinguished upon the execution of the deed of assignment." This statement is not sustained by the records. The transaction could not be dation in payment. As pointed out in the concurring and dissenting opinion of Justice Edgardo L. Paras and the dissenting opinion of Justice Mariano Serrano when the deed of assignment

was executed on December 4, 1959, the obligation of the assignor to refund the assignee had not yet arisen. In other words, there was no obligation yet on the part of the petitioner, Citizens' Surety and Insurance Company, to pay Singer Sewing Machine Co. There was nothing to be extinguished on that date, hence, there could not have been a dation in payment.

Art. 1248. Unless there is an express stipulation to that effect, the creditor cannot be compelled partially to receive the prestations in which the obligation consists. Neither may the debtor be required to make partial payments.

In the case of Lopez v. Court of Appeals (supra) we had the occasion to explain: Considering the above jurisprudence, We find that the debt or obligation at bar has not matured on June 2, 1959 when Lopez 'alienated' his 4,000 shares of stock to Philamgen. Lopez' obligation would arise only when he would default in the payment of the principal obligation (the loan) to the bank and Philamgen had to pay for it. Such fact being adverse to the nature and concept of dation in payment, the same could not have been constituted when the stock assignment was executed. Moreover, there is no express provision in the terms of the stock assignment between Philamgen and Lopez that the principal obligation (which is the loan) is immediately extinguished by reason of such assignment. (at p. 686) The deed of assignment cannot be regarded as an absolute conveyance whereby the obligation under the surety bonds was automatically extinguished. The subsequent acts of the private respondent bolster the fact that the deed of assignment was intended merely as a security for the issuance of the two bonds. Partial payments amounting to P55,600.00 were made after the execution of the deed of assignment to satisfy the obligation under the two surety bonds. Since later payments were made to pay the indebtedness, it follows that no debt was extinguished upon the execution of the deed of assignment. Moreover, a second real estate mortgage was executed on April 12, 1960 and eventually cancelled only on May 15, 1962. If indeed the deed of assignment extinguished the obligation, there was no reason for a second mortgage to still have to be executed. We agree with the two dissenting opinions in the Court of Appeals that the only conceivable reason for the execution of still another mortgage on April 12, 1960 was because the obligation under the indemnity bonds still existed. It was not yet extinguished when the deed of assignment was executed on December 4, 1959. The deed of assignment was therefore intended merely as another collateral security for the issuance of the two surety bonds. Application of Payments Art. 1252. He who has various debts of the same kind in favor of one and the same creditor, may declare at the time of making the payment, to which of them the same must be applied. Unless the parties so stipulate, or when the application of payment is made by the party for whose benefit the term has been constituted, application shall not be made as to debts which are not yet due. If the debtor accepts from the creditor a receipt in which an application of the payment is made, the former cannot complain of the same, unless there is a cause for invalidating the contract. (1172a) Application of Payment: is the designation of the debt which is being paid by a debtor who has several obligations of the same kind in favor of the creditor to whom payment is made. There is only one debtor; There are several debts; The debts are of the same kind; There is only one and the same creditor.

Due and demandable debts: as a general rule, all the debts must be due and demandable. EXCEPTION: when there is mutual agreement or when the consent of the party for whose benefit the term was constituted was obtained.

Right to apply payment: generally, the debtor has the right to apply the

payment at the time of making the payment, subject to the following LIMITATIONS: 1. Creditor cannot be compelled to accept partial payment. (Art. 1248);

43

2.

Debtor cannot apply payment to principal if interest has not been paid. Art. 1253. If the debt produces interest, payment of the principal shall not be deemed to have been made until the interests have been covered. (1173)

3. 4. 5.

The debt must be liquidated, except when the parties agree otherwise; Cannot be made when the period has not arrived and such period was constituted in favour of the creditor, except with the consent of the creditor (Art. 1252); When there is agreement as to which debt must be paid first.

Example: if A is indebted to B for P100, P50 and P25, and A pays P25, to which shall the payment apply? Answer: Generally, the debt which was assigned by the debtor. What if A designates the second debt, P50? Not allowed, because a limitation as to his right to designate is that the creditor cannot be compelled to receive partial payment. Except if it is partly liquidated and partly unliquidated. What if A designates the third debt, P25? Generally allowed, except if the same is not yet due and the benefit of the period was constituted for the creditor.

If the debtor did not designate, to which debt shall payment apply? That which was chosen by the creditor as reflected in the receipt which is accepted by the debtor without protest. (Art. 1252, 2nd par.) Art. 1254. When the payment cannot be applied in accordance with the preceding rules, or if application cannot be inferred from other circumstances, the debt which is most onerous to the debtor, among those due, shall be deemed to have been satisfied. If the debts due are of the same nature and burden, the payment shall be applied to all of them proportionately. (1174a)

If debtor and creditor did not designate: 1. 2.

If the debts are of different nature and burden – to that debt which is most onerous to the debtor; IF the debts are of the same nature and burden – applied proportionately.

Debts which are considered more onerous: 1.

Requisites: 1. 2. 3. 4.

However, when the debt is in part liquidated and in part unliquidated, the creditor may demand and the debtor may effect the payment of the former without waiting for the liquidation of the latter. (1169a)


2. 3. 4. 5.

PRINCIPAL

ebt

where he is the SOLE DEBTOR each is more burdensome than as to every debtor

6.

t with HIGHEST INTEREST RATE When there is an unsecured debt with interest and a secured debt

7. 8.

When there is a bond where the principal and surety are solidarily principal, the UNSECURED PORTION of the debt is more onerous

9.

over those governed by the general rules on damages 10. Liquidated debts over unliquidated ones 11. Those where the debtor is in default over those where he is not

Requisites: 1. 2.

Payment by Cession or Assignment

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

Art. 1255. The debtor may cede or assign his property to his creditors in payment of his debts. This cession, unless there is stipulation to the contrary, shall only release the debtor from responsibility for the net proceeds of the thing assigned. The agreements which, on the effect of the cession, are made between the debtor and his creditors shall be governed by special laws. (1175a)

Consignation alone shall produce the same effect in the following cases: (1) When the creditor is absent or unknown, or does not appear at the place of payment; (2) When he is incapacitated to receive the payment at the time it is due; (3) When, without just cause, he refuses to give a receipt; (4) When two or more persons claim the same right to collect; (5) When the title of the obligation has been lost. (1176a)

Two Kinds: 1. Voluntary – Art. 1255; 2. Judicial – under the Insolvency Law. Remedy of the debtor if the creditors do not accept his voluntary cession. Advantages of judicial cession is that the court discharges the debtor of his debts and the obligations are extinguished.

As a rule, tender of payment is not required prior to consignation. There is only one instance where tender of payment is required, i.e., when the creditor refuses to accept without just cause.

Properties exempt from Execution: are generally not covered by cession. Except if the debtor waives such exemption.

Does the debtor need to be insolvent? Authors have different opinion.

3.

But Atty. Uribe is agreeing with Professor Sta. Maria, that the debtor need not be insolvent, financial difficulty suffices.

How proceeds distributed to the creditors: 1. 2.

Stipulation; Preference of credit.

Tender of Payment and Consignation Tender of Payment is the manifestation made by the debtor to the creditor of his desire to comply with his obligation, with the offer of immediate performance. It is a PREPARATORY ACT to consignation and in itself DOES NOT extinguish the obligation.

There is previous notice to consign to the persons having interest in the fulfilment of the obligation; Art. 1257. In order that the consignation of the thing due may release the obligor, it must first be announced to the persons interested in the fulfillment of the obligation.

Dation in payment vs. Assignment: Dation in payment Cession or Assignment both are substitute of performance of an obligation Art 1245 Art 1255 Ownership of the thing is No such transfer transferred to the creditor Obligation may be totally Obligation is extinguished only extinguished insofar as the net proceeds (except: otherwise stipulated) does not involve plurality of involves plurality of creditors creditors Involves a specific thing Involves all the properties of the debtor unless exempt from execution. may be made even by a solvent supposes financial difficulty on the debtor; merely involves a change part of the debtor of the object of the obligation by agreement of the parties and at the same time fulfilling the same voluntarily

There is a debt due; There is legal cause to consign in any of the following grounds:

The consignation shall be ineffectual if it is not made strictly in consonance with the provisions which regulate payment. (1177) Effect if there is no notice:  According to Tolentino, it does not invalidate the consignation but merely makes the debtor liable for damages;  However, in Soco vs. Militante, it was held that without the notice first announced to the persons interested in the fulfillment of the obligation, the consignation as a payment is void. The purpose of the notice is in order to give the creditor an opportunity to reconsider his unjustified refusal and to accept payment thereby avoiding consignation and the subsequent litigation. This previous notice is essential to the validity of the consignation and its lack invalidates the same. In this case, since there were 9 debts, there should have been 18 notices, one before consignation is done to inform those who have interest in the fulfilment of the obligation and another one after consignation has been done. 4.

The amount or thing due is deposited in court. Art. 1258. Consignation shall be made by depositing the things due at the disposal of judicial authority, before whom the tender of payment shall be proved, in a proper case, and the announcement of the consignation in other cases. The consignation having been made, the interested parties shall also be notified thereof. (1178)

Art. 1259. The expenses of consignation, when properly made, shall be charged against the creditor. (1178)

Consignation is the deposit of the object of the obligation in a competent court in accordance with rules prescribed by law, AFTER the tender of payment has been refused or because of circumstances which render direct payment to the creditor impossible. It extinguishes the obligation.

Withdrawal of the Thing Deposited:

Applies only to extinguish of obligation not to exercise a right: such

Before the creditor has accepted the consignation, or before a judicial declaration that the consignation has been properly made, the debtor may withdraw the thing or the sum deposited, allowing the obligation to remain in force. (1180)

that in a situation where a party would exercise his right of repurchase and the buyer refused to accept. The right to redeem is a RIGHT, not an obligation, therefore, there is no consignation required. (Immaculata vs.

Navarro)

44


Art. 1260. Once the consignation has been duly made, the debtor may ask the judge to order the cancellation of the obligation.

Withdrawal as a matter of right: debtor withdraws before acceptance

The allegation that the offer to redeem was not sincere, because there was no consignation of the amount in Court is devoid of merit. The right to redeem is a RIGHT, not an obligation, therefore, there is no consignation required (De Jesus v. Garcia, C.A. 47 O.G. 2406; Resales v. Reyes, 25 Phil. 495, Vda. de Quirino v. Palarca, L-28269, Aug. 16, 1969) to preserve the right to redeem (Villegas v. Capistrano, 9 Phil. 416).

Withdrawal after acceptance or declaration: obligation is revived. As

The case is remanded to the court a quo for it to accept payment or consignation 2 (in connection with the legal redemption which We are hereby allowing the petitioner to do) by the herein petitioner of whatever he received from respondent at the time the transaction was made.

Art. 1261. If, the consignation having been made, the creditor should authorize the debtor to withdraw the same, he shall lose every preference which he may have over the thing. The co-debtors, guarantors and sureties shall be released. (1181a) by the creditor or before judicial declaration of propriety of consignation. In this case, no extinguishment yet of the obligation. As such, no revival since the obligation has not been extinguished to begin with.

such, creditor can no longer run after the guarantor, unless the latter consented. This is because the obligation has been extinguished. The revival did not revive the guaranty. INTEREST LIABILITY OF DEBTOR: A was indebted to B payable in 2003. The following transpired:  2005: tender of payment;  2009: consignation in court;  2014: promulgation of the decision finding that the consignation was proper. What is the liability of A as to interest? From 2003 to 2005 only. Although the obligation was extinguished only in 2009 when the consignation in court was made, in this case, A made a tender of payment in 2005, which B refused. At that moment, A was already in delay for non-payment, but B was also in delay for unjustified refusal to accept payment. As such, both of them are already in delay starting 2005. As such, no one is in delay. Accordingly, A should not be liable for interest from the time the tender of payment was made. LAURO IMMACULATA, represented by his wife AMPARO VELASCO, as Guardian Ad Litem, petitioner, vs. HON. PEDRO C. NAVARRO, in his capacity as Presiding Judge of the Court of First Instance of Rizal, Branch No. II, and HEIRS OF JUANITO VICTORIA, namely: LOLITA, TOMAS, BENJAMIN, VIRGINIA, BRENDA and ELVIE, all surnamed VICTORIA, and JUANITA NAVAL, surviving widow; and the PROVINCIAL SHERIFF OF RIZAL, respondents.

G.R. No. L-42230 | April 15, 1988 | Second Division | J. Paras

FACTS: The case involves a Motion for Reconsideration of the SC’s decision dated November 26, 1986 asking the Court to consider the matter of legal redemption of a parcel of land previously obtained by petitioner Lauro Immaculata thru a free patent. ISSUE: WON consignation is required when an offer to redeem is made within the legal redemption period? HELD: The reconsideration of this issue is hereby GRANTED. While res judicata may bar questions on the validity of the sale in view of alleged insanity and intimidation (and this point is no longer pressed by counsel for the petitioner) still the question of the right of legal redemption has remained unresolved. Be it noted that in an action (Civil Case No. 20968) filed on March 24, 1975 before the defunct Court of First Instance of Rizal, petitioner presented an alternative cause of action or prayer just in case the validity of the sale would be sustained. And this alternative cause of action or prayer is to allow petitioner to legally redeem the property. We hereby grant said alternative cause of action or prayer. While the sale was originally executed sometime in December, 1969, it was only on February 3, 1974 when, as prayed for 1 by private respondent, and as ordered by the court a quo, a "deed of conveyance" was formally executed. Since offer to redeem was made on March 24, 1975, this was clearly within the five-year period of legal redemption allowed by the Public Land Act (See Abuan v. Garcia, 14 SCRA 759, 761).

45


2.

Loss of the thing due or Impossibility of Performance

Loss: means when the thing goes out of commerce, perishes or disappears in such a way that its existence is unknown or that it cannot be recovered. Art. 1262. An obligation which consists in the delivery of a determinate thing shall be extinguished if it should be lost or destroyed without the fault of the debtor, and before he has incurred in delay. When by law or stipulation, the obligor is liable even for fortuitous events, the loss of the thing does not extinguish the obligation, and he shall be responsible for damages. The same rule applies when the nature of the obligation requires the assumption of risk. (1182a)

Fortuitous Event: generally, the debtor is not liable for damages if the thing is lost due to fortuitous event, EXCEPTIONS: 1. When the law so provides; 2. When stipulation so provides; 3. When the nature of the obligation requires the assumption of risk.

For fortuitous event to be invoked, there must be no negligence on the part of the party invoking.

Malfunction of the break system – is not a fortuitous event since this could’ve been prevented by a regular maintenance of the vehicle.

Robbery and Theft: are not considered Fortuitous Event for a pawnshop business or a bank. (Sicam vs. Jorge) Reciprocal Obligations: the extinguishment of one party’s obligation due

to loss due to a fortuitous event, likewise extinguishes the other party’s obligation based on the principle of res perit domino (the thing is lost to the owner).

Liability even if the loss is due to a fortuitous event as provided by law: Article 1942. The bailee is liable for the loss of the thing, even if it should be through a fortuitous event: (1) If he devotes the thing to any purpose different from that for which it has been loaned; (2) If he keeps it longer than the period stipulated, or after the accomplishment of the use for which the commodatum has been constituted; (3) If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation exempting the bailee from responsibility in case of a fortuitous event; (4) If he lends or leases the thing to a third person, who is not a member of his household; (5) If, being able to save either the thing borrowed or his own thing, he chose to save the latter. (1744a and 1745) Article 1979. The depositary is liable for the loss of the thing through a fortuitous event: (1) If it is so stipulated; (2) If he uses the thing without the depositor's permission; (3) If he delays its return; (4) If he allows others to use it, even though he himself may have been authorized to use the same. (n)

Article 2147. The officious manager shall be liable for any fortuitous event: (1) If he undertakes risky operations which the owner was not accustomed to embark upon; (2) If he has preferred his own interest to that of the owner; (3) If he fails to return the property or business after demand by the owner; (4) If he assumed the management in bad faith. (1891a) Article 2159. Whoever in bad faith accepts an undue payment, shall pay legal interest if a sum of money is involved, or shall be liable for fruits received or which should have been received if the thing produces fruits. He shall furthermore be answerable for any loss or impairment of the thing from any cause, and for damages to the person who delivered the thing, until it is recovered. (1896a) Article 1174. Except in cases expressly specified by the law, or when it is otherwise declared by stipulation, or when the nature of the obligation requires the assumption of risk, no person shall be responsible for those events which could not be foreseen, or which, though foreseen, were inevitable. (1105a) Article 1165. When what is to be delivered is a determinate thing, the creditor, in addition to the right granted him by article 1170, may compel the debtor to make the delivery. If the thing is indeterminate or generic, he may ask that the obligation be complied with at the expense of the debtor. If the obligor delays, or has promised to deliver the same thing to two or more persons who do not have the same interest, he shall be responsible for any fortuitous event until he has effected the delivery. (1096) Article 1268. When the debt of a thing certain and determinate proceeds from a criminal offense, the debtor shall not be exempted from the payment of its price, whatever may be the cause for the loss, unless the thing having been offered by him to the person who should receive it, the latter refused without justification to accept it. (1185) Art. 1263. In an obligation to deliver a generic thing, the loss or destruction of anything of the same kind does not extinguish the obligation. (n)

Genus nunquam perit: Genus does not perish.

Partial Loss: may be determined by the court as so important to extinguish the obligation.

In doing so, intent of the parties must necessarily be considered. E.g., A promised to deliver a cellphone with its casing. The cellphone was stolen but A managed to save the casing. Would A still be liable to deliver the casing? Yes, if the primary consideration of the creditor was to obtain the casing. The test is whether the parties would not have entered into the obligation without the thing that have been lost, then the obligation is extinguished. Art. 1265. Whenever the thing is lost in the possession of the debtor, it shall be presumed that the loss was due to his fault, unless there is proof to the contrary, and without prejudice to the provisions of article 1165. This presumption does not apply in case of earthquake, flood, storm, or other natural calamity. (1183a)

Burden of proof: is generally with the creditor claiming that the loss was due to the fault of the debtor. However, if the thing is lost while in the possession of the debtor, a presumption arises that it was due to his fault, thus, the burden of proof shifts to him. However still, if the thing was lost on the occasion of a calamity, then no such presumption arises, the burden of proof is still with the creditor.

Art. 1266. The debtor in obligations to do shall also be released when the prestation becomes legally or physically impossible without the fault of the obligor. (1184a) Loss of the thing may likewise cover impossibility of performance, e.g., a debtor is obliged to paint a building and the building was destroyed (physical impossibility) or a law took effect making the obligation illegal (legal impossibility).

When: In impossibility, the law should take effect, or the impossibility

happened DURING the existence of the obligation so as to extinguish it. If the law took effect or the impossibility arose BEFORE the existence of the obligation, the obligation is void.

Types of Impossibility: 1. 2.

EXCEPTIONS: 1. 2. 3.

When the thing goes out of commerce; By legal impossibility; Limited Generic: In such cases where the generic thing belongs to a particular group of thing and the loss pertains to the whole group and NOT ONLY to the thing itself, then the obligation is extinguished. E.g., A promise to deliver one of his horses and ALL the horses of the A died, the obligation is extinguished.

BAR EXAM QUESITON: For value received, Pedro promised to deliver to Juan on or before Aug. 15, 1984 a Mercedes benz with plate number 123 which he had just brought home from Germany as well as a 1984 tv set. Unfortunately the two were destroyed by an accidental fire. Are obligations of Pedro extinguished? ANSWER: CAR – due to fortuitous event – extinguished. This is an obligation to deliver a determinate thing, therefore, with the loss of the thing due to a FE, the obligation is extinguished without liability for damages on the part of the debtor. TV – not extinguished. Generic. Loss of the thing of the same kind and quality as that of the thing to be delivered will not extinguish the obligation to deliver a generic thing. A genus does not perish. Genus nunquam perit. Art. 1264. The courts shall determine whether, under the circumstances, the partial loss of the object of the obligation is so important as to extinguish the obligation. (n)

46


3. 4.

As to nature: Physical (by reason of its nature); and Legal (through some subsequent law); As to whom impossibility refers: a. Objective – impossibility of the act or service itself without considering the person of the debtor; b. Subjective - impossibility refers to the fact that the act or service can no longer be done by the debtor but may still be performed by another person As to extent: Partial or Total; As to period of impossibility: Permanent or Temporary.

Not applicable to a surety company who issued a bail bond even if the DFA provided the accused with a passport: it is still the duty of

the surety to make sure that the accused will appear before the trial and to do everything and take all steps necessary to prevent departure. As such, it should have informed the DFA of the pending case against the accused. Moreover, Art. 1266 is not applicable since it pertains to the relationship of creditor and debtor which does not exists between a surety company on one hand, and the State on the other. (See People vs. Franklin) PEOPLE OF THE PHILIPPINES, plaintiff-appellee, vs. NATIVIDAD FRANKLIN, accused, ASIAN SURETY & INSURANCE COMPANY, INC., bondsman-appellant.

G.R. No. L-21507 | June 7, 1971 | EN BANC | J. Dizon

FACTS: Natividad Franklin was charged before the Justice of the Peace Court of Angeles, Pampanga with estafa. Upon a bail bond posted by the Asian Surety & Insurance Company, Inc. in the amount of P2,000, she was released from custody.

After preliminary investigation, the Justice of the Peace Court elevated it to the CFI of Pampanga where the Provincial Fiscal filed the corresponding information against the accused. As the accused failed to appear on the date set for her arraignment, the court ordered her arrest and required the surety company to show cause why the bail bond posted by it should not be forfeited. Due to the failure of the surety company to produce the accused again notwithstanding the 60-day period granted to it, the court rendered the judgment of forfeiture of the bail bond posted by it for the provisional release of Natividad Franklin. Subsequently, the trial court denied the surety company’s motion for a reduction of bail and its ensuing motion for reconsideration. The surety company appealed before the SC. Appellant contended that the lower court should have released it from all liability under the bail bond posted by it because its failure to produce and surrender the accused was due to the negligence of the Philippine Government itself in issuing a passport to said accused, thereby enabling her to leave the country and proceed to the United States. In support of this contention the provisions of Article 1266 of the New Civil Code are invoked. ISSUE: WON Article 1266 of the NCC is applicable in this case? HELD: NO. Appellant's contention is untenable. The abovementioned legal provision does not apply to its case, because the same speaks of the relation between a debtor and a creditor, which does not exist in the case of a surety upon a bail bond, on the one hand, and the State, on the other. In U.S. vs. Bonoan, et al., 22 Phil., p. 1, We held that: The rights and liabilities of sureties on a recognizance or bail bond are, in many respects, different from those of sureties on ordinary bonds or commercial contracts. The former can discharge themselves from liability by surrendering their principal; the latter, as a general rule, can only be released by payment of the debt or performance of the act stipulated. In the more recent case of Uy Tuising, 61 Phil. 404, We also held that: By the mere fact that a person binds himself as surety for the accused, he takes charge of, and absolutely becomes responsible for the latter's custody, and under such circumstances it is incumbent upon him, or rather, it is his inevitable obligation not merely a right, to keep the accused at all times under his surveillance, inasmuch as the authority emanating from his character as surety is no more nor less than the Government's authority to hold the said accused under preventive imprisonment. In allowing the accused Eugenio Uy Tuising to leave the jurisdiction of the Philippines, the appellee necessarily ran the risk of violating and in fact it clearly violated the terms of its bail bonds because it failed to produce the said accused when on January 15, 1932, it was required to do so. Undoubtedly, the result of the obligation assumed by the appellee to hold the accused at all times to the orders and processes of the lower court was to prohibit said accused from leaving the jurisdiction of the Philippines because, otherwise, said orders and processes would be nugatory and inasmuch as the jurisdiction of the court from which they issued does not extend beyond that of the Philippines, they would have no binding force outside of said jurisdiction. It is clear, therefore, that in the eyes of the law a surety becomes the legal custodian and jailer of the accused, thereby assuming the obligation to keep the latter at all times under his surveillance, and to produce and surrender him to the court upon the latter's demand.

47


That the accused in this case was able to secure a Philippine passport which enabled her to go to the United States was, in fact, due to the surety company's fault because it was its duty to do everything and take all steps necessary to prevent that departure. This could have been accomplished by seasonably informing the Department of Foreign Affairs and other agencies of the government of the fact that the accused for whose provisional liberty it had posted a bail bond was facing a criminal charge in a particular court of the country. Had the surety company done this, there can be no doubt that no Philippine passport would have been issued to Natividad Franklin. Difficulty of prestation Art. 1267. When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor may also be released therefrom, in whole or in part. (n)

Court action: when the performance of the obligation is difficult, it does

not, on its own, warrant extinguishment of the obligation. However, when it has become so difficult beyond the contemplation of the parties, the debtor may go to court to release him from the obligation but not to modify the terms of the contract.

International law: the rule in international law is pacta sunt servanda, an exception thereto similar to Art. 1267 is rebus sic stantibus. However, Art. 1267 is not an absolute application of the latin maxim since it may impair the rights of parties to an agreement.

Rebus sic stantibus: or “things thus standing” is the legal doctrine allowing for treaties to become inapplicable because of a fundamental change of circumstances. It is essentially an "escape clause" that makes an exception to the general rule of pacta sunt servanda (promises must be kept).

Requisites for applicability: 1. 2. 3. 4.

Event or change in the circumstances that could not have been foreseen at the time of the execution of the contract; Such event or change makes the performance extremely difficult but not impossible; Such event or change is not due to the act of any of the parties; The contract concerns a future prestation.

Loss of protected interest: where the creditor’s interest which is sought to be protected by the obligation disappears, such obligation is extinguished

Difficulty must be caused by an event not contemplated by the parties: For Art. 1267 to apply, the difficulty must be something beyond

the contemplation of the parties, such that, increase in the prices of construction materials would not warrant extinguishment of the obligation as this is not a fortuitous event beyond the contemplation of the parties. Moreover, assuming it was not foreseen, the power of the court is only to release the debtor from his obligations and does not cover changing the terms of the obligation. (see Occena vs. Jabson) JESUS V. OCCENA and EFIGENIA C. OCCENA, petitioners, vs. HON. RAMON V. JABSON, Presiding Judge of the Court Of First Instance of Rizal, Branch XXVI; COURT OF APPEALS and TROPICAL HOMES, INC., respondents. G.R. No. L-44349 | October 29, 1976 | FACTS: On February 25, 1975, private respondent Tropical Homes, Inc. filed a complaint for modification of the terms and conditions of its subdivision contract with petitioners (landowners of a 55,330 square meter parcel of land in Davao City), making the following allegations: "That due to the increase in price of oil and its derivatives and the concomitant worldwide spiralling of prices, which are not within the control of plaintiff, of all commodities including basis raw materials required for such development work, the cost of development has risen to levels which are unanticipated, unimagined and not within the remotest contemplation of the parties at the time said agreement was

entered into and to such a degree that the conditions and factors which formed the original basis of said contract, Annex 'A', have been totally changed; That further performance by the plaintiff under the contract, Annex 'S', will result in situation where defendants would be unustly enriched at the expense of the plaintiff; will cause an iniquitous distribution of proceeds from the sales of subdivided lots in manifest actually result in the unjust and intolerable exposure of plaintiff to implacable losses, all such situations resulting in an unconscionable, unjust and immoral situation contrary to and in violation of the primordial concepts of good faith, fairness and equity which should pervade all human relations. Under the subdivision contract, respondent "guaranteed (petitioners as landowners) as the latter's fixed and sole share and participation an amount equivalent to 40% percent of all cash receipts from the sale of the subdivision lots." Petitioners moved to dismiss the complaint principally for lack of cause of action, and upon denial thereof and of reconsideration by the lower court, elevated the matter on certiorari to the CA. The CA dismissed the petition on the ground that under Article 1267 of the Civil Code which provides that: ART. 1267. When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor may also be released therefrom, in whole or in part. .. a positive right is created in favor of the obligor to be released from the performance of an obligation in full or in part when its performance 'has become so difficult as to be manifestly beyond the contemplation of the parties. Hence, the petition at bar wherein petitioners insist that the worldwide increase in prices cited by respondent does not constitute a sufficient cause of action for modification of the subdivision contract. ISSUE: WON the worldwide increase in prices cited by respondent constitute a sufficient cause for modification of the subdivision contract? HELD: NO. The Court reverses the Court of Appeals appealed resolution. The Civil Code authorizes the release of an obligor when the service has become so difficult as to be manifestly beyond the contemplation of the parties but does not authorize the courts to modify or revise the subdivision contract between the parties or fix a different sharing ratio from that contractually stipulated with the force of law between the parties. Private respondent's complaint for modification of the contract manifestly has no basis in law and must therefore be dismissed for failure to state a cause of action. While respondent court correctly cited in its decision the Code Commission's report giving the rationale for Article 1267 of the Civil Code, to wit; The general rule is that impossibility of performance releases the obligor. However, it is submitted that when the service has become so difficult as to be manifestly beyond the contemplation of the parties, the court should be authorized to release the obligor in whole or in part. The intention of the parties should govern and if it appears that the service turns out to be so difficult as have been beyond their contemplation, it would be doing violence to that intention to hold the obligor still responsible. ... It misapplied the same to respondent's complaint. If respondent's complaint were to be released from having to comply with the subdivision contract, assuming it could show at the trial that the service undertaken contractually by it had "become so difficult as to be manifestly beyond the contemplation of the parties", then respondent court's upholding of respondent's complaint and dismissal of the petition would be justifiable under the cited codal article. Without said article, respondent would remain bound by its contract under the theretofore prevailing doctrine that

48


performance therewith is not excused "by the fact that the contract turns out to be hard and improvident, unprofitable, or unexpectedly burdensome", since in case a party desires to be excuse from performance in the event of such contingencies arising, it is his duty to provide therefor in the contract. But respondent's complaint seeks not release from the subdivision contract but that the court "render judgment I modifying the terms and Conditions of the Contract by fixing the proper shares that should pertain to the herein parties out of the gross proceed., from the sales of subdivided lots of subject subdivision". The cited article does not grant the courts this authority to remake, modify or revise the contract or to fix the division of shares between the parties as contractually stipulated with the force of law between the parties, so as to substitute its own terms for those covenanted by the parties themselves. Respondent's complaint for modification of contract manifestly has no basis in law and therefore states no cause of action. Under the particular allegations of respondent's complaint and the circumstances therein averred, the courts cannot even in equity grant the relief sought. LAGUNA TAYABAS BUS COMPANY and BATANGAS TRANSPORTATION COMPANY, petitioners, vs. FRANCISCO C. MANABAT, as assignee of Biñan Transportation Company, Insolvent, respondent. G.R. No. L-23546 | August 29, 1974 | First Division | J. Makasiar FACTS: On January 20, 1956, a contract was executed whereby the Biñan Transportation Company leased to the Laguna-Tayabas Bus Company at a monthly rental of P2,500 its certificates of public convenience over the lines known as Manila-Biñan, Manila-Canlubang and Sta. Rosa-Manila, and to the Batangas Transportation Company its certificate of public convenience over the line known as Manila-Batangas Wharf, together with one "International" truck, for a period of five years, renewable for another similar period, to commence from the approval of the lease contract by the Public Service Commission. On the same date, the Public Service Commission provisionally approved the lease contract subject to certain conditions. Sometime after the execution of the lease contract, Biñan Transportation Company was declared insolvent in Special Proceedings No. B-30 of the CFI of Laguna, and Francisco C. Manabat was appointed as its assignee. The petitioners paid the lease rentals up to December, 1957, with the exception of the rental for August 1957, from which there was deducted the sum of P1,836.92 without the consent of the plaintiff. This deduction was based on the ground that the employees of the defendants on the leased lines went on strike. The assignee of the plaintiff objected to such deduction. The defendants neither refunded the deductions nor paid the rentals beginning January, 1958, notwithstanding demands therefor made from time to time. On February 18, 1958, the Batangas Transportation Company and LagunaTayabas Bus Company separately filed with the Public Service Commission a petition for authority to suspend the operation on the lines covered by the certificates of public convenience leased to each of them by the Biñan Transportation Company. The petitioners alleged as reasons the reduction in the amount of dollars allowed by the Monetary Board of the Central Bank of the Philippines for the purchase of spare parts needed in the operation of their trucks, the alleged difficulty encountered in securing said parts, and their procurement at exorbitant costs, thus rendering the operation of the leased lines prohibitive. They further alleged that the high cost of operation, coupled with the lack of passenger traffic on the leased lines resulted in financial losses. Biñan’s assignee opposed the petition on the ground that the Public Service Commission had no jurisdiction to grant the relief prayed for. The latter, however, overruled all oppositions filed by the assignee and other creditors of the insolvent. On May 19, 1959, plaintiff Biñan Transportation Company represented by Francisco C. Manabat, assignee, filed this action against defendants Laguna Tayabas Bus Company and Batangas Transportation Company for the recovery of the sum of P42,500 representing the accrued rentals for the

lease of the certificates of public convenience of the former to the latter, corresponding to the period from January 1958, to May 1959, inclusive, plus the sum of P1,836.92 which was deducted by the defendants from the rentals due for August, 1957, together with all subsequent rentals from June, 1959, that became due and payable;. The CFI ruled in favor of the respondent. On appeal, the CA affirmed in toto the CFI decision. On September 21, 1964, appellants filed the present appeal before the SC which issued a resolution dismissing said petition "for lack of merit." On October 31, 1964, the day the SC's resolution was to become final, petitioners filed a "Motion to Admit Amended Petition and to Give Due Course Thereto." In said motion, petitioners explained — ... The amendment includes an alternative ground relating to petitioners' prayer for the reduction of the rentals payable by them. This alternative petition was not included in the original one as petitioners where genuinely convinced that they should have been absolved from all liabilities whatever. However, in view of the apparent position taken by this Honorable Court, as implied in its resolution on October 12, 1964, notice of which was received on October 16, 1964, petitioners now squarely submit their alternative position for consideration. There is decisional authority for the reduction of rentals payable (see Reyes v. Caltex, 47 O.G. 1193, 1203-1204) (p. 44, rec). ISSUE: WON Article 1680 of the Civil Code is applicable to the case at bar? HELD: NO. The authorities from which the petitioners draw support, however, are not applicable to the case at bar. Article 1680 of the Civil Code reads thus: Art. 1680. The lessee shall have no right to a reduction of the rent on account of the sterility of the land leased, or by reason of the loss of fruits due to ordinary fortuitous events; but he shall have such right in case of the loss of more than one-half of the fruits through extraordinary and unforeseen fortuitous events, save always when there is a specific stipulation to the contrary. Extraordinary fortuitous events are understood to be: fire, war, pestilence, unusual flood, locusts, earthquake, or others which are uncommon, and which the contracting parties could not have reasonably foreseen. Article 1680, it will be observed is a special provision for leases of rural lands. No other legal provision makes it applicable to ordinary leases. Had theintention of the lawmakers been so, they would have placed the article among the general provisions on lease. Nor can the article be applied analogously to ordinary leases, for precisely because of its special character, it was meant to apply only to a special specie of lease. It is a provision of social justice designed to relieve poor farmers from the harsh consequences of their contracts with rich landowners. And taken in that light, the article provides no refuge to lessees whose financial standing or social position is equal to, or even better than, the lessor as in the case at bar. Even if the cited article were a general rule on lease, its provisions nevertheless do not extend to petitioners. One of its requisites is that the cause of loss of the fruits of the leased property must be an "extraordinary and unforeseen fortuitous event." The circumstances of the instant case fail to satisfy such requisite. As correctly ruled by the Court of Appeals, the alleged causes for the suspension of operations on the lines leased, namely, the high prices of spare parts and gasoline and the reduction of the dollar allocations, "already existed when the contract of lease was executed". The cause of petitioners' inability to operate on the lines cannot, therefore, be ascribed to fortuitous events or circumstances beyond their control, but to their own voluntary desistance.

49


If the petitioners would predicate their plea on the basis solely of their inability to use the certificates of public convenience, absent the requisite of fortuitous event, the cited article would speak strongly against their plea. Article 1680 opens with the statement: "The lessee shall have no right to reduction of the rent on account of the sterility of the land leased ... ." Obviously, no reduction can be sustained on the ground that the operation of the leased lines was suspended upon the mere speculation that it would yield no substantial profit for the lessee bus company. Petitioners' profits may be reduced due to increase operating costs; but the volume of passenger traffic along the leased lines not only remains same but may even increase as the tempo of the movement of population is intensified by the industrial development of the areas covered or connected by the leased routes. Moreover, upon proper showing, the Public Service Commission might have granted petitioners an increase in rates, as it has done so in several instances, so that public interest will always be promoted by a continuous flow of transportation facilities to service the population and the economy. The citizenry and the economy will suffer by reason of any disruption in the transportation facilities. Furthermore, we are not at all convinced that the lease contract brought no material advantage to the lessor for the period of suspension. It must be recalled that the lease contract not only stipulated for the transfer of the lessor's right to operate the lines covered by the contract, but also for a forbearance on the part of the lessor to operate transportation business along the same lines — and to hold a certificate for that purpose. Thus, even if the lessee would not actually make use of the lessor's certificates over the leased lines, the contractual commitment of the lessor not to operate on the lines would sufficiently insure added profit to the lessees on account of the lease contract. In other words, the commitment alone of the lessor under the contract would enable the lessees to reap full benefits therefrom since the commuting public would, after all, be forced — at their inconvenience and prejudice — to patronize petitioner's remaining buses. Contrary to what petitioners want to suggest, WE refused in the Reyes case, supra, to apply by analogy Article 1680 and consequently, WE denied the plea of lessee therein for an equitable reduction of the stipulated rentals, holding that: The general rule on performance of contracts is graphically set forth in American treatises which is also the rule, in our opinion, obtaining under the Civil Code. Where a person by his contract charges himself with an obligation possible to be performed, he must perform it, unless the performance is rendered impossible by the act of God, by the law, or by the other party, it being the rule that in case the party desires to be excused from the performance in the event of contingencies arising, it is his duty to provide therefor in his contract. Hence, performance is not excused by subsequent inability to perform, by unforeseen difficulties, by unusual or unexpected expenses, by danger, by inevitable accident, by breaking of machinery, by strikes, by sickness, by failure of a party to avail himself of the benefits to be had under the contract, by weather conditions, by financial stringency or by stagnation of business. Neither is performance excused by the fact that the contract turns out to be hard and improvident, unprofitable, or impracticable, ill-advised, or even foolish, or less profitable, unexpectedly burdensome. (17 CJS 946-948) (Reyes vs. Caltex, supra, 664. Emphasis supplied). Also expressed in said case is a ruling in American jurisprudence, which found relevance again in the case at bar, to wit: "(S)ince, by the lease, the lessee was to have the advantage of casual profits of the leased premises, he should run the hazard of casual losses during the term and not lay the whole burden upon the lessor." (Reyes vs. Caltex, supra, 664). Militating further against a grant of reduction of the rentals to the petitioners is the petitioners' conduct which is not in accord with the rules of fair play and justice. Petitioners, it must be recalled, promised to pay the accrued rentals in due time. Later, however, when they believed they found a convenient excuse for escaping their obligation, they reneged on their earlier promise. Moreover, petitioners' option to suspend operation on the

leased lines appears malicious. Thus, Justice Esguerra, speaking for the Court of Appeals, propounded the following questions: "If it were true that thecause of the suspension was the high prices of spare parts, gasoline and needed materials and the reduction of the dollar allocation, why was it that only plaintiff-appellee's certificate of public convenience was sought to be suspended? Why did not the defendants-appellants ask for a corresponding reduction or suspension under their own certificate along the same route? Suppose the prices of the spare parts and needed materials were cheap, would the defendants-appellants have paid more than what is stipulated in the lease contract? We believe not. Hence, the suspension of operation on the leased lines was conceived as a scheme to lessen operation costs with the expectation of greater profit." (p. 14, Decision).

Art. 749. In order that the donation of an immovable may be valid, it must be made in a public document, specifying therein the property donated and the value of the charges which the donee must satisfy. The acceptance may be made in the same deed of donation or in a separate public document, but it shall not take effect unless it is done during the lifetime of the donor. If the acceptance is made in a separate instrument, the donor shall be notified thereof in an authentic form, and this step shall be noted in both instruments. (633)

Indeed, petitioners came to court with unclean hands, which fact militates against their plea for equity. Art. 1269. The obligation having been extinguished by the loss of the thing, the creditor shall have all the rights of action which the debtor may have against third persons by reason of the loss. (1186) 3.

One and the other kind shall be subject to the rules which govern inofficious donations. Express condonation shall, furthermore, comply with the forms of donation. (1187) Condonation/Remission is an act of liberality, by virtue of which, without receiving any equivalent, the creditor renounces the enforcement of an obligation, which is extinguished in its entirety or in that part or aspect of the same to which the remission refers.

Gratuitous: If not gratuitous, it will be considered: 2. 3.

Dation in payment – when the creditor receives a thing different from that stipulated; Novation – when the subject or principal conditions of the obligation should be changed; Compromise – when the matter renounced is in litigation or dispute and in exchange of some concession which the creditor receives.

Kinds of Condonation: 1.

As to form: a. Express – when made formally; should be in accordance with the forms of ordinary donations. i.

Acceptance is necessary for this to become effective; Article 745. The donee must accept the donation personally, or through an authorized person with a special power for the purpose, or with a general and sufficient power; otherwise, the donation shall be void. (630) Article 746. Acceptance must be made during the lifetime of the donor and of the donee. (n)

ii.

Movable property must comply with the form prescribed under Art. 748:

Art. 748. The donation of a movable may be made orally or in writing.

Implied – when it can be inferred from the acts of the parties. E.g., delivery of the promissory note to the debtor.

2.

As to extent a. Total b. Partial – which may be as to the amount; as to the accessory obligation; or as to a certain amount of debt (in case of solidarity).

3.

As to manner of remission a. Inter vivos b. Mortis causa – must be in a will.

Condonation or remission of the debt

Art. 1270. Condonation or remission is essentially gratuitous, and requires the acceptance by the obligor. It may be made expressly or impliedly.

1.

b.

BAR QUESTION: Arturo borrowed P500,000.00 from his father. After he had paid P300,000.00, his father died. When the administrator of his father’s estate requested payment of the balance of P200,000.00, Arturo replied that the same had been condoned by his father as evidenced by a notation at the back of his check payment for the P300,000.00 reading: “In full payment of the loan”. Will this be a valid defense in an action for collection? (3%) ANSWER: No. The condonation in this case is express. However, the same covering movable real property and more than P500, the law requires it to be written and the acceptance thereof must likewise be in writing. In this scenario, the condonation is written, however, there is nothing that shows acceptance was made in writing neither in the instrument itself or on a separate instrument. Art. 1271. The delivery of a private document evidencing a credit, made voluntarily by the creditor to the debtor, implies the renunciation of the action which the former had against the latter. If in order to nullify this waiver it should be claimed to be inofficious, the debtor and his heirs may uphold it by proving that the delivery of the document was made in virtue of payment of the debt. (1188)

Implied/Tacit Remission may be had from: 1. 2.

Delivery of a private document evidencing a credit, voluntarily made by the creditor to the debtor (Art. 1271); Voluntary destruction or cancellation of the evidence of credit by the creditor with intent to renounce his right

Covers “private instrument” only: because if what was delivered is a

public document, the fact that there remains a copy in the archive of certain offices of such document means that there can be no renunciation if such were the case.

An oral donation requires the simultaneous delivery of the thing or of the document representing the right donated.

Art. 1272. Whenever the private document in which the debt appears is found in the possession of the debtor, it shall be presumed that the creditor delivered it voluntarily, unless the contrary is proved. (1189)

If the value of the personal property donated exceeds five thousand pesos, the donation and the acceptance shall be made in writing, otherwise, the donation shall be void. (632a)

Art. 1273. The renunciation of the principal debt shall extinguish the accessory obligations; but the waiver of the latter shall leave the former in force. (1190)

iii.

50

Immovable property must comply with the form prescribed under Art. 749: Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 Civil Law Review 2 under the class of Atty. Uribe

Art. 1274. It is presumed that the accessory obligation of pledge has been remitted when the thing pledged, after its delivery to the creditor, is found

in the possession of the debtor, or of a third person who owns the thing. (1191a) 4.

Confusion or Merger of Rights

Art. 1275. The obligation is extinguished from the time the characters of creditor and debtor are merged in the same person. (1192a)

Merger/Confusion: the meeting in one person of the qualities of the creditor and debtor with respect to the same obligation.

Requisites: a. b. c.

Must take place between the credit and the principal debtor; Must involve the very same obligation; Must be total.

Examples: a. b.

PNB is indebted to Allied. PNB and Allied Bank entered into a merger agreement. In this case, the indebtedness of PNB is extinguished due to the merger. H is indebted to his father T. When T dies and H is his only heir, the obligation becomes extinguished since H will inherit the credit. The characters of the creditor and debtor in the said obligation are merged in his person.

QUESTION: A borrowed money from B for P3B in 1998. In 2005, there was merger of the credit and the debt in the person of B. In 2014, there was rescission of such merger. On 2016, B filed an action against A for the collection of the P3B. A put up the defense of prescription. Will the action prosper? ANSWER: Yes. The running of the prescriptive period is suspended during the time of merger, i.e., 2005 to 2014. This is because B cannot be expected to sue itself. As such, it has only been 9 years from the time the obligation was constituted to the time the action was filed (1998-2005, 2014-2016). Art. 1276. Merger which takes place in the person of the principal debtor or creditor benefits the guarantors. Confusion which takes place in the person of any of the latter does not extinguish the obligation. (1193)

Guarantors: this article is for the benefit of the guarantor. But the merger of the creditor and guarantor does not affect the principal application.

5.

Compensation

Art. 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of each other. (1195)

Compensation: a mode of extinguishment to the concurrent amount, the

obligations of those persons who in their own right, are reciprocally creditors and debtors of each other.

Compensation vs. Payment, Merger and Counterclaim capacity of party to dispose of thing extent of extinguishment of obligation

number of obligations parties

need to allege

The creditor who may have executed any of these acts, as well as he who collects the debt, shall be liable to the others for the share in the obligation corresponding to them. (1143) Art. 1217. Payment made by one of the solidary debtors extinguishes the obligation. If two or more solidary debtors offer to pay, the creditor may choose which offer to accept. He who made the payment may claim from his co-debtors only the share which corresponds to each, with the interest for the payment already made. If the payment is made before the debt is due, no interest for the intervening period may be demanded. When one of the solidary debtors cannot, because of his insolvency, reimburse his share to the debtor paying the obligation, such share shall be borne by all his co-debtors, in proportion to the debt of each. (1145a)

51


Payment indispensable

Compensation always 2

Merger only one

2 persons are mutually the creditor and debtor of each other

the creditor and the debtor become one and the same

Compensation need not be alleged and proven because it takes effect by operation of law

Counterclaim must be alleged and proven

must be complete

Kinds of Compensation: 1.

As to effects/extent: a. Total – when the two obligations are of the same amount; Art. 1281. Compensation may be total or partial. When the two debts are of the same amount, there is a total compensation. (n) b.

2.

Partial – when the amounts are not equal. This is total as to the debt with lower amount. As to origin/cause: a. Legal – takes effect by operation of law because all the requisites are present; b. Facultative – can be claimed by one of the parties who, however, has the right to object to it

Art. 1277. Confusion does not extinguish a joint obligation except as regards the share corresponding to the creditor or debtor in whom the two characters concur. (1194) Art. 1215. Novation, compensation, confusion or remission of the debt, made by any of the solidary creditors or with any of the solidary debtors, shall extinguish the obligation, without prejudice to the provisions of Article 1219.

Compensation not necessary because it takes effect by operation of law may be partial

c.

Example: when one of the obligations has a period for the benefit of one party alone and who renounces that period so as to make the obligation due Conventional – when the parties agree to compensate their mutual obligations even if some of the requisite are lacking. Art. 1282. The parties may agree upon the compensation of debts which are not yet due. (n)

d.

Judicial – decreed by the court in a case where there is a counterclaim. Art. 1283. If one of the parties to a suit over an obligation has a claim for damages against the other, the former may set it off by proving his right to said damages and the amount thereof. (n)

Requisites: Art. 1279. In order that compensation may be proper, it is necessary: (1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; (2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated;

(3) That the two debts be due; (4) That they be liquidated and demandable; (5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor. (1196)

Requisites: 1.

Parties must be mutual principal debtors and creditors in their own right:

BAR QUESTION: “B” borrowed from “C” P1,000.00 payable in one year. When “C” was in the province, “C’s” 17-year old son borrowed P500.00 from “B” for his school tuition. However, the son spent it instead nightclubbing. When the debt to “C” fell due, “B” tendered only P500.00, claiming compensation o on the P500.00 borrowed by “C’s” son. a) Is there legal compensation? Why? b) Suppose the minor son actually used the money for school tuition, would the answer be different? Reasons. ANSWER: a) Based on the facts, No. B is the debtor of C, but C’s son is the debtor of B. No mutuality. No showing that the debt of C’s son redound to the benefit of his father. b) Yes. This time the obligation is that of father to support his son for education. The father would be considered as if he was the debtor in relation to the P500.

Credit Line – the existence of a credit line does not necessarily create a debtor-creditor relationship if the debtor did not avail of said credit line. (see PNB vs. Vda de Ong Acero) PHILIPPINE NATIONAL BANK, petitioner, vs. GLORIA G. VDA. DE ONG ACERO, ARNOLFO ONG ACERO & SOLEDAD ONG ACERO CHUA, respondents.

G.R. No. L-69255 February 27, 1987

FACTS: Savings Account No. 010-5878868-D of Isabela Wood Construction & Development Corporation, opened with the Philippine National Bank on March 9, 1979 in the amount of P2 million is the subject of two (2) conflicting claims, sought to be definitively resolved in the proceedings at bar: One claim is asserted by the ACEROS — Gloria G. Vda. de Ong Acero, Arnolfo Ong Acero and Soledad Ong Acero-Chua, judgment creditors of the depositor (hereafter simply referred to as ISABELA) — who seek to enforce against said savings account the final and executory judgment rendered in their favor by the Court of First Instance of Rizal QC, arising from a garnishment thereof in the first judgment for P1.5M and the rest for the second judgment obtained by the ACEROS’. The other claim has been put forth by the Philippine National Bank (hereafter, simply PNB) which claims that since ISABELA was at some point in time both its debtor and creditor-ISABELA's deposit being deemed a loan to it (PNB)-there had occurred a mutual set-off between them, which effectively precluded the ACEROS' recourse to that deposit, by virtue of an agreement between ISABELA and PNB that the said deposit was collateral in connection to the indebtedness to PNB as to which ISABELA had assumed certain undertakings and failure to fulfill the same would empower PNB to apply the deposit as payment of that indebtedness. As such, PNB intervened in the execution of the judgment in favor of the ACEROS and moved for reconsideration but was denied by the lower court. Petitioner again moved for the reconsideration of the second judgment where the trial court (now under Judge Solano) set aside the two judgments and set for hearing PNB’s first motion for reconsideration of the earlier judgment which was eventually stricken down, holding that there was a valid assignment by ISABELA to PNB which effectively placed the amounts beyond the reach of PNB.

52


The shoe was now on the other foot. It was the ACEROS' turn to move for reconsideration, which they did as regards this Order of October 1, 1982; but by Order promulgated on December 14, 1982, the Court declined to modify its resolution. On appeal, the Intermediate Appellate Court rendered a decision in favor of respondents and reinstated the earlier reversed order. ISSUE: WON there was proper set-off between PNB and ISABELA as to make the deposits of the latter beyond the garnishment of the respondnets? HELD: No. PNB's main thesis is that when it opened a savings account for ISABELA on March 9, 1979 in the amount of P 2M, it (PNB) became indebted to ISABELA in that amount. So that when ISABELA itself subsequently came to be indebted to it on account of ISABELA's breach of the terms of the Credit Agreement of October 13, 1977, and therefore ISABELA and PNB became at the same time creditors and debtors of each other, compensation automatically took place between them, in accordance with Article 1278 of the Civil Code. The amounts due from each other were, in its view, applied by operation of law to satisfy and extinguish their respective credits. More specifically, the P2M owed by PNB to ISABELA was automatically applied in payment and extinguishment of PNB's own credit against ISABELA. This having taken place, that amount of P2M could no longer be levied on by any other creditor of ISABELA, as the ACEROS attempted to do in the case at bar, in order to satisfy their judgment against ISABELA. Article 1278 of the Civil Code does indeed provide that "Compensation shall take when two persons, in their own right, are creditors and debtors of each other. " Also true is that compensation may transpire by operation of law, as when all the requisites therefor, set out in Article 1279, are present. Nonetheless, these legal provisions cannot apply to PNB's advantage under the circumstances of the case at bar. The insuperable obstacle to the success of PNB's cause is the factual finding of the IAC, by which upon firmly established rules even this Court is bound, that it has not proven by competent evidence that it is a creditor of ISABELA. The only evidence present by PNB towards this end consists of two (2) documents marked in its behalf as Exhibits 1 and 2, But as the IAC has cogently observed, these documents do not prove any indebtedness of ISABELA to PNB. All they do prove is that a letter of credit might have been opened for ISABELA by PNB, but not that the credit was ever availed of (by ISABELA's foreign correspondent MAN, or that the goods thereby covered were in fact shipped, and received by ISABELA. Quite obviously, as the IAC has further observed, the most persuasive evidence of these facts — i.e., ISABELA's availment of the credit, as well as the actual delivery of the goods covered by and shipped pursuant to the letter of credit-assuming these facts to have occurred, would naturally and logically have been in PNB's possession and could have been readily submitted to the Court. It bears stressing that PNB did not at all lack want for opportunity to produce these documents, if it does indeed have them. Judge Solano, it should be recalled, specifically allowed PNB to introduce evidence in relation to its Motion for Reconsideration filed on August 26, 1980, and thus furnished the occasion for PNB to prove, among others, ISABELA's debt to it. PNB unaccountably failed to do so. Moreover, PNB never even attempted to offer or exhibit such evidence, in the course of the appellate proceedings before the IAC, which is a certain indication, in that Court's view, that PNB does not really have these proofs at all. For this singular omission PNB offers no explanation except that it saw no necessity to submit the Documents in evidence, because sometime on March 14, 1980, the ACEROS's attorney had been shown those precise documents — setting forth ISABELA's loan obligations, such as the import bills and the sight draft covering drawings on the L/C for ISABELA's account — and after all, the ACEROS had not really put this indebtedness in issue. The explanation cannot be taken seriously. In the picturesque but forceful language of the Appellate Court, the explanation "is silly as you do not prove a fact in issue by showing evidence in support thereof to the opposing counsel; you prove it by submitting evidence to the proper court."

The fact is that the record does not disclose that the ACEROS have ever admitted the asserted theory of ISABELA's indebtedness to PNB. At any rate, not being privies to whatever transactions might have generated that indebtedness, they were clearly not in a position to make any declaration on the matter. The fact is, too, that the avowed indebtedness of ISABELA was an essential element of PNB's claim to the former's P2 million deposit and hence, it was incumbent on the latter to demonstrate it by competent evidence if it wished its claim to be judicially recognized and enforced. This, it has failed to do. The failure is fatal to its claim.

due to the Local Government while the liability from expropriation is with the National Government. Moreover, taxes are not in the nature of contracts between the party and party but grow out of duty to, and are the positive acts of the government to the making and enforcing of which, the personal consent of individual taxpayers is not required. (See Francia vs. IAC)

PNB has however deposited an alternative theory, which is that the P2M deposit had been assigned to it by ISABELA as "collateral," although not by way of pledge; that ISABELA had explicitly authorized it to apply the P2M deposit in payment of its indebtedness; and that PNB had in fact applied the deposit to the payment of ISABELA's debt on February 26, 1980, in concept of voluntary compensation. This second, alternative theory, is as untenable as the first.

G.R. No. L-67649 June 28, 1988

In the first place, there being no indebtedness to PNB on ISABELA's part, there is in consequence no occasion to speak of any mutual set-off, or compensation, whether it be legal, i.e., which automatically occurs by operation of law, or voluntary, i.e., which can only take place by agreement of the parties. In the second place, the documents indicated by PNB as constitutive of the claimed assignment do not in truth make out any such transaction. While the Credit Agreement of October 13, 1977 (Exh. 1) declares it to be ISABELA's intention to "assign to the BANK the proceeds of its contract with the Department of Public Works for the construction of Nagapit Suspension Bridge (Substructure) in Cagayan," it does not appear that that intention was adhered to, much less carried out. The letter of ISABELA's president dated February 21, 1979 (Exh. 2) would on the contrary seem to indicate the abandonment of that intention, in the light of the statements therein that the amount of P2M (representing the bulk of the proceeds of its contract referred to) "shall be placed in a savings account" and that "said amount shall remain in the savings account until ** (ISABELA is) able to comply with" specified commitments — these being: the constitution and registration of a mortgage in PNB's favor over its "Paranaque property," and the obtention from the first mortgage thereof of consent for the creation of a second lien on the property. These statements are to be sure inconsistent with the notion of an assignment of the money. In addition, there is yet another circumstance militating against the actuality of such an assignmentthe "most telling argument" against it, in fact, in the line of the Appellate Court-and that is, that PNB itself, through its International Department, deposited the whole amount of P2 million, not in its name, but in the name of ISABELA, without any accompanying statement even remotely intimating that it (PNB) was the owner of the deposit, or that an assignment thereof was intended, or that some condition or lien was meant to burden it. Even if it be assumed that such an assignment had indeed been made, and PNB had been really authorized to apply the P2M deposit to the satisfaction of ISABELA's indebtedness to it, nevertheless, since the record reveals that the application was attempted to be made by PNB only on February 26, 1980, that essayed application was ineffectual and futile because at that time, the deposit was already in custodia legis, notice of garnishment thereof having been served on PNB on January 9, 1980 (pursuant to the writ of execution issued by the Court of First Instance on December 23, 1979 for the enforcement of the partial judgment in the ACEROS' favor rendered on November 18,1979). One final factor precludes according validity to PNB's arguments. On the assumption that the P2M deposit was in truth assigned as some sort of "collateral" to PNB — although as PNB insists, it was not in the form of a pledge — the agreement postulated by PNB that it had been authorized to assume ownership of the fund upon the coming into being of ISABELA s indebtedness is void ab initio, it being in the nature of a pactum commisoruim proscribed as contrary to public policy.

Liability for taxes – liability for real property tax cannot be offset with the amount due from the government arising from expropriation. The RPT is

53


ENGRACIO FRANCIA, petitioner, vs. INTERMEDIATE APPELLATE COURT and HO FERNANDEZ, respondents. FACTS: Engracio Francia is the registered owner of a residential lot and a two-story house built upon it. On October 15, 1977, a 125 square meter portion of Francia's property was expropriated by the Republic of the Philippines for the sum of P4,116.00 representing the estimated amount equivalent to the assessed value of the aforesaid portion. Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus, on December 5, 1977, his property was sold at public auction by the City Treasurer of Pasay City pursuant to Section 73 of the Real Property Tax Code in order to satisfy a tax delinquency of P2,400.00. Ho Fernandez was the highest bidder for the property. Francia was not present during the auction sale since he was in Iligan City at that time helping his uncle ship bananas. On March 3, 1979, Francia received a notice of hearing of LRC Case No. 1593-P "In re: Petition for Entry of New Certificate of Title" filed by Ho Fernandez, seeking the cancellation of his TCT and the issuance in Ho’s name of a new certificate of title. Upon verification through his lawyer, Francia discovered that a Final Bill of Sale had been issued in favor of Ho Fernandez by the City Treasurer on December 11, 1978. The auction sale and the final bill of sale were both annotated at the back of TCT No. 4739 (37795) by the Register of Deeds. On March 20, 1979, Francia filed a complaint to annul the auction sale. The trial court ordered the issuance of new TCTs in favor of Ho Fernandez. On appeal, the IAC affirmed the trial court. ISSUE: WON the supposed tax delinquency of P2,400 may be offset with the amount of P4,116 which the government is indebted to petitioner by virtue of the expropriation? HELD: No. Francia contends that his tax delinquency of P2,400.00 has been extinguished by legal compensation. He claims that the government owed him P4,116.00 when a portion of his land was expropriated on October 15, 1977. Hence, his tax obligation had been set-off by operation of law as of October 15, 1977. There is no legal basis for the contention. By legal compensation, obligations of persons, who in their own right are reciprocally debtors and creditors of each other, are extinguished (Art. 1278, Civil Code). The circumstances of the case do not satisfy the requirements provided by Article 1279, to wit: (1) that each one of the obligors be bound principally and that he be at the same time a principal creditor of the other; xxx xxx xxx (3) that the two debts be due. xxx xxx xxx This principal contention of the petitioner has no merit. We have consistently ruled that there can be no off-setting of taxes against the claims that the taxpayer may have against the government. A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the government.

In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court ruled that Internal Revenue Taxes cannot be the subject of set-off or compensation. We stated that: A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under the statutes of set-off, which are construed uniformly, in the light of public policy, to exclude the remedy in an action or any indebtedness of the state or municipality to one who is liable to the state or municipality for taxes. Neither are they a proper subject of recoupment since they do not arise out of the contract or transaction sued on. ... (80 C.J.S., 7374). "The general rule based on grounds of public policy is well-settled that no set-off admissible against demands for taxes levied for general or local governmental purposes. The reason on which the general rule is based, is that taxes are not in the nature of contracts between the party and party but grow out of duty to, and are the positive acts of the government to the making and enforcing of which, the personal consent of individual taxpayers is not required. ..." We stated that a taxpayer cannot refuse to pay his tax when called upon by the collector because he has a claim against the governmental body not included in the tax levy. This rule was reiterated in the case of Corders v. Gonda (18 SCRA 331) where we stated that: "... internal revenue taxes cannot be the subject of compensation: Reason: government and taxpayer are not mutually creditors and debtors of each other' under Article 1278 of the Civil Code and a "claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off." There are other factors which compel us to rule against the petitioner. The tax was due to the city government while the expropriation was effected by the national government. Moreover, the amount of P4,116.00 paid by the national government for the 125 square meter portion of his lot was deposited with the Philippine National Bank long before the sale at public auction of his remaining property. Notice of the deposit dated September 28, 1977 was received by the petitioner on September 30, 1977. The petitioner admitted in his testimony that he knew about the P4,116.00 deposited with the bank but he did not withdraw it. It would have been an easy matter to withdraw P2,400.00 from the deposit so that he could pay the tax obligation thus aborting the sale at public auction. Petitioner had one year within which to redeem his property although, as well be shown later, he claimed that he pocketed the notice of the auction sale without reading it. Petitioner, therefore, was notified about the auction sale. It was negligence on his part when he ignored such notice. By his very own admission that he received the notice, his now coming to court assailing the validity of the auction sale loses its force.

They must be creditors in their own right – If one of the creditors is not a creditor in his own right, that is, his right to collect is because of a contract of agency, compensation cannot take place between the debt of such agent to a party who is indebted to the principal. (See Sycip vs. CA) FRANCISCO SYCIP, petitioner, vs. HONORABLE COURT OF APPEALS and PEOPLE OF THE PHILIPPINES, respondents. G.R. No. L-38711 January 31, 1985 FACTS: Jose Lapuz received from Albert Smith 2,000 shares of stock of the Republic Flour Mills, Inc. in the name of the Dwight Dill who had left for Honolulu. Lapuz was supposed to sell the shares at present market value out of which he was supposed to get certain commission. Sycip approached Lapuz and told him that he had good connections in the Stock Exchange, assuring him that he could sell them at a good price. The shares of stocks were given to Sycip with knowledge that the shares did not belong to Lapuz and that the same are entrusted for sale only.

54


After several sales transactions on the shares of stock, the accusedappellant later on wrote a letter to Jose K. Lapuz, dated June 1, 1961 (Exhibit "I"), confirming their conversation on that date that "500 shares out of the 1,000 shares of the Republic Flour ... has been sold," and stating further that "pending receipt of the payment, expected next week, we are enclosing herewith our draft to cover the full value of 500 shares." He asked in that letter, "Please give me the 50 shares in the name of Mr. Felix Gonzales and the photostat of 208 shares in the name of Trans Oceanic Factors and Company." The accused-appellant sold and paid for the other 500 shares of stock, for the payment of which Jose K. Lapuz issued in his favor a receipt, dated June 9, 1961 (Exhibit "H"). The draft (Exhibit "J") for P8,000.00, "the full value of the 500 shares' mentioned in the letter of the accused-appellant (Exhibit "I"), was dishonored by the bank, for lack of funds. Jose K. Lapuz then "discovered from the bookkeeper that he got the money and he pocketed it already, so I (he) started hunting for Mr. Sycip" (accused-appellant). When he found the accused-appellant, the latter gave him a check in the amount of P5,000.00, issued by his daughter on July 12, 1961 (Exhibit "K"). This also was dishonored by the bank for lack of sufficient funds to cover it (Exhibits "K-l" and "K-2"). When Jose K. Lapuz sent a wire to him, telling him that he would "file estafa case (in the) fiscals office ... against him' unless he raise [the] balance left eight thousand" (Exhibit "L"), the accused-appellant answered him by sending a wire, "P5,000 remitted ask boy check Equitable (Exhibit "M"). But "the check was never made good," so Jose K. Lapuz testified. He had to pay Albert Smith the value of the 500 shares of stock." (Petitioner's brief, pp. 58-62) Petitioner was then charged and convicted by the trial court of estafa. ISSUE: WON there should have been compensation since Lapuz still owned petitioner P5,000? HELD: No. Compensation cannot take place in this case since the evidence shows that Jose K. Lapuz is only an agent of Albert Smith and/or Dr. Dwight Dill. Compensation takes place only when two persons in their own right are creditors and debtors of each other, and that each one of the obligors is bound principally and is at the same time a principal creditor of the other. Moreover, as correctly pointed out by the trial court, Lapuz did not consent to the off-setting of his obligation with petitioner's obligation to pay for the 500 shares. Indeed, Jose K. Lapuz demanded from petitioner the amount of P5,000.00 with a notice that in the event he (petitioner) would fail to pay the amount, Lapuz would file an estafa case against him. By and large, respondent Court of Appeals has not overlooked facts of substance and value that, if considered, would alter the result of the judgment. 2.

Both debts must be due and demandable – does not necessitate that both debts are due AT THE SAME TIME; one debt may have been due earlier. The requirement is that at the time of the compensation, both debts are already due.

3.

Debts must pertain to sums of money or if consumables, they must be of the same kind and quality

No compensation in reciprocal obligations: a.

b.

They must have arisen from the same cause, as such they can never involve both sums of money or the same consumables of the same kind and quality; Otherwise, no one can be compelled to perform an obligation

Attorney’s Fees may be the subject of legal compensation MINDANAO PORTLAND CEMENT CORPORATION

vs. COURT OF APPEALS, PACWELD STEEL CORPORATION and Atty. CASIANO P. LAQUIHON FACTS: In 1978, Atty. Laquihon, in behalf of Pacweld Steel, filed a pleading addressed to Mindanao Portland (MPCC) entitled ‘motion to direct payment of attorney’s fees to counsel (Laquihon)’, invoking that in a decision of the court, MPCC was adjudged to pay Pacweld the sum of P10K as attorney’s fees.

In the meantime, over Gan Tion's opposition, Ong Wan Sieng was able to obtain a writ of execution of the judgment for attorney's fees in his favor. Gan Tion went on certiorari to the Court of Appeals, where he pleaded legal compensation, claiming that Ong Wan Sieng was indebted to him in the sum of P4,320 for unpaid rents. The appellate court accepted the petition but eventually decided for the respondent, holding that although "respondent Ong is indebted to the petitioner for unpaid rentals in an amount of more than P4,000.00," the sum of P500 could not be the subject of legal compensation, it being a "trust fund for the benefit of the lawyer, which would have to be turned over by the client to his counsel."

MPCC opposed this, stating that said amount is set-off by a sum of 10K which MPCC has collectible in its favor from Pacweld, also by way of attorney’s fees which MPCC recovered from CFI Manila, by virtue of a writ of execution. CFI ordered MPCC to pay the amount of 10K attorney’s fees to Atty. Casiano Laquihon.

In the opinion of said court, the requisites of legal compensation, namely, that the parties must be creditors and debtors of each other in their own right (Art. 1278, Civil Code) and that each one of them must be bound principally and at the same time be a principal creditor of the other (Art. 1279), are not present in the instant case, since the real creditor with respect to the sum of P500 was the defendant's counsel.

Hence, MPCC appealed to the SC on pure question of law.

ISSUE: WON there was legal compensation between the parties as to the accrued rentals and attorney’s fees due to each other?

G.R. No. L-62169 February 28, 1983

ISSUE: WON the set off made by MPCC was proper? HELD: YES. It is clear from the record that both corporations, petitioner Mindanao Portland Cement Corporation (appellant) and respondent Pacweld Steel Corporation (appellee), were creditors and debtors of each other, their debts to each other consisting in final and executory judgments of the Court of First Instance in two (2) separate cases, ordering the payment to each other of the sum of P10,000.00 by way of attorney's fees. The two (2) obligations, therefore, respectively offset each other, compensation having taken effect by operation of law and extinguished both debts to the concurrent amount of P10,000.00, pursuant to the provisions of Arts. 1278, 1279 and 1290 of the Civil Code, since all the requisites provided in Art. 1279 of the said Code for automatic compensation "even though the creditors and debtors are not aware of the compensation" were duly present. Necessarily, the appealed order of June 26, 1978 granting Atty. Laquihon's motion for amendment of the judgment of September 14, 1976 against Mindanao Portland Cement Corporation so as to make the award therein of P10,000.00 as attorney's fees payable directly to himself as counsel of Pacweld Steel Corporation instead of payable directly to said corporation as provided in the judgment, which had become final and executory long before the issuance of said "amendatory" order was a void alteration of judgment. It was a substantial change or amendment beyond the trial court's jurisdiction and authority and it could not defeat the compensation or set-off of the two (2) obligations of the corporations to each other which had already extinguished both debts by operation of law. GAN TION, petitioner, vs. HON. COURT OF APPEALS, HON. JUDGE AGUSTIN P. MONTESA, as Judge of the Court of First Instance of Manila, ONG WAN SIENG and THE SHERIFF OF MANILA, respondents.

G.R. No. L-22490

May 21, 1969

FACTS: Ong Wan Sieng was a tenant in certain premises owned by Gan Tion. In 1961 the latter filed an ejectment case against the former, alleging non-payment of rents for August and September of that year, at P180 a month, or P360 altogether. The defendant denied the allegation and said that the agreed monthly rental was only P160, which he had offered to but was refused by the plaintiff. The plaintiff obtained a favorable judgment in the municipal court (of Manila), but upon appeal the CFI, on July 2, 1962, reversed the judgment and dismissed the complaint, and ordered the plaintiff to pay the defendant the sum of P500 as attorney's fees. That judgment became final. On October 10, 1963 Gan Tion served notice on Ong Wan Sieng that he was increasing the rent to P180 a month, effective November 1st, and at the same time demanded the rents in arrears at the old rate in the aggregate amount of P4,320.00, corresponding to a period from August 1961 to October 1963.

55


HELD: Yes. This is not an accurate statement of the nature of an award for attorney's fee's. The award is made in favor of the litigant, not of his counsel, and is justified by way of indemnity for damages recoverable by the former in the cases enumerated in Article 2208 of the Civil Code. It is the litigant, not his counsel, who is the judgment creditor and who may enforce the judgment by execution. Such credit, therefore, may properly be the subject of legal compensation. Quite obviously it would be unjust to compel petitioner to pay his debt for P500 when admittedly his creditor is indebted to him for more than P4,000. WHEREFORE, the judgment of the Court of Appeals is reversed, and the writ of execution issued by the Court of First Instance of Manila in its Civil Case No. 49535 is set aside. Costs against respondent. 4.

The claim must be clearly demandable, i.e., no controversy as to the claim.

BAR QUESTION: Stockton is a stockholder of Core Corp. He desires to sell his shares in Core Corp. in vies of a court suit that Core Corp. has filed against him for damages in the amount of P10 million, plus attorney’s fees of P1 million, as a result of statements published by Stockton which are allegedly defamatory because it was calculated to injure and damage the corporation’s reputation and goodwill. The articles of incorporation of Core Corp. provide for a right of first refusal in favor of the corporation. Accordingly, Stockton gave written notice to the corporation of his offer to sell his shares of P10 million. The response of Core Corp. was an acceptance of the offer in the exercise of its rights of first refusal, offering for the purpose payment in form of compensation or set-off against the amount of damages it is claiming against him, exclusive of the claim for attorney’s fees. Stockton rejected the offer of the corporation, arguing that compensation between the value of the shares and the amount of damages demanded by the corporation cannot legally take effect. It Stockton correct? Give reasons for your answer. (5%) ANSWER: Yes. The Corporation’s claim for damages is not yet vested. For all we know, the Corporation may lose. Compensation may not be invoked until it wins in the suit. CASE:

Proof of the liquidation of a claim, in order that there be compensation of debts, is proper if such claim is disputed. But, if the claim is undisputed, as in the case at bar, the statement is sufficient and no other proof may be required. REPUBLIC OF THE PHILIPPINES, in behalf of the RICE AND CORN ADMINISTRATION, petitioner, vs. HON. WALFRIDO DE LOS ANGELES, in his capacity as Judge of the

Court of First Instance of Rizal, Branch IV, Quezon City and MARCELO STEEL CORPORATION, respondents.

G.R. No. L-30187 June 25, 1980

FACTS: the Spouses Farin obtained a loan from respondent Marcelo Steel Corporation (MSC) in the amount of P600,000 secured by a real estate mortgage over a parcel of land in QC covered by TCT No. 42589. On July 24, 1965, the mortgagee foreclosed said mortgage. A petition for prohibition was filed by the mortgagors Farins together with damages against Benito Macrohon, as sheriff of QC and MSC. Acting upon the petition, the herein respondent Judge Walfrido de los Angeles, issued an order commanding the respondent Sheriff and the respondent Corporation to desist from proceeding with the public auction sale of the property scheduled. While the above case was pending, Petra Farin leased portions of the "Doña Petra Building situated on the mortgaged premises, to the Rice and Corn Administration, (RCA, for short), for the amount of P11,500.00 per month.” Later on, the MSC invoking paragraph 5 of the mortgage contract, filed a motion praying that an order be issued directing and/or authorizing the RCA and another business concern holding offices at the Doña Petra Building to channel or pay directly to it the rents for the use of the building, which was granted by respondent judge. RCA filed a MR to be excluded from the above for the reasons that (a) the rents due Petra Farin had been assigned by her, with the conformity with the RCA, to Vidal A. Tan; (b) Petra Farin has an outstanding obligation with the RCA in the amount of P263,062.40, representing rice shortages incurred by her as a bonded warehouse under contract with the RCA, which should be compensated with the rents due and may be due; among others – which was denied. On August 28, 1968, the RCA filed a motion to vacate the orders directing the RCA to pay rentals to MSC, reiterating therein the grounds alleged in its motion for reconsideration dated January 19, 1968, and in its second motion for reconsideration dated April 17, 1968, which has remained unacted upon. In said motion, the RCA emphasized that it is not a party to the case; that it had been denied due process for lack of notice and the right to be heard; that compensation took place by operation of law pursuant to Art. 1286 of the Civil Code without the need of a case against Petra R. Farin, or a decision rendered against her for the payment of such obligation; and that the provisions of the Rules of Court permitting a judgment creditor to reach money or property in the hands of third persons file the RCA, all purpose a final judgment, and not a mere interlocutory order. The motion was denied on December 19, 1968. ISSUE: WON compensation took place between the debt of Petra Farin and RCA which would make the latter no longer liable for rentals? HELD: Yes. The respondent Judge erred in denying the claim of the RCA that compensation of debts had taken place allegedly because "The records does not show any proof that the plaintiff is indebted to the aforesaid movant, RCA, as alleged in the said motion and assuming that the herein plaintiff is really indebted to the RCA, the records further does not show that a case has been filed against her, or a decision has been rendered against her for the payment of such obligation." Proof of the liquidation of a claim, in order that there be compensation of debts, is proper if such claim is disputed. But, if the claim is undisputed, as in the case at bar, the statement is sufficient and no other proof may be required. In the instant case, the claim of the RCA that Petra R. Farin has an outstanding obligation to the RCA in the amount of P263,062.40 which should be compensated against the rents already due or may be due, was raised by the RCA in its motion for the reconsideration of the order of December 23, 1967. A copy of said motion was duly furnished counsel for Petra R. Farin and although the said Petra R. Farin subsequently filed a similar motion for the reconsideration of the order of December 23, 1967, she did not dispute nor deny such claim Neither did the Marcelo Steel

56


Corporation dispute such claim of compensation in its opposition to the motion for the reconsideration of the order of December 23, 1967. The silence of Petra R. Farin, order of December 23, 1967. although the declaration is such as naturally one to call for action or comment if not true, could be taken as an admission of the existence and validity of such a claim. Therefore, since the claim of the RCA is undisputed, proof of its liquidation is not necessary. At any rate, if the record is bereft of the proof mentioned by the respondent Judge of first instance, it is because the respondent Judge did not call for the submission of such proof. Had the respondent Judge issued an order calling for proof, the RCA would have presented sufficient evidence to the satisfaction of the court.

Compensation cannot take place where one's claim against the other is still the subject of court litigation. It is a requirement, for compensation to take place, that the amount involved be certain and liquidated. LORETO J. SOLINAP, petitioner, vs. HON. AMELIA K. DEL ROSARIO, as Presiding Judge of Branch IV, Court of First Instance of Iloilo, SPOUSES JUANITO and HARDEVI R. LUTERO, and THE PROVINCIAL SHERIFF OF ILOILO, respondents. G.R. No. L-50638 July 25, 1983 FACTS: Spouses Tiburcio Lutero and Asuncion Magalona, owners of Hacienda Tambal, leased the said hacienda to petitioner Solinap for a period of 10 years for a stipulated rental of P50,000 per year, and it was agreed in the lease contract that out of the P50,000, P25,000 should be paid by Solinap to the PNB to amortize the indebtedness of the spouses Lutero with the said bank. Tiburcio Lutero died and his heirs instituted the testate estate proceedings of the deceased before the CFI of IloIlo presided by respondent judge. Because of the mounting interest on the unpaid account of the estate, the Judge ordered the administrator to scout who among the testamentary heirs is financially in a position to pay all obligations, including interest, with the right of subrogation. Respondents Juanito (grandson of Tiburcio) and his wife Hardevi paid the PNB P25,000 as partial settlement of the deceased’s obligation. Where upon the respondents Lutero filed a motion in the testate court for reimbursement from the petitioner of the amount thus paid. They argued that the said amount should have been paid by petitioner to the PNB, as stipulated in the lease contract he had entered into with the deceased Tiburcio Lutero; and that such reimbursement to them was proper, they being subrogees of the PNB. Before the motion could be resolved, petitioner filed a separate action against the respondent spouses for collection of the total amount of P71,000 alleging that the defendants borrowed from him P45,000 secured by a real estate mortgage, P3,000 evidenced by a receipt issued by them; P23,000 for dishonored checks. In their answer, the respondents Lutero traversed the material averments of the complaint and set up legal and factual defenses. They further pleaded a counterclaim against petitioners for the total sum of P 125,000.00 representing unpaid rentals on Hacienda Tambal. Basis of the counterclaim is the allegation that they had purchased one-half [1/2] of Hacienda Tambal, and that plaintiffs had failed to pay said rentals despite demands. On June 14, 1978, the respondent judge issued an order in Sp. Proc. No. 1870, granting the respondent Lutero's motion for reimbursement from petitioner of the sum of P25,000.00 plus interest. Petitioner filed a petition for certiorari before this Court, docketed as G.R. No. L-48776, assailing the above order. This Court, however, in a resolution dated January 4, 1979 dismissed the petition for lack of merit. Thereafter the respondent Luteros filed with the respondent court a "Motion to Reiterate Motion for Execution of the Order dated June 14, 1978."

Petitioner filed a rejoinder to said motion, raising for the first time the thesis that the amount payable to private respondents should be compensated against the latter's indebtedness to him amounting to P71,000.00. Petitioner attached to his rejoinder copies of the pleadings filed in Civil Case No. 12397, then pending before Branch V of the Court of First Instance of Iloilo. This motion was denied by respondent judge on the ground that "the claim of Loreto Solinap against Juanito Lutero in Civil Case No. 12397 is yet to be liquidated and determined in the said case, such that the requirement in Article 1279 of the New Civil Code that both debts are liquidated for compensation to take place has not been established by the oppositor Loreto Solinap." ISSUE: WON the obligation of petitioners to private respondents may be compensated or set- off against the amount sought to be recovered in an action for a sum of money filed by the former against the latter? HELD: No. Petitioner contends that respondent judge gravely abused her discretion in not declaring the mutual obligations of the parties extinguished to the extent of their respective amounts. He relies on Article 1278 of the Civil Code to the effect that compensation shall take place when two persons, in their own right, are creditors and debtors of each other. The argument fails to consider Article 1279 of the Civil Code which provides that compensation can take place only if both obligations are liquidated. In the case at bar, the petitioner's claim against the respondent Luteros in Civil Case No. 12379 is still pending determination by the court. While it is not for Us to pass upon the merits of the plaintiffs' cause of action in that case, it appears that the claim asserted therein is disputed by the Luteros on both factual and legal grounds. More, the counterclaim interposed by them, if ultimately found to be meritorious, can defeat petitioner's demand. Upon this premise, his claim in that case cannot be categorized as liquidated credit which may properly be set-off against his obligation. As this Court ruled in Mialhe vs. Halili, " compensation cannot take place where one's claim against the other is still the subject of court litigation. It is a requirement, for compensation to take place, that the amount involved be certain and liquidated." COMPANIA MARITIMA vs. COURT OF APPEALS and PAN ORIENTAL SHIPPING CO.

G.R. No. L-50900 APRIL 9, 1985

FACTS: On March 7, 1947, Fernando Froilan purchased from the shipping Administration a boat for P200K with a downpayment of P50K, secured by a real mortgage on the vessel in favor of the Shipping Administration. Froilan defaulted in his payments on the unpaid balance. The GM of Shipping Administration ordered the immediate possession of the vessel and to suspend the unloading of all cargoes. The boat was repossessed and the title thereto was registered again in the name of the Shipping Administration, thereby re-transferring the ownership thereof to the government. In 1949, Pan Oriental Shipping offered to charter said vessel for a monthly rent of P3K. The vessel was delivered to the possession of Pan Oriental. They entered into a bareboat charter with option to purchase filed on June 4, 1949 with the Office of the President. Meanwhile, upon protest of Froilan, the Cabinet restored to him all his rights in the contract of sale on condition that he would settle partially the amounts overdue and to reimburse for repair and drydocking performed by Pan Oriental. Because of this, the formal bareboat charter agreement was not approved. Pan Oriental protested the restoration of Froilan’s rights under the contract of sale. Pan Oriental refused to surrender possession of the vessel despite payment by Froilan of the required cash. Froilan filed an action for replevin in the CFI Manila to recover possession thereof and to have him declared as the rightful owner of the property. This

57


was granted by the court and ordered the seizure of the vessel from Pan Oriental and the delivery to Froilan. This was questioned by Pan Oriental up to the Supreme Court via certiorari, but the same was dismissed in 1951. Pan Pacific accordingly filed its answer in the proceedings below. The RP also intervened in the proceedings. Subsequently, Compania Maritima, as purchaser of the vessel from Froilan, was allowed to intervene in the lower court proceedings. CFI Manila upheld the Compania Maritima’s right to the ownership and possession of the vessel. This order was questioned by Pan Oriental 3 times to the SC. The case was remanded to the lower court for the determination of necessary expenses, interest and rentals. The CFI Manila, this time, ruled for Pan Oriental and ordered Compania and the Republic to pay, jointly and severally, Pan Oriental with legal interest from the time of disbursement of legitimate expenses. CA affirmed this judgment. From this, Compania and the Republic appealed to the SC. ISSUE: WON there was compensation or set-off by operation of law that took place between the Republic and Pan-Oriental as of February 3, 1951, the date Pan Oriental was dispossessed of the vessel? HELD: No. REPUBLIC maintains that compensation or set-off took place between it and PAN-ORIENTAL as of February 3, 1951, the date the latter was dispossessed of the vessel For compensation to take place, one of the elements necessary is that the debts be liquidated. In this case, all the elements for Compensation to take place were not present on the date of dispossession, or on February 3, 1951. The amount expended for repairs and improvements had yet to be determined by the Trial Court pursuant to the Decision of this Court promulgated on October 31, 1964. At the time of dispossession also, PAN-ORIENTAL was still insisting on its right to purchase the vessel. The obligation of REPUBLIC to reimburse PAN-ORIENTAL for expenses arose only after this Court had so ruled. Rentals for the use of the vessel by PAN- ORIENTAL were neither due and demandable at the time of dispossession but only after this Court had issued its Resolution of August 27, 1965. More, the legal interest payable from February 3, 1951 on the sum of P40,797.54, representing useful expenses incurred by PAN-ORIENTAL, is also still unliquidated since interest does not stop accruing "until the expenses are fully paid." Thus, we find without basis REPUBLIC's allegation that PAN- ORIENTAL's claim in the amount of P40,797.54 was extinguished by compensation since the rentals payable by PAN-ORIENTAL amount to P59,500.00 while the expenses reach only P40,797.54. Deducting the latter amount from the former, REPUBLIC claims that P18,702.46 would still be owing by PAN-ORIENTAL to REPUBLIC. That argument loses sight of the fact that to the sum of P40,797.54 will still have to be added the legal rate of interest "from February 3, 1951 until fully paid." But although compensation by operation of law cannot take place as between REPUBLIC and PAN-ORIENTAL, by specific pronouncement of this Court in its Resolution of November 23, 1966, supra, the rentals payable by PAN-ORIENTAL in the amount of P59,500.00 should be deducted from the sum of useful expenses plus legal interest due, assuming that the latter amount would still be greater. Otherwise, the corresponding adjustments can be made depending on the totality of the respective amounts. Since we are holding that the obligation of REPUBLIC to pay P40,797.54 to PAN-ORIENTAL was not extinguished by compensation, the obligation of REPUBLIC to pay legal interest on said amount has neither become stale as REPUBLIC contends. Of special note is the fact that payment of that interest was the specific ruling of this Court in its Resolution of August 27, 1965, thus: ... For this reason, Froilan and the REPUBLIC of the Philippines are declared jointly and severally liable, not only for reimbursement to Pan Oriental, of

the legitimate necessary expenses incurred on the vessel, but also for payment of legal interest thereon, computed from the date of the defendant's dispossession of the property.

executed to secure the loan extended to her, is vigorously disputed. This circumstance prevents legal compensation from taking place.

THE INTERNATIONAL CORPORATE BANK INC. vs. THE IMMEDIATE APPELLATE COURT, HON. ZOILO AGUINALDO, NATIVIDAD FAJARDO and SILVINO PASTRANA

It must be noted that Civil Case No. 83-19717 is still pending consideration at the RTC Manila, for annulment of Sheriffs sale on extra-judicial foreclosure of private respondent's property from which the alleged deficiency arose. Therefore, the validity of the extrajudicial foreclosure sale and petitioner's claim for deficiency are still in question, so much so that it is evident, that the requirement of Article 1279 that the debts must be liquidated and demandable has not yet been met. For this reason, legal compensation cannot take place under Article 1290 of the Civil Code.

G.R. No. L-69569 June 30, 1988

FACTS: In the early 1980, Natividad Fajardo secured from International Corp. Bank’s (ICB) predecessors-in-interest the then Investment and Underwriting Corp. of the Philippines and Atrium Capital Corp., a loan in the amount of P50M, secured by a real estate mortgage of her properties in Manila and Bulacan. Only P20M was approved for release. The same amount was applied to pay her other obligations to ICB - bank charges and fees. Thus, it is claimed by Fajardo that she did not receive anything from the approved loan. On September 11, 1980, Fajardo made a money market placement with Atrium in the amount of P1M. Meanwhile, Fajardo allegedly failed to pay her mortgaged indebtedness to the bank so that the latter refused to pay the proceeds of the money market placement on maturity but applied the amount instead to the deficiency in the proceeds of the auction sale of the mortgaged properties. As Atrium was the sole bidder, the properties were sold in its favor for only P20M. ICB claims that Fajardo, even after deducting this amount, is still indebted to it of P6.81M. Fajardo filed a complaint for annulment of the sheriff’s sale of her properties, and prayed for the release of P30M loan, and recovery of P1M money market investment. ICB answered that it had the right to set off Fajardo’s money market claim. The trial court ruled for Fajardo, ordering ICB to deliver to her the amount covered by the money market investment (P1,046,253.77). CA affirmed this ruling, holding that legal compensation cannot take place in this case since the question of whether Fajardo was indebted to ICB is vigorously disputed. Trial court then issued a writ of execution to implement its Order and a levy was made on ICB’s personal properties consisting of 20 motor vehicles; and ordered the four branches of ICB to pay P250K each to Fajardo. Hence, ICB filed for a petition for review on certiorari with prayer for a TRO and a writ of preliminary injunction. ISSUE: WON there can be legal compensation for the proceeds of the money market placement and deficiency from the foreclosure of the mortgage? HELD: No. Compensation shall take place when two persons, in their own right, are creditors and debtors of each other. (Art. 1278, Civil Code). "When all the requisites mentioned in Art. 1279 of the Civil Code are present, compensation takes effect by operation of law, even without the consent or knowledge of the debtors." (Art. 1290, Civil Code). Article 1279 of the Civil Code requires among others, that in order that legal compensation shall take place, "the two debts be due" and "they be liquidated and demandable." Compensation is not proper where the claim of the person asserting the set-off against the other is not clear nor liquidated; compensation cannot extend to unliquidated, disputed claim arising from breach of contract. There can be no doubt that petitioner is indebted to private respondent in the amount of P1,062,063.83 representing the proceeds of her money market investment. This is admitted. But whether private respondent is indebted to petitioner in the amount of P6.81 million representing the deficiency balance after the foreclosure of the mortgage

58


Art. 1280. Notwithstanding the provisions of the preceding article, the guarantor may set up compensation as regards what the creditor may owe the principal debtor. (1197) Art. 1284. When one or both debts are rescissible or voidable, they may be compensated against each other before they are judicially rescinded or avoided. (n) Art. 1285. The debtor who has consented to the assignment of rights made by a creditor in favor of a third person, cannot set up against the assignee the compensation which would pertain to him against the assignor, unless the assignor was notified by the debtor at the time he gave his consent, that he reserved his right to the compensation. If the creditor communicated the cession to him but the debtor did not consent thereto, the latter may set up the compensation of debts previous to the cession, but not of subsequent ones. If the assignment is made without the knowledge of the debtor, he may set up the compensation of all credits prior to the same and also later ones until he had knowledge of the assignment. (1198a)

Debtor may still invoke compensation even after assignment, if: 1. 2.

Had no knowledge of or did not consent to the assignment; or If with knowledge or consent, but reserved his right to the compensation.

ILLUSTRATION: A borrowed money from B for P100,000 payable on July 31, 2016. In turn, B is indebted to A on the following amounts:

  

P40k due on February 1, 2016; P30k due on August 15, 2016; P15l due on Oct. 2, 3016

On August 5, 2016 B assigned his credit to X. a. b.

c.

How much can X demand from A on June 5, 2016? None. The debt is not yet due. If demand was made on Aug. 5, 2015, how much can X collect from A? It depends: 1. If A had knowledge of the assignment and gave his consent thereto, and made no reservation as to his right to set-up compensation: P100k 2. If he made a reservation: P60k, the debt that became due on Feb. 1, 2016 is compensated. 3. If he had knowledge but did not give his consent: P60k, the debt that became due before the assignment is compensated. 4. If he had no knowledge: P60k. If demand was made on September 30, 2016, how much can X collect from A? 1. If A had knowledge of the assignment and gave his consent thereto, and made no reservation as to his right to set-up compensation: P100k 2. If he made reservation: P60k, he can only set-up those debts which were due before the assignment but not later ones. 3. If he had knowledge but did not give his consent: similar to (2).

4.

If he had no knowledge: he may set up compensation as to the P40k and the P30k: thus, P30k only as provided under the last par. of Art. 1285. Thus, he may set-up compensation against the debts the assignor had prior to the assignment and subsequent ones thereto until he had knowledge.

FACTS: AA Salazar Construction and Engineering Services filed an action for a sum of money with damages against herein petitioner Bank, which was later on amended to substitute Anabelle Salazar as the real party in interest, where respondent Salazar prays for the recovery of P267,707.70 debited by petitioner Bank from her account.

Art. 1286. Compensation takes place by operation of law, even though the debts may be payable at different places, but there shall be an indemnity for expenses of exchange or transportation to the place of payment. (1199a)

In its Answer, BPI alleged hat Julio Templonuevo, 3rd party defendant and herein private respondent, demanded from the former payment in the said amount representing the aggregate of 3 checks which were allegedly payable to him but which were deposited with the account of Salazar without his knowledge and corresponding endorsement.

Art. 1287. Compensation shall not be proper when one of the debts arises from a depositum or from the obligations of a depositary or of a bailee in commodatum. Neither can compensation be set up against a creditor who has a claim for support due by gratuitous title, without prejudice to the provisions of paragraph 2 of Article 301. (1200a) Art. 1288. Neither shall there be compensation if one of the debts consists in civil liability arising from a penal offense. (n)

When compensation may not be proper: 1. 2. 3. 4.

Depositum – as to the depositary; Bail – as to the bailee; Support – as to the one giving support, EXCEPT: support in arrears and those contractual in nature; Civil liability arising from a penal offense.

BAR QUESTION: X, who has a savings deposit with Y Bank in the sum of P1,000,000.00, incurs a loan obligation with the said Bank in the sum of P800,000.00 which has become due. When X tries to withdraw his deposit, Y Bank allows only P200,000.00 to be withdrawn, less service charges, claiming that compensation has extinguished its obligation under the savings account to the concurrent amount of X’s debt. X contends that compensation is improper when one of the debts, as here, arises from a contract of deposit. Assuming that the promissory note signed by X to evidence the loan does not provide for compensation between said loan and his savings deposit, who is correct? (3%) ANSWER: By opening a deposit, they did not enter a contract of deposit. Deposits in bank are simple loans. The bank is correct. MODIFIED: instead of opening a savings account, X instead delivered a sum of money with the bank for safekeeping in a safety deposit box. If the bank would invoke compensation for the debt due, can the Bank do that? ANSWER: No. this time, one of the debts pertain to an obligation arising from a depositum. SC would consider this a special kind of deposit, therefore, 1287 is applicable, compensation would not be proper since one of the contract is a depositum. What if the Bank is the one demanding and X says that the Bank get it from the deposit, is it proper? Yes. 1287 – only legal compensation is not allowed. Depositor can invoke compensation. The law protects the depositor, that upon demand, the depositary should deliver. As such, the Bank cannot refuse compensation. CASE:

The relationship between banks and depositors has been held to be that of creditor and debtor. Thus, legal compensation under Article 1278 of the Civil Code may take place "when all the requisites mentioned in Article 1279 are present. BANK OF THE PHILIPPINE ISLANDS, Petitioner, vs. COURT OF APPEALS, ANNABELLE A. SALAZAR, and JULIO R. TEMPLONUEVO, Respondents

G.R. No. 136202

59

January 25, 2007


BPI froze Account No. 0201-0588-48 of AA Salazar Construction and Engineering Services, instead of Account No. 0203-1187-67 where the checks were deposited, since the latter account was alredy closed by respondent Salazar or had an insufficient balance. As it appeared that Salazar was not entitled to the funds represented by the checks, BPI decided to debit the amount from Salazar’s account (02010588-48) and the same was paid to Templonuevo by means of a cashier’s check. In his answer, Templonuevo admitted the payment to him by BPI and argued that the said payment was to correct the malicious deposit made by private respondent Salazar to her private account. The RTC rendered a decision against petitioner and ordered to pay the amount debited and damages. On appeal, the CA affirmed the trial court holding that Salazar and Templonuevo had previously agreed that the checks payable to JRT Construction and Trading actually belonged to Salazar and would be deposited to her account, with petitioner acquiescing to the arrangement. ISSUE: WON petitioner Bank had the right to set-off Salazar’s account for the said checks? HELD: Yes. The right of set-off was explained in Associated Bank v. Tan: A bank generally has a right of set-off over the deposits therein for the payment of any withdrawals on the part of a depositor. The right of a collecting bank to debit a client's account for the value of a dishonored check that has previously been credited has fairly been established by jurisprudence. To begin with, Article 1980 of the Civil Code provides that "[f]ixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan." Hence, the relationship between banks and depositors has been held to be that of creditor and debtor. Thus, legal compensation under Article 1278 of the Civil Code may take place "when all the requisites mentioned in Article 1279 are present," as follows: (1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; (2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated; (3) That the two debts be due; (4) That they be liquidated and demandable; (5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor. ISSUE2: WON petitioner Bank acted properly as to its right of set-off? HELD: No. While, however, it is conceded that petitioner had the right of set-off over the amount it paid to Templonuevo against the deposit of Salazar, the issue of whether it acted judiciously is an entirely different matter. As businesses affected with public interest, and because of the nature of their functions, banks are under obligation to treat the accounts of their depositors with meticulous care, always having in mind the fiduciary

nature of their relationship. In this regard, petitioner was clearly remiss in its duty to private respondent Salazar as its depositor. To begin with, the irregularity appeared plainly on the face of the checks. Despite the obvious lack of indorsement thereon, petitioner permitted the encashment of these checks three times on three separate occasions. This negates petitioner’s claim that it merely made a mistake in crediting the value of the checks to Salazar’s account and instead bolsters the conclusion of the CA that petitioner recognized Salazar’s claim of ownership of checks and acted deliberately in paying the same, contrary to ordinary banking policy and practice. It must be emphasized that the law imposes a duty of diligence on the collecting bank to scrutinize checks deposited with it, for the purpose of determining their genuineness and regularity. The collecting bank, being primarily engaged in banking, holds itself out to the public as the expert on this field, and the law thus holds it to a high standard of conduct. The taking and collection of a check without the proper indorsement amount to a conversion of the check by the bank. More importantly, however, solely upon the prompting of Templonuevo, and with full knowledge of the brewing dispute between Salazar and Templonuevo, petitioner debited the account held in the name of the sole proprietorship of Salazar without even serving due notice upon her. This ran contrary to petitioner’s assurances to private respondent Salazar that the account would remain untouched, pending the resolution of the controversy between her and Templonuevo. The records further bear out the fact that respondent Salazar had issued several checks drawn against the account of A.A. Salazar Construction and Engineering Services prior to any notice of deduction being served. The CA sustained private respondent Salazar’s claim of damages in this regard: The act of the bank in freezing and later debiting the amount of P267,692.50 from the account of A.A. Salazar Construction and Engineering Services caused plaintiff-appellee great damage and prejudice particularly when she had already issued checks drawn against the said account. As can be expected, the said checks bounced. To prove this, plaintiff-appellee presented as exhibits photocopies of checks dated September 8, 1991, October 28, 1991, and November 14, 1991 (Exhibits "D", "E" and "F" respectively) These checks, it must be emphasized, were subsequently dishonored, thereby causing private respondent Salazar undue embarrassment and inflicting damage to her standing in the business community. Under the circumstances, she was clearly not given the opportunity to protect her interest when petitioner unilaterally withdrew the above amount from her account without informing her that it had already done so. For the above reasons, the Court finds no reason to disturb the award of damages granted by the CA against petitioner. This whole incident would have been avoided had petitioner adhered to the standard of diligence expected of one engaged in the banking business. A depositor has the right to recover reasonable moral damages even if the bank’s negligence may not have been attended with malice and bad faith, if the former suffered mental anguish, serious anxiety, embarrassment and humiliation. Moral damages are not meant to enrich a complainant at the expense of defendant. It is only intended to alleviate the moral suffering she has undergone. The award of exemplary damages is justified, on the other hand, when the acts of the bank are attended by malice, bad faith or gross negligence. The award of reasonable attorney’s fees is proper where exemplary damages are awarded. It is proper where depositors are compelled to litigate to protect their interest. WHEREFORE, the petition is partially GRANTED. The assailed Decision dated April 3, 1998 and Resolution dated April 3, 1998 rendered by the Court of Appeals in CA-G.R. CV No. 42241 are MODIFIED insofar as it ordered petitioner Bank of the Philippine Islands to return the amount of Two Hundred Sixty-seven Thousand Seven Hundred and Seven and 70/100 Pesos (P267,707.70) to respondent Annabelle A. Salazar, which portion is REVERSED and SET ASIDE. In all other respects, the same are AFFIRMED.

Art. 1289. If a person should have against him several debts which are susceptible of compensation, the rules on the application of payments shall apply to the order of the compensation. (1201) Art. 1290. When all the requisites mentioned in Article 1279 are present, compensation takes effect by operation of law, and extinguishes both debts to the concurrent amount, even though the creditors and debtors are not aware of the compensation. (1202a) Art. 1243. Payment made to the creditor by the debtor after the latter has been judicially ordered to retain the debt shall not be valid. (1165) Art. 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) 6.

Novation

Dual Function: extinguishes the obligation and creates a new one. Requisites: 1.

Previous valid obligation Art. 1298. The novation is void if the original obligation was void, except when annulment may be claimed only by the debtor or when ratification validates acts which are voidable. (1208a)

2. 3. 4.

Agreement of all parties to a new contract Extinguishment of old obligation Validity of the new obligation Art. 1297. If the new obligation is void, the original one shall subsist, unless the parties intended that the former relation should be extinguished in any event. (n)

Relevance of determining existence of novation: examples: 1. 2.

Vitiation of consent – in the previous obligation, is not carried to the new obligation if there is no such vitiation of consent in the novation; Prescription – if there is no novation, the prescriptive period of the previous obligation continues to run.

Death of one of the creditor: the new creditor is(are) the heir(s), no novation. Mere change in the person of the creditor does not cause novation. Art. 1291. Obligations may be modified by: (1) Changing their object or principal conditions; (2) Substituting the person of the debtor; (3) Subrogating a third person in the rights of the creditor. (1203)

Kinds of Novation: 1.

2. 3.

As to nature: a. Subjective/Personal b. Objective/Real c. Mixed As to form: a. Express; b. Implied As to extent: a. Total; b. Partial.

Subjective Novation: changing the subject: 1. Active – if a third person is subrogated to the rights of the creditor; How? a.

60


By agreement or express

Whose consent necessary:



Art. 1300. Subrogation of a third person in the rights of the creditor is either legal or conventional. The former is not presumed, except in cases expressly mentioned in this Code; the latter must be clearly established in order that it may take effect. (1209a) Art. 1301. Conventional subrogation of a third person requires the consent of the original parties and of the third person. (n) b.

In the above cases, Legal Subrogation is because of payment. BAR QUESTION: JC construction bought steel bars from Matibay Steel Industries owned by Buddy Batongbakal. JC failed to pay. JC persuaded its client Amoroso with whom it had receivables to pay MSI. Amoroso agreed and paid. Later on, Amoroso failed to pay. MSI collected from JC. JC contended that the obligation has been extinguished as to him; that MSI consented to the novation because of acceptance of the partial payments of Amoroso. Can MSI validly demand from JC? ANSWER: Yes. for substitution to take place, it must be clearly intended by the parties that this third person will be the new and only debtor. In this case, the acceptance of the partial payment was not a clear act of consenting to the substitution. The creditor merely accepted payments but the debtor JC was not released from his obligation.

Effects of subrogation: Art. 1303. Subrogation transfers to the persons subrogated the credit with all the rights thereto appertaining, either against the debtor or against third person, be they guarantors or possessors of mortgages, subject to stipulation in a conventional subrogation. (1212a) Art. 1304. A creditor, to whom partial payment has been made, may exercise his right for the remainder, and he shall be preferred to the person who has been subrogated in his place in virtue of the partial payment of the same credit. (1213) 2.

Art. 1294. If the substitution is without the knowledge or against the will of the debtor, the new debtor's insolvency or non-fulfillment of the obligations shall not give rise to any liability on the part of the original debtor. (n) b.

By law or implied – Art. 1302

Art. 1302. It is presumed that there is legal subrogation: (1) When a creditor pays another creditor who is preferred, even without the debtor's knowledge; (2) When a third person, not interested in the obligation, pays with the express or tacit approval of the debtor; (3) When, even without the knowledge of the debtor, a person interested in the fulfillment of the obligation pays, without prejudice to the effects of confusion as to the latter's share. (1210a)

Passive – if a third person is substituted to the person of the debtor. In this case, it should be clear to both parties that the new debtor is in lieu of the old debtor. a.

Expromision - without knowledge or against the will of the original debtor



As to extent of reimbursement – Arts. 1236 and 1237 shall be applicable, as such, the new debtor can only recover only upto the extent that the old debtor was benefited. Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may be made even without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment by the new debtor gives him the rights mentioned in Articles 1236 and 1237. (1205a)

61


As to right of the creditor when the new debtor becomes insolvent or fails to fulfil the obligation – he cannot run after the old debtor.

Delegacion - with consent or knowledge of the original debtor but without any objection. Here, it is the debtor who offers the change.

Parties:

Delegante – the old debtor; Delegado – the new debtor Delegatorio – the creditor.  

As to extent of reimbursement – the whole amount paid regardless of the extent the old debtor was benefited. As to right of the creditor when the new debtor becomes insolvent – he can run after the old debtor, IF: the insolvency was already existing and of public knowledge, or known to the debtor. Otherwise, the creditor cannot run after the old debtor. Art. 1295. The insolvency of the new debtor, who has been proposed by the original debtor and accepted by the creditor, shall not revive the action of the latter against the original obligor, except when said insolvency was already existing and of public knowledge, or known to the debtor, when the delegated his debt. (1206a)

Creditor’s consent – in any case, the creditor’s consent is necessary for there to be a novation in the person of the debtor as provided under Art. 1293.

BAR QUESTION: Baldomero leased his house with a telephone to Jose. The lease contract provided that Jose shall pay for all electricity, water and telephone services in the leased premises during the period of the lease. Six months later, Jose surreptitiously vacated the premises. He left behind unpaid telephone bills for overseas telephone calls amounting to over P20,000.00. Baldomero refused to pay the said bill on the ground that Jose had already substituted him as the customer of the telephone company. The latter maintained that Baldomero remained, as his customer as far as their service contract was concerned, notwithstanding the lease contract between Baldomero and Jose. Who is correct, Baldomero or the telephone company? Explain. ANSWER: Telephone Company. Because the claim of substitution is untenable. There can never be a substitution in the person of the debtor without the consent of the creditor. CASE ON SUBSTITUTION OF DEBTOR: ESTRELLA BENIPAYO RODRIGUEZ, MANUEL D. BENIPAYO, DONATO BENIPAYO, JR., JAIME D. BENIPAYO, MAXIMA BENIPAYO MORALES, AURORA BENIPAYO DE LEON, FRANCISCO D. BENIPAYO, ALEJANDRO D. BENIPAYO, TERESITA BENIPAYO DE LOS SANTOS, LYDIA BENIPAYO CLEMENTE, and JULIA C. MERCADO, petitioners, vs. HON. JUAN O. REYES, in his capacity as Presiding Judge of the Manila Court of First Instance, Branch XXI, ALBERTO D. BENIPAYO, DR. JOSE N. DUALAN and VICENTE SAYSON, JR., respondents.

G.R. No. L-22958 January 30, 1971

By buying the property with notice that it was mortgaged, respondent Dualan only undertook either to pay or else allow the land's being sold if the mortgage creditor could not or did no obtain payment from the principal debtor when the debt matured. Nothing else. Certainly the buyer did not obligate himself to replace the debtor in the principal obligation, and he could not do so in law without the creditor's consent..

FACTS: Petitioners filed an action against their brother private respondent Alberto Benipayo for the partition of the properties they held in common. In the course of the proceedings, the parties agreed to sell the properties in litigation at public auction and divide the profits among themselves. In one of the properties subject of the public auction, herein private respondent Dualan was the highest bidder. After the sheriff had filed his return with the respondent judge, petitioners moved for the approval of the sale, deducting from the total amount of P408,000.00 the sheriff's percentage, and the expenses incurred by petitioners for the publication of the notice of sale. Commenting on the aforesaid motion, private respondents Benipayo and Dualan prayed that the respondent Judge Reyes order (1) the payment of the mortgage debt in favor of the Development Bank of the Philippines in the amount of P37,121.96 from the proceeds of the auction sale; (2) the issuance by the sheriff of Manila of a certificate of sale in favor of Dualan of the property sold to him free from all liens and encumbrances; and (3) the payment to respondent Benipayo of 1/12 of the proceeds of the sale after deducting therefrom the payment to the Development Bank of the Philippines. In resolving the said motion, respondent Judge issued an order stating: WHEREFORE, the Manila Sheriff's Report dated March 30, 1964, and the Quezon City Sheriff's Report dated April 6, 1964, are hereby approved, subject to the following conditions: 1.

That the vendors or the owners of the properties sold shall clear said properties of all encumbrances that were incurred in them long before the auction sales;

2.

That since the taxes on said real estates are not encumbrances incurred by the owners of the properties, but are proper charges attached and against the properties themselves, the real estate taxes shall be borne by the owner or owners of the said properties on the date when said taxes become due for payment.

Hence, this petition. Petitioners seek to apply the doctrine of caveat emptor to the successful bidder Dualan, and contend that under said rule Dualan bought at his own peril and, having purchased the property with knowledge of the encumbrance he should assume payment of the indebtedness secured thereby. ISSUE: WON private respondent Dualan is liable for the payment of the unpaid obligation of the petitioners with the DBP, on the ground of the doctrine of caveat emptor and novation? HELD: No. We find the stand of petitioners-appellants to be unmeritorious and untenable. The maxim "caveat emptor" applies only to execution sales, and this was not one such. The mere fact that the purchaser of an immovable has notice that the required realty is encumbered with a mortgage does not render him liable for the payment of the debt guaranteed by the mortgage, in the absence of stipulation or condition that he is to assume payment of the mortgage debt. The reason is plain: the mortgage is merely an encumbrance on the property, entitling the mortgagee to have the property foreclosed, i.e., sold, in case the principal obligor does not pay the mortgage debt, and apply the proceeds of the sale to the satisfaction of his credit. Mortgage is merely an accessory undertaking for the convenience and security of the mortgage creditor, and exists independently of the obligation to pay the debt secured by it. The mortgagee, if he is so minded, can waive the mortgage security and proceed to collect the principal debt by personal action against the original mortgagor. By buying the property with notice that it was mortgaged, respondent Dualan only undertook either to pay or else allow the land's being sold if the mortgage creditor could not or did no obtain payment from the principal debtor when the debt matured. Nothing else. Certainly the buyer did not obligate himself to

62


replace the debtor in the principal obligation, and he could not do so in law without the creditor's consent. Our Civil Code, Article 1293, explicitly provides: ART. 1293. Novation which consists in substituting a new debtor in the place of the original one, may be made even with out the knowledge or against the will of the latter, but not without the consent of the creditor. Payment by the new debtor gives him the rights mentioned in articles 1236 and 1237. The obligation to discharge the mortgage indebtedness, therefore, remained on the shoulders of the original debtors and their heirs, petitioners herein, since the record is devoid of any evidence of contrary intent. This Court has so ruled in Bank of the Philippine Islands vs. Concepcion e Hijos, Inc., 53 Phil. 806, from which We quote: But the plaintiff argues that in American jurisprudence, the purchaser of mortgaged property who assumes the payment of the mortgage debt, may for that reason alone be sued for the debt by the creditor and that that rule is applicable in this jurisdiction. Aside from the fact we are not here dealing with a mere assumption of the debt, but with a subrogation, it may be noted that this court has already held that the American doctrine in this respect is not in harmony with the spirit of our legislation and has not been adopted in this country. In the case of E. C. McCullough & Co. vs. Veloso and Serna (46 Phil., 1), the court, speaking through its present Chief Justice, said: The effects of a transfer of a mortgaged property to a third person are well determined by the Civil Code. According to article 1879 7 of this Code, the creditor may demand of the third person in possession of the property mortgaged payment of such part of the debt, as is secured by the property in his possession, in the manner and form established by the law. The Mortgage Law in force at the promulgation of the Civil Code and referred to in the latter, exacted, among other conditions, also the circumstance that after judicial or notarial demand, the original debtor had failed to make payment of the debt at maturity. (Art. 135 of the Mortgage Law of the Philippines of 1889.) According to this, the obligation of the new possessor to pay the debt originated only from the right of the creditor to demand payment of him, it being necessary that a demand for payment should have previously been made upon the debtor and the latter should have failed to pay. And even if these requirements were complied with, still the third possessor might abandon the property mortgaged, and in that case it is considered to be in the possession of the debtor. (Art. 136 of the same law.) This clearly shows that the spirit of the Civil Code is to let the obligation of the debtor to pay the debt stand although the property mortgaged to secure the payment of said debt may have been transferred to a third person. While the Mortgage Law of 1893 eliminated these provisions, it contained nothing indicating any change in the spirit of the law in this respect. Article 129 of this law, which provides for the substitution of the debtor by the third person in possession of the property, for the purposes of the giving of notice, does not show this change and has reference to a case where the action is directed only against the property burdened with the mortgage. (Art. 168 of the Regulation ) Upon the other hand, the orders complained of, in so far as they require the vendors-heirs to clear the title to the land sold to respondent Dualan, when the latter bid for it with full knowledge that the same was subject to a valid and subsisting mortgage, is plainly erroneous. In submitting his bid, Dualan is presumed to know, and in fact did know, that the property was subject to a mortgage lien; that such encumbrance would make him, as purchaser, eventually liable to discharge mortgage by paying or settling with the mortgage creditor, should the original mortgagors fail to satisfy the debt. Normally, therefore, he would have taken this eventuality into account in making his bid, and offer a lower amount for the lot than if it were not encumbered. If he intended his bid to be understood as conditioned upon the property being conveyed to him free from encumbrance, it was his duty to have so stated in his bid, or at least before depositing the purchase price. He did not do so, and the bid must be understood and taken to conform to

the normal practice of the buyer's taking the mortgaged property subject to the mortgage. Consequently, he may not demand that the vendors should discharge the encumbrance aforesaid.

But pursuant to an alias writ of execution issued by CFI Manila, the sheriff, without publishing a new notice, sold said land in a public auction for P1923.32.

Thus, the questioned order of the trial court ordering the vendors-heirs to clear the property of all its encumbrances is not in accordance with law.

A final deed of sale was executed in favor of FUA.

Objective or Real Novation 1. 2.

Change in the object Change in the principal conditions of the obligation, which may either be: a. Express; or b. Implied: Art. 1292. In order that an obligation may be extinguished by another which substitute the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other. (1204) The SC has ruled that there are no hard and fast rule to determine if there was implied novation. The TEST: is whether the old and the new obligations are incompatible with each other.

Changes in the terms of a final and executory judgment: 



There is Novation: liability under the judgment in civil case No. 42125 had been extinguished by the settlement evidenced by the mortgage executed by them in favor of the appellee on December 16, 1933. Although said mortgage did not expressly cancel the old obligation, this was impliedly novated by reason of incompatibly resulting from the fact that, whereas the judgment was for P1,538.04 payable at one time, did not provide for attorney's fees, and was not secured, the new obligation is or P1,200 payable in installments, stipulated for attorney's fees, and is secured by a mortgage. (Fua vs. Yap) There is no Novation: Where the new obligation merely reiterates or ratifies the old obligation, although the former effects but minor alterations or slight modifications with respect to the cause or object or conditions of he latter, such changes do not effectuate any substantial incompatibility between the two obligations Only those essential and principal changes introduced by the new obligation producing an alteration or modification of the essence of the old obligation result in implied novation. In the case at bar, the mere reduction of the amount due in no sense constitutes a sufficient indictum of incompatibility, especially in the light of (a) the explanation by the petitioner that the reduced indebtedness was the result of the partial payments made by the respondent before the execution of the chattel mortgage agreement and (b) the latter's admissions bearing thereon. (Millar

vs. CA)

CASES ON EXPRESS AND IMPLIED NOVATION: FUA CAM LU vs. YAP FAUCO and YAP SINGCO

G.R. No. L-48797 July 30, 1943

FACTS: FUA obtained a favorable judgment in the CFI Manila ordering YAP FAUCO and YAP SINGCO to pay FUA P1,538.04 with legal interest and costs. By virtue of a writ of execution, a land belonging to YAPs in Sorsogon was levied upon and was scheduled to be sold at public auction. To prevent the sale, YAPs executed a mortgage in favor of FUA, wherein it was stipulated that their obligation would be reduced to P1,200 which was made payable in 3 installments from 1934 to 1935, secured by a Camarin belonging to YAPs. As a result of this agreemet, the sale did not take place.

FUA filed an action in the CFI of Sorsogon against the YAPs for their refusal to recognize FUA’s title and to vacate the land. YAPs interposed the defense of novation by the mortgage they executed in favor of FUA. CFI ruled for FUA, recognizing the latter to be the owner of the land and ordered the YAPs to deliver the same to him. Hence, the YAPs filed this petition. ISSUE: WON there was novation with the changes in the terms of the final and executor judgment? HELD: YES, implied novation took place. We concur in the theory that appellants liability under the judgment in civil case No. 42125 had been extinguished by the settlement evidenced by the mortgage executed by them in favor of the appellee on December 16, 1933. Although said mortgage did not expressly cancel the old obligation, this was impliedly novated by reason of incompatibly resulting from the fact that, whereas the judgment was for P1,538.04 payable at one time, did not provide for attorney's fees, and was not secured, the new obligation is or P1,200 payable in installments, stipulated for attorney's fees, and is secured by a mortgage. The appellee, however, argues that the later agreement merely extended the time of payment and did not take away his concurrent right to have the judgment executed. This court not have been the purpose for execution of the mortgage, because it was therein recited that the appellants promised to pay P1,200 to the appellee as a settlement of the judgment in civil case No. 42125 (en forma de transaccion de la decision . . . en el asunto civil No. 42125). Said judgment cannot be said to have been settled, unless it was extinguished. Moreover, the sheriff's sale in favor of the appellee is void because no notice thereof was published other than that which appeared in the Mamera Press regarding the sale to be held on December 12, 1933. Lack of new publication is shown by appellee's own evidence and the issue, though not raised in the pleadings, was thereby tried by implied consent of the parties, emphasized by the appellants in the memorandum filed by them in the lower court and squarely threshed out in this Court by both the appellants and the appellee. The latter had, besides, admitted that there was no new publication, and so much so that in his brief he merely resorted to the argument that "section 460 of Act 190 authorized the sheriff to adjourn any sale upon execution to any date agreed upon in writing by the parties . . . and does not require the sheriff to publish anew the public sale which was adjourned." The appellee has correctly stated the law but has failed to show that it supports his side, for it is not pretended that there was any written agreement between the parties to adjourn the sale advertised for December 12, 1933, to May 28, 1934. Neither may it be pretended that the sale in favor of the appellee was by virtue of a mere adjournment, it appearing that it was made pursuant to an alias writ of execution. Appellee's admission has thus destroyed the legal presumption that official duty was regularly performed. SC reversed the ruling of the lower court. SPOUSES ANICETO BALILA and EDITHA S. DE GUZ MAN, SPOUSES ASTERIO DE GUZMAN and ERLINDA CONCEPCION and ENCARNACION OCAMPO VDA. DE CONCEPCION, petitioners, vs. HONORABLE INTERMEDIATE APPELLATE COURT, HONORABLE FLORANTE S. ABASOLO, in his capacity as Judge, Regional Trial Court, First Judicial Region, Branch L, Villasis, Pangasinan, GUADALUPE C. VDA. DE DEL CASTILLO and WALDO DEL CASTILLO, respondents.

G. R. No. L-68477 October 29, 1987

63


FACTS: Petitioners Sps. Balila, Sps. De Guzman, Ocampo and Conception, and Private respondents Del Castillo entered into a compromise agreement with respect to a civil case which provides that the petitioners:

paid the aforestated amount on an installment basis and they were given by private respondents no less than eight extensions of time pay their obligation.

"having sold under a pacto de retro sale the parcels of land 4 described in the complaint in the amount of P84,000.00" and

These transactions took place during the pendency of the motion for reconsideration of the Order of the trial court dated April 26, 1983 in Civil Case No. U-3501, during the pendency of the petition for certiorari in AC-G.R. SP-01307 before the Intermediate Appellate Court and after the filing of the petition before us. This answers the claim of the respondents on the failure of the petitioners to present evidence or proofs of payment in the lower court and the appellate court. We have touched on this issue, similarly, in the case of de los Santos vs. Rodriguez wherein We ruled that:

"hereby promise to pay the said amount within the period of four (4) months but not later than May 15,1981." On December 11, 1980, the trial Court rendered its judgment based on compromise agreement. On December 30, 1981, petitioners were able to redeem one of the parcels of land described in the complaint. On August 4, 1982, private respondent filed a motion for hearing on the consolidation of title over the remaining parcels of land, on the ground that the petitioners failed to comply with their obligation to pay. Petitioners contend that they had made partial payments of their obligation through plaintiff's attorney in fact and son, private respondent Waldo del Castillo, as well as to the Sheriff. However, the trial Court ruled in favor of the consolidation On June 8, 1983, while the order of the lower Court was not yet enforced, petitioners tendered the amount of P28,800.00, leaving a balance of P35,200.00. Petitioners were given 45 days to comply with such obligation. However, despite the given period of 45 days, petitioners still failed to comply. On certiorari, the IAC affirmed the lower court. Petitioners contend that respondent appellate Court failed to recognize that the decision of the trial Court was already novated by the subsequent mutual agreement of the parties. ISSUE: WON the decision rendered by the trial Court was novated by the subsequent mutual agreements between the parties? HELD: Yes. The root of all the issues raised before Us is that judgment by compromise rendered by the lower court based on the terms of the amicable settlement of the contending parties. Such agreement not being contrary to law, good morals or public policy was approved by the lower court and therefore binds the parties who are enjoined to comply therewith. However, the records show that petitioners made partial payments to private respondent Waldo del Castillo after May 15, 1981 or the last day for making payments, redeeming Lot No. 52 as earlier stated. (Annex "A," Petition). There is no question that petitioners tendered several payments to Waldo del Castillo even after redeeming lot No. 52. A total of these payments reveal that petitioners fully paid the amount stated in the judgment by compromise. The only issue is whether Waldo del Castillo was a person duly authorized by his mother Guadalupe Vda. de del Castillo, as her attorney-infact to represent her in transactions involving the properties in question. We believe that he was so authorized in the same way that the appellate court took cognizance of such fact as embodied in its assailed decision. reading as follows: It may be mentioned that on May 25,1981, Guadalupe Vda. de Del Castillo,

represented by her attorney in fact Waldo Castillo, filed a complaint for consolidation of ownership against the same petitioners herein before the

Court of First Instance of Pangasinan, docketed as Civil Case No. U-3650, the allegations of which are Identical to the complaint filed in Civil Case No. U-3501 of the same court. This case U-3650 was, however, dismissed in an Order dated May 27, 1983, in view of the order of consolidation issued in Civil Case No. U-350 1. (p. 37, Rollo) (Underscoring supplied) The fact therefore remains that the amount of P84,000.00 payable on or before May 15, 1981 decreed by the trial court in its judgment by compromise was novated and amended by the subsequent mutual agreements and actions of petitioners and private respondents. Petitioners

64


As early as Molina vs. De la Riva the principle has been laid down that, when, after judgment has become final, facts and circumstances transpire which render its execution impossible or unjust, the interested party may ask the court to modify or alter the judgment to harmonize the same with justice and the facts. For this reason, in Amor vs. Judge Jose, We used the following language: The Court cannot refuse to issue a writ of execution upon a final and executory judgment, or quash it, or order its stay, for, as a general rule, parties will not be allowed, after final judgment, to object to the execution by raising new issues of fact or of law, except when there had been a change in the situation of the parties which makes such execution inequitable; or when it appears that the controversy has never been submitted to the judgment of the court, or when it appears that the writ of execution has been improvidently issued, or that it is defective in substance, or issued against the wrong party or that judgment debt has been paid or otherwise satisfied or when the writ has been issued without authority. Likewise in the case of Dormitorio vs. Fernandez, We held: What was done by respondent Judge in setting aside the writ of execution in Civil Case No. 5111 finds support in the applicable authorities. There is this relevant excerpt in Barretto v. Lopez this Court speaking through the then Chief Justice Paras: "Allegating that the respondent judge of the municipal court had acted in excess of her jurisdiction and with grave abuse of discretion in issuing the writ of execution of December 15, 1947, the petitioner has filed the present petition for certiorari and prohibition for the purpose of having said writ of execution annulled. Said petition is meritorious. The agreement filed by the parties in the ejectment case created as between them new rights and obligations which naturally superseded the judgment of the municipal court." In Santos v. Acuna, it was contended that a lower court decision was novated by the subsequent agreement of the parties. Implicit in this Court's ruling is that such a plea would merit approval if indeed that was what the parties intended. EUSEBIO S. MILLAR, petitioner, vs. THE HON. COURT OF APPEALS and ANTONIO P. GABRIEL, respondents.

G.R. No. L-29981 April 30, 1971

The defense of implied novation requires clear and convincing proof of complete incompatibility between the two obligations. The law requires no specific form for an effective novation by implication. The test is whether the two obligations can stand together. If they cannot, incompatibility arises, and the second obligation novates the first. If they can stand together, no incompatibility results and novation does not take place. FACTS: Petitioner Millar obtained favorable decision from the Court of First Instance of Manila, which ordered herein private respondent Gabriel to pay him the sum of P1,746.00 with interest amounting to 12% per annum from the date of the filing of the complaint, the sum of P400 as attorney's fees, and the costs of suit. Upon motion of petitioner, a writ of execution was issued on which basis the sheriff of Manila seized the respondent's Willy's Ford jeep.

The private respondent, however, pleaded with the petitioner to release the jeep under an arrangement whereby the respondent, to secure the payment of the judgement debt, agreed to mortgage the vehicle in favor of the petitioner. Despite such, private respondent still failed to comply with the obligation to pay the sum of money, which constrained the petitioner to obtain an alias writ of execution. On the fifth alias writ of execution, the sheriff levied on certain personal properties belonging to the respondent, and then scheduled them for execution sale. The private respondent filed an urgent motion for suspension of the execution sale on the ground of payment of the judgement obligation. The lower Court resolved the motion, reiterated the execution, and held that novation had taken place, and that the parties had executed the chattel mortgage only "to secure or get better security for the judgment.” On appeal, respondent Court of Appeals set aside the order of execution, and held that the subsequent agreement of the parties impliedly novated the judgment obligation, hence this petition. The appellate court stated that the following circumstances sufficiently demonstrate the incompatibility between the judgment debt and the obligation embodied in the deed of chattel mortgage, warranting a conclusion of implied novation: 1.

Whereas the judgment orders the respondent to pay the petitioner the sum of P1,746.98 with interest at 12% per annum from the filing of the complaint, plus the amount of P400 and the costs of suit, the deed of chattel mortgage limits the principal obligation of the respondent to P1,700;

2.

Whereas the judgment mentions no specific mode of payment of the amount due to the petitioner, the deed of chattel mortgage stipulates payment of the sum of P1,700 in two equal installments;

3.

Whereas the judgment makes no mention of damages, the deed of chattel mortgage obligates the respondent to pay liquidated damages in the amount of P300 in case of default on his part; and

4.

Whereas the judgment debt was unsecured, the chattel mortgage, which may be foreclosed extrajudicially in case of default, secured the obligation.

ISSUE: WON respondent Court of Appeals erred when it held that the judgment obligation was novated due to the subsequent agreement of the parties in the deed of chattel mortgage entered into between the petitioner and the private respondent? HELD: Yes, the Court held that respondent Court of Appeals did err when it held that the judgment obligation was novated. The Court of Appeals, in arriving at the conclusion that implied novation has taken place, took into account the four circumstances heretofore already adverted to as indicative of the incompatibility between the judgment debt and the principal obligation under the deed of chattel mortgage. 1. Anent the first circumstance, the petitioner argues that this does not constitute a circumstance in implying novation of the judgment debt, stating that in the interim — from the time of the rendition of the judgment in civil case 27116 to the time of the execution of the deed of chattel mortgage — the respondent made partial payments, necessarily resulting in the lesser sum stated in the deed of chattel mortgage. He adds that on record appears the admission by both parties of the partial payments made before the execution of the deed of chattel mortgage. The erroneous conclusion arrived at by the Court of Appeals, the petitioner argues, creates the wrong impression that the execution of the deed of chattel mortgage provided the consideration or the reason for the reduced judgment indebtedness. Where the new obligation merely reiterates or ratifies the old obligation, although the former effects but minor alterations or

65


slight modifications with respect to the cause or object or conditions of the latter, such changes do not effectuate any substantial incompatibility between the two obligations. Only those essential and principal changes introduced by the new obligation producing an alteration or modification of the essence of the old obligation result in implied novation. In the case at bar, the mere reduction of the amount due in no sense constitutes a sufficient indictum of incompatibility, especially in the light of (a) the explanation by the petitioner that the reduced indebtedness was the result of the partial payments made by the respondent before the execution of the chattel mortgage agreement and (b) the latter's admissions bearing thereon. At best, the deed of chattel mortgage simply specified exactly how much the respondent still owed the petitioner by virtue of the judgment in civil case 27116. The parties apparently in their desire to avoid any future confusion as to the amounts already paid and as to the sum still due, decoded to state with specificity in the deed of chattel mortgage only the balance of the judgment debt properly collectible from the respondent. All told, therefore, the first circumstance fails to satisfy the test of substantial and complete incompatibility between the judgment debt and the pecuniary liability of the respondent under the chattel mortgage agreement. 2. The petitioner also alleges that the third circumstance, considered by the Court of Appeals as indicative of incompatibility, is directly contrary to the admissions of the respondent and is without any factual basis. The appellate court pointed out that while the judgment made no mention of payment of damages, the deed of chattel mortgage stipulated the payment of liquidated damages in the amount of P300 in case of default on the part of the respondent. However, the petitioner contends that the respondent himself in his brief filed with the Court of Appeals admitted his obligation, under the deed of chattel mortgage, to pay the amount of P300 by way of attorney's fees and not as liquidated damages. Similarly, the judgment makes mention of the payment of the sum of P400 as attorney's fees and omits any reference to liquidated damages. The discrepancy between the amount of P400 and tile sum of P300 fixed as attorney's fees in the judgment and the deed of chattel mortgage, respectively, is explained by the petitioner, thus: the partial payments made by the respondent before the execution of the chattel mortgage agreement were applied in satisfaction of part of the judgment debt and of part of the attorney's fee fixed in the judgment, thereby reducing both amounts. At all events, in the absence of clear and convincing proof showing that the parties, in stipulating the payment of P300 as attorney's fees in the deed of chattel mortgage, intended the same as an obligation for the payment of liquidated damages in case of default on the part of the respondent, we find it difficult to agree with the conclusion reached by the Court of Appeals. 3. As to the second and fourth circumstances relied upon by the Court of Appeals in holding that the montage obligation superseded, through implied novation, the judgment debt, the petitioner points out that the appellate court considered said circumstances in a way not in accordance with law or accepted jurisprudence. The appellate court stated that while the judgment specified no mode for the payment of the judgment debt, the deed of chattel mortgage provided for the payment of the amount fixed therein in two equal installments. On this point, we see no substantial incompatibility between the mortgage obligation and the judgment liability of the respondent sufficient to justify a conclusion of implied novation. The stipulation for the payment of the obligation under the terms of the deed of chattel mortgage serves only to provide an express and specific method for its extinguishment — payment in two equal installments. The chattel mortgage simply gave the respondent a method and more time to enable him to fully satisfy the judgment indebtedness. The chattel mortgage agreement in no manner introduced any substantial modification or alteration of the judgment. Instead of extinguishing the obligation of the respondent arising from the judgment, the deed of chattel mortgage expressly ratified

and confirmed the existence of the same, amplifying only the mode and period for compliance by the respondent. The Court of Appeals also considered the terms of the deed of chattel mortgage incompatible with the judgment because the chattel mortgage secured the obligation under the deed, whereas the obligation under the judgment was unsecured. The petitioner argues that the deed of chattel agreement clearly shows that the parties agreed upon the chattel mortgage solely to secure, not the payment of the reduced amount as fixed in the aforesaid deed, but the payment of the judgment obligation and other incidental expenses in civil case 27116. The unmistakable terms of the deed of chattel mortgage reveal that the parties constituted the chattel mortgage purposely to secure the satisfaction of the then existing liability of the respondent arising from the judgment against him in civil case 27116. As a security for the payment of the judgment obligation, the chattel mortgage agreement effectuated no substantial alteration in the liability of the respondent. The defense of implied novation requires clear and convincing proof of complete incompatibility between the two obligations. The law requires no specific form for an effective novation by implication. The test is whether the two obligations can stand together. If they cannot, incompatibility arises, and the second obligation novates the first. If they can stand together, no incompatibility results and novation does not take place. We do not see any substantial incompatibility between the two obligations as to warrant a finding of an implied novation. Nor do we find satisfactory proof showing that the parties, by explicit terms, intended the full discharge of the respondent's liability under the judgment by the obligation assumed under the terms of the deed of chattel mortgage so as to justify a finding of express novation. NATIONAL POWER CORPORATION, petitioner, vs. JUDGE ABELARDO M. DAYRIT, Court of First Instance of Manila, Branch 39, and DANIEL R. ROXAS, doing business as United Veterans Security Agency and Foreign Boats Watchmen, respondents.

G.R. Nos. L-62845-46; November 25, 1983

It is elementary that novation is never presumed; it must be explicitly stated or there must be manifest incompatibility between the old and the new obligations in every aspect. Facts: Private Respondent Roxas filed a complaint against herein petitioner National Power Corporation (NPC) and two of its officers in Iligan City, to compel the NPC to restore the contract of Roxas for security services which the former had terminated. The parties entered into a compromise agreement which provides: The parties, DANIEL E. ROXAS, etc. and NATIONAL POWER CORPORATION, ET AL., represented by its President Mr. Gabriel Y. Itchon with due and proper authority under NP Board Resolution No. 81-224, assisted by their respective counsel, to this Honorable Court respectfully submit the following compromise agreement: 1.

The defendant National Power Corporation shall pay to plaintiff the sum of P7,277.45, representing the amount due to plaintiff for the services of one of plaintiff's supervisors;

2.

The defendant shall pay plaintiff the value of the line materials which were stolen but recovered, by plaintiff's agency which value is to be determined after a joint inventory by the representatives of both parties;

66


3.

The parties shall continue with the contract of security services under the same terms and conditions as the previous contract effective upon the signing thereof;

4.

The parties waive all their respective claims and counterclaims in favor of each other;

5.

The parties agree to faithfully comply with the foregoing agreement.

However, on May 14, 1982, despite the compromise agreement, NPC refused to implement the contract with herein private respondent, and even executed a contract with a third person, which was supposed to be for herein private respondent. As a result thereof, private respondent moved for the execution of the compromise agreement, which respondent Judge Dayrit granted, hence this petition. NPC contends that the contract in the compromise agreement was already novated by the contract executed with the third person. ISSUE: WON respondent Judge Dayrit erred when it issued the writ of execution directing herein petitioner to comply with the compromise agreement and to execute the contract in favor of herein private respondent. HELD: No. We sustain the private respondent. Article I of the May 14, 1982, agreement supports his contention. Said article reads: ARTICLE I DOCUMENTS COMPRISING THE CONTRACT The letter proposal dated September 5, 1981; CORPORATION'S counter- proposal dated September 11, 1981; Board Resolution No. 81-244 dated September 28, 1981; the Compromise Agreement and Court Decision dated October 30, 1981 in Civil Case No. 133528 CFIManila; other subsequent letters and the performance bond of AGENCY to be flied in favor of CORPORATION in the manner hereinafter provided, are hereby expressly made integral parts of this contract by reference. (Rollo, pp. 59-60.) It is elementary that novation is never presumed; it must be explicitly stated or there must be manifest incompatibility between the old and the new obligations in every aspect. Thus the Civil Code provides: Art. 1292. In order that an obligation may be extinguished by another which substitutes the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other. In the case at bar there is nothing in the May 14, 1982, agreement which supports the petitioner's contention. There is neither explicit novation nor incompatibility on every point between the "old" and the "new" agreements. PEOPLE'S BANK AND TRUST COMPANY, plaintiff-appellee, vs. SYVEL'S INCORPORATED, ANTONIO Y. SYYAP and ANGEL Y SYYAP, defendants-appellants.

G. R. No. L-29280 August 11, 1988

Novation takes place when the object or principal condition of an obligation is changed or altered. It is elementary that novation is never presumed; it must be explicitly stated or there must be manifest incompatibility between the old and the new obligations in every aspect. FACTS: An action for Foreclosure of Chattel Mortgage was filed by herein appellee People’s Bank and Trust Company against appellant Syvel’s Inc., against its stocks of goods, personal properties and other materials owned by it and located at its stores or warehouses at No. 406, Escolta, Manila, due to the failure of appellant corporation to pay a commercial line credit in the amount of P900,000.00.

In order to protect the goodwill of appellant corporation, appellant Antonio Syyap executed a real property mortgage in favor of herein appellee.

conditional nature of the said agreement (making the novation conditional) is expressly acknowledged and stipulated.

The trial Court rendered its decision in favor of herein appellee, hence this appeal.

MWSS' failure to pay within the stipulated period removed the very cause and reason for the agreement, rendering some ineffective. Petitioners, therefore, were remitted to their original rights under the judgment award.

Appellant contend that there was novation by the subsequent execution of a real estate mortgage as additional collateral to the obligation secured by said chattel mortgage. ISSUE: WON the original obligation to pay the commercial credit line was novated through the execution of a subsequent real estate mortgage? HELD: No. Novation takes place when the object or principal condition of an obligation is changed or altered. It is elementary that novation is never presumed; it must be explicitly stated or there must be manifest incompatibility between the old and the new obligations in every aspect. In the case at bar, there is nothing in the Real Estate Mortgage which supports appellants' submission. The contract on its face does not show the existence of an explicit novation nor incompatibility on every point between the "old and the "new" agreements as the second contract evidently indicates that the same was executed as new additional security to the chattel mortgage previously entered into by the parties. Moreover, records show that in the real estate mortgage, appellants agreed that the chattel mortgage "shall remain in full force and shall not be impaired by this (real estate) mortgage." It is clear, therefore, that a novation was not intended. The real estate mortgage was evidently taken as additional security for the performance of the contract (Bank of P.I. v. Herrige, 47 Phil. 57). Art. 1296. When the principal obligation is extinguished in consequence of a novation, accessory obligations may subsist only insofar as they may benefit third persons who did not give their consent. (1207)

Accessory obligations: General Rule: extinguished as a consequence of novation.

Exception: insofar as pour atrui is concerned and the third person for whose benefit the obligation was constituted did not give his consent.

Art. 1299. If the original obligation was subject to a suspensive or resolutory condition, the new obligation shall be under the same condition, unless it is otherwise stipulated. (n) Art. 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)

Case on Novation subject to a suspensive period: INTEGRATED CONSTRUCTION SERVICES, INC., and ENGINEERING CONSTRUCTION, INC., petitioners, vs. THE HONORABLE LORENZO RELOVA, as Judge of the Court of First Instance of Manila, and METROPOLITAN WATERWORKS & SEWERAGE SYSTEM, respondents.

G.R. No. L-41117 December 29, 1986

While the tenor of the subsequent letter-agreement in a sense novates the judgment award there being a shortening of the period within which to pay (Kabangkalan Sugar Co. vs. Pacheco, 55 Phil. 555), the suspensive and

67


FACTS: Herein petitioners Integrated Construction Service and Engineering Construction Inc. filed an action against private respondent Metropolitan Waterworks and Sewerage System (MWSS) with the Court of First instance of Manila, wherein respondent Judge Relova was the presiding Judge, for breach of contract. The parties entered into arbitration, which resulted to a decision-award in favor of herein petitioners. Subsequently, however, petitioners agreed to give MWSS some discounts in consideration of an early payment of the award. Upon MWSS' request, the petitioners signed their "Conforme" to the said letter-agreement, and extended the period to pay the judgment less the discounts aforesaid to October 31, 1972. MWSS, however, paid only on December 22, 1972, the amount stated in the decision but less the reductions provided for in the October 2, 1972 letter-agreement. Three years thereafter, or on June, 1975, after the last balance of the trust fund had been released and used to satisfy creditors' claims, the petitioners filed a motion for execution in said civil case against MWSS for the balance due under the decision-award. Respondent MWSS opposed execution setting forth the defenses of payment and estoppel. Respondent Judge denied the motion filed by herein petitioners on the ground that the parties had novated the award by their subsequent letteragreement, hence this Petition for Mandamus. ISSUE: Whether or not respondent Judge erred when it denied the Motion for Execution on the ground that the parties novated the award through the letter-agreement. HELD: Yes, the Court held that respondent Judge did err when it denied the Motion for Execution. While the tenor of the subsequent letter-agreement in a sense novates the judgment award there being a shortening of the period within which to pay (Kabangkalan Sugar Co. vs. Pacheco, 55 Phil. 555), the suspensive and conditional nature of the said agreement (making the novation conditional) is expressly acknowledged and stipulated in the 14th whereas clause of MWSS' Resolution No. 132-72, (p. 23, Rollo) which states: WHEREAS, all the foregoing benefits and advantages secured by the MWSS out of said conferences were accepted by the Joint Venture provided that the remaining net amount payable to the Joint Venture will be paid by the MWSS within fifteen (15) days after the official release of this resolution and a written CONFORME to be signed by the Joint Venture; MWSS' failure to pay within the stipulated period removed the very cause and reason for the agreement, rendering some ineffective. Petitioners, therefore, were remitted to their original rights under the judgment award. The placing of MWSS under the control and management of the Secretary of National Defense thru Letter of Instruction No. 2, dated September 22, 1972 was not an unforeseen supervening factor because when MWSS forwarded the letter-agreement to the petitioners on October 2, 1972, the MWSS was already aware of LOI No. 2. MWSS' contention that the stipulated period was intended to pressure MWSS officials to process the voucher is untenable. As aforestated, it is apparent from the terms of the agreement that the 15-day period was intended to be a suspensive condition. MWSS, admittedly, was aware of this, as shown by the internal memorandum of a responsible MWSS official, stating that necessary steps should be taken to effect payment within 15 days, for otherwise, MWSS would forego the advantages of the discount.

As to whether or not petitioners are now in estoppel to question the subsequent agreement, suffice it to state that petitioners never acknowledged full payment; on the contrary, petitioners refused MWSS' request for a conforme or quitclaim. 7.

Other Modes

II. CONTRACTS A.

IN GENERAL

1.

DEFINITION – Art. 1305

Art. 1305. A contract is a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service. (1254a)

Definition by Sanchez Roman: juridical convention manifested in legal

form, by virtue of which one or more person bind themselves in favor of another or others, or reciprocally, to the fulfillment of a prestation to give, to do, or not to do.

Agreement not necessarily a contract: if no obligation would arise from the agreement, there is no contract. People can agree who is the best boxer in the world, but this does not necessarily mean that they enter into a contract.

Dation in payment is not a contract: despite the statement in Macasaet vs. Macasaet, that dation in payment is a contract, it is not. Dation in payment is a special form of payment, thus it extinguishes an obligation, unlike contracts that give rise to one. The confusion comes from the requirement of consent in dation in payment. (Uribe, 2016)

Criticisms in the definition provided under Art. 1305: a.

b. c.

“to give something or to render some service” – connotes that obligation not to do is not covered, which is wrong. E.g., contract not to put up a fence or not to sell products of a competitor company, or in the case of Honda cars prohibiting conversion of the cars to taxicabs. “whereby one binds himself” – connotes that only one is obligated, which is wrong as well. Most of the contracts are actually reciprocal or bilateral. “Two persons” – connotes that a contract cannot be perfected if there is only one person, which is wrong. Auto-contracts involve only one person, although such person represent different interests.

AUTO-CONTRACTS – Arts. 1491, 1646, 1890

Auto-Contracts: one person is responsible for the perfection of the contract but this person is acting in two capacities, one in behalf of himself, one in behalf of another.

E.g., in a contract of agency, where A authorized B to borrow money in his behalf. If B would lend the money himself, he would be signing both as the lender and the borrower (in behalf of A). Void? No. As long as the interest rate is the current market rate.

Generally valid: the number of parties is not determinative of the existence of a contract; what is important is that there be at least 2 declaration of wills.

Auto-Contracts which are void: Art. 1491. The following persons cannot acquire by purchase, even at a public or judicial auction, either in person or through the mediation of another: (1) The guardian, the property of the person or persons who may be under his guardianship; (2) Agents, the property whose administration or sale may have been entrusted to them, unless the consent of the principal has been given; (3) Executors and administrators, the property of the estate under administration;

68


(4) Public officers and employees, the property of the State or of any subdivision thereof, or of any government-owned or controlled corporation, or institution, the administration of which has been intrusted to them; this provision shall apply to judges and government experts who, in any manner whatsoever, take part in the sale; (5) Justices, judges, prosecuting attorneys, clerks of superior and inferior courts, and other officers and employees connected with the administration of justice, the property and rights in litigation or levied upon an execution before the court within whose jurisdiction or territory they exercise their respective functions; this prohibition includes the act of acquiring by assignment and shall apply to lawyers, with respect to the property and rights which may be the object of any litigation in which they may take part by virtue of their profession. (6) Any others specially disqualified by law. (1459a) Art. 1646. The persons disqualified to buy referred to in Articles 1490 and 1491, are also disqualified to become lessees of the things mentioned therein. Art. 1890. If the agent has been empowered to borrow money, he may himself be the lender at the current rate of interest. If he has been authorized to lend money at interest, he cannot borrow it without the consent of the principal. 2.

ELEMENTS OF CONTRACTS A. Essential - those without which the contract cannot exist. B.

C.

Natural - those which exist as part of the contract even if the parties do not stipulate it because the law is deemed written therein. ct of sale Accidental - those which are agreed upon by the parties and which cannot exist without being stipulated.

Rules promulgated by administrative agencies by virtue of its quasilegislative power to implement statutes cannot be the source of a contractual obligation. In this case, M.B. Resolution No. 857, as amended, merely laid down a general policy on the utilization of the dollar earnings of Filipino and resident American contractors undertaking projects in U.S. military bases. It did not create an obligation on the part of the CB, based on contract, to resell dollars at the preferred rate. Had there been greater care therefore on the part of the plaintiff to show why in his opinion he could assert a right in accordance not with a contract binding on the Central Bank, because there is none, but by virtue of compliance with rules and regulations of an administrative tribunal, then perhaps a different outcome would have been justified. Here, there was wrong cause of action.

GEORGE W. BATCHELDER, doing business under the name and style of Batchelder Equipment, plaintiff-appellant, vs. THE CENTRAL BANK OF THE PHILIPPINES, defendant-appellant.

G.R. No. L-25071 March 29, 1972

FACTS: On March 30, 1960, the U.S. Navy accepted the proposal of the plaintiff of March 18, 1960 in the sum of $188,000.00 for the construction of the Mindanao Weather Station, Bukidnon, Mindanao, Philippines, in accordance with Bid Item 3, Yards and Docks Specifications No. 13374/59." Defendant Central Bank issued several circulars covering the sale of foreign exchange in the Philippines, the full decontrol of which was when it issued Circular No. 133 on Jan. 21, 1962. Under its Memorandum to Authorized Agent Bank ID-FM No. 11, and under Resolution No. 857 of the Monetary Board of the Central Bank, it was specifically provided that: "For imports against proceeds of contracts entered into prior to April 25, 1960, the preferred buying rate shall govern, regardless of the present commodity classifications." There was however a modification arising from Monetary Board Resolution No. 695 of April 28, 1961, which specified that the agent bank should, upon compliance with its terms, credit the contractor's accounts in pesos, the buying rate being governed by the appropriate rules and regulations.

In compliance with defendant's Monetary Board Resolutions Nos. 857 and 695, plaintiff surrendered to the Central Bank, through the latter's authorized agents, his dollar earnings amounting to U.S. $199,966.00. The plaintiff also appears to have applied with the defendant for license to utilize 90% of his surrendered earnings or the sum of U.S. $25,847.84 or 21.41% of the amount applied for. The plaintiff demanded from the defendant that it be allowed to utilize the balance of the 90% of his surrendered dollar earnings. However, it was only on March 21, 1963, after the plaintiff had filed the complaint in the present case and after full decontrol had been established through Circular No. 133 dated January 21, 1962, that the defendant informed the plaintiff, through its communication, that the latter could utilize at the free market rate the balance of his said 90% of surrendered earnings which had not been previously granted by the defendant for his importations. Plaintiff Batchelder filed a complaint to compel defendant Central Bank of the Philippines to resell to him $170,210.60 at the preferred rate of exchange of two Philippine pesos for one American dollar (P2:$1), more specifically P2.00375, or, in the alternative, to pay to him the difference between the peso cost of such amount at the market rate prevailing on the date of the satisfaction of the judgment in his favor and the peso cost of $170,210.60 at said preferred rate. On the other hand, the CB was insistent on the absence of any such right on the part of plaintiff to re-acquire from it the sum of $170,210.60 at the preferred rate of exchange. The lower court decided in favor of plaintiff Batchelder holding that the defendant CB is now bound by a contract, which could be implied from its stated policy, as enunciated in Monetary Board Resolutions Nos. 857 and 695, and the plaintiff's reliance on said resolutions,to resell in favor of the plaintiff 90% of the U.S. dollars earned by him under his U.S. Navy Contract aforementioned which were duly surrendered to the defendant. ISSUE: WON the issuance of a monetary policy by it, thereafter implemented by the appropriate resolutions, as to the rate of exchange at which dollars after being surrendered and sold to it could be re-acquired, creates a contractual obligation? HELD: No. The Civil Code expressly provides that a contract is a meeting of minds between two persons whereby one binds himself with respect to the other to give something or render some service. The above provision is practically a restatement, with slight modification, of Article1254 of the Civil Code of Spain of 1889, formerly enforced in our jurisdiction. Such an article, in the opinion of Justice J.B.L. Reyes, speaking for the Court, in A. Magsaysay, Inc. v. Cebu Portland Cement Co., requires that "the area of agreement must extend to all points that the parties deem material or there is no contract." It is noteworthy that in his Outlines on Civil Law, with Judge Ricardo Puno as coauthor, he speaks highly of Article 1321 of the Civil Code of Italy. It reads thus: "A contract is the accord of two (or more) persons (with previously diverging interests) for the purpose of creating, modifying or extinguishing a juridical relation between them." Likewise all commentators on the Civil Code have agreed that the birth or perfection of a consensual contract, Article 1315, commences from the moment the parties come to an agreement on a definite subject matter and valid consideration. Justice Capistrano, who was with the Code Commission, and Senators Ambrosio Padilla and Arturo Tolentino,all three distinguished in the field of civil law, are substantially in agreement." Planiol states the following: "The consent of the parties, that is to say, the accord of wills, is the essential element of every contract. The consent, in the matter of contracts, is composed of a double operation. (1) The parties must commence by agreeing as to the contents the "convention" that is to say, by making sufficiently precise the object and the essential conditions, and discussing the particular clauses which they desire to introduce to modify or to complete the ordinary effects. (2) This first operation having been terminated, the parties are in accord on the projected contract: there is between them what Littre calls the uniformity of opinions, which is one sense of the word "consent", but the contract is not

69


included, it still exists in a projected state. There remains to give its obligatory force by an act of will, expressing the individual adherence of each one of the parties to the act thus prepared. When all the necessary consents (sic) are obtained, and manifested in legal form, the contract is formed, the lien of law is tied. It is therefore the union of these adherences (sic) which constitute the contract and which gives birth to the obligations which are derived from it. It is an act of volition, while the preliminary operation of discussion of the project is a work of the mind and reasoning. In their Jurisprudence and Legal Philosophy, the late Professors Morris R. Cohen and Felix R. Cohen, father and son and jurists of note, noted that the concepts found in the Civil Code of Spain showing basic contract rules are "equally valid in France, Chile, Columbia, Germany, Holland, Italy, Mexico, Portugal and many other lands, and equally honored across eighteen and more centuries." Even more impressive is their conclusion that the views of such common law scholars as Maine, Williston, Pound, Holdsworth, Llewellyn, and Kessler, are not dissimilar. Thus Pollock could describe the English common law quoting whole paragraphs from a German scholar's description of the law of ancient Rome. It is in that sense that for them the Roman phrasing contrahitur obligation “throws more light than volumes of exegesis: One contracts an obligation as one contracts pneumonia or any other disability. Contract is that part of our legal burdens that we bring on ourselves." If there be full cognizance of the implications of the controlling principles as thus expounded, impressive for their well-nigh unanimity of approach, the conclusion reached by the lower court certainly cannot be accepted as correct. As is so evident from the recital of facts made in the lower court and equally so in the brief of plaintiff Batchelder, as appellant, what was done by the Central Bank was merely to issue in pursuance of its rule-making power the resolutions relied upon by plaintiff, which for him should be impressed with a contractual character. There is no question that the Central Bank as a public corporation could enter into contracts. It is so provided for among the corporate powers vested in it. Thus: "The Central Bank is hereby authorized to adopt, alter, and use a corporate seal which shall be judicially noticed; to make contracts; to lease or own real personal property, and to sell or otherwise dispose of the same; to sue and be sued; and otherwise to do and perform any and all things that may be necessary or proper to carry out the purposes of this Act." No doubt would have arisen therefore if defendant Central Bank, utilizing a power expressly granted, did enter into a contract with plaintiff. It could have done so, but it did not do so. How could it possibly be maintained then that merely through the exercise of its regulatory power to implement statutory provisions, a contract as known to the law was thereby created? Yet that is precisely what the lower court held in reaching such a conclusion. It was not only unmindful of the controlling doctrines as to when a contract exists, but it was equally oblivious of the competence lodged in an administrative agency like the Central Bank. Even the most cursory perusal of Republic Act No. 265 would yield the irresistible conclusion that the establishment of the Central Bank was intended to attain basic objectives in the field of currency and finance. In the language of the Act: "It shall be the responsibility of the Central Bank of the Philippines to administer the monetary and banking system of the Republic. It shall be the duty of the Central Bank to use the powers granted to it under this Act to achieve the following objectives: (a) to maintain monetary stability in the Philippines; (b) to preserve the international value of the peso and the convertibility of the peso into other freely convertible currencies; and (c) to promote a rising level of production, employment and real income in the Philippines." It would be then to set at naught fundamental concepts in administrative law that accord due recognition to the vesting of quasi-legislative and quasijudicial power in administrative law for the purpose of attaining statutory objectives, especially now that government is saddled with greater responsibilities due to the complex situation of the modern era, if the lower court is to be upheld. For if such be the case then, by the judiciary failing to

exercise due care in its oversight of an administrative agency, substituting its own discretion for what usually is the more expert appraisal of such an instrumentality, there may even be a frustration if not a nullification of the objective of the law. Nor is this to deal unjustly with plaintiff. Defendant Central Bank in its motion to dismiss before the lower court was quite explicit as to why under the circumstances, no right could be recognized as possessed by him. As set forth in such pleading: "We contend that Monetary Board Resolution No. 857, dated June 17, 1960, as amended by Monetary Board Resolution No. 695, dated April 28, 1961, does not give right to Filipino and resident American contractors undertaking construction projects in U.S. military bases to reacquire at the preferred rate ninety per cent (90%) of the foreign exchange sold or surrendered to defendant Central Bank thru the authorized agent banks. Nor does said resolution serve as a general authorization or license granted by the Central Bank to utilize the ninety per cent (90%) of their dollar earnings. M.B. Resolution No. 857, as amended, merely laid down a general policy on the utilization of the dollar earnings of Filipino and resident American contractors undertaking projects in U.S. military bases, ... ." Further, there is this equally relevant portion in such motion to dismiss: "It is clear from the aforecited provisions of said memorandum that not all imports against proceeds of contracts entered into prior to April 25, 1960 are entitled to the preferred buying rate of exchange. Only imports against proceeds of contracts entered into prior to April 25, 1960, not otherwise classified as dollar-to-dollar transactions, are entitled to the preferred rate of exchange. It is for this reason that the contractor is required to first file an application with defendant Central Bank (Import Department) thru the Authorized Agent Banks, for the purpose of determining whether the imports against proceeds of contracts entered into prior to April 25, 1960 are classified as dollar-to-dollar transactions (which are not entitled to the preferred rate of exchange), or not (which are entitled to the preferred rate of exchange), and that if said imports are entitled to the preferred rate of exchange, defendant Central Bank would issue a license to the contractor for authority to buy foreign exchange at the preferred rate for the payment of said imports." Had there been greater care therefore on the part of the plaintiff to show why in his opinion he could assert a right in accordance not with a contract binding on the Central Bank, because there is none, but by virtue of compliance with rules and regulations of an administrative tribunal, then perhaps a different outcome would have been justified. WHEREFORE, the decision of the lower court of January 10, 1963 is reversed and the complaint of the plaintiff dismissed, without prejudice to his taking the appropriate action to enforce whatever rights he possesses against defendant Central Bank in accordance with its valid and binding rules and regulations. With costs against plaintiff. B.

FUNDAMENTAL CONTRACTS

CHARACTERISTICS/

PRINCIPLES

1.

CONSENSUALITY OF CONTRACTS – ARTS. 1305, 1317

OF

Art. 1305. A contract is a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service. (1254a) Art. 1317. No one may contract in the name of another without being authorized by the latter, or unless he has by law a right to represent him. A contract entered into in the name of another by one who has no authority or legal representation, or who has acted beyond his powers, shall be unenforceable, unless it is ratified, expressly or impliedly, by the person on whose behalf it has been executed, before it is revoked by the other contracting party. (1259a) CONTRACT OF ADHESION - one where there is already a prepared form containing the stipulations desired by one party whereby the latter only asks the other party to agree to them if he wants to enter into a contract.

70


Generally valid: because a party who does not consent to the terms and

conditions in the contract can opt not to. As such, in a case where a passenger of PAL lost his luggage who sued for damages, and PAL contended that its liability should not exceed P100 based on the contract, the Supreme Court held that the provision is valid even if it was contained in a contract of adhesion since the passenger could not have consented thereto if he did not agree on the same.

Exceptional case: if a WAIVER is contained in a contract of adhesion, the

contract is void, not because it is contrary to public policy but because of the fact that consent to such waiver was not freely given, the waiver being in a contract of adhesion affects the voluntariness of the act. E.g., In relation to a real estate mortgage, the principal debtor defaulted and the Bank foreclosed the property and there was foreclosure sale where the Bank is the winning bidder. The mortgagor signified his intent to redeem. The Bank countered that their mortgage agreement contained a waiver of the right to redeem. The Supreme Court held that the waiver is void since it is contained in a contract of adhesion.

PAL case: A’s luggage was lost. He sued PAL for damages. PAL raised the

defense that it can only be made liable upto P100 as written in the contract. SC: sustained PAL. Though this contract is a contract of carriage, and one of adhesion, still, A gave his consent to the terms and conditions thereof. As such, he is bound by such stipulation.

Not even the government can force someone to enter into a contract: as such, in the case of PLDT, the SC held that it cannot compel

PLDT to enter into an interconnection with the government. However, the government may exercise its sovereign power of eminent domain and compel PLDT to allow the use of its facilities subject to just compensation. In this case, the Court treated the action as one of expropriation. (See

Republic vs. PLDT)

REPUBLIC OF THE PHILIPPINES, plaintiff-appellant, vs. PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, defendantappellant.

G.R. No. L-18841

January 27, 1969

FACTS: Soon after its creation in 1947, the Bureau of Telecommunications, a government instrumentality of plaintiff, set up its own Government Telephone System (GTS) by utilizing its own appropriation and equipment and by renting trunk lines of the PLDT to enable government offices to call private parties. Its application for the use of these trunk lines was in the usual form of applications for telephone service, containing a statement, above the signature of the applicant, that the latter will abide by the rules and regulations of the PLDT which are on file with the Public Service Commission. One of the many rules prohibits the public use of the service furnished the telephone subscriber for his private use. The Bureau has extended its services to the general public since 1948, using the same trunk lines owned by, and rented from, the PLDT, and prescribing its (the Bureau's) own schedule of rates. Through these trunk lines, a Government Telephone System subscriber could make a call to a PLDT subscriber in the same way that the latter could make a call to the former. On 5 March 1958, the plaintiff, through the Director of Telecommunications, entered into an agreement with RCA Communications, Inc., for a joint overseas telephone service whereby the Bureau would convey radiotelephone overseas calls received by RCA's station to and from local residents. Actually, they inaugurated this joint operation on 2 February 1958, under a "provisional" agreement. The Bureau of Telecommunications had proposed to the PLDT on 8 January 1958 that both enter into an interconnecting agreement, with the government paying (on a call basis) for all calls passing through the interconnecting facilities from the Government Telephone System to the PLDT. The PLDT replied that it was willing to enter into an agreement on overseas telephone service to Europe and Asian countries provided that the Bureau would submit to the jurisdiction and regulations of the Public Service Commission and in consideration of 37 1/2% of the gross revenues. In its memorandum in lieu of oral argument in this Court dated 9 February 1964, on page 8, the defendant reduced its offer to 33 1/3 % (1/3) as its share in

the overseas telephone service. The proposals were not accepted by either party. On 12 April 1958, plaintiff Republic commenced suit against the defendant, Philippine Long Distance Telephone Company, to compel PLDT to execute a contract with plaintiff, through the Bureau, for the use of the facilities of defendant's telephone system throughout the Philippines under such terms and conditions as the court might consider reasonable, and for a writ of preliminary injunction against the defendant company to restrain the severance of the existing telephone connections and/or restore those severed. After trial, the lower court rendered judgment that it could not compel the PLDT to enter into an agreement with the Bureau because the parties were not in agreement. ISSUE: WON PLDT may be forced to enter into an interconnection contract? ISSUE2: WON the Republic may exercise its eminent domain power for the use of PLDT’s facilities? HELD: No. Yes. We agree with the court below that parties cannot be coerced to enter into a contract where no agreement is had between them as to the principal terms and conditions of the contract. Freedom to stipulate such terms and conditions is of the essence of our contractual system, and by express provision of the statute, a contract may be annulled if tainted by violence, intimidation, or undue influence (Articles 1306, 1336, 1337, Civil Code of the Philippines). But the court a quo has apparently overlooked that while the Republic may not compel the PLDT to celebrate a contract with it, the Republic may, in the exercise of the sovereign power of eminent domain, require the telephone company to permit interconnection of the government telephone system and that of the PLDT, as the needs of the government service may require, subject to the payment of just compensation to be determined by the court. Nominally, of course, the power of eminent domain results in the taking or appropriation of title to, and possession of, the expropriated property; but no cogent reason appears why the said power may not be availed of to impose only a burden upon the owner of condemned property, without loss of title and possession. It is unquestionable that real property may, through expropriation, be subjected to an easement of right of way. The use of the PLDT's lines and services to allow inter-service connection between both telephone systems is not much different. In either case private property is subjected to a burden for public use and benefit. If, under section 6, Article XIII, of the Constitution, the State may, in the interest of national welfare, transfer utilities to public ownership upon payment of just compensation, there is no reason why the State may not require a public utility to render services in the general interest, provided just compensation is paid therefor. Ultimately, the beneficiary of the interconnecting service would be the users of both telephone systems, so that the condemnation would be for public use. A perusal of the complaint shows that the Republic's cause of action is predicated upon the radio telephonic isolation of the Bureau's facilities from the outside world if the severance of interconnection were to be carried out by the PLDT, thereby preventing the Bureau of Telecommunications from properly discharging its functions, to the prejudice of the general public. Save for the prayer to compel the PLDT to enter into a contract (and the prayer is no essential part of the pleading), the averments make out a case for compulsory rendering of inter-connecting services by the telephone company upon such terms and conditions as the court may determine to be just. And since the lower court found that both parties "are practically at one that defendant (PLDT) is entitled to reasonable compensation from plaintiff for the reasonable use of the former's telephone facilities" (Decision, Record on Appeal, page 224), the lower court should have proceeded to treat the case as one of condemnation of such services independently of contract and proceeded to determine the just and reasonable compensation for the same, instead of dismissing the petition. In the ultimate analysis, the true objection of the PLDT to continue the link between its network and that of the Government is that the latter competes "parasitically" (sic) with its own telephone services. Considering, however,

71


that the PLDT franchise is non-exclusive; that it is well-known that defendant PLDT is unable to adequately cope with the current demands for telephone service, as shown by the number of pending applications therefor; and that the PLDT's right to just compensation for the services rendered to the Government telephone system and its users is herein recognized and preserved, the objections of defendant-appellant are without merit. To uphold the PLDT's contention is to subordinate the needs of the general public to the right of the PLDT to derive profit from the future expansion of its services under its non-exclusive franchise. WHEREFORE, the decision of the Court of First Instance, now under appeal, is affirmed, except in so far as it dismisses the petition of the Republic of the Philippines to compel the Philippine Long Distance Telephone Company to continue servicing the Government telephone system upon such terms, and for a compensation, that the trial court may determine to be just, including the period elapsed from the filing of the original complaint or petition. And for this purpose, the records are ordered returned to the court of origin for further hearings and other proceedings not inconsistent with this opinion.

Implied consent from intention of the parties: R. MARINO CORPUS, petitioner, vs. COURT OF APPEALS and JUAN T. DAVID, respondents

G.R. No. L-40424 June 30, 1980

FACTS: Having been close friends, aside from being membres Civil Liberties Union, petitioner Corpus intimately calls respondent David by his nickname "Juaning" and the latter addresses the former simply as "Marino". In March 1958, Corpus, a director in the Central Bank, was charged administratively and later on acquitted of said charges. However, he was removed by Miguel Cuaderno, Sr., then Central Bank Governor on the ground of loss of confidence. Corpus, thru Atty. Alvarez, filed before the CFI, a petition for certiorari, mandamus and quo warranto but the same was dismissed for failure to exhaust administrative remedies. It was at this state that the plaintiff entered into the case under circumstances about which the parties herein have given divergent versions.vLaying aside for the moment the true circumstances under which the plaintiff David started rendering professional services to the defendant Corpus, the undisputed evidence shows that on July 7, 1960, the plaintiff filed a motion for reconsideration of the order of dismissal under the joint signatures of the plaintiff and Atty. Alverez (Exhibit B). The plaintiff argued the said motion during the hearing thereof On August 8, 1960, he file a 13page 'Memorandum of Authorities in support of said motion for reconsideration (Exhibit C). A 3-page supplemental memorandum of authorities was filed by the plaintiff on September 6, 1960 (Exhibit D) On November 15, 1960, Judge Lantin denied the motion for reconsideration. On November 19, 1960, the plaintiff perfected the appeal from the order of dismissal dated June 14, 1960. For purposes of said appeal the plaintiff prepared a 232-page brief and submitted the same before the SC on April 20, 1961, where plaintiff David is the one who orally argued. In connection with the trip to Baguio for the said oral argument, the plaintiff used his car which broke down and necessitated extensive repairs paid for by the plaintiff himself. On March 30, 1962, the Supreme Court promulgated its decision reversing the order of dismissal and remanding the case for further proceedings. On April 18, 1962, after the promulgation of the decision of the Supreme Court reversing the dismissal of the case the defendant wrote the plaintiff the following letter, Exhibit 'Q'. . xxxxxxxxx Dear Juaning

Will you please accept the attached check in the amount of TWO THOUSAND P2,000.00) PESOS for legal services in the handling of L17860 recently decided by the Court? I wish I could give more but as

y•u know we were banking on a SC decision reinstating me and reimburse my backstage I had been wanting to offer some token of my appreciation of your legal fight for and in my behalf, and it was only last week that I received something on account of a pending claim. Looking forward to a continuation of the case in the lower court, I remain Sincerely yours, Illegible

xxxxxxxxx

In a reply letter dated April 25, 1962, the plaintiff returned the check, explaining said act as follows: April 25, 1962 My dear Marino: Yesterday, I received your letter of April 18th with its enclosure. I wish to thank you for your kind thoughts, however, please don't take offense if I have to return the check. I will explain.

When I decided to render professional services in your case, I was motivated by the value to me of the very intimate relations which you and I have enjoyed during the past many years. It was not primarily, for a professional fee. Although we were not fortunate to have obtained a decision in your case which should have put an end to it. I feel that we have reason to

be jubilant over the outcome, because, the final favorable outcome of the case seems certain irrespective of the length of time required to terminate the same.

Your appreciation of the efforts I have invested in your case is enough compensation therefor, however, when you shall have obtained a decision which would have finally resolved the case in your favor, remembering me then will make me happy. In the meantime, you will make me happier by just keeping the check. Sincerely yours, JUANING

xxxxxxxxx

When the case was remanded, the evidence was presented by Atty. Alvarez with the cooperation of plaintiff David. Judge Lantin later on rendered a decision in favor of defendant Carlos. Appeals were made. Later on, the SC rendered a decision affirming the trial court. On April 19, 1965 the plaintiff’s law office made a formal command upon the defendant for collection of 50% of the amount recovered by the defendant as back salaries and other emoluments from the Central Bank (Exhibit N). This letter was written after the defendant failed to appear at an appointment with the plaintiff so that they could go together to the Central Bank to claim the possession of the office to which the defendant was reinstated and after a confrontation in the office of the plaintiff wherein the plaintiff was remanding 50% of the back salaries and other emoluments amounting to P203,000.00 recoverable by the defendant. The defendant demurred to this demand inasmuch as he had plenty of outstanding obligations and that his tax liability for said back salaries was around P90,000.00, and that he expected to net only around P10,000.00 after deducting all expenses and taxes. On the same date, April 19,1965 the plaintiff wrote the Governor for of Central Bank requesting that the amount representing the back salaries of the defendant be made out in two, one in favor of the defendant and the other representing the professional fees equivalent to 50% of the said back salaries being claimed by the plaintiff (Exhibit 8). Failing to obtain the relief from the Governor of Central Bank, the plaintiff instituted this action before this Court on July 20, 1965, which was granted, ordering Corpus to pay P30,000 to David. On appeal, the CA affirmed in toto the trial court. ISSUE: WON private respondent Atty. Juan T. David is entitled to attorney's fees?

72


HELD: Yes. Petitioner Marino Corpus contends that respondent David is not entitled to attorney's fees because there was no contract to that effect. On the other hand, respondent David contends that the absence of a formal contract for the payment of the attorney's fees will not negate the payment thereof because the contract may be express or implied, and there was an implied understanding between the petitioner and private respondent that the former will pay the latter attorney's fees when a final decision shall have been rendered in favor of the petitioner reinstating him to -his former position in the Central Bank and paying his back salaries. WE find respondent David's position meritorious. While there was express agreement between petitioner Corpus and respondent David as regards attorney's fees, the facts of the case support the position of respondent David that there was at least an implied agreement for the payment of attorney's fees. Respondent David's letter-reply of April 25, 1962 confirms the promise of petitioner Corpus to pay attorney's fees upon his reinstatement and payment of back salaries. Said reply states that respondent David decided to be his counsel in the case because of the value to him of their intimate relationship over the years and "not, primarily, for a professional fee." It is patent then, that respondent David agreed to render professional services to petitioner Corpus secondarily for a professional fee. This is stressed by the last paragraph of said reply which states that "however, when you shall have obtained a decision which would have finally resolved the case in your favor, remembering me then will make me happy. In the meantime, you will make me happier by just keeping the check." Thereafter, respondent David continued to render legal services to petitioner Corpus, in collaboration with Atty. Alverez until he and Atty. Alvarez secured the decision directing petitioner's reinstatement with back salaries, which legal services were undisputedly accepted by, and benefited petitioner. Moreover, the payment of attorney's fees to respondent David may also be justified by virtue of the innominate contract of facio ut des (I do and you give) which is based on the principle that "no one shall unjustly enrich himself at the expense of another." Innominate contracts have been elevated to a codal provision in the New Civil Code by providing under Article 1307 that such contracts shall be regulated by the stipulations of the parties, by the general provisions or principles of obligations and contracts, by the rules governing the most analogous nominate contracts, and by the customs of the people. The rationale of this article was stated in the 1903 case of Perez vs. Pomar (2 Phil. 982). In that case, the Court sustained the claim of plaintiff Perez for payment of services rendered against defendant Pomar despite the absence of an express contract to that effect, thus: It does not appear that any written contract was entered into between the parties for the employment of the plaintiff as interpreter, or that any other innominate contract was entered into but whether the plaintiff’s services were solicited or whether they were offered to the defendant for his assistance, inasmuch as these services were accepted and made use of by the latter, we must consider that there was a tacit and mutual consent as to the rendition of the services. This gives rise to the obligation upon the person benefited by the services to make compensation therefor, since the bilateral obligation to render service as interpreter, on the one hand, and on the other to pay for the service rendered, is thereby incurred. (Arts. 1088, 1089, and 1262 of the Civil Code). xxxxxxxxx ... Whether the service was solicited or offered, the fact remains that Perez rendered to Pomar services as interpreter. As it does not appear that he did this gratuitously, the duty is imposed upon the defendant, he having accepted the benefit of the service, to pay a just compensation therefor, by virtue of the innominate contract of facio ut des implicitly established. xxxxxxxxx ... because it is a well-known principle of law that no one should permitted to enrich himself to the damage of another" (emphasis supplied; see also Tolentino, Civil Code of the Philippines, p. 388, Vol. IV 119621, citing Estate of Reguera vs. Tandra 81 Phil. 404 [1948];

Arroyo vs. Azur 76 Phil. 493119461; and Perez vs. Pomar. 2 Phil. 682 [1903]). WE reiterated this rule in Pacific Merchandising Corp. vs. Consolacion Insurance & Surety Co., Inc. (73 SCRA 564 [1976]) citing the case of Perez v. Pomar, supra thus: Where one has rendered services to another, and these services are accepted by the latter, in the absence of proof that the service was rendered gratuitously, it is but just that he should pay a reasonable remuneration therefor because 'it is a well-known principle of law, that no one should be permitted to enrich himself to the damage of another (emphasis supplied). Likewise, under American law, the same rule obtains (7 CJS 1079; FL Still & Co. v. Powell, 114 So 375). WHEREFORE, PETITIONER R. MARINO CORPUS IS HEREBY DIRECTED TO PAY RESPONDENT ATTY. JUAN T. DAVID THE SUM OF TWENTY THOUSAND (P20,000.00) PESOS AS ATTORNEY'S FEES. 2.

AUTONOMY OF CONTRACTS – ARTS. 1306, 1799, 2088, 2130

Art. 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy. (1255a) Otherwise known as the Freedom or Liberty to Contract. Examples of void stipulations for being CONTRARY TO LAW: a.

Partnership: Pactum Leonina

Art. 1799. A stipulation which excludes one or more partners from any share in the profits or losses is void. (1691) b.

Mortgage/Pledge: Pactum Commissorium

Art. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void. (1859a) c.

Mortgage/Pledge: Pactum de non aliendo

Art. 2130. A stipulation forbidding the owner from alienating the immovable mortgaged shall be void. ESCALATION CLAUSE: where one increases/decreases compensation of one of the parties.

When Void: when the increase is dependent solely upon the will of one of the parties. This is void for violation of the principle of mutuality of contracts.

When Valid: when the increase/decrease is dependent on valid and reasonable standards.

peso the dollar.” Starting March 1, 2001, the lessor increased the rental to P2,000.00 a month, on the ground of inflation proven by the fact that the exchange rate of the Philippine peso to the dollar had increased from P25.00=$1.00 to P50.00=$1.00. Brian refused to pay the increased rate and an action for unlawful detainer was filed against him. Will the action prosper? Why? (5%) ANSWER: Yes. The action will prosper. The increase or decrease in the rental is a valid stipulation since it is based on a valid and reasonable standard, i.e., appreciation or devaluation of the dollar. Note: this is different from extraordinary inflation or deflation which requires a government pronouncement (which was the suggested answer in the UP Law Center). Art. 1250 is not applicable in this case since the increase is not extraordinary. Here, it is only by stipulation. Art. 1250 is by law, when there is no stipulation as to increase or decrease. Contract of loan: where the escalation clause as to the interest is dependent on the Bank only – void. However, if the increase is based on reasonable standards, such as: (1) the requirement of a de-escalation clause; (2) the clause can be invoked only once a year on the anniversary date; (3) the remaining period of the loan must be at least 730 days. (See Banco Filipino Savings vs. Navarro and Florendo vs. CA) BANCO FILIPINO SAVINGS and MORTGAGE BANK, petitioner, vs. HON. MIGUEL NAVARRO, Presiding Judge, Court of First Instance of Manila, Branch XXXI and FLORANTE DEL VALLE, respondents.

G.R. No. L-46591

July 28, 1987

FACTS: On May 20, 1975, respondent Florante del Valle (the BORROWER) obtained a loan secured by a real estate mortgage (the LOAN, for short) from petitioner BANCO FILIPINO in the sum of P41,300.00, payable and to be amortized within fifteen (15) years at 12% interest annually. Hence, the LOAN still had more than 730 days to run by January 2, 1976, the date when CIRCULAR No. 494 was issued by the Central Bank. Stamped on the promissory note evidencing the loan is an Escalation Clause, reading as follows: I/We hereby authorize Banco Filipino to correspondingly increase the interest rate stipulated in this contract without advance notice to me/us in the event law should be enacted increasing the lawful rates of interest that may be charged on this particular kind of loan. The Escalation Clause is based upon Central Bank CIRCULAR No. 494 issued on January 2, 1976, the pertinent portion of which reads: 3. The maximum rate of interest, including commissions, premiums, fees and other charges on loans with maturity of more than seven hundred thirty (730) days, by banking institutions, including thrift banks and rural banks, or by financial intermediaries authorized to engage in quasi-banking functions shall be nineteen percent (19%) per annum. xxx xxx xxx 7. Except as provided in this Circular and Circular No. 493, loans or renewals thereof shall continue to be governed by the Usury Law, as amended."

Contract for a piece of work: where the compensation of the contractor may be increased on the basis of minimum wage or as to materials, based on the consumer price index.

On the strength of CIRCULAR No. 494 BANCO FILIPINO gave notice to the BORROWER on June 30, 1976 of the increase of interest rate on the LOAN from 12% to 17% per annum effective on March 1, 1976.

Contract of Lease: where the rental would be increased or decreased based on the movement (increase or devaluation) of foreign exchange – valid. (Del Rosario vs. Shell)

Contending that CIRCULAR No. 494 is not the law contemplated in the Escalation Clause of the promissory note, the BORROWER filed suit against BANCO FILIPINO for "Declaratory Relief" with respondent Court, praying that the Escalation Clause be declared null and void and that BANCO FILIPINO be ordered to desist from enforcing the increased rate of interest on the BORROWER's real estate loan.

BAR QUESTION: On July 1, 1998, Brian leased an office space in a building for a period of five years at a rental rate of P1,000.00 a month. The contract of lease contained the proviso that “in case of inflation or devaluation of the Philippine peso, the monthly rental will automatically be increased or decreased depending on the devaluation or inflation of the

73


The trial court nullified the escalation clause reasoning that P.D. No. 116 does not expressly grant the Central Bank authority to maximize interest

rates with retroactive effect and that BANCO FILIPINO cannot legally impose a higher rate of interest before the expiration of the 15-year period in which the loan is to be paid other than the 12% per annum in force at the time of the execution of the loan. ISSUE: WON the questioned escalation clause is valid? HELD: Yes. Some contracts contain what is known as an "escalator clause," which is defined as one in which the contract fixes a base price but contains a provision that in the event of specified cost increases, the seller or contractor may raise the price up to a fixed percentage of the base. Attacks on such a clause have usually been based on the claim that, because of the open price-provision, the contract was too indefinite to be enforceable and did not evidence an actual meeting of the minds of the parties, or that the arrangement left the price to be determined arbitrarily by one party so that the contract lacked mutuality. In most instances, however, these attacks have been unsuccessful.

be reduced in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board; Provided, further, That the adjustment in the rate of interest agreed upon shall take effect on or after the effectivity of the increase or decrease in the maximum rate of interest. (Paragraphing and emphasis supplied). It is now clear that from March 17, 1980, escalation clauses to be valid should specifically provide: (1) that there can be an increase in interest if increased by law or by the Monetary Board; and (2) in order for such stipulation to be valid, it must include a provision for reduction of the stipulated interest "in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board."

The Court further finds as a matter of law that the cost of living index adjustment, or escalator clause, is not substantively unconscionable.

While P.D. No. 1684 is not to be given retroactive effect, the absence of a de-escalation clause in the Escalation Clause in question provides another reason why it should not be given effect because of its one-sidedness in favor of the lender.

Cost of living index adjustment clauses are widely used in commercial contracts in an effort to maintain fiscal stability and to retain "real dollar" value to the price terms of long term contracts. The provision is a common one, and has been universally upheld and enforced. Indeed, the Federal government has recognized the efficacy of escalator clauses in tying Social Security benefits to the cost of living index, 42 U.S.C.s 415(i). Pension benefits and labor contracts negotiated by most of the major labor unions are other examples. That inflation, expected or otherwise, will cause a particular bargain to be more costly in terms of total dollars than originally contemplated can be of little solace to the plaintiffs.

WHEREFORE, the Court rules that while an escalation clause like the one in question can ordinarily be held valid, nevertheless, petitioner Banco Filipino cannot rely thereon to raise the interest on the borrower's loan from 12% to 17% per annum because Circular No. 494 of the Monetary Board was not the "law" contemplated by the parties, nor should said Circular be held as applicable to loans secured by registered real estate in the absence of any such specific indication and in contravention of the policy behind the Usury Law. The judgment appealed from is, therefore, hereby affirmed in so far as it orders petitioner Banco Filipino to desist from enforcing the increased rate of interest on petitioner's loan.

ISSUE2: WON BANCO FILIPINO can increase the interest rate on the LOAN from 12% to 17% per annum under the Escalation Clause?

SPOUSES MARIANO and GILDA FLORENDO, petitioners, vs. COURT OF APPEALS and LAND BANK PHILIPPINES, respondents.

HELD: No. The Monetary Board Circular is not the “law” contemplated therein. It is clear from the stipulation between the parties that the interest rate may be increased "in the event a law should be enacted increasing the lawful rate of interest that may be charged on this particular kind of loan." " The Escalation Clause was dependent on an increase of rate made by "law" alone. CIRCULAR No. 494, although it has the effect of law, is not a law. "Although a circular duly issued is not strictly a statute or a law, it has, however, the force and effect of law." (Italics supplied). "An administrative regulation adopted pursuant to law has the force and effect of law." 7 "That administrative rules and regulations have the force of law can no longer be questioned.” The distinction between a law and an administrative regulation is recognized in the Monetary Board guidelines quoted in the letter to the BORROWER of Ms. Paderes of September 24, 1976 (supra). According to the guidelines, for a loan's interest to be subject to the increases provided in CIRCULAR No. 494, there must be an Escalation Clause allowing the increase "in the event that any law or Central Bank regulation is promulgated increasing the maximum interest rate for loans." The guidelines thus presuppose that a Central Bank regulation is not within the term "any law." The distinction is again recognized by P.D. No. 1684, promulgated on March 17, 1980, adding section 7-a to the Usury Law, providing that parties to an agreement pertaining to a loan could stipulate that the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest is increased "by law or by the Monetary Board." To quote:

OF

THE

G.R. No. 101771 December 17, 1996

FACTS: Petitioner Gilda FLorendo was an employee of respondent Ban from May 17, 1976 to August 16, 1984. However, before her resignation, she applied for a housing loan of P148,000, payable within 25 years from the Bank’s Provident Fund. Under the Loan Agreement, a Real Estate Mortgage and Promissory Note was executed. On March 19, 1985, the Bank increased the interest rate on said loan from 9% to 17%, the said increase to take effect on March 19, 1985 and petitioner was informed for said increase. Petitioners protested the increase without any heed from the Bank. The Bank continued to demand the increased interest or the new monthly installments based on the increased interest rates, but petitioner vehemently maintained that the said increase is unlawful and unjustifiable. Because of the Bank’s repeated demands, the petitioner filed the instant injunction suit and damages. The clauses or provisions in the Housing Loan Agreement and the Real Estate Mortgage as the basis for the escalation are: a. Section I-F of Article VI of the Housing Loan Agreement, 3 which provides that, for as long as the loan or any portion thereof or any sum that may be due and payable under the said loan agreement remains outstanding, the borrower shall —

Sec. 7-a Parties to an agreement pertaining to a loan or forbearance of money, goods or credits may stipulate that the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest is increased by law or by the Monetary Board:

f) Comply with all the rules and regulations of the program imposed by the LENDER and to comply with all the rules and regulations that the Central Bank of the Philippines has imposed or will impose in connection with the financing programs for bank officers and employees in the form of fringe benefits.

Provided, That such stipulation shall be valid only if there is also a stipulation in the agreement that the rate of interest agreed upon shall

b. Paragraph (f) of the Real Estate Mortgage which states:

74


The rate of interest charged on the obligation secured by this mortgage. . ., shall be subject, during the life of this contract, to such an increase/decrease in accordance with prevailing rules, regulations and circulars of the Central Bank of the Philippines as the Provident Fund Board of Trustees of the Mortgagee may prescribe for its debtors and subject to the condition that the increase/decrease shall only take effect on the date of effectivity of said increase/decrease and shall only apply to the remaining balance of the loan. c. and ManCom (Management Committee) Resolution No. 85-08, together with PF (Provident Fund) Memorandum Circular No. 85-08, which escalated the interest rates on outstanding housing loans of bank employees who voluntarily "secede" (resign) from the Bank; the range of rates varied depending upon the number of years service rendered by the employees concerned. The rates were made applicable to those who had previously resigned from the bank as well as those who would be resigning in the future. The trial court ruled in favor of respondent bank, and held that the bank was vested with authority to increase the interest rate (and the corresponding monthly amortizations) pursuant to said escalation provisions in the housing loan agreement and the mortgage contract. On appeal, the respondent court affirmed the trial court. ISSUE: WON the escalation clause is valid? HELD: Yes. Petitioners argue that the HLA provision covers only administrative and other matters, and does not include interest rates per se, since Article VI of the agreement deals with insurance on and upkeep of the mortgaged property. As for the stipulation in the mortgage deed, they claim that it is vague because it does not state if the "prevailing" CB rules and regulations referred to therein are those prevailing at the time of the execution of these contracts or at the time of the increase or decrease of the interest rate. They insist that the bank's authority to escalate interest rates has not been shown to be "crystal-clear as a matter of fact" and established beyond doubt. The contracts being "contracts of adhesion," any vagueness in their provisions should be interpreted in favor of petitioners. We note that Section 1-F of Article VI of the HLA cannot be read as an escalation clause as it does not make any reference to increases or decreases in the interest rate on loans. However, paragraph (f) of the mortgage contract is clearly and indubitably an escalation provision, and therefore, the parties were and are bound by the said stipulation that "(t)he rate of interest charged on the obligation secured by this mortgage . . ., shall be subject, during the life of this contract, to such an increase/decrease in accordance with prevailing rules, regulations and circulars of the Central Bank of the Philippines as the Provident Fund Board of Trustees of the Mortgagee (respondent bank) may prescribe for its debtors . . . ." Contrary to petitioners' allegation, there is no vagueness in the aforequoted proviso; even their own arguments (below) indicate that this provision is quite clear to them. In Banco Filipino Savings & Mortgage Bank vs. Navarro, this Court in essence ruled that in general there is nothing inherently wrong with escalation clauses. In IBAA vs. Spouses Salazar, the Court reiterated the rule that escalation clauses are valid stipulations in commercial contracts to maintain fiscal stability and to retain the value of money in long term contracts. ISSUE2: WON the Bank may validly increase the interest rate? HELD: No. In Banco Filipino, this Court, speaking through Mme. Justice Ameurfina M. Herrera, disallowed the bank from increasing the interest rate on the subject loan from 12% to 17% despite an escalation clause in the loan agreement authorizing the bank to "correspondingly increase the interest rate stipulated in this contract without advance notice to me/us in

the event a law should be enacted increasing the lawful rates of interest that may be charged on this particular kind of loan". In said case, the bank had relied upon a Central Bank circular as authority to up its rates.

The Court ruled that CB Circular No. 494, although it has the effect of law, is not a law, but an administrative regulation.

75


In PNB vs. Court of Appeals, this Court disallowed the increases in interest rate imposed by the petitioner-bank therein, on the ground, among others, that said bank relied merely on its own Board Resolution (No. 681), PNB Circular No. 40-79-84, and PNB Circular No. 40-129-84, which were neither laws nor resolutions of the Monetary Board. In the case at bar, the loan was perfected on July 20, 1983. PD No. 116 became effective on January 29, 1973. CB Circular No. 416 was issued on July 29, 1974. CB Circ. 504 was issued February 6, 1976. CB Circ. 706 was issued December 1, 1979. CB Circ. 905, lifting any interest rate ceiling prescribed under or pursuant to the Usury Law, as amended, was promulgated in 1982. These and other relevant CB issuances had already come into existence prior to the perfection of the housing loan agreement and mortgage contract, and thus it may be said that these regulations had been taken into consideration by the contracting parties when they first entered into their loan contract. In light of the CB issuances in force at that time, respondent bank was fully aware that it could have imposed an interest rate higher than 9% per annum rate for the housing loans of its employees, but it did not. In the subject loan, the respondent bank knowingly agreed that the interest rate on petitioners' loan shall remain at 9% p.a. unless a CB issuance is passed

authorizing an increase (or decrease) in the rate on such employee loans and the Provident Fund Board of Trustees acts accordingly. Thus, as far as

the parties were concerned, all other onerous factors, such as employee resignations, which could have been used to trigger an application of the escalation clause were considered barred or waived. If the intention were otherwise, they — especially respondent bank — should have included such factors in their loan agreement. ManCom Resolution No. 85-08, which is neither a rule nor a resolution of the Monetary Board, cannot be used as basis for the escalation in lieu of CB issuances, since paragraph (f) of the mortgage contract very categorically specifies that any interest rate increase be in accordance with "prevailing rules, regulations and circulars of the Central Bank . . . as the Provident Fund Board . . . may prescribe." The Banco Filipino and PNB doctrines are applicable four-square in this case. As a matter of fact, the said escalation clause further provides that the increased interest rate "shall only take effect on the date of effectivity of (the) increase/decrease" authorized by the CB rule, regulation or circular. Without such CB issuance, any proposed increased rate will never become effective. We have already mentioned (and now reiterate our holding in several cases) that by virtue of CB Circular 905, the Usury Law has been rendered ineffective. Thus, petitioners' contention that the escalation clause is violative of the said law is bereft of any merit. On the other hand, it will not be amiss to point out that the unilateral determination and imposition of increased interest rates by the herein respondent bank is obviously violative of the principle of mutuality of contracts ordained in Article 1308 of the Civil Code. As this Court held in PNB: In order that obligations arising from contracts may have the force of law between the parties, there must be mutuality between the parties based on their essential equality. A contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that the . . . loan agreement between the PNB and the private respondent gave the PNB a license (although in fact there was none) to increase the interest rate at will during the term of the loan, that license would have been null and void for being violative of the principle of mutuality essential in contracts. It would have invested the loan agreement with the character of a contract of adhesion, where the parties do not bargain on equal footing, the weaker party's (the debtor) participation being reduced to the alternative "to take it or leave it" (Qua vs. Law Union & Rock Insurance Co., 95 Phil 85). Such a contract is a veritable trap for the weaker party whom the courts of justice must protect against abuse and imposition.

The respondent bank tried to sidestep this difficulty by averring that petitioner Gilda Florendo as a former bank employee was very knowledgeable concerning respondent bank's lending rates and procedures, and therefore, petitioners were "on an equal footing" with respondent bank as far as the subject loan contract was concerned. That may have been true insofar as entering into the original loan agreement and mortgage contract was concerned. However, that does not hold true when it comes to the determination and imposition of escalated rates of interest as unilaterally provided in the ManCom Resolution, where she had no voice at all in its preparation and application. To allay fears that respondent bank will inordinately be prejudiced by being stuck with this "sweetheart loan" at patently concessionary interest rates, which according to respondent bank is the "sweetest deal" anyone could obtain and is an act of generosity considering that in 1985 lending rates in the banking industry were peaking well over 30% p.a., we need only point out that the bank had the option to impose in its loan contracts the condition that resignation of an employee-borrower would be a ground for escalation. The fact is it did not. Hence, it must live with such omission. And it would be totally unfair to now impose said condition, not to mention that it would violate the principle of mutuality of consent in contracts. It goes without saying that such escalation ground can be included in future contracts — not to agreements already validly entered into. Let it be clear that this Court understands respondent bank's position that the concessional interest rate was really intended as a means to remunerate its employees and thus an escalation due to resignation would have been a valid stipulation. But no such stipulation was in fact made, and thus the escalation provision could not be legally applied and enforced as against herein petitioners. WHEREFORE, the petition is hereby GRANTED. The Court hereby REVERSES and SETS ASIDE the challenged Decision of the Court of Appeals. The interest rate on the subject housing loan remains at nine (9) percent per annum and the monthly amortization at P1,248.72. NON-INVOLVEMENT CLAUSE: prohibiting an employee, during his employment and after separation, from engaging or be involved with any corporation, association or entity, whether directly or indirectly, engaged in the same business or belonging to the same industry. This clause may be valid, provided there are limitations as to the period, the industry or the area or location where the prohibition applies. (see Tiu vs.

Platinum Plans, Inc.)

DAISY B. TIU, Petitioner vs. PLATINUM PLANS PHIL., INC., Respondent.

G.R. No. 163512

February 28, 2007

FACTS: Respondent Platinum Plans Philippines, Inc. is a domestic corporation engaged in the pre-need industry. From 1987 to 1989, petitioner Daisy B. Tiu was its Division Marketing Director. On January 1, 1993, respondent re-hired petitioner as Senior Assistant Vice-President and Territorial Operations Head in charge of its Hongkong and Asean operations. The parties executed a contract of employment valid for five years. On September 16, 1995, petitioner stopped reporting for work. In November 1995, she became the Vice-President for Sales of Professional Pension Plans, Inc., a corporation engaged also in the pre-need industry. Consequently, respondent sued petitioner for damages alleging, among others, that petitioner’s employment with Professional Pension Plans, Inc. violated the non-involvement clause in her contract of employment, to wit: 8. NON INVOLVEMENT PROVISION – The EMPLOYEE further undertakes that during his/her engagement with EMPLOYER and in case of separation from the Company, whether voluntary or for cause, he/she shall not, for the next TWO (2) years thereafter, engage in or be involved with any corporation, association or entity, whether directly or indirectly, engaged in the same business or belonging to the same pre-need industry as the EMPLOYER. Any breach of the foregoing

76


provision shall render the EMPLOYEE liable to the EMPLOYER in the amount of One Hundred Thousand Pesos (P100,000.00) for and as liquidated damages. In upholding the validity of the non-involvement clause, the trial court ruled that a contract in restraint of trade is valid provided that there is a limitation upon either time or place. In the case of the pre-need industry, the trial court found the two-year restriction to be valid and reasonable. On appeal, the CA affirmed the trial court’s ruling holding that petitioner entered into the contract on her own will and volition. Thus, she bound herself to fulfill not only what was expressly stipulated in the contract, but also all its consequences that were not against good faith, usage, and law. The appellate court also ruled that the stipulation prohibiting nonemployment for two years was valid and enforceable considering the nature of respondent’s business. ISSUE: WON the non-involvement clause is valid? HELD: Yes. Petitioner avers that the non-involvement clause is offensive to public policy since the restraint imposed is much greater than what is necessary to afford respondent a fair and reasonable protection. She adds that since the products sold in the pre-need industry are more or less the same, the transfer to a rival company is acceptable. Petitioner also points out that respondent did not invest in her training or improvement. At the time she joined respondent, she already had the knowledge and expertise required in the pre-need industry. Finally, petitioner argues that a strict application of the non-involvement clause would deprive her of the right to engage in the only work she knows. Respondent counters that the validity of a non-involvement clause has been sustained by the Supreme Court in a long line of cases. It contends that the inclusion of the two-year non-involvement clause in petitioner’s contract of employment was reasonable and needed since her job gave her access to the company’s confidential marketing strategies. Respondent adds that the non-involvement clause merely enjoined her from engaging in pre-need business akin to respondent’s within two years from petitioner’s separation from respondent. She had not been prohibited from marketing other service plans. As early as 1916, we already had the occasion to discuss the validity of a non-involvement clause. In Ferrazzini v. Gsell, we said that such clause was unreasonable restraint of trade and therefore against public policy. In Ferrazzini, the employee was prohibited from engaging in any business or occupation in the Philippines for a period of five years after the termination of his employment contract and must first get the written permission of his employer if he were to do so. The Court ruled that while the stipulation was indeed limited as to time and space, it was not limited as to trade. Such prohibition, in effect, forces an employee to leave the Philippines to work should his employer refuse to give a written permission. In G. Martini, Ltd. v. Glaiserman, we also declared a similar stipulation as void for being an unreasonable restraint of trade. There, the employee was prohibited from engaging in any business similar to that of his employer for a period of one year. Since the employee was employed only in connection with the purchase and export of abaca, among the many businesses of the employer, the Court considered the restraint too broad since it effectively prevented the employee from working in any other business similar to his employer even if his employment was limited only to one of its multifarious business activities. However, in Del Castillo v. Richmond, we upheld a similar stipulation as legal, reasonable, and not contrary to public policy. In the said case, the employee was restricted from opening, owning or having any connection with any other drugstore within a radius of four miles from the employer’s place of business during the time the employer was operating his drugstore. We said that a contract in restraint of trade is valid provided there is a limitation upon either time or place and the restraint upon one party is not greater than the protection the other party requires. Finally, in Consulta v. Court of Appeals, we considered a non-involvement clause in accordance with Article 1306 of the Civil Code. While the

complainant in that case was an independent agent and not an employee, she was prohibited for one year from engaging directly or indirectly in activities of other companies that compete with the business of her principal. We noted therein that the restriction did not prohibit the agent from engaging in any other business, or from being connected with any other company, for as long as the business or company did not compete with the principal’s business. Further, the prohibition applied only for one year after the termination of the agent’s contract and was therefore a reasonable restriction designed to prevent acts prejudicial to the employer.

salary is contrary to such policy is void for being contrary to such public policy.

Conformably then with the aforementioned pronouncements, a noninvolvement clause is not necessarily void for being in restraint of trade as long as there are reasonable limitations as to time, trade, and place.



In this case, the non-involvement clause has a time limit: two years from the time petitioner’s employment with respondent ends. It is also limited as to trade, since it only prohibits petitioner from engaging in any pre-need business akin to respondent’s.

EMETERIO CUI, plaintiff-appellant, vs. ARELLANO UNIVERSITY, defendant-appellee.

More significantly, since petitioner was the Senior Assistant Vice-President and Territorial Operations Head in charge of respondent’s Hongkong and Asean operations, she had been privy to confidential and highly sensitive marketing strategies of respondent’s business. To allow her to engage in a rival business soon after she leaves would make respondent’s trade secrets vulnerable especially in a highly competitive marketing environment. In sum, we find the non-involvement clause not contrary to public welfare and not greater than is necessary to afford a fair and reasonable protection to respondent.

FACTS: Emetrio Cui, plaintiff, before the school year 1948-1949 took up preparatory law course in the defendant University. After finishing his preparatory law course plaintiff enrolled in the College of Law of the defendant from the school year 1948-1949. Plaintiff finished his law studies in the defendant university up to and including the first semester of the fourth year. During all the school years in which plaintiff was studying law in defendant law college, Francisco R. Capistrano, uncle of Emetrio Cui, was the dean of the College of Law and legal counsel of the defendant university. Plaintiff enrolled for the last semester of his law studies in the defendant university but failed to pay his tuition fees because his uncle Dean Francisco R. Capistrano having severed his connection with defendant and having accepted the deanship and chancellorship of the College of Law of Abad Santos University, plaintiff left the defendant's law college and enrolled for the last semester of his fourth year law in the college of law of the Abad Santos University graduating from the college of law of the latter university.

In any event, Article 1306 of the Civil Code provides that parties to a contract 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. Article 1159 of the same Code also provides that obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. Courts cannot stipulate for the parties nor amend their agreement where the same does not contravene law, morals, good customs, public order or public policy, for to do so would be to alter the real intent of the parties, and would run contrary to the function of the courts to give force and effect thereto. Not being contrary to public policy, the non-involvement clause, which petitioner and respondent freely agreed upon, has the force of law between them, and thus, should be complied with in good faith. Thus, as held by the trial court and the Court of Appeals, petitioner is bound to pay respondent P100,000 as liquidated damages. While we have equitably reduced liquidated damages in certain cases, we cannot do so in this case, since it appears that even from the start, petitioner had not shown the least intention to fulfill the non-involvement clause in good faith. BAR QUESTION: Alma was hired as a domestic helper in Hongkong by the Dragon Services, Ltd., through its local agent. She executed a standard employment contract designed by the Philippine Overseas Workers Administration (POEA) for overseas Filipino workers. It provided for her employment for one year at a salary of US$1,000.00 a month. It was submitted to and approved by the POEA. However, when she arrived in Hongkong, she was asked to sign another contract by Dragon Services, Ltd. which reduced her salary to only US$600.00 a month. Having no other choice, Alma signed the contact but when she returned to the Philippines, she demanded payment of the salary differential of US$400.00 a month. Both Dragon Services, Ltd. and its local agent claimed that the second contract is valid under the laws of Hongkong, and therefore binding on Alma. Is their claim correct? Explain ANSWER: No. Just because a contract is valid in the place where it was celebrated, it can be enforced here in the Philippines. The Philippine Constitution affords full protection to labor. Such stipulation reducing the

77


STIPULATIONS WHICH ARE VOID FOR BEING CONTRARY TO PUBLIC POLICY:  Refund of tuition fees during the time a student is covered by a scholarship, if such student transfers schools. Scholarships are granted not to attract and to keep brilliant students in school for their

propaganda mine but to reward merit or help gifted students in whom society has an established interest or a first lien. (see Cui vs. Arellano)

Prohibiting a losing candidate in a convention to run as an independent candidate which contrary to constitutionality protected right to be elected in public office and the right of the electorate to choose. (see

Saura vs. Sindico)

G.R. No. L-15127

May 30, 1961

Plaintiff, during all the time he was studying law in defendant university was awarded scholarship grants, for scholastic merit, so that his semestral tuition fees were returned to him after the ends of semester. The whole amount of tuition fees paid by plaintiff to defendant and refunded to him by the latter from the first semester up to and including the first semester of his last year in the college of law or the fourth year, is in total P1,033.87. After graduating in law from Abad Santos University he applied to take the bar examination. To secure permission to take the bar he needed the transcripts of his records in defendant Arellano University. Plaintiff petitioned the latter to issue to him the needed transcripts. The defendant refused until after he had paid back the P1,033.87 which defendant refunded to him as above stated. As he could not take the bar examination without those transcripts, plaintiff paid to defendant the said sum under protest. This is the sum which plaintiff seeks to recover from defendant in this case. Before defendant awarded to plaintiff the scholarship grants as above stated, he was made to sign the following contract covenant and agreement: "In consideration of the scholarship granted to me by the University, I hereby waive my right to transfer to another school without having refunded to the University (defendant) the equivalent of my scholarship cash. (Sgd.) Emeterio Cui". It is admitted that, on August 16, 1949, the Director of Private Schools issued Memorandum No. 38, series of 1949, on the subject of "Scholarship," addressed to "All heads of private schools, colleges and universities," reading: 1. School catalogs and prospectuses submitted to this Bureau show that some schools offer full or partial scholarships to deserving students — for excellence in scholarship or for leadership in extracurricular activities. Such inducements to poor but gifted students

should be encouraged. But to stipulate the condition that such scholarships are good only if the students concerned continue in the same school nullifies the principle of merit in the award of these scholarships. 2. When students are given full or partial scholarships, it is understood that such scholarships are merited and earned. The amount in tuition and other fees corresponding to these scholarships should not be subsequently charged to the recipient students when they decide to quit school or to transfer to another institution. Scholarships should not be offered merely to attract and keep students in a school. 3. Several complaints have actually been received from students who have enjoyed scholarships, full or partial, to the effect that they could not transfer to other schools since their credentials would not be released unless they would pay the fees corresponding to the period of the scholarships. Where the Bureau believes that the right of the student to transfer is being denied on this ground, it reserves the right to authorize such transfer. The plaintiff asked the Bureau of Private Schools to pass upon the issue on his right to secure the transcript of his record in defendant University, without being required to refund the sum of P1,033.87 and was upheld by the Bureau. However, defendant still refused to release the transcript of records. As above stated, plaintiff was, accordingly, constrained to pay, and did pay under protest, said sum of P1,033.87, in order that he could take the bar examination in 1953. Subsequently, he brought this action for the recovery of said amount, aside from P2,000 as moral damages, P500 as exemplary damages, P2,000 as attorney's fees, and P500 as expenses of litigation. In its answer, defendant reiterated the stand it took, vis-a-vis the Bureau of Private Schools, namely, that the provisions of its contract with plaintiff are valid and binding and that the memorandum above-referred to is null and void. The trial court ruled in favor of defendant and upheld the validity of the above-quoted provision. ISSUE: WON the above-quoted provision of the contract between plaintiff and the defendant, whereby the former waived his right to transfer to another school without refunding to the latter the equivalent of his scholarships in cash, is valid? HELD: No. We are of the opinion that the stipulation in question is contrary to public policy and, hence, null and void. The aforesaid memorandum merely incorporates a sound principle of public policy. As the Director of Private Schools correctly pointed, out in his letter, Exhibit B, to the defendant, There is one more point that merits refutation and that is whether or not the contract entered into between Cui and Arellano University on September 10, 1951 was void as against public policy. In the case of Zeigel vs. Illinois Trust and Savings Bank, 245 Ill. 180, 19 Ann. Case 127, the court said: 'In determining a public policy of the state, courts are limited to a consideration of the Constitution, the judicial decisions, the statutes, and the practice of government officers.' It might take more than a government bureau or office to lay down or establish a public policy, as alleged in your communication, but courts consider the practices of government officials as one of the four factors in determining a public policy of the state. It has been consistently held in America that under the principles relating to the doctrine of public policy, as applied to the law of contracts, courts of justice will not recognize or uphold a transaction which its object, operation, or tendency is calculated to be prejudicial to the public welfare, to sound morality or to civic honesty. If Arellano University understood clearly the real essence of scholarships and the motives which prompted this office to issue Memorandum No. 38, s. 1949, it should have not entered into a contract of waiver with Cui on September 10, 1951, which is a direct violation of our Memorandum and an open challenge to the authority of the Director of Private Schools because the contract was repugnant to sound morality and civic honesty. And finally, in Gabriel vs. Monte de Piedad, Off. Gazette Supp. Dec. 6,

78


1941, p. 67 we read: 'In order to declare a contract void as against public policy, a court must find that the contract as to consideration or the thing to be done, contravenes some established interest of society, or is inconsistent with sound policy and good morals or tends clearly to undermine the security of individual rights. The policy enunciated in Memorandum No. 38, s. 1949 is sound policy. Scholarships are awarded in

recognition of merit not to keep outstanding students in school to bolster its prestige. In the understanding of that university scholarships award is a business scheme designed to increase the business potential of an education institution. Thus conceived it is not only

inconsistent with sound policy but also good morals. But what is morals? Manresa has this definition. It is good customs; those generally accepted principles of morality which have received some kind of social and practical confirmation. The practice of awarding scholarships to attract students and keep them in school is not good customs nor has it received some kind of social and practical confirmation except in some private institutions as in Arellano University. The University of the Philippines which implements Section 5 of Article XIV of the Constitution with reference to the giving of free scholarships to gifted children, does not require scholars to reimburse the corresponding value of the scholarships if they transfer to other schools. So also with the leading colleges and universities of the United States after which our educational practices or policies are patterned. In these institutions, scholarships are granted not to attract and to

keep brilliant students in school for their propaganda mine but to reward merit or help gifted students in whom society has an established interest or a first lien. (Emphasis supplied.)

WHEREFORE, the decision appealed from is hereby reversed and another one shall be entered sentencing the defendant to pay to the plaintiff the sum of P1,033.87, with interest thereon at the legal rate from September 1, 1954, date of the institution of this case, as well as the costs, and dismissing defendant's counterclaim. It is so ordered. RAMON E. SAURA, plaintiff-appellant, vs. ESTELA P. SINDICO, defendant-appellee.

G.R. No. L-13403

March 23, 1960

FACTS: Ramon E. Saura and Estela P. Sindico were contesting for nomination as the official candidate of the Nacionalista Party in the fourth district of Pangasinan in the congressional elections of November 12, 1957. On August 23, 1957, the parties entered into a written agreement bearing the same date, containing among other matters stated therein, a pledge that — Each aspirant shall respect the result of the aforesaid convention, i.e., no one of us shall either run as a rebel or independent candidate after losing in said convention. In the provincial convention, Saura was elected and proclaimed the Party's official congressional candidate for the aforesaid district of Pangasinan. Nonetheless, Sindico, in disregard of the covenant, filed, on September 6, 1957, her certificate of candidacy for the same office with the COMELEC, and she openly and actively campaigned for her election. Wherefore, on October 5, 1957, plaintiff Saura commenced this suit for the recovery of damages which was dismissed on the basis that the agreement sued upon is null and void, in that (1) the subject matter of the contract, being a public office, is not within the commerce of man; and (2) the "pledge" was in curtailment of the free exercise of elective franchise and therefore against public policy. Hence, this appeal. ISSUE: WON the agreement in question is valid? HELD: No. Among those that may not be the subject matter (object) of contracts are certain rights of individuals, which the law and public policy have deemed wise to exclude from the commerce of man. Among them are the political rights conferred upon citizens, including, but not limited to, one's right to vote, the right to present one's candidacy to the people and to be voted to public office, provided, however, that all the qualifications prescribed by law obtain. Such rights may not, therefore, be

bargained away curtailed with impunity, for they are conferred not for individual or private benefit or advantage but for the public good and interest. Constitutional and statutory provision fix the qualifications of persons who may be eligible for certain elective public offices. Said requirements may neither be enlarged nor reduced by mere agreements between private parties. A voter possessing all the qualifications required to fill an office may, by himself or through a political party or group, present his candidacy without further limitations than those provided by law.

Every voter has a right to be a candidate for public office if he possesses the qualifications required to fill the office. It does not

person, whose decision shall not be binding until it has been made known to both contracting parties. (n) Art. 1310. The determination shall not be obligatory if it is evidently inequitable. In such case, the courts shall decide what is equitable under the circumstances. Art. 1182. When the fulfillment of the condition depends upon the sole will of the debtor, the conditional obligation shall be void. If it depends upon chance or upon the will of a third person, the obligation shall take effect in conformity with the provisions of this Code. (1115) ACCELERATION

necessarily follow that he can be the candidate of a particular political party. The statute provides when and how one may be a candidate of

a political party. If he cannot fill the requirement so as to be the candidates of the political party of his choice, he may still be a candidate at the general election by petition. The right of the voter to vote at the general election for whom he pleases cannot be limited. (Roberts vs. Cleveland, Secretary of State of State of New Mexico, 48 NM 226, 149 P (2d) 120, 153 A.L.R. 635, 637-638) (Emphasis supplied)

In common law, certain agreements in consideration of the withdrawal of candidates for office have invariably been condemned by the courts as being against public policy, be it a withdrawal from the race for nomination or, after nomination, from the race for election. In the case at hand, plaintiff complains on account of defendant's alleged violation of the "pledge" in question by filing her own certificate o candidacy for a seat in the Congress of the Philippines and in openly and actively campaigning for her election. In the face of the preceding considerations, we certainly cannot entertain plaintiff's action, which would result in limiting the choice of the electors to only those persons selected by a small group or by party boses. The case of Pendleton vs. Pace, cited by the appellant, is clearly inapplicable. The court there only sanctioned the validity of an agreement by the opposing candidates for nomination setting aside and re-submitting the nomination for another primary election on account of the protest or contest filed by the losing candidate in the first primary election. To abandon the contest proceedings, the candidates for nomination agreed to submit again their nomination to the electors in the subsequent primary. Appellant likewise cites and quotes a portion of our ruling in Monsale vs. Nico, to the effect that it is not incompetent or a candidate to withdraw or annul his certificate of candidacy. This is not in point, for while we stated there that he may do so, there being no legal prohibition against such a voluntary withdrawal, it does not follow, nor did we imply anywhere in the decision, that in case there is any agreement or consideration for such a withdrawal, said agreement or consideration should be held valid or given effect. We find it unnecessary to discuss the other points raised by the parties. Wherefore, the order of dismissal appealed from is hereby affirmed. STIPULATION WHICH IS VOID FOR BEING CONTRARY TO MORALS: in a contract of loan, where the interest rate is 50%, is void for being contrary to morals, the same being unconscionable, confiscatory, exorbitant, excessive or inequitable, not because of it is usurious. 3.

MUTUALITY – ARTS. 1308-1310, 1182

Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them. (1256a)

4.

Art. 1309. The determination of the performance may be left to a third

79


and

ESCALATION

CLAUSE

(see

OBLIGATORY FORCE OF CONTRACTS – ARTS. 1159, 13151316, 749

Art. 1159. Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. (1091a) Art. 1315. Contracts are perfected by mere consent, and from that moment the parties are bound not only to the fulfillment of what has been expressly stipulated but also to all the consequences which, according to their nature, may be in keeping with good faith, usage and law. (1258) Art. 1316. Real contracts, such as deposit, pledge and Commodatum, are not perfected until the delivery of the object of the obligation. Art. 749. In order that the donation of an immovable may be valid, it must be made in a public document, specifying therein the property donated and the value of the charges which the donee must satisfy. The acceptance may be made in the same deed of donation or in a separate public document, but it shall not take effect unless it is done during the lifetime of the donor. If the acceptance is made in a separate instrument, the donor shall be notified thereof in an authentic form, and this step shall be noted in both instruments. (633) 5.

RELATIVITY OF CONTRACTS – ARTS. 1311-1314, 1177-1178, 1381(3)

Art. 1311. Contracts take effect only between the parties, their assigns and heirs, except in case where the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law. The heir is not liable beyond the value of the property he received from the decedent. If a contract should contain some stipulation in favor of a third person, he may demand its fulfillment provided he communicated his acceptance to the obligor before its revocation. A mere incidental benefit or interest of a person is not sufficient. The contracting parties must have clearly and deliberately conferred a favor upon a third person. (1257a) Art. 1178. Subject to the laws, all rights acquired in virtue of an obligation are transmissible, if there has been no stipulation to the contrary. (1112) PRIVITY OF CONTRACTS: means that the contract takes effect only between the parties, their assigns and heirs which are referred to as privies.

When not transmissible: a.

Validity or compliance: not extinguishment. As such, in a contract of lease which may be terminated upon the will of the lessee by simply giving notice to the lessor, the same is valid and does not violate the mutuality of contracts principle. The principle pertains to validity or compliance and not termination of contracts.

CLAUSE

Autonomy of Contracts)

b.

When the nature of the obligation is that it is not transmissible: when the rights are purely or strictly personal in nature, i.e., the qualifications and skills of the person have been considered in the constitution of the contract. By stipulation: e.g. the right to sublease is granted by law, but may be prohibited by stipulation.

c.

By provision of law: e.g. heirs as to the usufruct. The law provides that the rights of a usufructuary shall not be transmitted to the heirs, unless the parties stipulate otherwise.

contract on that ground. The plaintiff disputes this by alleging that since the contract was executed in the Philippines under whose law the age of majority is 18 years, he was no longer a minor at the time of perfection of the contract.

Third Parties: as a general rule do not have a cause of action to enforce or annul a contract.

Suppose XYZ Corporation is impleaded as co-defendant, what would be the basis of its liability, if any? (2%)

Exceptions: a.

Third person may be bound by the contract:

ANSWER: 1314. Interference by a third person. When a person maliciously induced another.

Art. 1312. In contracts creating real rights, third persons who come into possession of the object of the contract are bound thereby, subject to the provisions of the Mortgage Law and the Land Registration Laws. (n)

Who is liable? Both the debtor who failed to comply and the third party

who maliciously induced such non-compliance. However, the liability of the third party cannot be greater than that of the debtor who is guilty of breach of contract.

Example: in a contract of mortgage where the mortgagor A sold his property to C. C shall be bound by the contract of mortgage on the premise that the mortgage in favor of B, the mortgagor, is registered. This is because real rights attaches to the property. As such, under Art. 1312, any person who comes into the possession of said real property shall be bound by the encumbrance therein, i.e., the mortgage.

BAR QUESTION: Roland, a basketball star, was under contract for one year to play-for-play exclusively for Lady Love, Inc. However, even before the basketball season could open, he was offered a more attractive pay plus fringe benefits by Sweet Taste, Inc. Roland accepted the offer and transferred to Sweet Taste. Lady Love sues Roland and Sweet Taste for breach of contract. Defendants claim that the restriction to play for Lady Love alone is void, hence, unenforceable, as it constitutes an undue interference with the right of Roland to enter into contracts and the impairment of his freedom to play and enjoy basketball.

The exception to the above example, is when the mortgage is not registered. Accordingly, the buyer, C, will not be bound by it. b.

A creditor may initiate an action against the contracting parties

Can Roland be bound by the contract he entered into with Lady Love or can he disregard the same? Is he liable at all? How about Sweet Taste? Is it liable to Lady Love?

Art. 1313. Creditors are protected in cases of contracts intended to defraud them. (n)

ANSWER: Yes. Roland is bound under Art. 1159, obligations arising from contract have the force of law between the parties.

Art. 1177. The creditors, after having pursued the property in possession of the debtor to satisfy their claims, may exercise all the rights and bring all the actions of the latter for the same purpose, save those which are inherent in his person; they may also impugn the acts which the debtor may have done to defraud them. (1111) Art. 1381. The following contracts are rescissible: xxx (3) Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them; xxx

Yes, he is liable for breach of contract. He can be held liable with Sweet Taste under Art. 1314, this can be considered malicious interference to violate the contract. d.

Art. 1311. xxx If a contract should contain some stipulation in favor of a third person, he may demand its fulfillment provided he communicated his acceptance to the obligor before its revocation. A mere incidental benefit or interest of a person is not sufficient. The contracting parties must have clearly and deliberately conferred a favor upon a third person.

Rescission by accion pauliana. As such, the creditor has a cause of action against the acts of the debtor and any person he contracts with, where the contract is to defraud the creditor, i.e., the creditor will have a right to rescind said contract. c.

Third persons may be liable under a contract

Subject matter: must be secondary or incidental only, not the main

Art. 1314. Any third person who induces another to violate his contract shall be liable for damages to the other contracting party.

object of the contract. E.g., in a contract of loan with a stipulation that the interests are payable to a third person.

Malicious interference by third persons: as the name implies, there

Communication of acceptance to the obligor is required. No form is

should be malice or a malicious inducement by the third person as a result of which, the debtor does not comply with his obligation under the contract, which necessarily implies that such third person has knowledge of the existence of the contract.

required. It can even be implied from the acts of the third person.

Revocation: cannot be done by one party alone. The Supreme Court

has held that if this revocation is a unilateral act of one of the parties, it is void for violation of the principle of mutuality of contracts. For a revocation to take effect, it must be with consent of both parties (obligor and oblige) and should be done before the communication of acceptance to the obligor.

How to know if there was malice: usually, the words use would indicate malice, e.g., “entice,” sometimes, it may be inferred from the circumstances, i.e., where a party entice an employee of another to leave by offering him a better compensation package.

BAR QUESTION: Francis Albert, a citizen and resident of New Jersey U.S.A., under whose law he was still a minor, being only 20 years of age, was hired by ABC Corporation of Manila to serve for two years as its chief computer programmer. But after serving for only four months, he resigned to join XYZ Corporation, which enticed him by offering more advantageous terms. His first employer sues him in Manila for damages arising from the breach of his contract of employment. He sets up his minority as a defense and asks for annulment of the

80


Third persons may be benefited by a contract – 2nd paragraph of Art. 1311, otherwise known as a stipulation pour atrui.

C. 1.

CLASSIFICATION OF CONTRACTS ACCORDING TO DEGREE OF DEPENDENCE a.

PREPARATORY – ARTS. 1479, 1767, 1868

Art. 1479. A promise to buy and sell a determinate thing for a price certain is reciprocally demandable.

An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon the promissor if the promise is supported by a consideration distinct from the price. (1451a) Art. 1767. By the contract of partnership two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves.

a.

CONSENSUAL – are those perfected by mere consent.

Art. 1315. Contracts are perfected by mere consent, and from that moment the parties are bound not only to the fulfillment of what has been expressly stipulated but also to all the consequences which, according to their nature, may be in keeping with good faith, usage and law. (1258)

Two or more persons may also form a partnership for the exercise of a profession. (1665a)

Art. 1475. The contract of sale is perfected at the moment there is a meeting of minds upon the thing which is the object of the contract and upon the price.

Art. 1868. By the contract of agency a person binds himself to render some service or to do something in representation or on behalf of another, with the consent or authority of the latter. (1709a)

From that moment, the parties may reciprocally demand performance, subject to the provisions of the law governing the form of contracts. (1450a)

b.

PRINCIPAL – ARTS. 1458, 1638, 1642, 1933, 1962

Art. 1458. By the contract of sale one of the contracting parties obligates himself to transfer the ownership and to deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent. A contract of sale may be absolute or conditional. (1445a) Art. 1638. By the contract of barter or exchange one of the parties binds himself to give one thing in consideration of the other's promise to give another thing. (1538a) Art. 1642. The contract of lease may be of things, or of work and service. (1542) Art. 1933. By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter may use the same for a certain time and return it, in which case the contract is called a commodatum; or money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be paid, in which case the contract is simply called a loan or mutuum.

Commodatum is essentially gratuitous. Simple loan may be gratuitous or with a stipulation to pay interest. In commodatum the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes to the borrower. (1740a) c.

ACCESSORY – those which cannot stand on its own and are dependent upon other contracts for its validity. E.g., guaranty, suretyship, mortgage and antichresis.

Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In such case the contract is called a suretyship. (1822a) Art. 2085. The following requisites are essential to the contracts of pledge and mortgage: (1) That they be constituted to secure the fulfillment of a principal obligation; (2) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged; (3) That the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose. Third persons who are not parties to the principal obligation may secure the latter by pledging or mortgaging their own property. (1857) 2.

ACCORDING TO PERFECTION

81


b.

REAL – those which are perfected only upon delivery of the thing subject of the contract. E.g., deposit, pledge, commodatum and mutuum.

Art. 1316. Real contracts, such as deposit, pledge and Commodatum, are not perfected until the delivery of the object of the obligation. (n) Art. 1934. An accepted promise to deliver something by way of commodatum or simple loan is binding upon parties, but the commodatum or simple loan itself shall not be perfected until the delivery of the object of the contract. (n) c.

FORMAL – those which require a certain form for its validity. E.g., antichresis

Art. 1356. Contracts shall be obligatory, in whatever form they may have been entered into, provided all the essential requisites for their validity are present. However, when the law requires that a contract be in some form in order that it may be valid or enforceable, or that a contract be proved in a certain way, that requirement is absolute and indispensable. In such cases, the right of the parties stated in the following article cannot be exercised. (1278a) Article 1357. If the law requires a document or other special form, as in the acts and contracts enumerated in the following article, the contracting parties may compel each other to observe that form, once the contract has been perfected. This right may be exercised simultaneously with the action upon the contract.

Art. 1357: does not apply where the formality is a requirement for validity. As such, an action under Art. 1357 cannot prosper to compel the other party to execute a formality, when it has not been complied with, in cases where the formality is required for validity.

Art. 1357 presupposes the existence of a valid contract and cannot possibly refer to the form required to make it valid but rather to that required to simply to make it effective.

Form requirements as to the validity of the contract: or ad

essential/ad solemnitatem:  Negotiable instruments – must be in writing;  Donations of personal property more than P5,000 – must be in writing;  Donations of real property – must be in a public instrument;  Interests on loan – must be stipulated in writing, otherwise they are not due;  Principal and interests in antichresis – must be specified in writing, otherwise the contract is void.  Sale and transfer of large cattle – under the Cattle Registration Act, the same must be registered and a certificate of transfer must be issued.  Chattel mortgage – requires registration.  Contract of partnership where real property or real rights are contributed – must be in a public instrument with an inventory attached. Article 1358. The following must appear in a public document: (1) Acts and contracts which have for their object the creation, transmission, modification or extinguishment of real rights over immovable

property; sales of real property or of an interest therein are governed by articles 1403, No. 2, and 1405; (2) The cession, repudiation or renunciation of hereditary rights or of those of the conjugal partnership of gains; (3) The power to administer property, or any other power which has for its object an act appearing or which should appear in a public document, or should prejudice a third person; (4) The cession of actions or rights proceeding from an act appearing in a public document.

3.

Art. 1356. Contracts shall be obligatory, in whatever form they may have been entered into, provided all the essential requisites for their validity are present. However, when the law requires that a contract be in some form in order that it may be valid or enforceable, or that a contract be proved in a certain way, that requirement is absolute and indispensable. In such cases, the right of the parties stated in the following article cannot be exercised. (1278a)

All other contracts where the amount involved exceeds five hundred pesos must appear in writing, even a private one. But sales of goods, chattels or things in action are governed by articles, 1403, No. 2 and 1405. (1280a)

Formal requirements to prove existence: STATUTE OF FRAUDS: Article 1403. The following contracts are unenforceable, unless they are ratified: (1) Those entered into in the name of another person by one who has been given no authority or legal representation, or who has acted beyond his powers; (2) Those that do not comply with the Statute of Frauds as set forth in this number. In the following cases an agreement hereafter made shall be unenforceable by action, unless the same, or some note or memorandum, thereof, be in writing, and subscribed by the party charged, or by his agent; evidence, therefore, of the agreement cannot be received without the writing, or a secondary evidence of its contents: (a) An agreement that by its terms is not to be performed within a year from the making thereof; (b) A special promise to answer for the debt, default, or miscarriage of another; (c) An agreement made in consideration of marriage, other than a mutual promise to marry; (d) An agreement for the sale of goods, chattels or things in action, at a price not less than five hundred pesos, unless the buyer accept and receive part of such goods and chattels, or the evidences, or some of them, of such things in action or pay at the time some part of the purchase money; but when a sale is made by auction and entry is made by the auctioneer in his sales book, at the time of the sale, of the amount and kind of property sold, terms of sale, price, names of the purchasers and person on whose account the sale is made, it is a sufficient memorandum; (e) An agreement for the leasing for a longer period than one year, or for the sale of real property or of an interest therein; (f) A representation as to the credit of a third person. (3) Those where both parties are incapable of giving consent to a contract.

IMPORTANCE OF CLASSIFICATION AS TO PERFECTION: if the contract is consensual, it is perfected by mere consent; if real, by delivery; if formal; upon compliance with the required form.

BAR QUESTION: Merle offered to sell her automobile to Violy for P60,000.00. After inspecting the automobile, Violy offered to buy it for P50,000.00. This offer was accepted by Merle. The next day, Merle offered to deliver the automobile, but Violy being short of funds, secured postponement of the delivery, promising to pay the price “upon arrival of the steamer, Helena”. The steamer however never arrived because it was wrecked by a typhoon and sank somewhere off the Coast of Samar. Is there a perfected contract in this case? Why? ANSWER: Yes. In this case, the contract involved is one of sale. Sale is not a real or a formal contract which would require delivery or compliance with a certain form for its perfection; it is a consensual contract which is perfected at the moment there is meeting of the minds. In this case, there was meeting of the minds the moment the counter-offer or offer to buy was accepted. As such, there is a perfected contract. Note: that the condition “upon arrival of the steamer Helena” was only for performance and not for perfection. It is a condition as to the payment but not as to whether the contract would be perfected or not.

82


ACCORDING TO SOLEMNITY OR FORM – ART. 1356

a. b. 4.

ANY FORM – e.g. loan. SPECIAL FORM – e.g. donations, mortgage of immovable property.

ACCORDING TO PURPOSE a. TRANSFER OF OWNERSHIP – Donation, Sale and Barter

(ARTS. 725, 1458, 1638)

Art. 725. Donation is an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another, who accepts it. (618a) Art. 1458. By the contract of sale one of the contracting parties obligates himself to transfer the ownership and to deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent. A contract of sale may be absolute or conditional. (1445a) Art. 1638. By the contract of barter or exchange one of the parties binds himself to give one thing in consideration of the other's promise to give another thing. (1538a) b.

CONVEYANCE OF USE – Usufruct, Lease and Loan (ARTS. 562,

1642, 1933)

Art. 562. Usufruct gives a right to enjoy the property of another with the obligation of preserving its form and substance, unless the title constituting it or the law otherwise provides. (467) Art. 1642. The contract of lease may be of things, or of work and service. (1542) Art. 1643. In the lease of things, one of the parties binds himself to give to another the enjoyment or use of a thing for a price certain, and for a period which may be definite or indefinite. However, no lease for more than ninetynine years shall be valid. (1543a) Art. 1933. By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter may use the same for a certain time and return it, in which case the contract is called a commodatum; or money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be paid, in which case the contract is simply called a loan ormutuum.

Commodatum is essentially gratuitous. Simple loan may be gratuitous or with a stipulation to pay interest. In commodatum the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes to the borrower. (1740a) c.

RENDITION OF SERVICE – Lease and Agency (ARTS. 1642,

1868)

Art. 1642. The contract of lease may be of things, or of work and service. (1542) Art. 1868. By the contract of agency a person binds himself to render some service or to do something in representation or on behalf of another, with the consent or authority of the latter. (1709a)

5.

ACCORDING TO NATURE OF OBLIGATION PRODUCED a. BILATERAL – where both parties are reciprocally obligated, e.g., lease (where the lessor is obliged to allow the use of the thing and the lessee is obliged to pay rent) and sale (where the buyer is obliged to pay the price and the seller obliged to deliver the thing)

(ARTS. 1642, 1458)

Art. 1642. The contract of lease may be of things, or of work and service. (1542) Art. 1458. By the contract of sale one of the contracting parties obligates himself to transfer the ownership and to deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent. A contract of sale may be absolute or conditional. (1445a)

b.

GRATUITOUS OR LUCRATIVE – ARTS. 725, 1933

Art. 725. Donation is an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another, who accepts it. (618a) Art. 1933. By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter may use the same for a certain time and return it, in which case the contract is called a commodatum; or money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be paid, in which case the contract is simply called a loan ormutuum.

Commodatum is essentially gratuitous. Simple loan may be gratuitous or with a stipulation to pay interest.

b.

UNILATERAL – only one party is obliged. E.g., guaranty and pledge. (ARTS. 2047, 2093)

Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In such case the contract is called a suretyship. (1822a) Art. 2093. In addition to the requisites prescribed in Article 2085, it is necessary, in order to constitute the contract of pledge, that the thing pledged be placed in the possession of the creditor, or of a third person by common agreement. (1863) IMPORTANCE OF CLASSIFICATION:

In commodatum the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes to the borrower. (1740a) c.

IMPORTANCE OF CLASSIFICATION; EXAMPLES:

Presumption that the transfer of ownership is in fraud of creditors: A sold his only property to B. At the time of sale, he was indebted to X. In this case, it may not necessarily be in fraud of X, since the sale may have been precisely to have the proceeds delivered to X for payment. Would there be such presumption? It depends:  

As to FRUITS: in conditional obligations, who would be entitled to the fruits

before the happening of the suspensive condition?  Bilateral: the fruits are deemed mutually compensated under Art. 1187.  Unilateral: the fruits shall pertain to the debtor unless a contrary intention is clear.

Rescission: under Art. 1191, is implied in reciprocal obligations, or in this case, bilateral contracts where both are reciprocally obligated. But if the contract is unilateral, logically, the creditor would not rescind, he would either demand performance or seek damages.

Delay: in reciprocal obligations (bilateral contracts), from the moment one of the parties had already complied and the other did not, the latter shall be considered in delay even if there is no demand. 6.

ACCORDING TO CAUSE – ART. 1350

Art. 1350. In onerous contracts the cause is understood to be, for each contracting party, the prestation or promise of a thing or service by the other; in remuneratory ones, the service or benefit which is remunerated; and in contracts of pure beneficence, the mere liberality of the benefactor. (1274) a.

ONEROUS – ARTS. 1458, 1638, 1642

Art. 1458. By the contract of sale one of the contracting parties obligates himself to transfer the ownership and to deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent.

Art. 1642. The contract of lease may be of things, or of work and service. (1542)

83


Onerous: if there is already a judgment against A as to his liability to X and the transfer is onerous, such as this one (a sale), there is a presumption that the transfer of ownership is in fraud of creditors. Gratuitous: it would depend on the remaining amount of property, such that if A donated his property to B worth P3M, the presumption would arise only if A did not reserve sufficient properties to cover his debts.

Interpretation of contracts: A obliged to deliver a car to B and upon

delivery, B noticed that the car stereo was missing. B asked for the stereo but A claims that he is the owner thereof. Who is entitled to the stereo? It depends:  Gratuitous: such as a donation, the principle that would apply is the least transmission of rights, such that the donor would be entitled to the stereo.  Onerous: such as a sale, the principle that would apply is the greatest reciprocity of interests, such that the buyer would be entitled to the stereo. NOTE: the above principles would be applicable only on secondary matters of the contract. Such that if the ambiguity pertains to the principal prestation, such as the car in this case, then the contract would be void. 7.

ACCORDING TO RISK a. CUMULATIVE b. ALEATORY – ART. 2010

Art. 2010. By an aleatory contract, one of the parties or both reciprocally bind themselves to give or to do something in consideration of what the other shall give or do upon the happening of an event which is uncertain, or which is to occur at an indeterminate time. (1790) 8.

A contract of sale may be absolute or conditional. (1445a) Art. 1638. By the contract of barter or exchange one of the parties binds himself to give one thing in consideration of the other's promise to give another thing. (1538a)

REMUNERATORY

ACCORDING TO NAME a. NOMINATE b. INNOMINATE – ART. 1307

Art. 1307. Innominate contracts shall be regulated by the stipulations of the parties, by the provisions of Titles I and II of this Book, by the rules governing the most analogous nominate contracts, and by the customs of the place. 9.

ACCORDING TO SUBJECT MATTER

a. b. c. D.

THING RIGHT SERVICE

STAGES OF CONTRACTS 1. NEGOTIATION CONTRACT OF OPTION – ARTS. 1324, 1479, 1482

Art. 1324. When the offerer has allowed the offeree a certain period to accept, the offer may be withdrawn at any time before acceptance by communicating such withdrawal, except when the option is founded upon a consideration, as something paid or promised. Option Agreement: in an option agreement, as provided under Art. 1324, the offeror may withdraw the offer before acceptance is communicated to him, and he would not be liable for damages. Offeror is not bound, he may withdraw anytime before acceptance is conveyed to him. Art. 1479. A promise to buy and sell a determinate thing for a price certain is reciprocally demandable. An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon the promissor if the promise is supported by a consideration distinct from the price. (1451a) Option Contract: there is already a perfected contract of option. Here, there is a consideration distinct and separate from the price. As such, the offeror cannot validly withdraw before the period agreed upon without being liable for damages. This does not, however, entitle the offeree the right to demand specific performance since there is no perfected contract of sale yet. Likewise, an option contract does not bind the offeror to enter into a contract, he has the choice whether to pursue or not the contract, if he does not pursue, he loses his right to the option money given. (What if the the exercise of the option was at the fault of the offeree, e.g., reservation fee paid for a car, and the color chosen for which the option payment was given, was not available?)

Offeree accepted before withdrawal of the offer is communicated to him: the contract of sale, being consensual, is already perfected.

Option Money:  

is not necessarily “money” only, it can be any prestation like services or other things. Not necessarily “paid” already. “Promise” may also be considered as a consideration for the option contract.

BAR QUESTION: Marvin offered to construct the house of Carlos for a very reasonable price of P900,000.00, giving the latter 10 days within which to accept or reject the offer. On the fifth day, before Carlos could make up his mind, Marvin withdrew his offer. (a) What is the effect of the withdrawal of Marvin’s offer? (2%) Valid. Offeror may validly withdraw before acceptance is communicated to him. (b) Will your answer be the same if Carlos paid Marvin P10,000.00 as consideration for that option? Explain. (2%) No. Here there is an option contract. Offeror cannot validly withdraw the offer. Otherwise, there would be breach of the option contract. Remedy is action for damages. (c) Supposing that Carlos accepted the offer before Marvin could communicate his withdrawal thereof? Discuss the legal consequences. (2%) There would be a perfected contract. A contract for a piece of work is a consensual contract perfected by the meeting of the minds of the parties. As such, the contract was already perfected when the acceptance was communicated to Marvin before he could communicate his withdrawal.

84


BAR QUESTION: Sergio is the registered owner of a parcel of land. His friend Marcelo succeeded in convincing him to sell such land to Marcelo. On June 2, 2012, they agreed on the price of P600,000 and a period until June 30, 2012 within which Marcel may raise the amount. Marcelo in a light tone, usual between them, said that they should seal their agreement through a case of Jack Daniel’s Black and P5,000 pulutan, which they did. On June 13, 2015, Sergio learned of a new buyer Roberto who is offering to buy the land for P800,000 cash. Sergio withdrew his offer to Marcelo. Marcelo objected claiming that there is an option to buy supported by a valuable consideration. Does Marcelo have a cause of action against Sergio? Answer: Yes. There is already a perfected contract of sale. From the facts, “succeeded in persuading Sergio to sell it to him” and given the period “until June 30, 2012” is only for the performance. The case of bourbon and P5,000 pulutan - can be considered only as to statute of frauds that this should be in writing, but the party had already performed. “Decided to withdraw his offer” is not accurate, because he did not withdraw from the offer, but from the contract of sale. Art. 1482. Whenever earnest money is given in a contract of sale, it shall be considered as part of the price and as proof of the perfection of the contract. (1454a) Earnest Money: the above provision refers to earnest money which is considered part of the price and proof of the perfection of the contract of sale. 2. 3. 4.

PERFECTION – goes into the essential elements of the contract. PERFORMANCE CONSUMMATION

E.

ESSENTIAL ELEMENTS OF CONTRACTS – ART. 1318

1.

CONSENT OF CONTRACTING PARTIES – ARTS. 1319-1346, 3742, 739, 1476(4), 1490-1491, 1533(5), 1646, 1782, 1409(7), 5;

Art. 1319. Consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract. The offer must be certain and the acceptance absolute. A qualified acceptance constitutes a counter-offer. Acceptance made by letter or telegram does not bind the offerer except from the time it came to his knowledge. The contract, in such a case, is presumed to have been entered into in the place where the offer was made. (1262a) Art. 1320. An acceptance may be express or implied. (n) Art. 1321. The person making the offer may fix the time, place, and manner of acceptance, all of which must be complied with. (n) Art. 1322. An offer made through an agent is accepted from the time acceptance is communicated to him. (n) Art. 1323. An offer becomes ineffective upon the death, civil interdiction, insanity, or insolvency of either party before acceptance is conveyed. (n) Art. 1324. When the offerer has allowed the offeree a certain period to accept, the offer may be withdrawn at any time before acceptance by communicating such withdrawal, except when the option is founded upon a consideration, as something paid or promised. (n) Art. 1325. Unless it appears otherwise, business advertisements of things for sale are not definite offers, but mere invitations to make an offer. (n) Art. 1326. Advertisements for bidders are simply invitations to make proposals, and the advertiser is not bound to accept the highest or lowest bidder, unless the contrary appears. (n)

Art. 1327. The following cannot give consent to a contract: (1) Unemancipated minors; (2) Insane or demented persons, and deaf-mutes who do not know how to write. (1263a) Art. 1328. Contracts entered into during a lucid interval are valid. Contracts agreed to in a state of drunkenness or during a hypnotic spell are voidable. (n) Art. 1329. The incapacity declared in Article 1327 is subject to the modifications determined by law, and is understood to be without prejudice to special disqualifications established in the laws. (1264) Art. 1330. A contract where consent is given through mistake, violence, intimidation, undue influence, or fraud is voidable. (1265a) Art. 1331. In order that mistake may invalidate consent, it should refer to the substance of the thing which is the object of the contract, or to those conditions which have principally moved one or both parties to enter into the contract. Mistake as to the identity or qualifications of one of the parties will vitiate consent only when such identity or qualifications have been the principal cause of the contract. A simple mistake of account shall give rise to its correction. (1266a) Art. 1332. When one of the parties is unable to read, or if the contract is in a language not understood by him, and mistake or fraud is alleged, the person enforcing the contract must show that the terms thereof have been fully explained to the former. (n) Art. 1333. There is no mistake if the party alleging it knew the doubt, contingency or risk affecting the object of the contract. (n) Art. 1334. Mutual error as to the legal effect of an agreement when the real purpose of the parties is frustrated, may vitiate consent. (n) Art. 1335. There is violence when in order to wrest consent, serious or irresistible force is employed. There is intimidation when one of the contracting parties is compelled by a reasonable and well-grounded fear of an imminent and grave evil upon his person or property, or upon the person or property of his spouse, descendants or ascendants, to give his consent. To determine the degree of intimidation, the age, sex and condition of the person shall be borne in mind. A threat to enforce one's claim through competent authority, if the claim is just or legal, does not vitiate consent. (1267a) Art. 1336. Violence or intimidation shall annul the obligation, although it may have been employed by a third person who did not take part in the contract. (1268) Art. 1337. There is undue influence when a person takes improper advantage of his power over the will of another, depriving the latter of a reasonable freedom of choice. The following circumstances shall be considered: the confidential, family, spiritual and other relations between the parties, or the fact that the person alleged to have been unduly influenced was suffering from mental weakness, or was ignorant or in financial distress. (n) Art. 1338. There is fraud when, through insidious words or machinations of one of the contracting parties, the other is induced to enter into a contract which, without them, he would not have agreed to. (1269) Art. 1339. Failure to disclose facts, when there is a duty to reveal them, as when the parties are bound by confidential relations, constitutes fraud. (n)

85


Art. 1340. The usual exaggerations in trade, when the other party had an opportunity to know the facts, are not in themselves fraudulent. (n) Art. 1341. A mere expression of an opinion does not signify fraud, unless made by an expert and the other party has relied on the former's special knowledge. (n) Art. 1342. Misrepresentation by a third person does not vitiate consent, unless such misrepresentation has created substantial mistake and the same is mutual. (n) Art. 1343. Misrepresentation made in good faith is not fraudulent but may constitute error. (n) Art. 1344. In order that fraud may make a contract voidable, it should be serious and should not have been employed by both contracting parties. Incidental fraud only obliges the person employing it to pay damages. (1270) Art. 1345. Simulation of a contract may be absolute or relative. The former takes place when the parties do not intend to be bound at all; the latter, when the parties conceal their true agreement. (n) Art. 1346. An absolutely simulated or fictitious contract is void. A relative simulation, when it does not prejudice a third person and is not intended for any purpose contrary to law, morals, good customs, public order or public policy binds the parties to their real agreement. Art. 37. Juridical capacity, which is the fitness to be the subject of legal relations, is inherent in every natural person and is lost only through death. Capacity to act, which is the power to do acts with legal effect, is acquired and may be lost. (n) Art. 38. Minority, insanity or imbecility, the state of being a deaf-mute, prodigality and civil interdiction are mere restrictions on capacity to act, and do not exempt the incapacitated person from certain obligations, as when the latter arise from his acts or from property relations, such as easements. (32a) Art. 39. The following circumstances, among others, modify or limit capacity to act: age, insanity, imbecility, the state of being a deaf-mute, penalty, prodigality, family relations, alienage, absence, insolvency and trusteeship. The consequences of these circumstances are governed in this Code, other codes, the Rules of Court, and in special laws. Capacity to act is not limited on account of religious belief or political opinion. A married woman, twenty-one years of age or over, is qualified for all acts of civil life, except in cases specified by law. Art. 40. Birth determines personality; but the conceived child shall be considered born for all purposes that are favorable to it, provided it be born later with the conditions specified in the following article. (29a) Art. 41. For civil purposes, the fetus is considered born if it is alive at the time it is completely delivered from the mother's womb. However, if the fetus had an intra-uterine life of less than seven months, it is not deemed born if it dies within twenty-four hours after its complete delivery from the maternal womb. (30a) Art. 42. Civil personality is extinguished by death. The effect of death upon the rights and obligations of the deceased is determined by law, by contract and by will. Art. 739. The following donations shall be void: (1) Those made between persons who were guilty of adultery or concubinage at the time of the donation; (2) Those made between persons found guilty of the same criminal offense, in consideration thereof;

(3) Those made to a public officer or his wife, descedants and ascendants, by reason of his office. In the case referred to in No. 1, the action for declaration of nullity may be brought by the spouse of the donor or donee; and the guilt of the donor and donee may be proved by preponderance of evidence in the same action. Art. 1476. In the case of a sale by auction: xxx (4) Where notice has not been given that a sale by auction is subject to a right to bid on behalf of the seller, it shall not be lawful for the seller to bid himself or to employ or induce any person to bid at such sale on his behalf or for the auctioneer, to employ or induce any person to bid at such sale on behalf of the seller or knowingly to take any bid from the seller or any person employed by him. Any sale contravening this rule may be treated as fraudulent by the buyer. Art. 1490. The husband and the wife cannot sell property to each other, except: (1) When a separation of property was agreed upon in the marriage settlements; or (2) When there has been a judicial separation or property under Article 191. (1458a) Art. 1491. The following persons cannot acquire by purchase, even at a public or judicial auction, either in person or through the mediation of another: (1) The guardian, the property of the person or persons who may be under his guardianship; (2) Agents, the property whose administration or sale may have been entrusted to them, unless the consent of the principal has been given; (3) Executors and administrators, the property of the estate under administration; (4) Public officers and employees, the property of the State or of any subdivision thereof, or of any government-owned or controlled corporation, or institution, the administration of which has been intrusted to them; this provision shall apply to judges and government experts who, in any manner whatsoever, take part in the sale; (5) Justices, judges, prosecuting attorneys, clerks of superior and inferior courts, and other officers and employees connected with the administration of justice, the property and rights in litigation or levied upon an execution before the court within whose jurisdiction or territory they exercise their respective functions; this prohibition includes the act of acquiring by assignment and shall apply to lawyers, with respect to the property and rights which may be the object of any litigation in which they may take part by virtue of their profession. (6) Any others specially disqualified by law. (1459a) Art. 1646. The persons disqualified to buy referred to in Articles 1490 and 1491, are also disqualified to become lessees of the things mentioned therein. (n)

Art. 1782. Persons who are prohibited from giving each other any donation or advantage cannot enter into universal partnership. (1677) ARTS. 87, 124, 234 FAMILY CODE; RA 6809; Art. 87. Every donation or grant of gratuitous advantage, direct or indirect, between the spouses during the marriage shall be void, except moderate gifts which the spouses may give each other on the occasion of any family rejoicing. The prohibition shall also apply to persons living together as husband and wife without a valid marriage. (133a) Art. 124. The administration and enjoyment of the conjugal partnership shall belong to both spouses jointly. In case of disagreement, the husband's decision shall prevail, subject to recourse to the court by the wife for proper remedy, which must be availed of within five years from the date of the contract implementing such decision. In the event that one spouse is incapacitated or otherwise unable to participate in the administration of the conjugal properties, the other spouse may assume sole powers of administration. These powers do not include disposition or encumbrance without authority of the court or the written consent of the other spouse. In the absence of such authority or consent, the disposition or encumbrance shall be void. However, the transaction shall be construed as a continuing offer on the part of the consenting spouse and the third person, and may be perfected as a binding contract upon the acceptance by the other spouse or authorization by the court before the offer is withdrawn by either or both offerors. (165a) Art. 234. Emancipation takes place by the attainment of majority. Unless otherwise provided, majority commences at the age of twenty-one years. Emancipation also takes place: (1) By the marriage of the minor; or (2) By the recording in the Civil Register of an agreement in a public instrument executed by the parent exercising parental authority and the minor at least eighteen years of age. Such emancipation shall be irrevocable. (397a, 398a, 400a, 401a) Republic Act No. 6809 December 13, 1989 AN ACT LOWERING THE AGE OF MAJORITY FROM TWENTY-ONE TO EIGHTEEN YEARS, AMENDING FOR THE PURPOSE EXECUTIVE ORDER NUMBERED TWO HUNDRED NINE, AND FOR OTHER PURPOSES

Be it enacted by the Senate and House of Representatives of the Philippines in Congress assembled: Section 1. Article 234 of Executive Order No. 209, the Family Code of the Philippines, is hereby amended to read as follows: "Art. 234. Emancipation takes place by the attainment of majority. Unless otherwise provided, majority commences at the age of eighteen years."

Art. 1533. xxx The seller is bound to exercise reasonable care and judgment in making a resale, and subject to this requirement may make a resale either by public or private sale. He cannot, however, directly or indirectly buy the goods. Art. 1409. The following contracts are inexistent and void from the beginning: (1) Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public policy; (2) Those which are absolutely simulated or fictitious; (3) Those whose cause or object did not exist at the time of the transaction; (4) Those whose object is outside the commerce of men; (5) Those which contemplate an impossible service; (6) Those where the intention of the parties relative to the principal object of the contract cannot be ascertained; (7) Those expressly prohibited or declared void by law These contracts cannot be ratified. Neither can the right to set up the

86

defense of illegality be waived.


Section 2. Articles 235 and 237 of the same Code are hereby repealed. Section 3. Article 236 of the same Code is also hereby amended to read as follows: "Art. 236. Emancipation shall terminate parental authority over the person and property of the child who shall then be qualified and responsible for all acts of civil life, save the exceptions established by existing laws in special cases. "Contracting marriage shall require parental consent until the age of twentyone. "Nothing in this Code shall be construed to derogate from the duty or responsibility of parents and guardians for children and wards below twenty-one years of age mentioned in the second and third paragraphs of Article 2180 of the Civil Code."

Section 4. Upon the effectivity of this Act, existing wills, bequests, donations, grants, insurance policies and similar instruments containing references and provisions favorable to minors will not retroact to their prejudice.

b.

Both parties gave their consent, but one is incapacitated i. ii.

Section 5. This Act shall take effect upon completion of its publication in at least two (2) newspapers of general circulation. ART. XII, SEC. 7 & 8, 1987 CONSTITUTION

Example: an alien is prohibited under the Constitution from acquiring private lands. EXCEPT: when acquired through (1) succession; or (2) sale of residential land to a former natural born Filipino citizen.

Section 7. Save in cases of hereditary succession, no private lands shall be transferred or conveyed except to individuals, corporations, or associations qualified to acquire or hold lands of the public domain.

A sale in violation of the prohibition is void. As such, the seller may recover the land. However, if at the time the action to recover was filed, the land was already transferred to a Filipino, the action will no longer prosper.

Section 8. Notwithstanding the provisions of Section 7 of this Article, a natural-born citizen of the Philippines who has lost his Philippine citizenship may be a transferee of private lands, subject to limitations provided by law. COGNITION THEORY – contract is perfected upon receipt of the acceptance. MANIFESTATION THEORY – contract is perfected upon manifestation of acceptance.

CASE: Common-law spouses bought land through salaries of alien Jamrich but was registered under the name of the Filipino wife. Jamrich used the lot to pay for his debt (purchase of yacht) to Borromeo. Agro-Macro, the seller, filed for annulment of sale. SC: if land is invalidly transferred to an alien who subsequently becomes a Filipino citizen or transfers it to a Filipino, the flaw in the original transaction is considered cured and the title of the transferee is rendered valid. (Borromeo vs. Descallar)

Kinds of Capacity: a. Juridical Capacity – fitness to be subject to a legal relation. Example of incapacity: a corporation without SEC Certificate of Registration. If incapacity pertains to juridical capacity, the contract is void. b.

c.

No consent of one or both parties

Here the contract is void. Art. 1409 involves fictitious or simulated contracts:  Fictitious Contracts: where one of the parties did not actually gave his consent. E.g., a party’s signature in a deed of sale is forged;  Simulated Contracts: where the parties would make it appear that they entered into a contract when in fact they did not. i.

Can be grouped into two: i. ii.

Absolutely Simulated Contracts – they did not intend to be bound by the contract or any contract for that matter. Usually to defraud someone.

Relatively Simulated Contracts – the parties intended another contract. Example: Sale of CJ Corona’s condominium unit to her daughter Karla worth P16M. The prosecution theorized that the sale is either absolutely or relatively simulated in order to avoid presenting the unit in the SALN. The prosecution presented the Commissioner of Internal Revenue who testified that Karla’s income statement the year prior to the supposed sale, Karla’s income was only P9,000 for the whole year. As such, it was theorized that if it was a realtively simulated sale, the intention was actually a donation. It was made to appear as a sale in order to avoid paying donor’s tax. Proof of relatively simulated sale: capacity of the buyer to buy. If he does not have capacity to buy, it would be proof of simulation.

87


Those affecting COGNITION or the awareness of certain facts: mistake and fraud. Those affecting VOLITION or voluntariness of the act: Violence, Intimidation or Undue Influence. Relevance of the above grouping: If violence was employed on the wife of the contracting party to force him to enter into a contract, the same would be voidable. Even though Art. 1335 only mentions intimidation on the person or property of the spouse, ascendants or descendants, the party may still invoke vitiation of consent due to the violence employed on the person of his spouse. This is because they have the same effect, i.e., they affect volition or voluntariness of giving consent. Moreover, if the law would already consider as ground for vitiation of consent, the intimidation, there is more reason to consider if violence is employed.

Example: in the trial of CJ Corona, the prosecution claimed that the sale of real properties made by the CJ to his relatives are simulated contracts in order to avoid presenting them in the SALN. The defense countered that these sales are supported by notarized deeds of sale. However, the prosecution presented the clerk of court where the supposed notary was commissioned and testified that no such person was commissioned during the period when the supposed sale happened. ii.

Both parties gave their consent Valid? It depends:  If consent is given in behalf of another without authority – unenforceable UNLESS the person acting has authority under the law (e.g., guardians, sheriff, executor, administrator, etc.)  If there was fraud, mistake, violence, intimidation or undue influence – voidable.

Capacity to Act – power to do acts with legal effects. Incapacity pertains to restrictions on the capacity to act.

Situations concerning consent of the parties: a.

Absolute Incapacity – the party cannot give consent in any contract, with anyone, in whatever capacity, over anything. Relative Incapacity – a person may be prohibited from entering specific contracts or that in a contract, he may be prohibited in a certain capacity, i.e., prohibited to be the buyer, or to specific things, or to specific persons.

d.

Both parties gave their consent, but both of the parties’ consent is vitiated or both are incapacitated – unenforceable. Art. 1403(3).

2.

OBJECT CERTAIN WHICH IS THE SUBJECT MATTER OF THE CONTRACT – ARTS. 1347-1349, 1311, 1178

Art. 1347. All things which are not outside the commerce of men, including future things, may be the object of a contract. All rights which are not intransmissible may also be the object of contracts. No contract may be entered into upon future inheritance except in cases expressly authorized by law. All services which are not contrary to law, morals, good customs, public

order or public policy may likewise be the object of a contract. (1271a) Art. 1348. Impossible things or services cannot be the object of contracts. (1272) OBJECT: is the subject matter of a contract which may not necessarily be a thing, it may be rights or service. BASIC REQUIREMENTS:  Rights – must not be intransmissible;  Services – not contrary to law, morals, good customs, public order or public policy;  Things – must not be outside of commerce of men, it must be licit and not impossible. Example: internal organs of humans.

Future Inheritance: cannot be the subject matter of a valid contract as

provided under Art. 1347. This is because the seller owns no inheritance while his predecessor lives. Public policy demands that if you’re going to sell, you have the right to do so, but not necessarily requiring that the seller is the owner. Art. 1349. The object of every contract must be determinate as to its kind. The fact that the quantity is not determinate shall not be an obstacle to the existence of the contract, provided it is possible to determine the same, without the need of a new contract between the parties. (1273) Art. 1311. Contracts take effect only between the parties, their assigns and heirs, except in case where the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law. The heir is not liable beyond the value of the property he received from the decedent. If a contract should contain some stipulation in favor of a third person, he may demand its fulfillment provided he communicated his acceptance to the obligor before its revocation. A mere incidental benefit or interest of a person is not sufficient. The contracting parties must have clearly and deliberately conferred a favor upon a third person. (1257a)

Art. 1354. Although the cause is not stated in the contract, it is presumed that it exists and is lawful, unless the debtor proves the contrary. (1277) Example: if the deed of sale did not indicate the price or there was no mention at all of the price, the contract may still be considered valid because the law expressly provides that the cause is presumed to exists and is lawful. Rationale: ordinarily, when one enters into a contract, there is a cause. Art. 1355. Except in cases specified by law, lesion or inadequacy of cause shall not invalidate a contract, unless there has been fraud, mistake or undue influence. (n) Example: A car with book value of P250,000 was sold for P1 in the deed of sale. Does this affect validity? Not necessarily. As a rule, gross inadequacy of the price does not affect the validity of contracts. There might have been another cause, such as liberality or previously rendered service. Except: in cases of rescissible contracts. 4. 5.

DELIVERY DUE OBSERVANCE OF PRESCRIBED FORMALITIES

e.

FORMS OF CONTRACT

Art. 1356. Contracts shall be obligatory, in whatever form they may have been entered into, provided all the essential requisites for their validity are present. However, when the law requires that a contract be in some form in order that it may be valid or enforceable, or that a contract be proved in a certain way, that requirement is absolute and indispensable. In such cases, the right of the parties stated in the following article cannot be exercised. (1278a)

Art. 1178. Subject to the laws, all rights acquired in virtue of an obligation are transmissible, if there has been no stipulation to the contrary. (1112)

Article 1357. If the law requires a document or other special form, as in the acts and contracts enumerated in the following article, the contracting parties may compel each other to observe that form, once the contract has been perfected. This right may be exercised simultaneously with the action upon the contract.

3.

Art. 1358. The following must appear in a public document:

CAUSE OF THE OBLIGATION – ARTS. 1350-1355

Art. 1350. In onerous contracts the cause is understood to be, for each contracting party, the prestation or promise of a thing or service by the other; in remuneratory ones, the service or benefit which is remunerated; and in contracts of pure beneficence, the mere liberality of the benefactor. (1274)

Pledge: what is the cause? 1. 2.

Onerous – the same as that of the principal contract; compensation; Gratuitous – liberality.

Art. 1351. The particular motives of the parties in entering into a contract are different from the cause thereof. (n) Question: A bought a gun to kill B and he was able to do so. Was the sale valid? Yes. As a rule, motive does not affect the validity of a contract since motive is different from cause and the illegality of motive does not affect the validity of the contract. Exception: if it predominates the purpose of the party to enter into a contract. E.g., sale to defraud creditors. Art. 1352. Contracts without cause, or with unlawful cause, produce no effect whatever. The cause is unlawful if it is contrary to law, morals, good customs, public order or public policy. (1275a) Art. 1353. The statement of a false cause in contracts shall render them void, if it should not be proved that they were founded upon another cause which is true and lawful. (1276)

88


(1) Acts and contracts which have for their object the creation, transmission, modification or extinguishment of real rights over immovable property; sales of real property or of an interest therein a governed by Articles 1403, No. 2, and 1405; (2) The cession, repudiation or renunciation of hereditary rights or of those of the conjugal partnership of gains; (3) The power to administer property, or any other power which has for its object an act appearing or which should appear in a public document, or should prejudice a third person; (4) The cession of actions or rights proceeding from an act appearing in a public document. All other contracts where the amount involved exceeds five hundred pesos must appear in writing, even a private one. But sales of goods, chattels or things in action are governed by Articles, 1403, No. 2 and 1405. (1280a) 1.

GENERAL RULE: contracts are obligatory in whatever form they may have been entered into, provided all the essential requisites are present.

2.

SPECIAL FORM: a.

VALIDITY – ARTS. 748, 749, 1744, 1773, 1874, 1956, 2134

Art. 748. The donation of a movable may be made orally or in writing. An oral donation requires the simultaneous delivery of the thing or of the document representing the right donated.

If the value of the personal property donated exceeds five thousand pesos, the donation and the acceptance shall be made in writing, otherwise, the donation shall be void. (632a) Art. 749. In order that the donation of an immovable may be valid, it must be made in a public document, specifying therein the property donated and the value of the charges which the donee must satisfy. The acceptance may be made in the same deed of donation or in a separate public document, but it shall not take effect unless it is done during the lifetime of the donor. If the acceptance is made in a separate instrument, the donor shall be notified thereof in an authentic form, and this step shall be noted in both instruments. (633) Art. 1744. A stipulation between the common carrier and the shipper or owner limiting the liability of the former for the loss, destruction, or deterioration of the goods to a degree less than extraordinary diligence shall be valid, provided it be: (1) In writing, signed by the shipper or owner; (2) Supported by a valuable consideration other than the service rendered by the common carrier; and (3) Reasonable, just and not contrary to public policy. Art. 1773. A contract of partnership is void, whenever immovable property is contributed thereto, if an inventory of said property is not made, signed by the parties, and attached to the public instrument. (1668a) Art. 1874. 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. (n) Art. 1956. No interest shall be due unless it has been expressly stipulated in writing. (1755a) Art. 2134. The amount of the principal and of the interest shall be specified in writing; otherwise, the contract of antichresis shall be void. (n) ACT 1147: CATTLE REGISTRATION DECREE, SEC. 22 Section 22 of Act No. 1147, enacted May 3, 1904, provides that, "No transfer of large cattle shall be valid unless registered, and a certificate of transfer secured as herein provided.”

Contract of Sale: nowhere in the Civil Code is there a requirement of a

specific form for a contract of sale. However, under special laws, such as the one above, transfer of large cattle need to be in a public instrument, registered and there must be a certificate of transfer. b.

ENFORCEABILITY – ARTS. 1403, 1878;

Note: the contracts here are valid but cannot be enforced until ratified. Art. 1403. The following contracts are unenforceable, unless they are ratified: (1) Those entered into in the name of another person by one who has been given no authority or legal representation, or who has acted beyond his powers; (2) Those that do not comply with the Statute of Frauds as set forth in this number. In the following cases an agreement hereafter made shall be unenforceable by action, unless the same, or some note or memorandum, thereof, be in writing, and subscribed by the party charged, or by his agent; evidence, therefore, of the agreement cannot be received without the writing, or a secondary evidence of its contents: (a) An agreement that by its terms is not to be performed within a

89


year from the making thereof; (b) A special promise to answer for the debt, default, or miscarriage of another; (c) An agreement made in consideration of marriage, other than a mutual promise to marry; (d) An agreement for the sale of goods, chattels or things in action, at a price not less than five hundred pesos, unless the buyer accept and receive part of such goods and chattels, or the evidences, or some of them, of such things in action or pay at the time some part of the purchase money; but when a sale is made by auction and entry is made by the auctioneer in his sales book, at the time of the sale, of the amount and kind of property sold, terms of sale, price, names of the purchasers and person on whose account the sale is made, it is a sufficient memorandum; (e) An agreement of the leasing for a longer period than one year, or for the sale of real property or of an interest therein; (f) A representation as to the credit of a third person. (3) Those where both parties are incapable of giving consent to a contract. Art. 1878. Special powers of attorney are necessary in the following cases: (1) To make such payments as are not usually considered as acts of administration; (2) To effect novations which put an end to obligations already in existence at the time the agency was constituted; (3) To compromise, to submit questions to arbitration, to renounce the right to appeal from a judgment, to waive objections to the venue of an action or to abandon a prescription already acquired; (4) To waive any obligation gratuitously; (5) To enter into any contract by which the ownership of an immovable is transmitted or acquired either gratuitously or for a valuable consideration; (6) To make gifts, except customary ones for charity or those made to employees in the business managed by the agent; (7) To loan or borrow money, unless the latter act be urgent and indispensable for the preservation of the things which are under administration; (8) To lease any real property to another person for more than one year; (9) To bind the principal to render some service without compensation; (10) To bind the principal in a contract of partnership; (11) To obligate the principal as a guarantor or surety; (12) To create or convey real rights over immovable property; (13) To accept or repudiate an inheritance; (14) To ratify or recognize obligations contracted before the agency; (15) Any other act of strict dominion. (n) c.

GREATER EFFICACY OR CONVENIENCE – ART. 1358

Art. 1358. The following must appear in a public document: (1) Acts and contracts which have for their object the creation, transmission, modification or extinguishment of real rights over immovable property; sales of real property or of an interest therein a governed by Articles 1403, No. 2, and 1405; (2) The cession, repudiation or renunciation of hereditary rights or of those of the conjugal partnership of gains; (3) The power to administer property, or any other power which has for its object an act appearing or which should appear in a public document, or should prejudice a third person; (4) The cession of actions or rights proceeding from an act appearing in a public document. All other contracts where the amount involved exceeds five hundred pesos must appear in writing, even a private one. But sales of goods, chattels or things in action are governed by Articles, 1403, No. 2 and 1405. (1280a) Note: the requirement that the contract appear in a public instrument is only to bind third persons and does not affect the validity of the contract. While conveyances of immovable are covered by Art. 1358, which includes a sale of land, the same article would tell us that a contract of sale involving an immovable is covered by Art. 1403. As such, it only is required to be in

writing to be valid. However, if the sale is orally made, it is unenforceable. The requirement of a public instrument is to bind third persons.

contemporaneous and subsequent acts shall be principally considered. (1282)

f.

Contemporaneous and Subsequent Acts: may be considered to

REFORMATION OF CONTRACTS – ARTS. 1359-1369

Art. 1359. When, there having been a meeting of the minds of the parties to a contract, their true intention is not expressed in the instrument purporting to embody the agreement, by reason of mistake, fraud, inequitable conduct or accident, one of the parties may ask for the reformation of the instrument to the end that such true intention may be expressed. If mistake, fraud, inequitable conduct, or accident has prevented a meeting of the minds of the parties, the proper remedy is not reformation of the instrument but annulment of the contract. Art. 1360. The principles of the general law on the reformation of instruments are hereby adopted insofar as they are not in conflict with the provisions of this Code. Art. 1361. When a mutual mistake of the parties causes the failure of the instrument to disclose their real agreement, said instrument may be reformed. Art. 1362. If one party was mistaken and the other acted fraudulently or inequitably in such a way that the instrument does not show their true intention, the former may ask for the reformation of the instrument. Art. 1363. When one party was mistaken and the other knew or believed that the instrument did not state their real agreement, but concealed that fact from the former, the instrument may be reformed. Art. 1364. When through the ignorance, lack of skill, negligence or bad faith on the part of the person drafting the instrument or of the clerk or typist, the instrument does not express the true intention of the parties, the courts may order that the instrument be reformed. Art. 1365. If two parties agree upon the mortgage or pledge of real or personal property, but the instrument states that the property is sold absolutely or with a right of repurchase, reformation of the instrument is proper. Art. 1366. There shall be no reformation in the following cases: (1) Simple donations inter vivos wherein no condition is imposed; (2) Wills; (3) When the real agreement is void. Art. 1367. When one of the parties has brought an action to enforce the instrument, he cannot subsequently ask for its reformation. Art. 1368. Reformation may be ordered at the instance of either party or his successors in interest, if the mistake was mutual; otherwise, upon petition of the injured party, or his heirs and assigns. Art. 1369. The procedure for the reformation of instrument shall be governed by rules of court to be promulgated by the Supreme Court. g.

INTERPRETATION OF CONTRACTS – ARTS. 1370-1379

determine if the parties’ intention are different from the clear words of the agreement.

In a case where a Deed of Assignment was issued as payment for the obligation of the debtor in an indemnity agreement by way of dacion en pago, the debtor thereafter made subsequent installment payments and executed a mortgage, the SC held that clearly the subsequent acts of the debtor does not reflect his claim that the deed of assignment was by dacion en pago. The deed of assignment was a form of security for the indemnity agreement. Art. 1372. However general the terms of a contract may be, they shall not be understood to comprehend things that are distinct and cases that are different from those upon which the parties intended to agree. (1283) Art. 1373. If some stipulation of any contract should admit of several meanings, it shall be understood as bearing that import which is most adequate to render it effectual. (1284) Art. 1374. The various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense which may result from all of them taken jointly. (1285) Art. 1375. Words which may have different significations shall be understood in that which is most in keeping with the nature and object of the contract. (1286) Art. 1376. The usage or custom of the place shall be borne in mind in the interpretation of the ambiguities of a contract, and shall fill the omission of stipulations which are ordinarily established. (1287) Art. 1377. The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity. (1288) Art. 1378. When it is absolutely impossible to settle doubts by the rules established in the preceding articles, and the doubts refer to incidental circumstances of a gratuitous contract, the least transmission of rights and interests shall prevail. If the contract is onerous, the doubt shall be settled in favor of the greatest reciprocity of interests. If the doubts are cast upon the principal object of the contract in such a way that it cannot be known what may have been the intention or will of the parties, the contract shall be null and void. (1289) Example: Lino entered into a contract to sell with Ramon to convey with one of the five lots he owns without specifying which lot. Later on, the parties cannot agree which of the five lots is the subject of the contract. What is the status of the contract? Void under Art. 1409(6): those where the intention of the parties relative to the principal object of the contract cannot be ascertained. h.

KINDS OF CONTRACT AS TO VALIDITY

1.

VALID AND BINDING

Art. 1370. If the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control.

2.

VALID BUT DEFECTIVE a. RESCISSIBLE CONTRACTS – ARTS. 1380-1389

If the words appear to be contrary to the evident intention of the parties, the latter shall prevail over the former. (1281)

Art. 1380. Contracts validly agreed upon may be rescinded in the cases established by law. (1290)

Primordial Consideration: is the intention of the parties. Such that even

Art. 1381. The following contracts are rescissible: (1) Those which are entered into by guardians whenever the wards whom they represent suffer lesion by more than one-fourth of the value of the things which are the object thereof; (2) Those agreed upon in representation of absentees, if the latter suffer

if the terms of the contract are clear, but does not reflect the intention of the parties, it is the intention which would prevail.

Art. 1371. In order to judge the intention of the contracting parties, their

90


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. (1291a)

Contracts undertaken in fraud of creditors when the latter cannot in any other collect the claims due them; how to prove fraud? 1.

2.

Presumptions: Examples: a. Onerous alienation of property after judgment has been rendered against the debtor in favour of any creditor, or after an order of garnishment or attachment was issued by the court. b. Gratuitous alienation of property wherein the debtor did not reserve sufficient property to cover his debts. Badges of Fraud: examples: a. Close relationship of the parties; b. When the debtor is the seller but is in continued possession of the property; c. When the price in the contract is grossly inadequate; d. When the debtor is already insolvent and he sells his property in credit.

CASE: ISIDORA L. CABALIW and SOLEDAD SADORRA, petitioners, vs. SOTERO SADORRA, ENCARNACION SADORRA, EMILIO ANTONIO, ESPERANZA RANJO, ANSELMO RALA, BASION VELASCO, IGNACIO SALMAZAN, and THE HONORABLE COURT OF APPEALS, respondents.

G.R. No. L-25650 June 11, 1975

The presumption of a fraudulent transaction which is not overcome by the mere fact that the deeds of sale in question were in the nature of public instruments Alienations by onerous title are also presumed fraudulent when made by persons against whom some judgment has been rendered in any instance or some writ of attachment has been issued. The decision or attachment need not refer to the property alienated, and need not have been obtained by the party seeking the rescission. Facts: Petitioner Isidora Cabaliw was the wife of Benigno Sadorra by his second marriage, they had a child, herein petitioner Soledad Sadorra. During their marriage, the spouses acquired two (2) parcels of land situated in Iniangan, Dupax, Nueva Vizcaya. Having been abandoned by her husband, Isidora Cabaliw instituted an action for support, which required Benigno Sadorra to pay herein petitioner Cabaliw the amount of P75.00 a month in terms of support as of January 1, 1933, and P150.00 in concept of attorney's fees and the costs. Due to the failure of Benigno to comply with the judgment of support, petitioner Cabaliw filed another action which authorized her to take possession of the conjugal property, to administer the same, and to avail herself of the fruits thereof in payment of the monthly support in arrears. Unknown to petitioner Cabaliw, Benigno executed two deeds of sale and sold the subject properties to herein private respondents. Such was fact only discovered after the judgment which authorized her to manage the same, Petitioners filed an action with the trial Court to recover the subject properties, which was ruled in their favor. The trial Court held that the deeds of sale executed by Benigno Sadorra to be simulated and fictitious. On appeal, the CA reversed the decision of the trial Court, hence this petition.

91


Petitioner contend that the Honorable Court of Appeals gravely erred in holding that the fraud could not be presumed in the transfer of the lots in question by the late Benigno Sadorra to his son-in-law Sotero Sadorra, even if this transfer was done shortly after judgment was rendered against the former and in favor of your petitioner Isidora Cabaliw. Respondent Court of Appeals sustained the validity and efficacy of the deeds of sale executed by Benigno Sadorra in favor of his son-in-law (Exhibits I and I-1) on the ground that these are public documents and as such are presumed by law to have been fair and legal; that the vendee Sotero Sadorra, is presumed to have acted in good faith, citing Art. 44, Spanish Civil Code, Art. 627 New Civil Code; that fraud is never presumed, and it is settled in this jurisdiction that strong and convincing evidence is necessary to overthrow the validity of an existing public instrument. The appellate court continued that inasmuch as under the old Civil Code in force at the time of the sale, the husband was empowered to dispose of the conjugal property without the consent of the wife, the sales made by Benigno Sadorra were valid, and the wife Isidora cannot now recover the property from the vendee. ISSUE: WON respondent Court of Appeals erred when it reversed the decision of the trial Court and held that fraud cannot be presumed in the transaction of Benigno and herein private respondents? HELD: Yes. The facts narrated in the first portion of this Decision which are not disputed, convincingly show or prove that the conveyances made by Benigno Sadorra in favor of his son-in-law were fraudulent. For the heart of the matter is that about seven months after a judgment was rendered against him in Civil Case No. 43192 of the Court of First Instance of Manila and without paying any part of that judgment, Benigno Sadorra sold the only two parcels of land belonging to the conjugal partnership to his son-inlaw. Such a sale even if made for a valuable consideration is presumed to be in fraud of the judgment creditor who in this case happens to be the offended wife. Article 1297 of the old Civil Code which was the law in force at the time of the transaction provides: Contracts by virtue of which the debtor alienates property by gratuitous title are presumed to be made in fraud of creditors. Alienations by onerous title are also presumed fraudulent when made by persons against whom some judgment has been rendered in any instance or some writ of attachment has been issued. The decision or attachment need not refer to the property alienated and need not have been obtained by the party seeking rescission. The above-quoted legal provision was totally disregarded by the appellate court, and there lies its basic error. We agree with petitioners that the parties here do not stand in equipoise, for the petitioners have in their favor, by a specific provision of law, the presumption of a fraudulent transaction which is not overcome by the mere fact that the deeds of sale in question were in the nature of public instruments. As well said in the dissenting opinion of Justice Magno Gatmaitan, the principle invoked by the majority opinion that to destroy the validity of an existing public document "strong and convincing evidence is necessary", operates "where the action was brought by one party against the other to impugn the contract but that rule cannot operate and does not, where the case is one wherein the suit is not between the parties inter se but is one instituted by a third person, not a party to the contract but precisely the victim of it because executed to his prejudice and behind his back; neither law, nor justice, nor reason, nor logic, should so permit, otherwise, in such a suit, the courts would be furnishing a most effective shield of defense to the aggressor." Furthermore, the presumption of fraud established by the law in favor of petitioners is bolstered by other indicia of bad faith on the part of the vendor and vendee. Thus (1) the vendee is the son-in-law of the vendor. In the early case of Regalado vs. Luchsinger & Co., 5 Phil. 625, this Court held that the close relationship between the vendor and the vendee is one of the known badges of fraud. (2) At the time of the conveyance, the vendee,

Sotero, was living with his father-in-law, the vendor, and he knew that there was a judgment directing the latter to give a monthly support to his wife Isidora and that his father-in-law was avoiding payment and execution of the judgment. (3) It was known to the vendee that his father-in-law had no properties other than those two parcels of land which were being sold to him. The fact that a vendor transfers all of his property to a third person when there is a judgment against him is a strong indication of a scheme to defraud one who may have a valid interest over his properties. Added to the above circumstances is the undisputed fact that the vendee Sotero Sadorra secured the cancellation of the lis pendens on O.C.T. No. 1, which was annotated in 1940 at the instance of Isidora Cabaliw, and the issuance of a transfer certificate of title in his favor, by executing an affidavit, Exhibit H, on June 7, 1948, wherein he referred to Isidora as "the late Isidora Cabaliw' when he knew for a fact that she was alive, and alleged that Civil Case 449 of the Court of First Instance of Nueva Vizcaya was decided in his favor where in truth there was no such decision because the proceedings in said case were interrupted by the last world war. Such conduct of Sotero Sadorra reveals, as stated by the lower court, an "utter lack of sincerity and truthfulness" and belies his pretensions of good faith.

Garganera, and her husband Mateo Garganera. The sale was registered on March 5, 1963. Transfer Certificate of Title No. 34425 was issued to the Garganeras. In Civil Case No. 626, another creditor of Pauli, the sale to the Garganera spouses was declared fictitious for being in fraud of creditors by the trial Court. In Civil Case No. 75319 dated January 13, 1969, having discovered the hidden property of herein appellant filed for the revival of Civil Case No. 32799, which was granted by the trial Court. On February 17, 1971, in Civil Case No 465, herein appellant filed another action against appellee Pauli, praying for the annulment of Conditional Sale as well as the Deed of Sale, of Hacienda Riverside to the Garganeras and also for annulment of Garganera's Certificate of Title No. T-34425. However, appellee Pauli filed a motion to dismiss on the grounds of res judicata, prescription, waiver and abandonment of claim, which was granted by the trial Court on the ground of prescription, hence this appeal.

On the part of the transferee, he did not present satisfactory and convincing evidence sufficient to overthrow the presumption and evidence of a fraudulent transaction. His is the burden of rebutting the presumption of fraud established by law, and having failed to do so, the fraudulent nature of the conveyance in question prevails.

ISSUE: WON the trial Court erred when it dismissed Civil Case No. 465 on the ground of prescription?

The decision of the Court of Appeals makes mention of Art. 1413 of the old Civil Code which authorizes the husband as administrator to alienate and bind by onerous title the property of the conjugal partnership without the consent of the wife, and by reason thereof, concludes that petitioner Isidora Cabaliw cannot now seek annulment of the sale made by her husband. On this point, counsel for petitioners rightly claims that the lack of consent of the wife to the conveyances made by her husband was never invoked nor placed in issue before the trial court. What was claimed all along by plaintiff, Isidora Cabaliw now petitioner, was that the conveyances or deeds of sale were executed by her husband to avoid payment of the monthly support adjudged in her favor and to deprive her of the means to execute said judgment. In other words, petitioner seeks relief not so much as an aggrieved wife but more as a judgment creditor of Benigno Sadorra. Art. 1413 therefore is inapplicable; but even if it were, the result would be the same because the very article reserves to the wife the right to seek redress in court for alienations which prejudice her or her heirs. The undisputed facts before Us clearly show that, the sales made by the husband were merely a scheme to place beyond the reach of the wife the only properties belonging to the conjugal partnership and deprive her of what rightly belongs to her and her only daughter Soledad.

Has the action for annulment of the sale of Lot 693 to the Garganeras prescribed? Did prescription of the action commence to run from the registration of the sale, or from the discovery of the transaction by the Bank?

HONGKONG & SHANGHAI BANKING CORPORATION, plaintiffappellant, vs. RALPH PAULI and SPOUSES SALLY P. GARGANERA and MATEO GARGANERA, defendants-appellees. G. R. No. L-38303 May 30, 1988

When a transaction involves registered land, the four-year period fixed in Article 1391 within winch to bring an action for annulment of the deed, shall be computed from the registration of the conveyance. The registration of the document is constructive notice of the conveyance to the whole world FACTS: In Civil Case No. 32799 dated June 14, 1957, appellant filed an action against appellee Pauli, in which its trial Court rendered in its favor. However, the writs of execution were returned unsatisfied because no leviable assets of Pauli could be located by the sheriffs. Unknown to herein appellant, Pauli had on January 8, 1957 purchased from the Philippine National Bank (PNB) a sugar cane plantation known as Hacienda Riverside. To avoid discovery of the transaction by his creditors, he did not register the deed of Sale. Six years later, on March 1, 1963, he fraudulently sold the hacienda to his daughter, defendant-appellee Sally

92


HELD: No, the Court held that the trial Court did no err when it dismissed Civil Case No. 465.

When a transaction involves registered land, the four-year period fixed in Article 1391 within winch to bring an action for annulment of the deed, shall be computed from the registration of the conveyance (March 5, 1963) on the familiar theory that the registration of the document is constructive notice of the conveyance to the whole world (Armentia vs. Patriarca, 18 SCRA 1253; Avecilla vs. Yatco, 103 Phil. 666). Plaintiff's submission that the four-year period commenced to run from the date when the Bank obtained actual knowledge of the fraudulent sale of Pauli's land to the Garganeras (sometime in 1969) and that hence the fouryear period for bringing an action to annul the sale had not yet expired when it filed the action for annullment on February 17, 1971, is unacceptable. That theory would diminish public faith in the integrity of torrens titles and impair commercial transactions involving registered lands for it would render uncertain the computation of the period for the prescription of such actions. Civil Case No. 465, the action for annulment of the Sale is not barred by res judicata, specifically, the prior judgment in Civil Case No. 75319, for revival of the judgment in the collection suit, Civil Case No. 32799, for the subject matter and causes of action in the two cases are different. The three (3) Identities required for the application of the bar by prior judgment: Identity of parties, of subject matter and causes of action, are lacking. Nevertheless, as the plaintiff's right of action in Civil Case No. 465 had already prescribed, the trial court did not err in dismissing the case. Art. 1382. Payments made in a state of insolvency for obligations to whose fulfillment the debtor could not be compelled at the time they were effected, are also rescissible. (1292) Art. 1383. The action for rescission is subsidiary; it cannot be instituted except when the party suffering damage has no other legal means to obtain reparation for the same. (1294) Art. 1384. Rescission shall be only to the extent necessary to cover the damages caused. (n) Art. 1385. Rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with

its interest; consequently, it can be carried out only when he who demands rescission can return whatever he may be obliged to restore. Neither shall rescission take place when the things which are the object of the contract are legally in the possession of third persons who did not act in bad faith. In this case, indemnity for damages may be demanded from the person causing the loss. (1295) Art. 1386. Rescission referred to in Nos. 1 and 2 of Article 1381 shall not take place with respect to contracts approved by the courts. (1296a) Art. 1387. All contracts by virtue of which the debtor alienates property by gratuitous title are presumed to have been entered into in fraud of creditors, when the donor did not reserve sufficient property to pay all debts contracted before the donation. Alienations by onerous title are also presumed fraudulent when made by persons against whom some judgment has been issued. The decision or attachment need not refer to the property alienated, and need not have been obtained by the party seeking the rescission. In addition to these presumptions, the design to defraud creditors may be proved in any other manner recognized by the law of evidence. (1297a) Art. 1388. Whoever acquires in bad faith the things alienated in fraud of creditors, shall indemnify the latter for damages suffered by them on account of the alienation, whenever, due to any cause, it should be impossible for him to return them. If there are two or more alienations, the first acquirer shall be liable first, and so on successively. (1298a) Art. 1389. The action to claim rescission must be commenced within four years. For persons under guardianship and for absentees, the period of four years shall not begin until the termination of the former's incapacity, or until the domicile of the latter is known. (1299) b.

VOIDABLE CONTRACTS – ARTS. 1390-1402, 1327-1328, 1339

Art. 1390. The following contracts are voidable or annullable, even though there may have been no damage to the contracting parties: (1) Those where one of the parties is incapable of giving consent to a contract; (2) Those where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud. These contracts are binding, unless they are annulled by a proper action in court. They are susceptible of ratification. (n) Art. 1391. The action for annulment shall be brought within four years. This period shall begin: In cases of intimidation, violence or undue influence, from the time the defect of the consent ceases. In case of mistake or fraud, from the time of the discovery of the same. And when the action refers to contracts entered into by minors or other incapacitated persons, from the time the guardianship ceases. (1301a) Art. 1392. Ratification extinguishes the action to annul a voidable contract. (1309a) Art. 1393. Ratification may be effected expressly or tacitly. It is understood

93


that there is a tacit ratification if, with knowledge of the reason which renders the contract voidable and such reason having ceased, the person who has a right to invoke it should execute an act which necessarily implies an intention to waive his right. (1311a) Art. 1394. Ratification may be effected by the guardian of the incapacitated person. (n) Art. 1395. Ratification does not require the conformity of the contracting party who has no right to bring the action for annulment. (1312) Art. 1396. Ratification cleanses the contract from all its defects from the moment it was constituted. (1313) Art. 1397. The action for the annulment of contracts may be instituted by all who are thereby obliged principally or subsidiarily. However, persons who are capable cannot allege the incapacity of those with whom they contracted; nor can those who exerted intimidation, violence, or undue influence, or employed fraud, or caused mistake base their action upon these flaws of the contract. (1302a) Art. 1398. An obligation having been annulled, the contracting parties shall restore to each other the things which have been the subject matter of the contract, with their fruits, and the price with its interest, except in cases provided by law. In obligations to render service, the value thereof shall be the basis for damages. (1303a) Art. 1399. When the defect of the contract consists in the incapacity of one of the parties, the incapacitated person is not obliged to make any restitution except insofar as he has been benefited by the thing or price received by him. (1304) Art. 1400. Whenever the person obliged by the decree of annulment to return the thing can not do so because it has been lost through his fault, he shall return the fruits received and the value of the thing at the time of the loss, with interest from the same date. (1307a) Art. 1401. The action for annulment of contracts shall be extinguished when the thing which is the object thereof is lost through the fraud or fault of the person who has a right to institute the proceedings. If the right of action is based upon the incapacity of any one of the contracting parties, the loss of the thing shall not be an obstacle to the success of the action, unless said loss took place through the fraud or fault of the plaintiff. (1314a) Art. 1402. As long as one of the contracting parties does not restore what in virtue of the decree of annulment he is bound to return, the other cannot be compelled to comply with what is incumbent upon him. (1308) Art. 1327. The following cannot give consent to a contract: (1) Unemancipated minors; (2) Insane or demented persons, and deaf-mutes who do not know how to write. (1263a) Art. 1328. Contracts entered into during a lucid interval are valid. Contracts agreed to in a state of drunkenness or during a hypnotic spell are voidable. (n) Art. 1339. Failure to disclose facts, when there is a duty to reveal them, as when the parties are bound by confidential relations, constitutes fraud. (n) c.

UNENFORCEABLE CONTRACTS – ARTS. 1403-1408, 1317, 1878

Art. 1403. The following contracts are unenforceable, unless they are ratified: (1) Those entered into in the name of another person by one who has been given no authority or legal representation, or who has acted beyond his

powers; (2) Those that do not comply with the Statute of Frauds as set forth in this number. In the following cases an agreement hereafter made shall be unenforceable by action, unless the same, or some note or memorandum, thereof, be in writing, and subscribed by the party charged, or by his agent; evidence, therefore, of the agreement cannot be received without the writing, or a secondary evidence of its contents:

For breach of that mutual promise to marry, Geronimo may sue Socorro for damages. This is such action, and evidence of such mutual promise is admissible. However Felipe Cabague's action may not prosper, because it is to enforce an agreement in consideration of marriage. Evidently as to Felipe Cabague and Matias Auxilio this action could not be maintained on the theory of "mutual promise to marry". Neither may it be regarded as action by Felipe against Socorro "on a mutual promise to marry."

(a) An agreement that by its terms is not to be performed within a year from the making thereof; (b) A special promise to answer for the debt, default, or miscarriage of another; (c) An agreement made in consideration of marriage, other than a mutual promise to marry; (d) An agreement for the sale of goods, chattels or things in action, at a price not less than five hundred pesos, unless the buyer accept and receive part of such goods and chattels, or the evidences, or some of them, of such things in action or pay at the time some part of the purchase money; but when a sale is made by auction and entry is made by the auctioneer in his sales book, at the time of the sale, of the amount and kind of property sold, terms of sale, price, names of the purchasers and person on whose account the sale is made, it is a sufficient memorandum; (e) An agreement of the leasing for a longer period than one year, or for the sale of real property or of an interest therein; (f) A representation as to the credit of a third person. (3) Those where both parties are incapable of giving consent to a contract.

Consequently, we declare that Geronimo may continue his action against Socorro for such damages as may have resulted from her failure to carry out their mutual matrimonial promises.

Breach of Promise to Marry: CASE: FELIPE CABAGUE and GERONIMO CABAGUE, plaintiffs-appellants, vs. MATIAS AUXILIO and SOCORRO AUXILIO, defendants-appellees. G. R. No. L-5028 November 26, 1952

For breach of that mutual promise to marry, Geronimo may sue Socorro for damages. This is such action, and evidence of such mutual promise is admissible. However Felipe Cabague's action may not prosper, because it is to enforce an agreement in consideration of marriage. Evidently as to Felipe Cabague and Matias Auxilio this action could not be maintained on the theory of "mutual promise to marry". Neither may it be regarded as action by Felipe against Socorro "on a mutual promise to marry." Facts: Appellants Felipe Cabague and Geronimo Cabague filed an action against herein appellees Matias Auxilio and Socorro Auxilio, to recover damages resulting from the appellees refusal to carry out the previously agreed marriage between Socorro and Geronimo. The complaint alleged, in short: (a) that defendants promised such marriage to plaintiffs, provided the latter would improve the defendants' house in Basud and spend for the wedding feast and the needs of the bride; (b) that relying upon such promises plaintiffs made the improvement and spent P700; and (c) that without cause defendants refused to honor their pledged word. Herein appellees moved to dismiss the case on the ground that the contract was oral, unenforceable under the rule of evidence hereinbefore mentioned, which was granted by the trial Court. On appeal, the appellate Court likewise issued an Order dismissing the case, hence this appeal. ISSUE: Whether or not the contract of promise to marry is unenforceable, on the ground that it is an oral contract. HELD: No. There is no question here that the transaction was not in writing. The only issue is whether it may be proved in court. The understanding between the plaintiffs on one side and the defendants on the other, really involves two kinds of agreement. One, the agreement between Felipe Cabague and the defendants in consideration of the marriage of Socorro and Geronimo. Another, the agreement between the two lovers, as "a mutual promise to marry".

94


Art. 1404. Unauthorized contracts are governed by Article 1317 and the principles of agency in Title X of this Book. Art. 1405. Contracts infringing the Statute of Frauds, referred to in No. 2 of Article 1403, are ratified by the failure to object to the presentation of oral evidence to prove the same, or by the acceptance of benefit under them. Art. 1406. When a contract is enforceable under the Statute of Frauds, and a public document is necessary for its registration in the Registry of Deeds, the parties may avail themselves of the right under Article 1357. Art. 1407. In a contract where both parties are incapable of giving consent, express or implied ratification by the parent, or guardian, as the case may be, of one of the contracting parties shall give the contract the same effect as if only one of them were incapacitated. If ratification is made by the parents or guardians, as the case may be, of both contracting parties, the contract shall be validated from the inception. Art. 1408. Unenforceable contracts cannot be assailed by third persons. Art. 1317. No one may contract in the name of another without being authorized by the latter, or unless he has by law a right to represent him. A contract entered into in the name of another by one who has no authority or legal representation, or who has acted beyond his powers, shall be unenforceable, unless it is ratified, expressly or impliedly, by the person on whose behalf it has been executed, before it is revoked by the other contracting party. (1259a) Art. 1878. Special powers of attorney are necessary in the following cases: (1) To make such payments as are not usually considered as acts of administration; (2) To effect novations which put an end to obligations already in existence at the time the agency was constituted; (3) To compromise, to submit questions to arbitration, to renounce the right to appeal from a judgment, to waive objections to the venue of an action or to abandon a prescription already acquired; (4) To waive any obligation gratuitously; (5) To enter into any contract by which the ownership of an immovable is transmitted or acquired either gratuitously or for a valuable consideration; (6) To make gifts, except customary ones for charity or those made to employees in the business managed by the agent; (7) To loan or borrow money, unless the latter act be urgent and indispensable for the preservation of the things which are under administration; (8) To lease any real property to another person for more than one year; (9) To bind the principal to render some service without compensation; (10) To bind the principal in a contract of partnership; (11) To obligate the principal as a guarantor or surety; (12) To create or convey real rights over immovable property; (13) To accept or repudiate an inheritance; (14) To ratify or recognize obligations contracted before the agency; (15) Any other act of strict dominion. (n) 3.

VOID OR INEXISTENT – ARTS. 1409-1422, 1318, 1353, 1378, 1491, 1898

Art. 1409. The following contracts are inexistent and void from the beginning: (1) Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public policy; (2) Those which are absolutely simulated or fictitious; (3) Those whose cause or object did not exist at the time of the transaction; (4) Those whose object is outside the commerce of men; (5) Those which contemplate an impossible service; (6) Those where the intention of the parties relative to the principal object of the contract cannot be ascertained; (7) Those expressly prohibited or declared void by law. These contracts cannot be ratified. Neither can the right to set up the defense of illegality be waived. Art. 1410. The action or defense for the declaration of the inexistence of a contract does not prescribe. Art. 1411. When the nullity proceeds from the illegality of the cause or object of the contract, and the act constitutes a criminal offense, both parties being in pari delicto, they shall have no action against each other, and both shall be prosecuted. Moreover, the provisions of the Penal Code relative to the disposal of effects or instruments of a crime shall be applicable to the things or the price of the contract. This rule shall be applicable when only one of the parties is guilty; but the innocent one may claim what he has given, and shall not be bound to comply with his promise. (1305) Art. 1412. If the act in which the unlawful or forbidden cause consists does not constitute a criminal offense, the following rules shall be observed: (1) When the fault is on the part of both contracting parties, neither may recover what he has given by virtue of the contract, or demand the performance of the other's undertaking; (2) When only one of the contracting parties is at fault, he cannot recover what he has given by reason of the contract, or ask for the fulfillment of what has been promised him. The other, who is not at fault, may demand the return of what he has given without any obligation to comply his promise. (1306) Art. 1413. Interest paid in excess of the interest allowed by the usury laws may be recovered by the debtor, with interest thereon from the date of the payment. Art. 1414. When money is paid or property delivered for an illegal purpose, the contract may be repudiated by one of the parties before the purpose has been accomplished, or before any damage has been caused to a third person. In such case, the courts may, if the public interest will thus be subserved, allow the party repudiating the contract to recover the money or property. Art. 1415. Where one of the parties to an illegal contract is incapable of giving consent, the courts may, if the interest of justice so demands allow recovery of money or property delivered by the incapacitated person. Art. 1416. When the agreement is not illegal per se but is merely prohibited, and the prohibition by the law is designated for the protection of the plaintiff, he may, if public policy is thereby enhanced, recover what he has paid or delivered. Art. 1417. When the price of any article or commodity is determined by statute, or by authority of law, any person paying any amount in excess of the maximum price allowed may recover such excess. Art. 1418. When the law fixes, or authorizes the fixing of the maximum number of hours of labor, and a contract is entered into whereby a laborer undertakes to work longer than the maximum thus fixed, he may demand additional compensation for service rendered beyond the time limit. Art. 1419. When the law sets, or authorizes the setting of a minimum

95


wage for laborers, and a contract is agreed upon by which a laborer accepts a lower wage, he shall be entitled to recover the deficiency. Art. 1420. In case of a divisible contract, if the illegal terms can be separated from the legal ones, the latter may be enforced. Art. 1421. The defense of illegality of contract is not available to third persons whose interests are not directly affected. Art. 1422. A contract which is the direct result of a previous illegal contract, is also void and inexistent. III. SPECIAL CONTRACTS A.

SALES Title VI. - SALES

QUESTION: A and B entered into an agreement whereby A obliged himself to deliver to A a specific thing and B will pay a certain price at the time of delivery. Was there a contract of sale? ANSWER: Not necessarily. Threre is no certainty as to the “purpose” of the delivery. If there is transfer of ownership, it will be regarded as a sale. If for use, lease. If for safekeeping, deposit. Art. 1458. By the contract of sale one of the contracting parties obligates himself to transfer the ownership and to deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent. A contract of sale may be absolute or conditional. (1445a) DEFINITION: Sales is a contract whereby one of the contracting parties obligates himself to transfer the ownership and to deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent. From the above definition: 1. Purpose: is to transfer of ownership; 2. Perfection: is by mere consent, since one of the parties “obligates” himself, as such, he already bound himself, a contract is already perfected even before delivery of the thing; 3. Subject Matter: determinate thing. 4. Cause: the contract of sale is onerous, since the other party has the obligation to pay; 5. Bilateral Contract: since both parties have their respective obligations; 6. Nominate Contract: not only because there’s a specific designation of the contract, but more so because there are specific rules are provided by law to govern the rights and obligations of the parties, after stipulations; 7. Commutative: classic commutative in the sense that there is equivalence in the prestation of the parties. Ordinarily, price reflects the value of the property, since the seller would not normally accept a price below the value of the property and the buyer would not normally pay an amount more than the value of the property.

Aleatory: there is also a sale of hope where there is no equivalence in the value of prestations. Since the obligation of the other party is not certain to arise. E.g., lotto.

Art. 1461. Things having a potential existence may be the object of the contract of sale. The efficacy of the sale of a mere hope or expectancy is deemed subject to the condition that the thing will come into existence. The sale of a vain hope or expectancy is void. (n) KINDS OF SALE: NATURE OF THE SUBJECT MATTER:

1.

Real or Personal:

2.

Relevant as to: a. Application of the statute of frauds; b. Rules on double sale; c. Maceda law which covers only “residential realty”. E.g., condominium units, land, buildings; d. Recto law which covers personal property only. Thing (corporeal or tangible) or Rights (incorporeal or intangible) Relevant as to mode of delivery.

KINDS OF SALE AS TO VALIDITY: valid, rescissible, voidable, unenforceable, or void. BAR QUESTION: State the basic difference (only in their legal effects) – (a) Between a contract to sell, on the one hand, and a contract of sale, on the other hand; (b) Between a conditional sale, on the one hand, and an absolute sale, on the other hand. ANSWER: contract to sell vs. contract of sale (both absolute and conditional): contract to sell is a special kind of conditional sale where ownership does not automatically pass upon fulfillment of the condition which is usually the full payment of the purchase price. It will only give the buyer the right to demand the execution of a deed of sale or to compel the seller to sell and the seller is now bound to sell. Ownership transfers upon execution of the deed of sale. The premise is that the buyer is already in possession of the property even before execution of the deed of sale. Whereas a conditional sale, ownership automatically transfers to the buyer upon fulfillment of the condition, without need of a new agreement or to execute a new contract In absolute sale, ownership transfers upon delivery, actual or constructive, even if no total payment yet. If no payment happened, the buyer becomes a debtor as far as the price is concerned. The remedy for the seller is rescission and not reconveyance of the property since the property already belongs to the buyer. BAR QUESTION: Arthur gave Richard a receipt which states: “Receipt Received from Richard as down payment for my 1995 Toyota Corolla with plate no. XYZ-123…………………………………… P50,000.00 Balance payable: 12/30/01…………………… P50,000.00 September 15, 2001

(Sgd.) Arturo”

After delivery of initial payment of P100,000, Monica took possession of the land but failed to pay the remaining balance. Nante filed an action to recover the property alleging that the contract is one to sell which was not perfected because of non-payment of the price in full. Is the contention of Nante tenable? HELD: No. This cannot be a contact to sell, because there is nothing in the contract that he reserved ownership until a certain condition is fulfilled. Thus, the contract is one of absolute sale. As such, upon delivery, Monica acquired ownership of the property. The action will not prosper because Monica is the owner and has a right to possess the property. Remedy of Nante should be “rescission” since there is substantial breach. DISTINGUISHED FROM OTHER TRANSACTIONS:: Rationale for distinguishing: because there are similarities which may cause confusion as to the rights and obligations of the parties. 1.

Contract for a piece of work

Art. 1467. A contract for the delivery at a certain price of an article which the vendor in the ordinary course of his business manufactures or procures for the general market, whether the same is on hand at the time or not, is a contract of sale, but if the goods are to be manufactured specially for the customer and upon his special order, and not for the general market, it is a contract for a piece of work. (n) Importance of Distinction: sale is covered by the statute of frauds. On the other hand, contracts for a piece of work is covered only if to be performed after more than one year. E.g., customized shoes. If for more than 1 year – covered by statute of frauds. If for 6 months – depends on type of contract. SIMILARITIES: transfer of ownership; buyer pays the price.

Subject matter: sale: thing; contract for a piece of work: service. the Massachussetts Rule: if the thing to be delivered by the obligor is manufactured in the ordinary course of business, and being offered to the general market, even if not at hand at the time the order is made, it is a contract of sale; But, if the thing is to be manufactured only because of the order of the buyer; not offered to the general market – contract for a piece of work.

Does this receipt evidence a contract to sell? Why?

2.

ANSWER: No. there is nothing in the receipt that would indicate that the seller reserved ownership. In a contract where the seller did not reserve ownership, it is an absolute sale. In a contract to sell, you have to impose as a condition for the transfer of ownership, the full payment of the price.

Similarity: upon delivery, ownership passes. Although, dacion en pago, there is always transfer of ownership.

Would action for recovery possession prosper? No. Because Richard is the owner. The action should be rescission. BAR QUESTION: a contract to sell is the same as a conditional sale. Do you agree? Why? ANSWER: I do not agree. A contract to sell is a kind of conditional contract of sale, it is not the same as a conditional contract of sale. BAR QUESTION: Nante, a registered owner of a parcel of land in QC sold the property to Monica under a Deed of Sale which reads as follows: “That for and in consideration of P500,000 to be delivered to me and receipt of which will be acknowledge by me, I hereby transfer, cede to Monica, a parcel of land covered by TCT No. 9138”

96


Dacion en pago:

Delivery – in dacion en pago is always required. Both governed by the law on sales. Distinction: sale is a contract and a source of obligation. Dation in payment is a special form of payment and a mode of extinguishment of an obligation. In sale, an obligation arises. In dation in payment, the obligation is extinguished. In sale, there is no requirement of a pre-existing obligation, in dation in payment, as a special form of payment, there is a need for a pre-existing obligation. If there is no obligation, there is nothing to be extinguished. 3.

Barter

Art. 1468. If the consideration of the contract consists partly in money, and partly in another thing, the transaction shall be characterized by the manifest intention of the parties. If such intention does not clearly appear, it shall be considered a barter if the value of the thing given as a part of the consideration exceeds the amount of the money or its equivalent; otherwise, it is a sale. (1446a) In an agreement where A obliged himself to give to B a watch worth P800,000, and B obliged himself to give to A, his car and cash P350,000. What contract was entered into? ANSWER: first, what is the intention? How the parties intended the contract to be. If the intention is not clear, it will depend on the value of the car. If the value of the car is greater than cash, it will be treated as barter. If the value of the car is less than P350,000 it will be treated as a sale. 4.

Contract of agency to sell

Art. 1466. In construing a contract containing provisions characteristic of both the contract of sale and of the contract of agency to sell, the essential clauses of the whole instrument shall be considered. (n) BAR QUESTION: A granted B the exclusive right to sell his brand of maong pants in Isabela, the price for his merchandise payable 60 days from delivery, and promising B a commission of 20% on all sales. After the delivery of the merchandise to B but before he could sell any of them, B’s store in Isabela was completely burned without his fault, together with all A’s pants. Must B pay A for his lost pants? Why? ANSWER: Yes. Risk of Loss – who bears the loss? The owner bears the loss – res perit domino. Under the facts, who is the owner of the loss when the maong pants were burned? Issue – what kind of contract was entered into? Quiroga vs. Parsons. The contract seems like an agency to sell: (1) exclusive right to sell; (2) commission. However, this is a contract of sale. 1466: if a contract has characteristics both of sale and agency, consider essential clauses of the contract: (1) A has the obligation to deliver the maong pants; (2) B has the obligation to pay the price within 60 days from delivery. The above clauses pertain to sales. “pay the price within 60 days” – not agency. In agency, the agent has the right to return the unsold pants and not to pay the price within a certain period. What kind of sale? Absolute or conditional? Absolute. Nothing in the problem would tell us that the seller reserved ownership and here there is delivery already. Therefore, B was the owner at the time of loss. B has the obligation to pay for the lost pants. ANDRES QUIROGA, plaintiff-appellant, vs. PARSONS HARDWARE CO., defendant-appellee.

G.R. No. L-11491

August 23, 1918

FACTS: Plaintiff and Defendant entered into a contract where plaintiff Quiroga gave the exclusive right to sell his beds to Parsons Harware Co.’s in the Visayan Islands under the following conditions, among others: 1. 2. 3. 4.

Quiroga would invoice the beds on the price fixed for sales in Manila and shall make an allowance of 25% of the invoiced prices as commission on the sale; Quiroga would order by the dozen, whether the same or different styles; Mr. Quiroga to give notice 15 days before any alteration in the price which he may plan to make in respect to his beds; Mr. Parsons binds himself not to sell any other kind except the “Quiroga” beds;

Of the three causes of action alleged by the plaintiff in his complaint, only two of them constitute the subject matter of this appeal and both substantially amount to the averment that the defendant violated the following obligations: not to sell the beds at higher prices than those of the

97


invoices; to have an open establishment in Iloilo; itself to conduct the agency; to keep the beds on public exhibition, and to pay for the advertisement expenses for the same; and to order the beds by the dozen and in no other manner. As may be seen, with the exception of the obligation on the part of the defendant to order the beds by the dozen and in no other manner, none of the obligations imputed to the defendant in the two causes of action are expressly set forth in the contract. But the plaintiff alleged that the defendant was his agent for the sale of his beds in Iloilo, and that said obligations are implied in a contract of commercial agency. The whole question, therefore, reduced itself to a determination as to whether the defendant, by reason of the contract hereinbefore transcribed, was a purchaser or an agent of the plaintiff for the sale of his beds. ISSUE: WON the contract is one of agency or one of sales? HELD: SALE. In order to classify a contract, due regard must be given to its essential clauses. In the contract in question, what was essential, as constituting its cause and subject matter, is that the plaintiff was to furnish the defendant with the beds which the latter might order, at the price stipulated, and that the defendant was to pay the price in the manner stipulated. The price agreed upon was the one determined by the plaintiff for the sale of these beds in Manila, with a discount of from 20 to 25 per cent, according to their class. Payment was to be made at the end of sixty days, or before, at the plaintiff's request, or in cash, if the defendant so preferred, and in these last two cases an additional discount was to be allowed for prompt payment. These are precisely the essential features of a contract of purchase and sale. There was the obligation on the part of the plaintiff to supply the beds, and, on the part of the defendant, to pay their price. These features exclude the legal conception of an agency or order to sell whereby the mandatory or agent received the thing to sell it, and does not pay its price, but delivers to the principal the price he obtains from the sale of the thing to a third person, and if he does not succeed in selling it, he returns it. By virtue of the contract between the plaintiff and the defendant, the latter, on receiving the beds, was necessarily obliged to pay their price within the term fixed, without any other consideration and regardless as to whether he had or had not sold the beds. It would be enough to hold, as we do, that the contract by and between the defendant and the plaintiff is one of purchase and sale, in order to show that it was not one made on the basis of a commission on sales, as the plaintiff claims it was, for these contracts are incompatible with each other. But, besides, examining the clauses of this contract, none of them is found that substantially supports the plaintiff's contention. Not a single one of these clauses necessarily conveys the idea of an agency. The words commission on sales used in clause (A) of article 1 mean nothing else, as stated in the contract itself, than a mere discount on the invoice price. The word agency, also used in articles 2 and 3, only expresses that the defendant was the only one that could sell the plaintiff's beds in the Visayan Islands. With regard to the remaining clauses, the least that can be said is that they are not incompatible with the contract of purchase and sale. The plaintiff also endeavored to prove that the defendant had returned beds that it could not sell; that, without previous notice, it forwarded to the defendant the beds that it wanted; and that the defendant received its commission for the beds sold by the plaintiff directly to persons in Iloilo. But all this, at the most only shows that, on the part of both of them, there was mutual tolerance in the performance of the contract in disregard of its terms; and it gives no right to have the contract considered, not as the parties stipulated it, but as they performed it. Only the acts of the contracting parties, subsequent to, and in connection with, the execution of the contract, must be considered for the purpose of interpreting the contract, when such interpretation is necessary, but not when, as in the instant case, its essential agreements are clearly set forth and plainly show that the contract belongs to a certain kind and not to another. Furthermore, the return made was of certain brass beds, and was not effected in exchange for the price paid for them, but was for other beds of another kind; and for the letter Exhibit L-1, requested the plaintiff's prior consent with respect to said beds, which shows that it was not considered that the defendant had a right, by virtue

of the contract, to make this return. As regards the shipment of beds without previous notice, it is insinuated in the record that these brass beds were precisely the ones so shipped, and that, for this very reason, the plaintiff agreed to their return. And with respect to the so-called commissions, we have said that they merely constituted a discount on the invoice price, and the reason for applying this benefit to the beds sold directly by the plaintiff to persons in Iloilo was because, as the defendant obligated itself in the contract to incur the expenses of advertisement of the plaintiff's beds, such sales were to be considered as a result of that advertisement. In respect to the defendant's obligation to order by the dozen, the only one expressly imposed by the contract, the effect of its breach would only entitle the plaintiff to disregard the orders which the defendant might place under other conditions; but if the plaintiff consents to fill them, he waives his right and cannot complain for having acted thus at his own free will. For the foregoing reasons, we are of opinion that the contract by and between the plaintiff and the defendant was one of purchase and sale, and that the obligations the breach of which is alleged as a cause of action are not imposed upon the defendant, either by agreement or by law. The judgment appealed from is affirmed, with costs against the appellant. So ordered. ELEMENTS OF A CONTRACT OF SALE: 1. 2.

3.

Natural – those which are deemed part of the contract even if not stipulated or even if the parties are unaware. Deemed part of the contract by law. E.g., warranties. Accidental – present only because the parties so stipulated. E.g. obligation to pay interest. E.g., in a contract of sale of a parcel of land, obligation of the seller to cause the registration of the land in the name of the buyer. Essential – required for validity.

ESSENTIAL ELEMENTS OF A CONTRACT OF SALE: 1. Consent of the contracting parties, i.e., the buyer and the seller. No consent of one of the contracting parties: the contract is VOID. Under the law on sales, it is a fictitious contract where the signature of one of the parties was forged. If the signature of the seller is forged, that would be a fictitious contract. The alleged seller will not have participation in the execution of the contract. Simulated Contract: parties to this contract actually would have participation or would have given their consent by voluntarily signing. However, they do not intend to be bound at all or they may intend to be bound to another contract aside from the contract executed. Example, the parties may have executed a deed of sale and voluntarily gave their consent thereto and signed the same, but no payment of the purchase price or no intention to pay such price, in this case, the contract intended might have been a donation. Gross Inadequacy of Price: as a rule, gross inadequacy of the price does not affect a contract of sale, but may reflect a different intention of the parties (e.g., donation). In which case, the price is simulated, it will be void as a sale: Art. 1471. If the price is simulated, the sale is void, but the act may be shown to have been in reality a donation, or some other act or contract. (n)

Why would they enter into such simulated contract? a.

b. c.

To defraud creditors – the seller might sell all of his assets to make it appear as if he had no more assets left; To defraud the government – to make it appear that the applicant for a resident visa has real property in the Philippines or in some other country for purposes of such visa. To minimize tax liabilities – this is when the parties would normally make it appear that they entered into a donation to minimize the tax liabilities imposable compared to the taxes due on a regular sale.

98


d.

To circumvent the provisions of legitimes and collation under succession – to make it appear that the asset was sold so as exclude it from collation.

Incapacity: consent may have been given, but the one giving it is incapacitated. a. Absolute Incapacity – the party cannot give consent to any and all contract; b. Relative Incapacity – the party is prohibited from entering some specific transactions with some persons and sometimes over specific things. 1490: spouses are prohibited from selling to each other. Rationale: possibility of undue influence. Except: when there is complete separation of property regime or there is a decree of separation of property (not legal separation). Art. 1490. The husband and the wife cannot sell property to each other, except: (1) When a separation of property was agreed upon in the marriage settlements; or (2) When there has been a judicial separation or property under Article 191. (1458a) 1491: prohibits in acquiring by purchase: (1) guardians as to the property of his ward; (2) agents, for properties delivered to him by the principal; (3) executors/administrators; (4) lawyers. Art. 1491. The following persons cannot acquire by purchase, even at a public or judicial auction, either in person or through the mediation of another: (1) The guardian, the property of the person or persons who may be under his guardianship; (2) Agents, the property whose administration or sale may have been entrusted to them, unless the consent of the principal has been given; (3) Executors and administrators, the property of the estate under administration; (4) Public officers and employees, the property of the State or of any subdivision thereof, or of any government-owned or controlled corporation, or institution, the administration of which has been intrusted to them; this provision shall apply to judges and government experts who, in any manner whatsoever, take part in the sale; (5) Justices, judges, prosecuting attorneys, clerks of superior and inferior courts, and other officers and employees connected with the administration of justice, the property and rights in litigation or levied upon an execution before the court within whose jurisdiction or territory they exercise their respective functions; this prohibition includes the act of acquiring by assignment and shall apply to lawyers, with respect to the property and rights which may be the object of any litigation in which they may take part by virtue of their profession. (6) Any others specially disqualified by law. (1459a) Art. 1492. The prohibitions in the two preceding articles are applicable to sales in legal redemption, compromises and renunciations. (n) Constitution: aliens are prohibited from acquiring lands in the Philippines, except: by succession or in case of a former natural born Filipino citizen who has lost his citizenship. Status of Contract: VOID. Contrary to public policy. Not subject to ratification. Rubias vs. Batiller – the SC held that 1491 cannot be “ratified.” There are others who claim that these can be ratified. The execution of a second contract does not retroact to the first contract. Ruling in Waltson vs. Martinez, holding that sale under 1491 is voidable, has long been abandoned even before the effectivity of the new Civil Code. BAR QUESTION: Rica filed a petition for annulment of his marriage with Richard. Richard hired Atty. Cruz who was paid through conveyance of a parcel of land which he recently purchased with his lotto winnings. The transfer documents were duly signed and Atty .Cruz took possession by

fencing the entire parameter. Richard then offered the same parcel of land to spouses Garcia. Immediately after the sale, Sps. Garcia commenced the construction on the land which was objected to by Atty. Cruz, who claims he has a better right over the property. Is Atty. Cruz correct?

Both would pertain to generic thing. Under the law, a thing is considered determinate only when it is particularly designated or physically segregated from all others of the same class. Both transactions pertain to generic so both transactions are void?

ANSWER: Atty. Cruz is not correct. First contract with Atty. Cruz is a dation in payment. Second contract is a sale. Double sale applicable despite dation since it is governed by law on sales. However, 1544 requires that both sales are valid.

A: No. The first transaction is void. The second transaction is valid because Article 1460 requires that the requirement of the law that a thing should be determinate would be sufficiently complied with if the thing which is the object of the sale is capable of being made determinate without a need of a new or further agreement.

Dation in payment – valid transaction? No. Void. 1491: a lawyer cannot in anyway acquire by purchase (law on sales is applicable on dation in payment) a thing which is the subject matter of an action. There was annulment of marriage, the parcel of land is one of the properties which would be considered in settlement of conjugal properties. Property acquired through his lotto winnings, if the marriage is solemnized under the Family Code, and no marriage settlement was entered into, absolute community of property. As such, lotto winnings are considered community property, consequently, the land is community property. As such, sale of such without the consent of the wife is void. Vitiated consent: by force, intimidation, violence, mistake or fraud – the contract is voidable. Consent by a party given by another without authority: the contract is unenforceable.

Minors and those without capacity to act: may enter into a valid

contract of sale of “necessaries” as provided under Art. 1489. Necessaries are those which are indispensable for sustenance, dwelling, clothing and medical attendance. (Art. 290 of the Civil Code under Support)

Art. 1464. In the case of fungible goods, there may be a sale of an undivided share of a specific mass, though the seller purports to sell and the buyer to buy a definite number, weight or measure of the goods in the mass, and though the number, weight or measure of the goods in the mass is undetermined. By such a sale the buyer becomes owner in common of such a share of the mass as the number, weight or measure bought bears to the number, weight or measure of the mass. If the mass contains less than the number, weight or measure bought, the buyer becomes the owner of the whole mass and the seller is bound to make good the deficiency from goods of the same kind and quality, unless a contrary intent appears. (n) Art. 1462. The goods which form the subject of a contract of sale may be either existing goods, owned or possessed by the seller, or goods to be manufactured, raised, or acquired by the seller after the perfection of the contract of sale, in this Title called "future goods." There may be a contract of sale of goods, whose acquisition by the seller depends upon a contingency which may or may not happen. (n) Art. 1463. The sole owner of a thing may sell an undivided interest therein. (n)

2.

Cause – as to each contracting party is the prestation or promise to be performed by the other party.

Art. 1465. Things subject to a resolutory condition may be the object of the contract of sale. (n)

3.

Object – not synonymous to thing, it is the subject matter – in sales, i.e., things and rights – not service (object in contracts, in general) since no person acquires ownership over service – object as to lease and agency.

PRICE: must be “certain in money”.

Sale of right – often called “assignment”. But assignment of right is not always a contract of sale, since it can be done by donation or dacion en pago.

Must be within the commerce of men: Examples: sale of a navigable river is void, sale of a cadaver is void but donation of a cadaver is allowed, sale of human organs is void, things which are not appropriated like air is void but if appropriated it can be the object of a valid sale.

Art. 1459. The thing must be licit and the vendor must have a right to transfer the ownership thereof at the time it is delivered. (n)

Thing must be licit: not contrary to law, i.e., sale of prohibited drugs, wild flowers or wild animals.

Art. 1460. A thing is determinate when it is particularly designated or physical segregated from all other of the same class. The requisite that a thing be determinate is satisfied if at the time the contract is entered into, the thing is capable of being made determinate without the necessity of a new or further agreement between the parties. (n)

Must be determinate: or at least capable of being made determinate without the requirement of a new or further agreement.

QUESTION: Sale of a car without agreement as to the features for P1M. On the other hand, another transaction would be a sale of Mitsubishi Lancer, 2007, GSL and color black for P1M. Are these 2 transactions, valid sale?

99


Art. 1469. In order that the price may be considered certain, it shall be sufficient that it be so with reference to another thing certain, or that the determination thereof be left to the judgment of a special person or persons. Should such person or persons be unable or unwilling to fix it, the contract shall be inefficacious, unless the parties subsequently agree upon the price. If the third person or persons acted in bad faith or by mistake, the courts may fix the price. Where such third person or persons are prevented from fixing the price or terms by fault of the seller or the buyer, the party not in fault may have such remedies against the party in fault as are allowed the seller or the buyer, as the case may be. (1447a)

Price Certain in Money: it is sufficient that it be so: 1. 2.

With reference to another thing certain; or That the determination thereof be left to the judgment of a special person or persons.

Art. 1470. Gross inadequacy of price does not affect a contract of sale, except as it may indicate a defect in the consent, or that the parties really intended a donation or some other act or contract. (n) OTHER PROVISIONS ON PRICE: Art. 1472. The price of securities, grain, liquids, and other things shall also be considered certain, when the price fixed is that which the thing sold would have on a definite day, or in a particular exchange or market, or when an amount is fixed above or below the price on such day, or in such exchange or market, provided said amount be certain. (1448) Art. 1473. The fixing of the price can never be left to the discretion of one

of the contracting parties. However, if the price fixed by one of the parties is accepted by the other, the sale is perfected. (1449a) Art. 1474. Where the price cannot be determined in accordance with the preceding articles, or in any other manner, the contract is inefficacious.

Option Contract: If there is a consideration distinct and separate from the price, the offerer cannot validly withdraw before the period agreed upon expires without being liable for damages. This does not, however, entitle the offeree the right to demand specific performance since there is no perfected contract of sale yet.

Offeree accepted before withdrawal of the offer is communicated to him:

However, if the thing or any part thereof has been delivered to and appropriated by the buyer he must pay a reasonable price therefor. What is a reasonable price is a question of fact dependent on the circumstances of each particular case. (n)

the contract of sale, being consensual, is already perfected.

PERFECTION:



Art. 1475. The contract of sale is perfected at the moment there is a meeting of minds upon the thing which is the object of the contract and upon the price.

Earnest Money: is different from option in money, since the former forms part of the purchase price.

From that moment, the parties may reciprocally demand performance, subject to the provisions of the law governing the form of contracts. (1450a)

Art. 1482. Whenever earnest money is given in a contract of sale, it shall be considered as part of the price and as proof of the perfection of the contract. (1454a)

Consensual Contract: sale, being a consensual contract, is perfected by

Does this mean that there is already a perfected contract of sale?

mere consent. The above article is likewise applicable to sale of rights, when there is a meeting of the minds as the “right involved” and the price. However, ownership over the thing or rights subject of the sale, does not transfer until delivery:

Art. 1477. The ownership of the thing sold shall be transferred to the vendee upon the actual or constructive delivery thereof. (n) Moreover, the parties may stipulate that ownership shall not pass until full payment of the price: Art. 1478. The parties may stipulate that ownership in the thing shall not pass to the purchaser until he has fully paid the price. (n) Art. 1476. In the case of a sale by auction: (1) Where goods are put up for sale by auction in lots, each lot is the subject of a separate contract of sale. (2) A sale by auction is perfected when the auctioneer announces its perfection by the fall of the hammer, or in other customary manner. Until such announcement is made, any bidder may retract his bid; and the auctioneer may withdraw the goods from the sale unless the auction has been announced to be without reserve. (3) A right to bid may be reserved expressly by or on behalf of the seller, unless otherwise provided by law or by stipulation. (4) Where notice has not been given that a sale by auction is subject to a right to bid on behalf of the seller, it shall not be lawful for the seller to bid himself or to employ or induce any person to bid at such sale on his behalf or for the auctioneer, to employ or induce any person to bid at such sale on behalf of the seller or knowingly to take any bid from the seller or any person employed by him. Any sale contravening this rule may be treated as fraudulent by the buyer. (n) Art. 1479. A promise to buy and sell a determinate thing for a price certain is reciprocally demandable. An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon the promissor if the promise is supported by a consideration distinct from the price. (1451a) Option Agreement: in an option agreement, as provided under Art. 1324, the offerer may withdraw the offer before acceptance is communicated to him, and he would not be liable for damages. Offerer is not bound, he may withdraw anytime before acceptance is conveyed to him. The above rule is likewise applicable to contracts of sale.

100


Option Money: 

is not necessarily “money” only, it can be any prestation like services or other things. Not necessarily “paid” already. “Promise” may also be considered as a consideration for the option contract.

Not necessarily. Earnest money is “proof” of perfection of the contract. The law does not say its presence entails perfection of the contract. Considering that it concerns “price” only, which is just one element of a contract of sale.

Art. 1481. In the contract of sale of goods by description or by sample, the contract may be rescinded if the bulk of the goods delivered do not correspond with the description or the sample, and if the contract be by sample as well as description, it is not sufficient that the bulk of goods correspond with the sample if they do not also correspond with the description. The buyer shall have a reasonable opportunity of comparing the bulk with the description or the sample. (n) Art. 1483. Subject to the provisions of the Statute of Frauds and of any other applicable statute, a contract of sale may be made in writing, or by word of mouth, or partly in writing and partly by word of mouth, or may be inferred from the conduct of the parties. (n)

Form: no specific form is required for the perfection of a contract of sale. However, the same is still subject to the Statute of Frauds for its enforceability.

BAR QUESTION: (2) “X” came across an advertisement in the “Manila Daily Bulletin” about the rush sale of three slightly used TOYOTA cars, Model 1989 for only P200,000 each. Finding the price to be very cheap and in order to be sure that he gets one unit ahead of the others, “X” immediately phoned the advertiser “Y” and placed an order for one car. “Y” accepted the order and promised to deliver the ordered unit on July 15, 1989. On the said date, however, “Y” did not deliver the unit. “X” brings an action to compel “Y” to deliver the unit. Will such action prosper? Give your reasons. ANSWER: WON the action will prosper goes into perfection, which may also be subject to formalities required by law. Since the subject matter is a movable, and price is more than P500, it is unenforceable since it is not written. The action will not prosper, if there is proper objection. BAR QUESTION: “A” and “B” entered into a verbal contract whereby “A” agreed to sell to “B” his only parcel of land for P20,000.00, and “B” agreed to buy at the aforementioned price. “B” went to the bank, withdrew the necessary amount, and returned to “A” for the consummation of the contract. “A” however, had changed his mind and refused to go through with the sale. Is the agreement valid? Will an action by “B” against “A” for specific performance prosper? Reason. ANSWER: even though there was an agreement as to the object and the price, and all the essential requisites are present and there is a valid

agreement, if there is a proper objection, it cannot be enforced, since this is a sale of immovable, which should have been made in writing. Can it be argued that since B wen to the bank to withdraw the money and returned to A for consummation, there was part performance? No. The act of B is just preliminary to performance.

memorandum, his cause of action is thereby established, especially since the defendant has not denied the letters in question. At any rate, if the Court below entertained any doubts about the existence of the written memorandum, it should have called for a preliminary hearing on that point, and not dismissed the complaint THE RECTO LAW:

CASE: Art. 1403(2): “an agreement hereafter made shall be unenforceable by action, unless the same, or some note or memorandum, thereof, be in writing, and subscribed by the party charged, or by his agent”

A transaction closed by a letter/telegram is perfected and is not covered by the Statute of Frauds, the letter/telegram being a “note or memorandum,” since they were signed, refer to the property sold and its area, and indicate the price. A sufficient memorandum may be contained in two or more documents. CIRILO PAREDES, plaintiff-appellant, vs. JOSE L. ESPINO, defendant-appellee.

G.R. No. L-23351

March 13, 1968

FACTS: Appellant Cirilo Parades filed an action to compel defendantappellee Jose L. Espino to execute a deed of sale and to pay damages alleging that the defendant "had entered into the sale" of a lot; that the deal had been "closed by letter and telegram" but the actual execution of the deed of sale and payment of the price were deferred to the arrival of defendant at Puerto Princesa; that defendant upon arrival had refused to execute the deed of sale although plaintiff was able and willing to pay the price, and continued to refuse despite written demands of plaintiff; that as a result, plaintiff had lost expected profits from a resale of the property, and caused plaintiff mental anguish and suffering. Defendant filed a motion to dismiss upon the ground that the complaint stated no cause of action, and that the plaintiff's claim upon which the action was founded was unenforceable under the Statute of Frauds which was granted by the court on the ground that there is no written contract between the parties. ISSUE: WON the contract is unenforceable under the Statute of Frauds? HELD: No. The Statute of Frauds, embodied in Article 1403 of the Civil Code of the Philippines, does not require that the contract itself be in writing. The plain text of Article 1403, paragraph (2) is clear that a written note or memorandum, embodying the essentials of the contract and signed by the party charged, or his agent, suffices to make the verbal agreement enforceable, taking it out of the operation of the statute. In the case at bar, the complaint in its paragraph 3 pleads that the deal had been closed by letter and telegram" (Record on Appeal, p. 2), and the letter referred to was evidently the one copy of which was appended as Exhibit A to plaintiff's opposition to the motion dismiss. This letter, together with that one marked as Appendix B, constitute an adequate memorandum of the transaction. They are signed by the defendant-appellee; refer to the property sold as a lot in Puerto Princesa, Palawan, covered, by TCT No. 62; give its area as 1826 square meters and the purchase price of four (P4.00) pesos per square meter payable in cash. We have in them therefore, all the essential terms of the contract, and they satisfy the requirements of the Statute of Frauds. We have ruled in Berg vs. Magdalena Estate, Inc., 92 Phil. 110, 115, that a sufficient memorandum may be contained in two or more documents. Defendant-appellee argues that the authenticity of the letters has not been established. That is not necessary for the purpose of showing prima facie that the contract is enforceable. For as ruled by us in Shaffer vs. Palma, L-24115, March 1, 1968, whether the agreement is in writing or not, is a question of evidence; and the authenticity of the writing need not be established until the trial is held. The plaintiff having alleged that the contract is backed by letter and telegram, and the same being a sufficient

101


Art. 1484. In a contract of sale of personal property the price of which is payable in installments, the vendor may exercise any of the following remedies: (1) Exact fulfillment of the obligation, should the vendee fail to pay; (2) Cancel the sale, should the vendee's failure to pay cover two or more installments; (3) Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendee's failure to pay cover two or more installments. In this case, he shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary shall be void. (1454-A-a)

Remedies are alternative: if the seller invoked one, he is no longer allowed to invoke any of the two remaining remedies.

If only one installment was not paid: the seller can only choose the

first remedy, since the 2nd and 3rd requires that there must be non-payment of two or more consecutive installments. Consecutive since the law does not state that “the buyer failed to pay TWICE”. (Uribe, 2016)

Restitution of payments under the 2nd option, cancellation of the sale: 1. 2. 3.

The cancellation would entail mutual restitution by the parties; The seller may retain a reasonable amount of the purchase price already paid as compensation for the use of the thing; The seller cannot retain ALL of the purchase price, EXCEPT: if there is a forfeiture clause, which entitles him to the purchase price already paid at the time of cancellation. However, this clause will not apply if the retention of ALL the purchase price would be unconscionable. Note that under the MACEDA law, a forfeiture clause would not be valid.

BAR QUESTION: bought a truck from B payable in installment secured by a chattel mortgage executed by A on the truck. As additional security, A’s brother, C, executed a real estate mortgage in favor of B. A defaulted in the payment of several installments. foreclosed the chattel mortgage.

Consequently, B

Can B proceed against the other properties of A and the real estate mortgage executed by C to recover the deficiency, if any, after the chattel mortgage foreclosure sale? Explain. ANSWER: No. The sale in this case is that of a personal property in installment. As such, the Recto Law applies. As such, the remedies being alternative under such law, since B already foreclosed the chattel mortgage, he can no longer exact fulfillment of the obligation by foreclosing the real estate mortgage or by proceeding against the other properties of A. If A would’ve foreclosed the real estate mortgage, the Recto Law would not have applied since the mortgage foreclose is not on the thing sold. Accordingly, such foreclosure would be in line with exacting fulfillment and he would’ve been entitled to a deficiency in the proceeds of the foreclosure sale and the unpaid amount. Art. 1485. The preceding article shall be applied to contracts purporting to be leases of personal property with option to buy, when the lessor has deprived the lessee of the possession or enjoyment of the thing. (1454-A-a) Art. 1486. In the case referred to in two preceding articles, a stipulation that the installments or rents paid shall not be returned to the vendee or lessee shall be valid insofar as the same may not be unconscionable under the circumstances. (n)

THE MACEDA LAW: or the Realty Installment Buyer Act (RA No. 6552).

the time of delivery, shall be governed by Articles 1163 to 1165, and 1262.

Object: is sale of residential realty on installments. Realty: covers house and lot and condominium units, NOT immovales. Installment: not “on credit”.

This rule shall apply to the sale of fungible things, made independently and for a single price, or without consideration of their weight, number, or measure.

Rights of the buyer: if installments have not yet reached 2 years

Should fungible things be sold for a price fixed according to weight, number, or measure, the risk shall not be imputed to the vendee until they have been weighed, counted, or measured and delivered, unless the latter has incurred in delay. (1452a)

equivalent: 1. Pay without interest within 60 days; 2. The buyer may sell his interest; 3. He may assign his interest (by way of donation or dacion en pago); 4. Pay the entire balance After two years’ worth of installment, the buyer will have: 5. 6.

Grace period of minimum of 60 days, if the instalments already covers AT LEAST two years, plus 1 month for every year after two years; Seller has a right to rescind, but the seller should first give the CASH SURRENDER VALUE: minimum of 50% of all payments (including downpayment) plus 5% after five years (55% after 7 years of payment), and 5% for every additional year thereafter upto a maximum of 90% (or 14 years of instalment).

Stipulations which are considered void: 1. 2.

Automatic cancellation or rescission upon default of the buyer; Stipulation as to interest or damages or penalty during the grace period.

BAR QUESTION: Pricilla purchased a condominium unit in Makati City from the Citiland Corporation for a price of P10 Million, payable P3 Million down and the balance with interest thereon at 14% per annum payable in sixty (60) equal monthly installments of P198,333.33. They executed a Deed of Conditional Sale in which it is stipulated that should the vendee fail to pay three (3) successive installments, the sale shall be deemed automatically rescinded without the necessity of judicial action and all payments made by the vendee shall be forfeited in favor of the vendor by way of rental for the use and occupancy of the unit and as liquidated damages. For 46 months, Pricilla paid the monthly installments religiously, but on the 47th and 48th months, she failed to pay. On the 49th month, she tried to pay the installments due but the vendor refused to receive the payments tendered by her. The following month, the vendor sent her a notice that it was rescinding the Deed of Conditional Sale pursuant to the stipulation for automatic rescission, and demanded that she vacate the premises. She replied that the contract cannot be rescinded without judicial demand or notarial act pursuant to Article 1592 of the Civil Code. Can the vendor rescind the contract? (2%) ANSWER: Sale of condominium unit and it would appear that it is a residential unit, in installment. This is covered by the Maceda Law. The stipulation of automatic rescission is void. When the buyer defaulted, it was already on the 47 th month. She had already paid 46 months or 3 years and 10 months. The grace period should have been 90 days. Since 1 month for every year after two years. On the 47th month, she was 1 day in default, 48th month, she was already 31 days in default, on the 49th month, 61 days. As such, the offer to pay was made within the 90 day period. The vendor does not have the right to rescind the contract.

What if 5th month defaulted: grace period is 60 days since the default

happened only on the first year, unless otherwise stipulated. If she was able to pay within the 60 days, and eventually failed to pay on the 3 rd month of the 5th year. The payment is made beyond the grace period. Under the law, the buyer is entitled only to a grace period once in every 5 years of the lifetime of the contract. INJURY OR BENEFIT PENDING DELIVERY: Art. 1480. Any injury to or benefit from the thing sold, after the contract has been perfected, from the moment of the perfection of the contract to

102


RISK OF LOSS: Art. 1493. If at the time the contract of sale is perfected, the thing which is the object of the contract has been entirely lost, the contract shall be without any effect. But if the thing should have been lost in part only, the vendee may choose between withdrawing from the contract and demanding the remaining part, paying its price in proportion to the total sum agreed upon. (1460a) Art. 1494. Where the parties purport a sale of specific goods, and the goods without the knowledge of the seller have perished in part or have wholly or in a material part so deteriorated in quality as to be substantially changed in character, the buyer may at his option treat the sale: (1) As avoided; or (2) As valid in all of the existing goods or in so much thereof as have not deteriorated, and as binding the buyer to pay the agreed price for the goods in which the ownership will pass, if the sale was divisible. (n) OBLIGATIONS OF THE VENDOR: 4. To take care of the thing after the contract has been perfected, prior to delivery. 5. Obligation to pay taxes and incidents of the sale, unless otherwise agreed upon: Article 1487. The expenses for the execution and registration of the sale shall be borne by the vendor, unless there is a stipulation to the contrary. (1455a) 6. 7.

To warrant the thing; To transfer ownership.

Obligation to Transfer Ownership Art. 1495. The vendor is bound to transfer the ownership of and deliver, as well as warrant the thing which is the object of the sale. (1461a) Art. 1496. The ownership of the thing sold is acquired by the vendee from the moment it is delivered to him in any of the ways specified in Articles 1497 to 1501, or in any other manner signifying an agreement that the possession is transferred from the vendor to the vendee. (n)

May a vendor sell a thing which he does not own? Yes. There are two aspects: validity of the contract of sale and ability to transfer ownership.

VALIDITY OF THE CONTRACT: the seller need not be the owner, he may be a liquidator, executor, administrator, sheriff, or a notary (in case of pledge). This is different from a pledge or mortgage which requires the pledger or mortgagor to be the absolute owner of the thing. TRANSFER OF OWNERSHIP: Yes. If the seller had authority to sell: 1. From the owner himself – agent; 2. From the law – such as those mentioned under validity of contract above. 3. From the court – in cases of judicial sale.

What if the seller had no authority to sell: Art. 1505: Art. 1505. Subject to the provisions of this Title, where goods are sold by a

person who is not the owner thereof, and who does not sell them under authority or with the consent of the owner, the buyer acquires no better title to the goods than the seller had, unless the owner of the goods is by his conduct precluded from denying the seller's authority to sell. Nothing in this Title, however, shall affect: (1) The provisions of any factors' act, recording laws, or any other provision of law enabling the apparent owner of goods to dispose of them as if he were the true owner thereof; (2) The validity of any contract of sale under statutory power of sale or under the order of a court of competent jurisdiction; (3) Purchases made in a merchant's store, or in fairs, or markets, in accordance with the Code of Commerce and special laws. (n) General Rule: the buyer acquires no better title to the goods than the seller had. EXCEPTIONS: 1. Estoppel: a. As to the owner: estoppel in pais - by his conduct or representation, he led the buyer to believe that the seller had authority to sell. Article 1431. Through estoppel an admission or representation is rendered conclusive upon the person making it, and cannot be denied or disproved as against the person relying thereon. b.

As to the seller: estoppel by deed – if after the sale, he acquired ownership, such ownership automatically passes to the buyer. THERE MUST BE DELIVERY.

Article 1434. When a person who is not the owner of a thing sells or alienates and delivers it, and later the seller or grantor acquires title thereto, such title passes by operation of law to the buyer or grantee. 2.

Sale of an Apparent Owner, REQUISITES: a.

There is apparent ownership: usually involves a registered piece of land.

Examples: 

An old lady asked a lawyer to register her land in her name. However, the lawyer instead registered it in his name. A group of businessmen agreed to register the lot in the name of the one who will manage the business.

 b. c.

Buyer in good faith and for value – the buyer had no knowledge of any defect in the seller’s title at the time of full payment (not only at the time of sale). There must be a law from which apparent ownership may be had: such as PD 1529 which provides that those dealing with registered land need not inquire into matter beyond the title, also known as the mirror principle, unless the buyer is required under the law to exercise the highest degree of diligence, e.g., banks and public utility companies.

Other examples: (1) Factor’s Act (agency) – so far as third

persons are concerned, they only have to rely on the power of attorney as written, they need not inquire into limitations imposed by the principal to the agent not written. (Art. 1900) (2) Art. 1518 – for goods covered by negotiable instruments. Art. 1518. The validity of the negotiation of a negotiable document of title is not impaired by the fact that the negotiation was a breach of duty on the part of the person making the negotiation, or by the fact that the owner of the document was deprived of the possession of the same by loss, theft, fraud, accident, mistake, duress, or conversion, if the person to whom the document was negotiated or a person to whom the document was subsequently negotiated paid value therefor in good faith without notice of the breach of duty, or loss, theft, fraud, accident, mistake, duress or conversion. (n)

103


BAR QUESTION: Before migrating to Canada in 1992, the spouses Teodoro and Anita entrusted all their legal papers and documents to their nephew, Atty. Tan. Taking advantage of the situation, Atty. Tan forged a deed of sale, making it appear that he had bought the couple’s property in Quezon City. In 2000, he succeeded in obtaining a TCT over the property in his name. Subsequently, Atty. Tan sold the same property to Luis, who built an auto repair shop on the property. In 2004, Luis registered the deed of conveyance, and title over the property was transferred in his name. In 2006, the spouses Teodoro and Anita came to the Philippines for a visit and discovered what had happened to their property. They immediately hire you as lawyer. What action or actions will you institute in order to vindicate their rights? Explain fully. (4%) ANSWER: Annulment or declaration of nullity of the contracts, if it can be proven that Luis is a buyer not in good faith, since he bought it from an apparent owner, Atty. Tan, who is the registered owner of the land. BAR QUESTION: (2) “A” is the owner of a registered land. The Torrens Title is entrusted to “B”, his clerk secretary, who forged “A’s” signature on a deed of sale of said land in his (B’s) favor. A new title is issued in the name of “B”, upon registration. Does “B” have a valid title over the land? If “B” sells the property to “C”, does the latter acquire a valid title over it? ANSWER: B does not have a valid title to the land. A forger will never acquire any right over the object of the contract. Otherwise stated, a forged document cannot convey any title. However, C may acquire valid title to the land because, while a forged deed cannot convey a valid title, it may be a root of a valid title if as a result of the forgery, the forger was able to register the land in his name and the land is bought by a purchaser in good faith and for value. CASE: MIGUEL MAPALO, ET AL., petitioners, vs. MAXIMO MAPALO, ET AL., respondents.

G.R. No. L-21489 and L-21628

May 19, 1966

FACTS: The spouses Miguel Mapalo and Candida Quiba, simple illiterate farmers, who, out of love and affection for Maximo Mapalo — a brother of Miguel who was about to get married — decided to donate the eastern half of the land to him. The OCT was delivered. As a result, however, they were deceived into signing a deed of absolute sale over the entire land in his favor. Their signatures thereto were procured by fraud, that is, they were made to believe by Maximo Mapalo and by the attorney who acted as notary public who "translated" the document, that the same was a deed of donation in Maximo's favor covering one-half (the eastern half) of their land. Although the document of sale stated a consideration of Five Hundred (P500.00) Pesos, the aforesaid spouses did not receive anything of value for the land. The attorney's misbehaviour was the subject of an investigation but its result does not appear on record. However we took note of the fact that during the hearing of these cases said notary public was present but did not take the witness stand to rebut the plaintiffs' testimony supporting the allegation of fraud in the preparation of the document. Following the execution of the afore-stated document, the spouses Miguel Mapalo and Candida Quiba immediately built a fence of permanent structure in the middle of their land segregating the eastern portion from its western portion. Said fence still exists. The spouses have always been in continued possession over the western half of the land up to the present. Not known to them, meanwhile, Maximo Mapalo registered the Deed of Sale and obtained a TCT over the entire land. 13 years later, he sold the land for P2,500 in favor of Evaristo, Petronila, Pacifico and Miguel all surnamed Narciso, who in turn obtained a TCT in their names.

The Narcisos took possession only of the eastern portion of the land in 1951 and on 1952 filed a suit to be declared owners of the entire land and for possession of the western land against the Mapalo as well as against Floro Guieb and Rosalia Mapalo Guieb who had a house on the western part of the land with the consent of the spouses Mapalo and Quiba. The Mapalo spouses filed their answer with a counterclaim seeking cancellation of the Transfer Certificate of Title of the Narcisos as to the western half of the land, on the grounds that their (Mapalo spouses) signatures to the deed of sale of 1936 was procured by fraud and that the Narcisos were buyers in bad faith. They asked for reconveyance to them of the western portion of the land and issuance of a Transfer Certificate of Title in their names as to said portion. In addition, the Mapalo spouses filed their own complaint against the aforestated Narcisos and Maximo Mapalo in the CFI of Pangasinan. They asked that the deeds of sale of 1936 and of 1951 over the land in question be declared null and void as to the western half of said land. The CFI of Pangasinan rendered judgment that the transaction was a donation only over the eastern half of the land and declaring null and void Maximo’s TCT as regards the western portion and ordered the Narcisos and the spouses Mapalo to subdivide the land. On appeal by the Narcisos, the CA reversed the trial court declaring that the sale was merely voidable and not void ab initio and therefore an action to annul the same within four years had long prescribed. From said decision of the Court of Appeals, the Mapalo spouses appealed to this Court. ISSUE: WON the sale was void for lack of consideration? HELD: Yes, as to the western portion. Starting with fundamentals, under the Civil Code, either the old or the new, for a contract to exist at all, three essential requisites must concur: (1) consent, (2) object, and (3) cause or consideration. The Court of Appeals is right in that the element of consent is present as to the deed of sale. For consent was admittedly given, albeit obtained by fraud. Accordingly, said consent, although defective, did exist. In such case, the defect in the consent would provide a ground for annulment of a voidable contract, not a reason for nullity ab initio. The parties are in agreement that the second element of object is likewise present in the deed of October 15, 1936, namely, the parcel of land subject matter of the same. Not so, however, as to the third element of cause or consideration. And on this point the decision of the Court of Appeals is silent. As regards the eastern portion of the land, the Mapalo spouses are not claiming the same, it being their stand that they have donated and freely given said half of their land to Maximo Mapalo. And since they did not appeal from the decision of the trial court finding that there was a valid and effective donation of the eastern portion of their land in favor of Maximo Mapalo, the same pronouncement has become final as to them, rendering it no longer proper herein to examine the existence, validity efficacy of said donation as to said eastern portion.

is supported by another real and licit consideration. And it is further provided by the Old Civil Code that the action for annulment of a contract on the ground of falsity of consideration shall last four years, the term to run from the date of the consummation of the contract. Accordingly, since the deed of sale of 1936 is governed by the Old Civil Code, it should be asked whether its case is one wherein there is no consideration, or one with a statement of a false consideration. If the former, it is void and inexistent; if the latter, only voidable, under the Old Civil Code. As observed earlier, the deed of sale of 1936 stated that it had for its consideration Five Hundred (P500.00) Pesos. In fact, however, said consideration was totally absent. The problem, therefore, is whether a deed which states a consideration that in fact did not exist, is a contract without consideration, and therefore void ab initio, or a contract with a false consideration, and therefore, at least under the Old Civil Code, voidable. According to Manresa, what is meant by a contract that states a false consideration is one that has in fact a real consideration but the same is not the one stated in the document. There was in fact no consideration, the statement of one in the deed will not suffice to bring it under the rule of Article 1276 of the Old Civil Code as stating a false consideration. In our view, therefore, the ruling of this Court in Ocejo, Perez & Co. vs. Flores, 40 Phil. 921, is squarely applicable herein. In that case we ruled that a contract of purchase and sale is null and void and produces no effect whatsoever where the same is without cause or consideration in that the purchase price which appears thereon as paid has in fact never been paid by the purchaser to the vendor. Needless to add, the inexistence of a contract is permanent and incurable and cannot be the subject of prescription. In Eugenio v. Perdido, 97 Phil. 41, 42-43, involving a sale dated 1932, this Court, speaking through Justice Cesar Bengzon, now Chief Justice, stated: Under the existing classification, such contract would be "inexisting" and "the action or defense for declaration" of such inexistence "does not prescribe". (Art. 1410, New Civil Code). While it is true that this is a new provision of the New Civil Code, it is nevertheless a principle recognized since Tipton vs. Velasco, 6 Phil. 67 that "mere lapse of time cannot give efficacy to contracts that are null and void". ISSUE2: WON the Narcisos are purchasers in good faith? HELD: No. Anent the matter of whether the Narcisos were purchasers in good faith, the trial court in its decision resolved this issue, thus:

It is reduced, then, to the question whether there was an onerous conveyance of ownership, that is, a sale, by virtue of said deed of October 15, 1936, with respect to said western portion. Specifically, was there a cause or consideration to support the existence of a contrary of sale?

With regard to the second issue, the Narcisos contend that they are the owners of the above-described property by virtue of the deed of sale (Exh. B, plaintiffs in 11991 and Exh. 2, defendants in U-133) executed in their favor by Maximo Mapalo, and further claim that they are purchasers for value and in good faith. This court, however, cannot also give weight and credit on this theory of the Narcisos on the following reasons: Firstly, it has been positively shown by the undisputed testimony of Candida Quiba that Pacifico Narciso and Evaristo Narciso stayed for some days on the western side (the portion in question) of the above-described land until their house was removed in 1940 by the spouses Mapalo and Quiba; secondly, Pacifica Narciso admitted in his testimony in chief that when they bought the property, Miguel Mapalo was still in the premises in question (western part) which he is occupying and his house is still standing thereon; and thirdly, said Pacifico Narciso when presented as a rebuttal and subrebuttal witness categorically declared that before buying the land in question he went to the house of Miguel Mapalo and Candida Quiba and asked them if they will permit their elder brother Maximo to sell the property.

The rule under the Civil Code, again be it the old or the new, is that contracts without a cause or consideration produce no effect whatsoever. Nonetheless, under the Old Civil Code, the statement of a false consideration renders the contract voidable, unless it is proven that it

Aside from the fact that all the parties in these cases are neighbors, except Maximo Mapalo the foregoing facts are explicit enough and sufficiently reveal that the Narcisos were aware of the nature and extent of the interest of Maximo Mapalo their vendor, over the above-

Now, as to the western portion, however, the fact not disputed herein is that no donation by the Mapalo spouses obtained as to said portion. Accordingly, we start with the fact that liberality as a cause or consideration does not exist as regards the western portion of the land in relation to the deed of 1936; that there was no donation with respect to the same.

104


described land before and at the time the deed of sale in their favor was executed. Upon the aforestated declaration of Pacifico Narciso the following question arises: What was the necessity, purpose and reason of Pacifico Narciso in still going to the spouses Mapalo and asked them to permit their brother Maximo to dispose of the above-described land? To this question it is safe to state that this act of Pacifico Narciso is a conclusive manifestation that they (the Narcisos) did not only have prior knowledge of the ownership of said spouses over the western half portion in question but that they also have recognized said ownership. It also conclusively shows their prior knowledge of the want of dominion on the part of their vendor Maximo Mapalo over the whole land and also of the flaw of his title thereto. Under this situation, the Narcisos may be considered purchasers in value but certainly not as purchasers in good faith. ... (pp. 97-98, Record on Appeal.) And said finding — which is one of fact — is found by us not a bit disturbed by the Court of Appeals. Said the Court of Appeals: In view of the conclusion thus reached, it becomes unnecessary to pass on the other errors assigned.Suffice it to say that, on the merits the appealed decision could have been upheld under Article 1332 of the new Civil Code and the following authorities: Ayola vs. Valderrama Lumber Manufacturers Co., Inc., 49 O.G. 980, 982; Trasporte vs. Beltran, 51 O.G. 1434, 1435; Cortez vs. Cortez, CA-G.R. No. 18451-R, August 8, 1961; Castillo vs. Laberinto, CA-G.R. No. 18118-R, December 20, 1961; and 13 C.J. 372-373, as well as the several facts and

circumstances appreciated by the trial court as supporting appellees' case.

thereby in effect sustaining — barring only its ruling on prescription — the judgment and findings of the trial court, including that of bad faith on the part of the Narcisos in purchasing the land in question. We therefore see no need to further remand this case to the Court of Appeals for a ruling on this point, as appellees request in their brief in the event we hold the contract of 1936 to be inexistent as regards the western portion of the land.

a) Could Rita recover the painting? If so, would Mario be entitled to reimbursement of the amount he paid for the painting? Explain. b) Supposing Mario bought the painting from a friend, would your answer be the same? Explain ANSWER: a) Yes. Rita has a right to recover, because she was unlawfully deprived of the painting. Under Art. 559, if an owner was unlawfully deprived of the thing, even if such thing is thereafter sold to somebody else, the owner has a right to recover from such buyer (559) but has to reimburse if: buyer bought it from a public sale, and the buyer is in good faith. Gallery auction is not a public sale, it is a private auction. As such, Mario is not entitled to reimbursement. b)

Yes. Answer would be the same. If the seller is his friend, it cannot be a public sale. Mario is not entitled to reimbursement.

BAR QUESTION: Mahinhin lost her diamond ring when the bus she was riding was held up by a band of brigands who divested the passengers of all their money and valuables. The ring found its way to the Pasanglaan pawnshop, where one of the robbers had pawned it. The pawnshop, in due time, foreclosed the pledge and sold the ring at public auction to Mayaman, the highest bidder. Three years after the loss, Mahinhin was able to trace the ring to Mayaman and demanded that the latter give the ring back to her. Mayaman refused, saying that he had acquired the ring in good faith. Who has the better right to the ring? Explain. ANSWER: Mayaman. Art. 559 applies. However, in the problem, Mayaman is a buyer in good faith and for value in a public sale. As such, Mahinhin has to reimburse Mayaman first before he can recover.

In view of defendants' bad faith under the circumstances we deem it just and equitable to award, in plaintiffs' favor, attorneys' fees on appeal, in the amount of P1,000.00 as prayed for in the counterclaim.

If the owner is not unlawfully deprived, can he recover? Yes. 559 is

Wherefore, the decision of the Court of Appeals is hereby reversed and set aside, and another one is hereby rendered affirming in toto the judgment of the Court of First Instance a quo, with attorney's fees on appeal in favor of appellants in the amount of P1,000.00, plus the costs, both against the private appellees. So ordered.

What if the thing is also not lost but bought from a seller who doesn’t have the right to sell, can the owner recover? Will he

3.

Valid Sale by Statutory or Judicial Authority – such as sales made by guardians, executors, administrators, sheriffs, etc.

4.

Purchase from a Merchant Store, Market or Fair in good faith and for value: the purpose of this exception is to facilitate commercial transactions so as not to degrade the trust in sales made through such stores.

ART. 1505 in relation to Art. 559: Article 559. The possession of movable property acquired in good faith is equivalent to a title. Nevertheless, one who has lost any movable or has been unlawfully deprived thereof, may recover it from the person in possession of the same. If the possessor of a movable lost or which the owner has been unlawfully deprived, has acquired it in good faith at a public sale, the owner cannot obtain its return without reimbursing the price paid therefor. (464a) BAR QUESTION: Rita owned a valuable painting which was stolen from her house. The theft was duly reported to the authorities. A year after, Rita saw the painting hanging in the office of Mario. When queried, Mario said that he bought the painting in a gallery auction. The painting was positively identified as the one stolen from the house of Rita.

105


still applicable if the thing was lost, the owner has a right to recover subject to the right of reimbursement.

reimburse? If the owner was NOT unlawfully deprived of the thing or lost it, Art. 559 is no longer applicable. See Sun Brothers vs. Velasco. SUN BROTHERS and Co. VS. JOSE VELASCO and CO KANG CHIU

FACTS: Sun Velasco was in the business of selling refrigerators. In this case 3 contracts of sale involving the same refrigerator occurred: 1st sale: to Lopez: conditional sale: full payment was condition for transfer of ownership. Refrigerator was delivered. 2nd sale: Lopez sold the same the day after, misrepresenting himself as a certain “LIM”, to JV Trading owned by Velasco. 3rd sale: Velasco to Co. ISSUE: Who has a better right to the refrigerator? HELD: Co. Art. 559 does not apply, but Art. 1505. Under Art. 1505, sale of goods by one who is not an owner does not vest a better title to the buyer. However, where purchases were made in a merchant’s store, or in fairs, or markets, such rule does not apply. In the case at bar, Lopez had no title because he acquired the title under a conditional sale and he failed to give the full payment of the price to SBC. The sale to Velasco also did not vest him any title because of his negligence.

As a merchant engaged in the business of selling refrigerators, he should have inquired into the title of Lopez because the latter is a private person not engaged in such business. The real conflict is between SBC and Co. Since Co bought it from the J.V. Trading, a merchant store, the exception in Art. 1505 applies. Co, being an innocent purchaser in good faith and for value, acquired a better right to the refrigerator. Art. 559 does not apply because SBC neither lost the property nor was it unlawfully deprived of such. The proper remedy for SBC is a claim for indemnity against Lopez.

to a carrier, whether named by the buyer or not, for the purpose of transmission to the buyer is deemed to be a delivery of the goods to the buyer, except in the case provided for in Article 1503, first, second and third paragraphs, or unless a contrary intent appears. Unless otherwise authorized by the buyer, the seller must make such contract with the carrier on behalf of the buyer as may be reasonable, having regard to the nature of the goods and the other circumstances of the case. If the seller omit so to do, and the goods are lost or damaged in course of transit, the buyer may decline to treat the delivery to the carrier as a delivery to himself, or may hold the seller responsible in damages.

Delivery is the mode by which ownership is transferred. This is relevant especially in determining who bears the risk of loss.

Unless otherwise agreed, where goods are sent by the seller to the buyer under circumstances in which the seller knows or ought to know that it is usual to insure, the seller must give such notice to the buyer as may enable him to insure them during their transit, and, if the seller fails to do so, the goods shall be deemed to be at his risk during such transit. (n)

MODES OF DELIVERY: THINGS

Delivery to a common carrier: when the parties so agreed that the seller

OBLIGATION TO DELIVER

Art. 1497. The thing sold shall be understood as delivered, when it is placed in the control and possession of the vendee. (1462a)

Actual Delivery: The actual and physical transfer of the thing to the buyer. Note that actual delivery entails that the “control” over the thing is transferred to the transferee. As such, if a thing is delivered to a depositary, there is no delivery, since there is no transfer of ownership. CONSTRUCTIVE DELIVERY Art. 1498. When the sale is made through a public instrument, the execution thereof shall be equivalent to the delivery of the thing which is the object of the contract, if from the deed the contrary does not appear or cannot clearly be inferred. With regard to movable property, its delivery may also be made by the delivery of the keys of the place or depository where it is stored or kept. (1463a)

Execution of Public Instrument: This mode of delivery is available to both sale of rights and sale of things.

Art. 1499. The delivery of movable property may likewise be made by the mere consent or agreement of the contracting parties, if the thing sold cannot be transferred to the possession of the vendee at the time of the sale, or if the latter already had it in his possession for any other reason. (1463a)

Traditio Longa Manu: by mere consent of the seller, ownership transfers to the buyer, because at the time of sale, the seller cannot transfer possession to the buyer, e.g., the thing is leased by another. Art. 1500. There may also be tradition constitutum possessorium. (n)

Consitutum Posessorium: at the time of sale, the seller is in possession and remains in possession in another concept other than an owner, like that of a lessee, depositary or borrower. Other Modes:

Brevi Manu: or short hand delivery. When the buyer is in possession of the thing, in a concept other than that of an owner, at the time of sale, and remains in possession after sale, now as owner. E.g., a lessee who buys the thing leased.

Symbolic Delivery: where the seller merely gives the key to a warehouse

where the goods are located. Note, if the object of the sale is the warehouse, this is actual delivery, since the buyer would have possession and control of the warehouse. Art. 1523. Where, in pursuance of a contract of sale, the seller is authorized or required to send the goods to the buyer, delivery of the goods

106


will deliver to the common carrier for ultimate delivery to the buyer. In this case, there is already delivery upon receipt of the common carrier.

Art. 1503. When there is a contract of sale of specific goods, the seller may, by the terms of the contract, reserve the right of possession or ownership in the goods until certain conditions have been fulfilled. The right of possession or ownership may be thus reserved notwithstanding the delivery of the goods to the buyer or to a carrier or other bailee for the purpose of transmission to the buyer. Where goods are shipped, and by the bill of lading the goods are deliverable to the seller or his agent, or to the order of the seller or of his agent, the seller thereby reserves the ownership in the goods. But, if except for the form of the bill of lading, the ownership would have passed to the buyer on shipment of the goods, the seller's property in the goods shall be deemed to be only for the purpose of securing performance by the buyer of his obligations under the contract. Where goods are shipped, and by the bill of lading the goods are deliverable to order of the buyer or of his agent, but possession of the bill of lading is retained by the seller or his agent, the seller thereby reserves a right to the possession of the goods as against the buyer. Where the seller of goods draws on the buyer for the price and transmits the bill of exchange and bill of lading together to the buyer to secure acceptance or payment of the bill of exchange, the buyer is bound to return the bill of lading if he does not honor the bill of exchange, and if he wrongfully retains the bill of lading he acquires no added right thereby. If, however, the bill of lading provides that the goods are deliverable to the buyer or to the order of the buyer, or is indorsed in blank, or to the buyer by the consignee named therein, one who purchases in good faith, for value, the bill of lading, or goods from the buyer will obtain the ownership in the goods, although the bill of exchange has not been honored, provided that such purchaser has received delivery of the bill of lading indorsed by the consignee named therein, or of the goods, without notice of the facts making the transfer wrongful. (n) EXCEPTIONS TO 1523: 1. Ownership is reserved by the seller – such as if it is deliverable to the seller or his agent. 2. The seller reserved possession – goods are deliverable to the buyer, but possession of the bill of lading is with the seller. MODE OF DELIVERY: As to rights: Art. 1501. With respect to incorporeal property, the provisions of the first paragraph of article 1498 shall govern. In any other case wherein said provisions are not applicable, the placing of the titles of ownership in the possession of the vendee or the use by the vendee of his rights, with the vendor's consent, shall be understood as a delivery. (1464) There is delivery of rights, other than by execution of public instrument by:

1. 2.

When the title of ownership is placed in the possession of the vendee (e.g., certificates of stock for sale of shares of stock); By the use of the vendee of his rights with the vendor’s consent. (e.g., the vendee of shares where the same has not been transferred in his name yet, with the consent of the owner, through a proxy, he may exercise his rights as a stockholder)

SALE OR RETURN AND SALE ON APPROVAL OR ON TRIAL OR ON SATISFACTION: Art. 1502. When goods are delivered to the buyer "on sale or return" to give the buyer an option to return the goods instead of paying the price, the ownership passes to the buyer of delivery, but he may revest the ownership in the seller by returning or tendering the goods within the time fixed in the contract, or, if no time has been fixed, within a reasonable time. (n) When goods are delivered to the buyer on approval or on trial or on satisfaction, or other similar terms, the ownership therein passes to the buyer:

ANSWER: Yes. Although there was a conditional sale, the condition, i.e., delivery to “X” was already fulfilled. As such, ownership already transferred prior to the destruction of the car. Following res perit domino, buyer bears the loss who is already the owner at the time of the loss.

EXCEPTIONS TO THE RES PERIT DOMINO: 1. 2.

By stipulation; If ownership is retained only to secure performance by the buyer. Title of the seller is known as “SECURITY TITLE”. This is what’s provided under Art. 1504(1). See Lawyer’s Coop vs. Tabora:

LAWYERS COOPERATIVE PUBLISHING COMPANY, plaintiff-appellee, vs. PERFECTO A. TABORA, defendant-appellant.

G.R. No. L-21263

April 30, 1965

FACTS: Tabora bought from Lawyers Cooperative Publishing Company one complete set of American Jurisprudence, plus one set of American Jurisprudence, General Index. Tabora made a partial payment and the books were duly delivered and receipted for by Tabora.

(1) When he signifies his approval or acceptance to the seller or does any other act adopting the transaction; (2) If he does not signify his approval or acceptance to the seller, but retains the goods without giving notice of rejection, then if a time has been fixed for the return of the goods, on the expiration of such time, and, if no time has been fixed, on the expiration of a reasonable time. What is a reasonable time is a question of fact. (n)

In the midnight of the same date, a fire broke out in the locality and burned all the buildings including the law office and library of Tabora. He then informed LCPC of the incident. As a token of goodwill, LCPC sent to Tabora, free of charge 4 volumes of Philippine Reports.

RISK OF LOSS: to determine who bears the risk of loss, it is important to know what kind of sale is involved and whether there was already delivery.

Defendant, in his answer, pleaded force majeure as a defense and argued that the seller retained ownership of the goods. As such, he should not bear the loss.

Art. 1504. Unless otherwise agreed, the goods remain at the seller's risk until the ownership therein is transferred to the buyer, but when the ownership therein is transferred to the buyer the goods are at the buyer's risk whether actual delivery has been made or not, except that:

The trial court rendered judgment in favor of petitioner. On appeal, the case was forwarded to the SC involving purely questions of law.

(1) Where delivery of the goods has been made to the buyer or to a bailee for the buyer, in pursuance of the contract and the ownership in the goods has been retained by the seller merely to secure performance by the buyer of his obligations under the contract, the goods are at the buyer's risk from the time of such delivery; (2) Where actual delivery has been delayed through the fault of either the buyer or seller the goods are at the risk of the party in fault. (n)

Res Perit Domino: as a rule, the one who bears the loss of the thing is the owner thereof.

BAR QUESTION: D sold a second-hand car to E for P150,000.00. The agreement between D and E was that half of the purchase price, or P75,000.00, shall be paid upon delivery of the car to E and the balance of P75,000.00 shall be paid in five equal monthly installments of P15,000.00 each. The car was delivered to E, and E paid the amount of P75,000.00 to D. Less than one month thereafter, the car was stolen from E’s garage with no fault on E’s part and was never recovered. Is E legally bound to pay the said unpaid balance of P75,000.00? Explain your answer. ANSWER: Yes. This case involves an absolute sale and there was already delivery. As such, ownership already passed to the buyer. Applying the res perit domino doctrine, the buyer bears the loss since he is already the owner at the time of loss. He can be compelled to pay the unpaid balance. BAR QUESTION: “S”, an American resident of Manila, about to leave on a vacation, sold his car to “B” for U.S.$2,000.00, the payment to be made ten days after delivery to “X”, a third party depositary agreed upon, who shall deliver the car to “B” upon receipt by “X” of the purchase price. It was stipulated that ownership is retained by “S” until delivery of the car to “X”. Five days after delivery of the car to “X”, it was destroyed in a fire which gutted the house of “X”, without the fault of either “X” or “B”. Is buyer “B” still legally obligated to pay the purchase price? Explain.

107


Tabora failed to pay the monthly installments and such, LCPC commenced an action before the CFI for recovery of the balance.

ISSUE: WON respondent may be held liable for the balance of the purchase price? HELD: Yes. Appellant bought from appellee one set of American Jurisprudence, including one set of general index, payable on installment plan. It was provided in the contract that "title to and ownership of the books shall remain with the seller until the purchase price shall have been fully paid. Loss or damage to the books after delivery to the buyer shall be borne by the buyer." The total price of the books, including the cost of freight, amounts to P1,682.40. Appellant only made a down payment of P300.00 thereby leaving a balance of P1,382.40. This is now the import of the present action aside from liquidated damages. Appellant’s contention cannot be sustained. While as a rule the loss of the object of the contract of sale is borne by the owner or in case of force majeure the one under obligation to deliver the object is exempt from liability, the application of that rule does not here obtain because the law on the contract entered into on the matter argues against it. It is true that in the contract entered into between the parties the seller agreed that the ownership of the books shall remain with it until the purchase price shall have been fully paid, but such stipulation cannot make the seller liable in case of loss not only because such was agreed merely to secure the performance by the buyer of his obligation but in the very contract it was expressly agreed that the "loss or damage to the books after delivery to the buyer shall be borne by the buyer." Any such stipulation is sanctioned by Article 1504 of our Civil Code, which in part provides: (1) Where delivery of the goods has been made to the buyer or to a bailee for the buyer, in pursuance of the contract and the ownership in the goods has been retained by the seller merely to secure performance by the buyer of his obligations under the contract, the goods are at the buyer's risk from the time of such delivery. Neither can appellant find comfort in the claim that since the books were destroyed by fire without any fault on his part he should be relieved from

the resultant obligation under the rule that an obligor should be held exempt from liability when the loss occurs thru a fortuitous event. This is because this rule only holds true when the obligation consists in the delivery of a determinate thing and there is no stipulation holding him liable even in case of fortuitous event. Here these qualifications are not present. The obligation does not refer to a determinate thing, but is pecuniary in nature, and the obligor bound himself to assume the loss after the delivery of the goods to him. In other words, the obligor agreed to assume any risk concerning the goods from the time of their delivery, which is an exception to the rule provided for in Article 1262 of our Civil Code. 3.

If there was delay in delivery of the goods and thereafter the goods are destroyed due to fortuitous event, whoever caused the delay bears the loss.

a. b.

c.

Place of payment as place of delivery: The above provides only for a

disputable presumption. Ultimately, the place of payment is the place of delivery. The Supreme Court, applying Art. 1582 in the reverse, the place of payment was considered the place of delivery. Art. 1582 provides:

Art. 1506. Where the seller of goods has a voidable title thereto, but his title has not been avoided at the time of the sale, the buyer acquires a good title to the goods, provided he buys them in good faith, for value, and without notice of the seller's defect of title. (n) Art. 1507. A document of title in which it is stated that the goods referred to therein will be delivered to the bearer, or to the order of any person named in such document is a negotiable document of title. (n)

Art. 1582. The vendee is bound to accept delivery and to pay the price of the thing sold at the time and place stipulated in the contract. If the time and place should not have been stipulated, the payment must be made at the time and place of the delivery of the thing sold. (1500a) 3.

Art. 1508 to 1521: covers negotiable documents of title, such as a warehouse receipt.

TIME AND PLACE OF DELIVERY: Art. 1521. Whether it is for the buyer to take possession of the goods or of the seller to send them to the buyer is a question depending in each case on the contract, express or implied, between the parties. Apart from any such contract, express or implied, or usage of trade to the contrary, the place of delivery is the seller's place of business if he has one, and if not his residence; but in case of a contract of sale of specific goods, which to the knowledge of the parties when the contract or the sale was made were in some other place, then that place is the place of delivery. Where by a contract of sale the seller is bound to send the goods to the buyer, but no time for sending them is fixed, the seller is bound to send them within a reasonable time. Where the goods at the time of sale are in the possession of a third person, the seller has not fulfilled his obligation to deliver to the buyer unless and until such third person acknowledges to the buyer that he holds the goods on the buyer's behalf. Demand or tender of delivery may be treated as ineffectual unless made at a reasonable hour. What is a reasonable hour is a question of fact. Unless otherwise agreed, the expenses of and incidental to putting the goods into a deliverable state must be borne by the seller. (n)

Time of Delivery: 1.

At the time of sale, if it is a pure obligation. However, as a rule, the seller is not bound to deliver until the buyer pays. Art. 1524. The vendor shall not be bound to deliver the thing sold, if the vendee has not paid him the price, or if no period for the payment has been fixed in the contract. (1466)

2.

Place of Delivery: 1. 2.

Stipulated; Place fixed by usage or trade – this may be determined by the shipping arrangements. Examples:

108


What kind of thing is to be delivered: a. Specific or determinate – the place where the thing was located at the time of perfection of the contract, provided, the buyer is aware of such place; b. Generic – the place of business of the seller, or if none, his residence.

DELIVERY OF LESS OR MORE OF THE QUANTITY AGREED UPON: Art. 1522. Where the seller delivers to the buyer a quantity of goods less than he contracted to sell, the buyer may reject them, but if the buyer accepts or retains the goods so delivered, knowing that the seller is not going to perform the contract in full, he must pay for them at the contract rate. If, however, the buyer has used or disposed of the goods delivered before he knows that the seller is not going to perform his contract in full, the buyer shall not be liable for more than the fair value to him of the goods so received. Where the seller delivers to the buyer a quantity of goods larger than he contracted to sell, the buyer may accept the goods included in the contract and reject the rest. If the buyer accepts the whole of the goods so delivered he must pay for them at the contract rate. Where the seller delivers to the buyer the goods he contracted to sell mixed with goods of a different description not included in the contract, the buyer may accept the goods which are in accordance with the contract and reject the rest. In the preceding two paragraphs, if the subject matter is indivisible, the buyer may reject the whole of the goods. The provisions of this article are subject to any usage of trade, special agreement, or course of dealing between the parties. (n)

Delivery of less than that agreed upon: 1. 2.

Period agreed upon. Except, if the buyer loses the right to make use of the period under Art. 1198: Art. 1536. The vendor is not bound to deliver the thing sold in case the vendee should lose the right to make use of the terms as provided in Article 1198. (1467a)

FOB – free on board – where the location indicated is the place of delivery, or where ownership transfers; CIF – cost, insurance, freight – where the port of origin is the place of delivery. Here, the price agreed upon by the parties already covers CIF which is paid by the buyer. Thus, at the point of origin, ownership already transfers. Others – FAS (Free Along Side), X Warehouse (Warehouse agreed upon), X Ship (where ship is located).

3.

The buyer may reject; The buyer may accept: a. If the buyer had knowledge that the seller is not going to perform the contract in full – he must pay for them at the contract rate. b. If the buyer had no such knowledge – he is liable for the fair value of the goods received. Note that in a commercial sale, the fair value would normally be less than the contract price due to the intended profit. If the subject matter is indivisible – the buyer may reject the whole.

Delivery in excess of that agreed upon: 1. 2.

The buyer may accept the quantity agreed upon and reject the rest; The buyer may accept all and pay them at the contract price;

3.

If the subject matter is indivisible – the buyer may reject the whole

Art. 1539. The obligation to deliver the thing sold includes that of placing in the control of the vendee all that is mentioned in the contract, in conformity with the following rules: If the sale of real estate should be made with a statement of its area, at the rate of a certain price for a unit of measure or number, the vendor shall be obliged to deliver to the vendee, if the latter should demand it, all that may have been stated in the contract; but, should this be not possible, the vendee may choose between a proportional reduction of the price and the rescission of the contract, provided that, in the latter case, the lack in the area be not less than one-tenth of that stated. The same shall be done, even when the area is the same, if any part of the immovable is not of the quality specified in the contract. The rescission, in this case, shall only take place at the will of the vendee, when the inferior value of the thing sold exceeds one-tenth of the price agreed upon. Nevertheless, if the vendee would not have bought the immovable had he known of its smaller area of inferior quality, he may rescind the sale. (1469a)

Real property: If the property turns out less than the area agreed upon: 1. 2. 3.

The buyer may ask for specific performance – only if the seller is in a position to give the lacking area Accion Quanti Minoris – the buyer may ask for the proportionate reduction in price if the sale appears to be for a certain price per unit of measure. Rescission – only if the area that is lacking is not substantial or more than 10%. Note that this remedy is available only if there was substantial breach. However, the buyer may still ask for recission if he can prove that he would not have bought the land if the area would be less than that agreed upon.

Art. 1540. If, in the case of the preceding article, there is a greater area or number in the immovable than that stated in the contract, the vendee may accept the area included in the contract and reject the rest. If he accepts the whole area, he must pay for the same at the contract rate. (1470a)

If the area is in EXCESS: 1. 2.

The buyer may accept the area included in the contract and reject the rest; The buyer may accept the whole area and pay the same at the contract rate.

Art. 1541. The provisions of the two preceding articles shall apply to judicial sales. (n) Art. 1542. In the sale of real estate, made for a lump sum and not at the rate of a certain sum for a unit of measure or number, there shall be no increase or decrease of the price, although there be a greater or less area or number than that stated in the contract. The same rule shall be applied when two or more immovables as sold for a single price; but if, besides mentioning the boundaries, which is indispensable in every conveyance of real estate, its area or number should be designated in the contract, the vendor shall be bound to deliver all that is included within said boundaries, even when it exceeds the area or number specified in the contract; and, should he not be able to do so, he shall suffer a reduction in the price, in proportion to what is lacking in the area or number, unless the contract is rescinded because the vendee does not accede to the failure to deliver what has been stipulated. (1471)

Lump-Sum Sale: note that accion quanti minoris is applicable only if the

sale is for a certain rate/price per unit. Otherwise, if the sale is lumpsum, there can be no proportional reduction of the price.

“More or less” – even if the sale is lumpsum and the area agreed upon is 4,000 sqm, more or less, and the area turned out to be 14,000 sqm, the

109


buyer is not entitled to the excess as provided under Art. 1542. This is because the parties agreed to an area “more or less” and the difference with the actual area cannot be considered a slight deviation which the phrase connotes. See Sps Caballero vs. Carmen Del Prado. Art. 1543. The actions arising from Articles 1539 and 1542 shall prescribe in six months, counted from the day of delivery. (1472a) UNPAID SELLER: Art. 1525. The seller of goods is deemed to be an unpaid seller within the meaning of this Title: (1) When the whole of the price has not been paid or tendered; (2) When a bill of exchange or other negotiable instrument has been received as conditional payment, and the condition on which it was received has been broken by reason of the dishonor of the instrument, the insolvency of the buyer, or otherwise. In Articles 1525 to 1535 the term "seller" includes an agent of the seller to whom the bill of lading has been indorsed, or a consignor or agent who has himself paid, or is directly responsible for the price, or any other person who is in the position of a seller. (n) Art. 1526. Subject to the provisions of this Title, notwithstanding that the ownership in the goods may have passed to the buyer, the unpaid seller of goods, as such, has: (1) A lien on the goods or right to retain them for the price while he is in possession of them; (2) In case of the insolvency of the buyer, a right of stopping the goods in transitu after he has parted with the possession of them; (3) A right of resale as limited by this Title; (4) A right to rescind the sale as likewise limited by this Title. Where the ownership in the goods has not passed to the buyer, the unpaid seller has, in addition to his other remedies a right of withholding delivery similar to and coextensive with his rights of lien and stoppage in transitu where the ownership has passed to the buyer. (n)

Rights of unpaid seller: 1.

Possessory lien – right to retain the goods or right to withhold delivery of the goods.

Art. 1527. Subject to the provisions of this Title, the unpaid seller of goods who is in possession of them is entitled to retain possession of them until payment or tender of the price in the following cases, namely: (1) Where the goods have been sold without any stipulation as to credit; (2) Where the goods have been sold on credit, but the term of credit has expired; (3) Where the buyer becomes insolvent. The seller may exercise his right of lien notwithstanding that he is in possession of the goods as agent or bailee for the buyer. (n) Art. 1528. Where an unpaid seller has made part delivery of the goods, he may exercise his right of lien on the remainder, unless such part delivery has been made under such circumstances as to show an intent to waive the lien or right of retention. (n) Difference with lien of the seller under rules on concurrence and preference of credit: “possessory” lien entails that the possession of the goods is still with the seller. In concurrence and preference of credits, the goods are already with the buyer. In the former, insolvency is not a required, though it may be a ground. In the latter, it presupposes that the buyer is already insolvent. Art. 1535. Subject to the provisions of this Title, the unpaid seller's right of lien or stoppage in transitu is not affected by any sale, or other disposition of the goods which the buyer may have made, unless the seller has assented thereto.

If, however, a negotiable document of title has been issued for goods, no seller's lien or right of stoppage in transitu shall defeat the right of any purchaser for value in good faith to whom such document has been negotiated, whether such negotiation be prior or subsequent to the notification to the carrier, or other bailee who issued such document, of the seller's claim to a lien or right of stoppage in transitu. (n) While with possessory lien, buyer sells the goods to a third person, will the seller lose possessory lien? As a rule, no. Exceptions: 1. He assented to the transfer; 2. If instead of alienated, the buyer sold the goods to the third person, (a) who is a buyer in good faith and for value, and (b) the goods are covered by a negotiable document of title, (c) which is negotiated to the third person. Loss of Possessory Lien: Art. 1529. The unpaid seller of goods loses his lien thereon: (1) When he delivers the goods to a carrier or other bailee for the purpose of transmission to the buyer without reserving the ownership in the goods or the right to the possession thereof; (2) When the buyer or his agent lawfully obtains possession of the goods; (3) By waiver thereof. The unpaid seller of goods, having a lien thereon, does not lose his lien by reason only that he has obtained judgment or decree for the price of the goods. (n) 2.

Stoppage in transit – right to stop the goods while in transit.

Art. 1530. Subject to the provisions of this Title, when the buyer of goods is or becomes insolvent, the unpaid seller who has parted with the possession of the goods has the right of stopping them in transitu, that is to say, he may resume possession of the goods at any time while they are in transit, and he will then become entitled to the same rights in regard to the goods as he would have had if he had never parted with the possession. (n) Art. 1531. Goods are in transit within the meaning of the preceding article: (1) From the time when they are delivered to a carrier by land, water, or air, or other bailee for the purpose of transmission to the buyer, until the buyer, or his agent in that behalf, takes delivery of them from such carrier or other bailee; (2) If the goods are rejected by the buyer, and the carrier or other bailee continues in possession of them, even if the seller has refused to receive them back. Goods are no longer in transit within the meaning of the preceding article: (1) If the buyer, or his agent in that behalf, obtains delivery of the goods before their arrival at the appointed destination; (2) If, after the arrival of the goods at the appointed destination, the carrier or other bailee acknowledges to the buyer or his agent that he holds the goods on his behalf and continues in possession of them as bailee for the buyer or his agent; and it is immaterial that further destination for the goods may have been indicated by the buyer; (3) If the carrier or other bailee wrongfully refuses to deliver the goods to the buyer or his agent in that behalf. If the goods are delivered to a ship, freight train, truck, or airplane chartered by the buyer, it is a question depending on the circumstances of the particular case, whether they are in the possession of the carrier as such or as agent of the buyer. If part delivery of the goods has been made to the buyer, or his agent in that behalf, the remainder of the goods may be stopped in transitu, unless such part delivery has been under such circumstances as to show an agreement with the buyer to give up possession of the whole of the goods. (n) Art. 1532. The unpaid seller may exercise his right of stoppage in transitu

110


either by obtaining actual possession of the goods or by giving notice of his claim to the carrier or other bailee in whose possession the goods are. Such notice may be given either to the person in actual possession of the goods or to his principal. In the latter case the notice, to be effectual, must be given at such time and under such circumstances that the principal, by the exercise of reasonable diligence, may prevent a delivery to the buyer. When notice of stoppage in transitu is given by the seller to the carrier, or other bailee in possession of the goods, he must redeliver the goods to, or according to the directions of, the seller. The expenses of such delivery must be borne by the seller. If, however, a negotiable document of title representing the goods has been issued by the carrier or other bailee, he shall not obliged to deliver or justified in delivering the goods to the seller unless such document is first surrendered for cancellation. (n)

Requisites: a. b. c.

The seller already parted with the possession of the goods; The goods are already in transit; The buyer is insolvent.

How? a. b.

The seller can take lawful possession of the goods from the carrier; Inform the carrier as to the exercise of the right and instruct him of the place of delivery.

What if carrier refused? Common carrier is not automatically liable. In order for him to be bound to follow the instructions, the seller must surrender the document of title, like a negotiable bill of lading. Considering that a third person may have a better right (see when a seller would lose his lien in sale of goods involving a negotiable document of title). If the buyer sells the thing to a third person: the seller does not lose the right to exercise stoppage in transitu, subject to the exceptions under Art. 1535 as discussed under possessory lien. 3.

Resale

Art. 1533. Where the goods are of perishable nature, or where the seller expressly reserves the right of resale in case the buyer should make default, or where the buyer has been in default in the payment of the price for an unreasonable time, an unpaid seller having a right of lien or having stopped the goods in transitu may resell the goods. He shall not thereafter be liable to the original buyer upon the contract of sale or for any profit made by such resale, but may recover from the buyer damages for any loss occasioned by the breach of the contract of sale. Where a resale is made, as authorized in this article, the buyer acquires a good title as against the original buyer. It is not essential to the validity of resale that notice of an intention to resell the goods be given by the seller to the original buyer. But where the right to resell is not based on the perishable nature of the goods or upon an express provision of the contract of sale, the giving or failure to give such notice shall be relevant in any issue involving the question whether the buyer had been in default for an unreasonable time before the resale was made. It is not essential to the validity of a resale that notice of the time and place of such resale should be given by the seller to the original buyer. The seller is bound to exercise reasonable care and judgment in making a resale, and subject to this requirement may make a resale either by public or private sale. He cannot, however, directly or indirectly buy the goods. (n) Grounds: a. Stipulated; b. The buyer was in default for an unreasonable length of time; c. The goods are perishable. Notice Requirement: (1) intention of the seller to resell - the first notice is relevant if the ground of the seller is (b) above, as proof that the buyer has been in default for an unreasonable length of time.

(2) date, time and place of resale – The seller is only entitled to the deficiency (price in resale and unpaid amount) if the resale was made in good faith and the notice would be a manifestation since the buyer was notified of the resale and he could’ve been there. Note that the seller is not allowed to buy the goods, directly or indirectly. What if the sale is in excess? It is still with the seller. There is no unjust enrichment, since the buyer is the one in default, and the seller only exercised his rights. Non-compliance with the notice requirement does not invalidate the resale. Kalaw vs. CA: if ownership already transferred to the buyer, seller is not required to rescind before he can exercise right to resell. Even if ownership is already transferred, when the seller sells the goods to another, the ownership of the first buyer is terminated by operation of law; and since the seller still has possessory lien, his delivery to the second buyer transfers ownership. 4.

Rescission

molasses and that the agreed sale was for only 300,000 gallons (not 400,000). ISSUE: WON the agreement was for only 300,000 gallons and not 400,000 as claimed by the plaintiff? HELD: Yes. We agree with appellant that the correspondence is susceptible of but one interpretation. The Hawaiian-Philippine Co. agreed to deliver to Song Fo & Company 300,000 gallons of molasses. The Hawaiian-Philippine Co. also believed it possible to accommodate Song Fo & Company by supplying the latter company with an extra 100,000 gallons. But the language used with reference to the additional 100,000 gallons was not a definite promise. Still less did it constitute an obligation. If Exhibit T relied upon by the trial court shows anything, it is simply that the defendant did not consider itself obliged to deliver to the plaintiff molasses in any amount. On the other hand, Exhibit A, a letter written by the manager of Song Fo & Company on October 17, 1922, expressly mentions an understanding between the parties of a contract for P300,000 gallons of molasses. ISSUE2: WON defendant had the right to rescind the contract?

Art. 1534. An unpaid seller having the right of lien or having stopped the goods in transitu, may rescind the transfer of title and resume the ownership in the goods, where he expressly reserved the right to do so in case the buyer should make default, or where the buyer has been in default in the payment of the price for an unreasonable time. The seller shall not thereafter be liable to the buyer upon the contract of sale, but may recover from the buyer damages for any loss occasioned by the breach of the contract. The transfer of title shall not be held to have been rescinded by an unpaid seller until he has manifested by notice to the buyer or by some other overt act an intention to rescind. It is not necessary that such overt act should be communicated to the buyer, but the giving or failure to give notice to the buyer of the intention to rescind shall be relevant in any issue involving the question whether the buyer had been in default for an unreasonable time before the right of rescission was asserted. (n) Grounds: 1. Stipulated; 2. The buyer was in default for an unreasonable length of time;

HELD: No. Song Fo & Company was to pay the Hawaiian-Philippine Co. upon presentation of accounts at the end of each month. Under this hypothesis, Song Fo & Company should have paid for the molasses delivered in December, 1922, and for which accounts were received by it on January 5, 1923, not later than January 31 of that year. Instead, payment was not made until February 20, 1923. All the rest of the molasses was paid for either on time or ahead of time. The terms of payment fixed by the parties are controlling. The time of payment stipulated for in the contract should be treated as of the essence of the contract. Theoretically, agreeable to certain conditions which could easily be imagined, the Hawaiian-Philippine Co. would have had the right to rescind the contract because of the breach of Song Fo & Company. But actually, there is here present no outstanding fact which would legally sanction the rescission of the contract by the HawaiianPhilippine Co.

Waiver of the condition of when to pay: accepting payment of the

The general rule is that rescission will not be permitted for a slight or casual breach of the contract, but only for such breaches as are so substantial and fundamental as to defeat the object of the parties in making the agreement. A delay in payment for a small quantity of molasses for some twenty days is not such a violation of an essential condition of the contract was warrants rescission for non-performance. Not only this, but the Hawaiian-Philippine Co. waived this condition when it arose by accepting payment of the overdue accounts and continuing with the contract. Thereafter, Song Fo & Company was not in default in payment so that the HawaiianPhilippine co. had in reality no excuse for writing its letter of April 2, 1923, cancelling the contract. (Warner, Barnes & Co. vs. Inza [1922], 43 Phil., 505.)

SONG FO & COMPANY, plaintiff-appellee, vs. HAWAIIAN PHILIPPINE CO., defendant-appellant.

We rule that the appellant had no legal right to rescind the contract of sale because of the failure of Song Fo & Company to pay for the molasses within the time agreed upon by the parties. We sustain the finding of the trial judge in this respect.

Art. 1191: rules are also applicable to rescission as a right. As such, it need not be stipulated and are available in reciprocal obligations. Substantial Breach: there must be substantial breach for rescission to be a ground. A delay in payment for a small quantity for some twenty days is not such a violation of an essential condition of the contract was warrants rescission for non-performance. See Song Fo &

Company vs. Hawaiian Phil. Co.

overdue accounts and continuing with the contract.

G.R. No. 23769

September 16, 1925

FACTS: Plaintiff Song Fo & Company filed a complaint for breach of contract against defendant Hawaiian Philippine Co. alleging failure to deliver 400,000 gallons of molasses as agreed upon. In an amended answer and cross-complaint, the defendant set up the special defense that since the plaintiff had defaulted in the payment for the molasses delivered to it by the defendant under the contract between the parties, the latter was compelled to cancel and rescind the said contract. The trial court decided in favor of plaintiff. On appeal, the defendant raises the issue that it had sufficient cause to cancel the contract for the sale of

111


Are the remedies of the unpaid seller alternative? No. the right to

rescind and resell would require that the seller still has possessory lien. However, possessory lien and stoppage in transit are exclusive in the sense that the latter requires that the seller had already delivered possession of the goods to the seller. However still, if the seller retained possession, such as when the goods are deliverable to the seller, the right to be invoked is possessory lien and not stoppage in transit.

Insolvency: not a requirement, only in stoppage in transit. But insolvency may be a ground (not required) in other remedies.

Remedies are not exclusive: seller may likewise exercise the following remedies: 1. Specific performance; 2. Action for damages.

DELIVERY OF ACCESSORIES: Art. 1537. The vendor is bound to deliver the thing sold and its accessions and accessories in the condition in which they were upon the perfection of the contract. All the fruits shall pertain to the vendee from the day on which the contract was perfected. (1468a)

Right to the fruits: General rule is that the buyer is entitled to the fruits

upon perfection of the contract on the premise that the obligation is pure. However, under Art. 1164, the creditor (the buyer in this case) is entitled to the fruits only when the obligation to deliver arises. LOSS, DETERIORATOIN OR IMPROVEMENT BEFORE DELIVERY: Art. 1538. In case of loss, deterioration or improvement of the thing before its delivery, the rules in Article 1189 shall be observed, the vendor being considered the debtor. (n) DOUBLE SALE:

Should it be immovable property, the ownership shall belong to the person acquiring it who in good faith first recorded it in the Registry of Property. Should there be no inscription, the ownership shall pertain to the person who in good faith was first in the possession; and, in the absence thereof, to the person who presents the oldest title, provided there is good faith. (1473)

If thing sold is movable property:

The first to take possession in good faith; If no one took possession, the person with the oldest title, who is in good faith.

If the thing sold is immovable property: 1. 2. 3.

The first to register in good faith; The first to take possession; If no one registered nor took possession, the person with the oldest title, who is in good faith.

“Good faith” pertains to the “Registrant” not the “buyer”: as such, if at the time of the second sale, the buyer had no knowledge of the prior sale, but learns of it prior to registration, he may still be considered a registrant NOT in good faith.

First buyer in bad faith: the first buyer cannot be in bad faith in relation to the second sale. However, he may be considered in bad faith if he has knowledge of any defect in the title of the seller or if he obtained title not through legal means (e.g., duress or intimidation).

BAR QUESTION: On June 15, 1995, Jesus sold a parcel of registered land to Jaime. On June 30, 1995, he sold the same land to Jose. Who has a better right if: a) b)

the the the the

first sale is registered ahead of the second sale with knowledge of latter. Why? (3%) second sale is registered ahead of the first sale, with knowledge of latter? Why? (2%)

ANSWER: a) Jaime. Even if the registration was done after the second sale, Jaime would still have a better title. He cannot be considered a registrant in

112

Premise of the rule: 1. 2.

The two sales are valid; The land is registered.

Unregistered land: is not covered by Art. 1544. (see Carumba vs. CA) Possession: need not be actual. Delivery by execution of a public

instrument constitutes actual possession of the buyer in the concept of an owner, even if the property was then leased to the sellers. As such, following the rule on double sales, the first buyer who took possession by the execution of the public instrument has a better right over the second buyer who took actual possession. (see Bautista vs. Sioson) Note, however, that the first buyer must have exercised his rights as owner, like in the case of Bautista where she leased the property to the sellers. If a public instrument was executed for the first sale, but the buyer did not exercise rights of ownership, and the second buyer did, such as collect rentals on the property, the second buyer would be considered the one who took possession in good faith. There is hierarchy of modes of delivery and between a notarized deed and actual possession, the latter prevails.

(Viatingo vs. Bugasis)

Art. 1544. If the same thing should have been sold to different vendees, the ownership shall be transferred to the person who may have first taken possession thereof in good faith, if it should be movable property.

1. 2.

b)

bad faith since there is no defect in his title. The defect of title is with the second buyer. As such, even if Jaime registered the sale even with knowledge of the second sale, he is still a registrant in good faith. Jaime has a better title, because Jose already had knowledge of the first sale. As such, he cannot be a registrant in good faith.


ROSALIO BAUTISTA, plaintiff-appellee, vs. FRANCISCO SIOSON, ET AL., defendants. RAYMUNDO DE LA CRUZ, appellant.

G.R. No. L-13125

February 11, 1919

FACTS: Plaintiff, through a contract of sale with repurchase, bought a camarin or a warehouse of strong materials with an iron roof and a house of mixed materials with a nipa roof, giving the spouses Francisco Sioson and Lorenza de la Cruz, the right of repurchase from the date of sale, or from Sept. 4, 1912. The same property was leased to the spouses. The two years elapsing, the spouses not paying any rent and not exercising their right of repurchase, and finding that defendant-appellant Raymundo dela Cruz was in possession of the said property by virtue of a sale made by the spouses to her within the 2 year period, she initiated a complaint which was granted by the trial court. The trial court declared her the owner of the two properties subject of the case and ordered defendant to place her in possession of the same. ISSUE: Who is the owner of the camarin of strong materials with an iron roof: (1) Rosalio Bautista, in whose favor its ownership became consolidated by the lapse of the term of two years without its having been repurchased by the vendors; or to (2) Raymundo de la Cruz, to whom Francisco Sioson likewise sold the said camarin on August 5, 1914, one year and eleven months after the sale of this building to the plaintiff Bautista, effected on September 4, 1912? HELD: Rosalio Bautista. Both alienations, effected successively by Francisco Sioson in favor of Bautista and Cruz, are recorded in notarial instruments, though they were not entered in the registry of property. To determine who is the lawful owner of the camarin sold, if the provisions of said article of the Code are to be observed, we have first to determine the contention in regard to which of the two purchasers is in possession thereof, and if, on the execution of the contract of lease by the first purchaser in favor of the vendor himself, the constitutum possessorium agreement is to be considered to have been stipulated, the conclusion must necessarily be reached as to which of the two purchasers first took possession of the camarin sold, and also whether the material possession of the tenant is of a precarious nature, enjoyed in the same and representation of the owner Bautista.

From the context of Article 1462, it is deduced that the delivery or tradition of the thing sold may be real or actual, and feigned. The execution of a public instrument constitutes one of the kinds of symbolic tradition, but, in all the different manners by which the thing sold may be delivered, it is necessary that the record bear proof and that it may be held that such delivery or tradition was determined by the will of the parties to deliver and receive, respectively, the thing that is the subject of the contract. So that by the execution of the deed of sale of September 4, 1912, Rosalio Bautista entered into the material possession under title of owner, of the camarin sold to him by Francisco Sioson, and, by virtue of another instrument of lease, of the same date, the purchaser and owner of the camarin conveyed and delivered this building to the lessee in view of said contract. Under these perfectly legal suppositions it is unquestionable that the purchaser Rosalio Bautista was the first person who entered into the possession of the camarin as soon as soon as he acquired it by virtue of said sale. The material possession which the other defendant, Raymundo de la Cruz, now enjoys, not only was subsequent by one year and eleven months, but also, on the other hand, is an unlawful possession which was transmitted to him by Francisco Sioson, who held the camarin precariously and in the capacity of tenant, and, consequently, without any right whatever to convey to Raymundo de la Cruz the possession under title of owner referred to in article 1473, aforementioned of the Civil Code. This article says: "If the same thing should have been sold to different vendees. . .;" but it must be understood that said sale was made by its original owner. In the instant case Francisco Sioson, on affecting the second sale in favor of Raymundo de la Cruz, was in possession of the camarin and occupied it, not in the capacity of owner, but in that of lessee or tenant, and therefore absolutely had no right to dispose of the building in the capacity of owner thereof; consequently Sioson could not convey to the second purchaser the lawful possession of the disputed camarin. AMADO CARUMBA, petitioner, vs. THE COURT OF APPEALS, SANTIAGO BALBUENA and ANGELES BOAQUIÑA as Deputy Provincial Sheriff,respondents. G.R. No. L-27587 February 18, 1970 FACTS: On April 12, 1955, the spouses Amado Canuto and Nemesia Ibasco, by virtue of a "Deed of Sale of Unregistered Land with Covenants of Warranty" (Exh. A), sold a parcel of land, partly residential and partly coconut land to the spouses Amado Carumba and Benita Canuto, for the sum of P350.00. The referred deed of sale was never registered in the Office of the Register of Deeds of Camarines Sur, and the Notary, Mr. Vicente Malaya, was not then an authorized notary public in the place, as shown by Exh. 5. On January 21, 1957, a complaint (Exh. B) for a sum or money was filed by Santiago Balbuena against Amado Canuto and Nemesia Ibasco which rendered a decision in favor of the plaintiff and against the defendants. On October 1, 1968, the ex-officio Sheriff, Justo V. Imperial, of Camarines Sur, issued a "Definite Deed of Sale (Exh. D) of the property now in question in favor of Santiago Balbuena, which instrument of sale was registered before the Office of the Register of Deeds of Camarines Sur, on October 3, 1958. The aforesaid property was declared for taxation purposes (Exh. 1) in the name of Santiago Balbuena in 1958. On appeal, the CFI reversed the justice of the peace. On appeal to the CA, the CA, without altering the findings of fact made by the court of origin, declared that there having been a double sale of the land subject of the suit Balbuena's title was superior to that of his adversary under Article 1544 of the Civil Code of the Philippines, since the execution sale had been properly registered in good faith and the sale to Carumba was not recorded. ISSUE: WON there was a double sale and Balbuena has a right to the said property?

113


HELD: No. While under the invoked Article 1544 registration in good faith prevails over possession in the event of a double sale by the vendor of the same piece of land to different vendees, said article is of no application to the case at bar, even if Balbuena, the later vendee, was ignorant of the prior sale made by his judgment debtor in favor of petitioner Carumba. The reason is that the purchaser of unregistered land at a sheriff's execution sale only steps into the shoes of the judgment debtor, and merely acquires the latter's interest in the property sold as of the time the property was levied upon. This is specifically provided by section 35 of Rule 39 of the Revised Rules of Court, the second paragraph of said section specifically providing that: Upon the execution and delivery of said (final) deed the purchaser, redemptioner, or his assignee shall be substituted to and acquire all the right, title, interest, and claim of the judgment debtor to the property as of the time of the levy, except as against the judgment debtor in possession, in which case the substitution shall be effective as of the time of the deed ... (Emphasis supplied) While the time of the levy does not clearly appear, it could not have been made prior to 15 April 1957, when the decision against the former owners of the land was rendered in favor of Balbuena. But the deed of sale in favor of Canuto had been executed two years before, on 12 April 1955, and while only embodied in a private document, the same, coupled with the fact that the buyer (petitioner Carumba) had taken possession of the unregistered land sold, sufficed to vest ownership on the said buyer. When the levy was made by the Sheriff, therefore, the judgment debtor no longer had dominical interest nor any real right over the land that could pass to the purchaser at the execution sale. Hence, the latter must yield the land to petitioner Carumba. The rule is different in case of lands covered by Torrens titles, where the prior sale is neither recorded nor known to the execution purchaser prior to the levy; but the land here in question is admittedly not registered under Act No. 496.

CONDITIONS: Art. 1545. Where the obligation of either party to a contract of sale is subject to any condition which is not performed, such party may refuse to proceed with the contract or he may waive performance of the condition. If the other party has promised that the condition should happen or be performed, such first mentioned party may also treat the nonperformance of the condition as a breach of warranty. Where the ownership in the thing has not passed, the buyer may treat the fulfillment by the seller of his obligation to deliver the same as described and as warranted expressly or by implication in the contract of sale as a condition of the obligation of the buyer to perform his promise to accept and pay for the thing. (n)

Conditions not fulfilled: the buyer may: 1. 2. 3.

Cancel the sale; Waive the happening of the condition and proceed with the sale; Treat the non-happening of the condition as a breach of warranty and hold the seller liable for damages.

OBLIGATION TO WARRANT Art. 1546. Any affirmation of fact or any promise by the seller relating to the thing is an express warranty if the natural tendency of such affirmation or promise is to induce the buyer to purchase the same, and if the buyer purchase the thing relying thereon. No affirmation of the value of the thing, nor any statement purporting to be a statement of the seller's opinion only, shall be construed as a warranty, unless the seller made such affirmation or statement as an expert and it was relied upon by the buyer. (n)

Express Warranty: is an affirmation of fact or promise by the seller

relating to the thing which would induce the buyer to buy the same. However, those relating to opinions of the seller are not considered warranties unless they are made by experts and the buyer relies upon them. Implied Warranties:

Art. 1547. In a contract of sale, unless a contrary intention appears, there is: (1) An implied warranty on the part of the seller that he has a right to sell the thing at the time when the ownership is to pass, and that the buyer shall from that time have and enjoy the legal and peaceful possession of the thing; (2) An implied warranty that the thing shall be free from any hidden faults or defects, or any charge or encumbrance not declared or known to the buyer. This Article shall not, however, be held to render liable a sheriff, auctioneer, mortgagee, pledgee, or other person professing to sell by virtue of authority in fact or law, for the sale of a thing in which a third person has a legal or equitable interest. (n)

Those not covered by the implied warranties of eviction and hidden defects: 1. 2. 3. 4. 5.

Sheriff; Auctioneer; Mortgagee; Pledgee; Other person professing to sell by virtue of authority in fact or law, for the sale of a thing in which a third person has a legal or equitable interest.

Liability of the Vendor: Art. 1554. If the vendee has renounced the right to warranty in case of eviction, and eviction should take place, the vendor shall only pay the value which the thing sold had at the time of the eviction. Should the vendee have made the waiver with knowledge of the risks of eviction and assumed its consequences, the vendor shall not be liable. (1477) Art. 1555. When the warranty has been agreed upon or nothing has been stipulated on this point, in case eviction occurs, the vendee shall have the right to demand of the vendor: (1) The return of the value which the thing sold had at the time of the eviction, be it greater or less than the price of the sale; (2) The income or fruits, if he has been ordered to deliver them to the party who won the suit against him; (3) The costs of the suit which caused the eviction, and, in a proper case, those of the suit brought against the vendor for the warranty; (4) The expenses of the contract, if the vendee has paid them; (5) The damages and interests, and ornamental expenses, if the sale was made in bad faith. (1478) 1.

SUBSECTION 1. - Warranty in Case of Eviction

If there is a waiver, the same is void.

Art. 1548. Eviction shall take place whenever by a final judgment based on a right prior to the sale or an act imputable to the vendor, the vendee is deprived of the whole or of a part of the thing purchased. The vendor shall answer for the eviction even though nothing has been said in the contract on the subject. The contracting parties, however, may increase, diminish, or suppress this legal obligation of the vendor. (1475a)

Coverage: not only deprivation of ownership, but also deprivation of possession. E.g., when there is an existing lease contract covering the thing sold.

Second-hand items: this warranty is still applicable even on second-hand items. Unlike the warranty against hidden defects, which may not apply.

When would the seller be liable? If the buyer is deprived of ownership and/or possession because of: 1. .

REQUISITES: 1. 2. 3.

There must be a final judgment; The buyer was derived of the thing due to a right prior to the sale; or Even if the right has arisen after sale, if the same is imputable to the vendor; Example: the first buyer who is deprived of the thing by the second buyer whose right accrued after the first sale but the deprivation would be imputable to the vendor

Art. 1549. The vendee need not appeal from the decision in order that the vendor may become liable for eviction. (n) Art. 1550. When adverse possession had been commenced before the sale but the prescriptive period is completed after the transfer, the vendor shall not be liable for eviction. (n) Art. 1551. If the property is sold for nonpayment of taxes due and not made known to the vendee before the sale, the vendor is liable for eviction. (n) Art. 1552. The judgment debtor is also responsible for eviction in judicial sales, unless it is otherwise decreed in the judgment. (n)

114


If the seller is in bad faith – liable for the value of the thing at the time of eviction, income/fruits, cost of suit, expenses of the contract and damages and interest, whether with waiver or not.

Art. 1553. Any stipulation exempting the vendor from the obligation to answer for eviction shall be void, if he acted in bad faith. (1476) 2.

If the seller is in good faith: a. With waiver: 1) Consciente – the buyer is not aware of the risk, or without knowledge of the defect in the title of the seller: seller is still liable but only for the value of the thing at the time of eviction; 2) Intencionada – the buyer was aware of the risk of eviction or of the defect in the title of the seller – the seller is no longer liable for anything. b. Without waiver: seller is liable for all except damages.

Art. 1556. Should the vendee lose, by reason of the eviction, a part of the thing sold of such importance, in relation to the whole, that he would not have bought it without said part, he may demand the rescission of the contract; but with the obligation to return the thing without other encumbrances that those which it had when he acquired it. He may exercise this right of action, instead of enforcing the vendor's liability for eviction. The same rule shall be observed when two or more things have been jointly sold for a lump sum, or for a separate price for each of them, if it should clearly appear that the vendee would not have purchased one without the other. (1479a) Art. 1557. The warranty cannot be enforced until a final judgment has been rendered, whereby the vendee loses the thing acquired or a part thereof. (1480) Art. 1558. The vendor shall not be obliged to make good the proper warranty, unless he is summoned in the suit for eviction at the instance of the vendee. (1481a) Art. 1559. The defendant vendee shall ask, within the time fixed in the Rules of Court for answering the complaint, that the vendor be made a codefendant. (1482a) Art. 1560. If the immovable sold should be encumbered with any nonapparent burden or servitude, not mentioned in the agreement, of such a nature that it must be presumed that the vendee would not have acquired it had he been aware thereof, he may ask for the rescission of the contract,

unless he should prefer the appropriate indemnity. Neither right can be exercised if the non-apparent burden or servitude is recorded in the Registry of Property, unless there is an express warranty that the thing is free from all burdens and encumbrances.

any particular purpose, unless there is a stipulation to the contrary. (n)

Within one year, to be computed from the execution of the deed, the vendee may bring the action for rescission, or sue for damages.

Art. 1565. In the case of a contract of sale by sample, if the seller is a dealer in goods of that kind, there is an implied warranty that the goods shall be free from any defect rendering them unmerchantable which would not be apparent on reasonable examination of the sample. (n)

One year having elapsed, he may only bring an action for damages within an equal period, to be counted from the date on which he discovered the burden or servitude. (1483a)

Non-apparent encumbrances: example: a right of way. Seller’s liability shall attach only if the encumbrance was not: 1. Apparent; 2. Not declared at the time of sale; or 3. Not annotated.

Otherwise, if it should have been known to the vendee, the seller would not be liable.

Prescription of action: 1. 2.

Rescission – within 1 year from the execution of the deed; Damages – within 1 year from discovery. SUBSECTION 2. - Warranty Against Hidden Defects of or Encumbrances Upon the Thing Sold

Art. 1561. The vendor shall be responsible for warranty against the hidden defects which the thing sold may have, should they render it unfit for the use for which it is intended, or should they diminish its fitness for such use to such an extent that, had the vendee been aware thereof, he would not have acquired it or would have given a lower price for it; but said vendor shall not be answerable for patent defects or those which may be visible, or for those which are not visible if the vendee is an expert who, by reason of his trade or profession, should have known them. (1484a)

Art. 1564. An implied warranty or condition as to the quality or fitness for a particular purpose may be annexed by the usage of trade. (n)

Art. 1566. The vendor is responsible to the vendee for any hidden faults or defects in the thing sold, even though he was not aware thereof. This provision shall not apply if the contrary has been stipulated, and the vendor was not aware of the hidden faults or defects in the thing sold. (1485) Art. 1567. In the cases of Articles 1561, 1562, 1564, 1565 and 1566, the vendee may elect between withdrawing from the contract and demanding a proportionate reduction of the price, with damages in either case. (1486a)

Remedies of the vendee: 1. 2.

Thing with hidden defect is lost or destroyed; liability of the seller: 1.

Effect of the hidden defect: 1. 2.

It would render the thing unfit for its intended use; Diminish its fitness for such use to such extent that, had the vendee ben aware thereof, he would not have acquired it or would have given a lower price for it.

Art. 1562. In a sale of goods, there is an implied warranty or condition as to the quality or fitness of the goods, as follows: (1) Where the buyer, expressly or by implication, makes known to the seller the particular purpose for which the goods are acquired, and it appears that the buyer relies on the seller's skill or judgment (whether he be the grower or manufacturer or not), there is an implied warranty that the goods shall be reasonably fit for such purpose; (2) Where the goods are brought by description from a seller who deals in goods of that description (whether he be the grower or manufacturer or not), there is an implied warranty that the goods shall be of merchantable quality. (n)

Warranty of Quality: in this case, there is no hidden defect, it’s just that

the thing is unfit for the particular purpose which the buyer intended it for. Liability attaches if: 1. The buyer expressly or impliedly made known such purpose and he relies on the seller’s skill or judgment that the thing sold would be reasonably fit therefor; 2. Where the goods are brought by description from a seller who deals in goods of that description. Art. 1563. In the case of contract of sale of a specified article under its patent or other trade name, there is no warranty as to its fitness for

115


If the cause was the defect itself: return the price, expenses of the contract, damages (if he was aware), interest (if he is not aware); Art. 1568. If the thing sold should be lost in consequence of the hidden faults, and the vendor was aware of them, he shall bear the loss, and shall be obliged to return the price and refund the expenses of the contract, with damages. If he was not aware of them, he shall only return the price and interest thereon, and reimburse the expenses of the contract which the vendee might have paid. (1487a)

Defects: must be physical and hidden, i.e., not obvious to the buyer even

after exercising his right of inspection. Note that the seller is NOT liable: 1. For patent defects or those which may be visible; or 2. Those which are invisible but the buyer is an expert on the thing and by reason of his trade or profession, he should have known.

Withdraw from the contract plus damages. Demand a proportionate reduction of the price plus damages.

2.

If the cause is fortuitous event – the price less the value at the time of loss, plus damages (if he was aware). Art. 1569. If the thing sold had any hidden fault at the time of the sale, and should thereafter be lost by a fortuitous event or through the fault of the vendee, the latter may demand of the vendor the price which he paid, less the value which the thing had when it was lost. If the vendor acted in bad faith, he shall pay damages to the vendee. (1488a)

Art. 1570. The preceding articles of this Subsection shall be applicable to judicial sales, except that the judgment debtor shall not be liable for damages. (1489a) Art. 1571. Actions arising from the provisions of the preceding ten articles shall be barred after six months, from the delivery of the thing sold. (1490)

Prescription of action: 6 months from DELIVERY. Art. 1572. If two or more animals are sold together, whether for a lump sum or for a separate price for each of them, the redhibitory defect of one shall only give rise to its redhibition, and not that of the others; unless it should appear that the vendee would not have purchased the sound animal or animals without the defective one. The latter case shall be presumed when a team, yoke pair, or set is bought, even if a separate price has been fixed for each one of the animals composing the same. (1491)

If more than one animal is bought: generally, the buyer can only cancel the sale pertaining to the animal with the hidden defect. EXCEPT: if it can be shown that the purchase would not have been made without the defective one, such as purchase of a team, yoke pair, or set. Art. 1576. If the hidden defect of animals, even in case a professional inspection has been made, should be of such a nature that expert knowledge is not sufficient to discover it, the defect shall be considered as redhibitory. But if the veterinarian, through ignorance or bad faith should fail to discover or disclose it, he shall be liable for damages. (1495)

Hidden defects in animals: for the seller to be liable, the defect must be redhibitory, i.e., even expert knowledge is not sufficient to detect the same.

Art. 1573. The provisions of the preceding article with respect to the sale of animals shall in like manner be applicable to the sale of other things. (1492) Art. 1574. There is no warranty against hidden defects of animals sold at fairs or at public auctions, or of live stock sold as condemned. (1493a) Art. 1575. The sale of animals suffering from contagious diseases shall be void. A contract of sale of animals shall also be void if the use or service for which they are acquired has been stated in the contract, and they are found to be unfit therefor. (1494a) Art. 1577. The redhibitory action, based on the faults or defects of animals, must be brought within forty days from the date of their delivery to the vendee. This action can only be exercised with respect to faults and defects which are determined by law or by local customs. (1496a) Art. 1578. If the animal should die within three days after its purchase, the vendor shall be liable if the disease which cause the death existed at the time of the contract. (1497a) QUESTION: S sold a dog to B, 2 days after the dog died. B sued. Will S be liable? HELD: No. whether the seller is aware or not aware of the defect is not important, it will only be determinative of the extent and not whether he is liable. S is not liable since the defect must be existing at the time of sale, even if the dog died within 3 days. Art. 1579. If the sale be rescinded, the animal shall be returned in the condition in which it was sold and delivered, the vendee being answerable for any injury due to his negligence, and not arising from the redhibitory fault or defect. (1498) Art. 1580. In the sale of animals with redhibitory defects, the vendee shall also enjoy the right mentioned in article 1567; but he must make use thereof within the same period which has been fixed for the exercise of the redhibitory action. (1499)

Art. 1583. Unless otherwise agreed, the buyer of goods is not bound to accept delivery thereof by installments. Where there is a contract of sale of goods to be delivered by stated installments, which are to be separately paid for, and the seller makes defective deliveries in respect of one or more instalments, or the buyer neglects or refuses without just cause to take delivery of or pay for one more instalments, it depends in each case on the terms of the contract and the circumstances of the case, whether the breach of contract is so material as to justify the injured party in refusing to proceed further and suing for damages for breach of the entire contract, or whether the breach is severable, giving rise to a claim for compensation but not to a right to treat the whole contract as broken. (n) Art. 1584. Where goods are delivered to the buyer, which he has not previously examined, he is not deemed to have accepted them unless and until he has had a reasonable opportunity of examining them for the purpose of ascertaining whether they are in conformity with the contract if there is no stipulation to the contrary. Unless otherwise agreed, when the seller tenders delivery of goods to the buyer, he is bound, on request, to afford the buyer a reasonable opportunity of examining the goods for the purpose of ascertaining whether they are in conformity with the contract. Where goods are delivered to a carrier by the seller, in accordance with an order from or agreement with the buyer, upon the terms that the goods shall not be delivered by the carrier to the buyer until he has paid the price, whether such terms are indicated by marking the goods with the words "collect on delivery," or otherwise, the buyer is not entitled to examine the goods before the payment of the price, in the absence of agreement or usage of trade permitting such examination. (n) Art. 1585. The buyer is deemed to have accepted the goods when he intimates to the seller that he has accepted them, or when the goods have been delivered to him, and he does any act in relation to them which is inconsistent with the ownership of the seller, or when, after the lapse of a reasonable time, he retains the goods without intimating to the seller that he has rejected them. (n)

When the buyer is deemed to have accepted delivery: 1. 2. 3.

He intimates to the seller his acceptance; He does any act which is inconsistent with the ownership of the seller; After the lapse of reasonable time, he retains the goods without intimating to the seller that he has rejected them.

Art. 1586. In the absence of express or implied agreement of the parties, acceptance of the goods by the buyer shall not discharge the seller from liability in damages or other legal remedy for breach of any promise or warranty in the contract of sale. But, if, after acceptance of the goods, the buyer fails to give notice to the seller of the breach in any promise of warranty within a reasonable time after the buyer knows, or ought to know of such breach, the seller shall not be liable therefor. (n) Art. 1587. Unless otherwise agreed, where goods are delivered to the buyer, and he refuses to accept them, having the right so to do, he is not bound to return them to the seller, but it is sufficient if he notifies the seller that he refuses to accept them. If he voluntarily constitutes himself a depositary thereof, he shall be liable as such. (n)

Art. 1581. The form of sale of large cattle shall be governed by special laws. (n) CHAPTER 5 OBLIGATIONS OF THE VENDEE Art. 1582. The vendee is bound to accept delivery and to pay the price of the thing sold at the time and place stipulated in the contract. If the time and place should not have been stipulated, the payment must be made at the time and place of the delivery of the thing sold. (1500a)

116


OBLIGATION TO ACCEPT: Aside from paying the price, it is the obligation of the vendee to accept delivery. If he refuses: 1. Without just cause – ownership is deemed transferred to him; 2. With just cause – ownership will not pass to the buyer. Art. 1589. The vendee shall owe interest for the period between the delivery of the thing and the payment of the price, in the following three cases: (1) Should it have been so stipulated; (2) Should the thing sold and delivered produce fruits or income;

(3) Should he be in default, from the time of judicial or extrajudicial demand for the payment of the price. (1501a) Art. 1590. Should the vendee be disturbed in the possession or ownership of the thing acquired, or should he have reasonable grounds to fear such disturbance, by a vindicatory action or a foreclosure of mortgage, he may suspend the payment of the price until the vendor has caused the disturbance or danger to cease, unless the latter gives security for the return of the price in a proper case, or it has been stipulated that, notwithstanding any such contingency, the vendee shall be bound to make the payment. A mere act of trespass shall not authorize the suspension of the payment of the price. (1502a)

Suspension of payments: may be made by the vendee if he is disturbed or have reasonable grounds to fear such disturbance upon his possession or ownership, by a vindicatory action or a foreclosure of mortgage. EXCEPT: 1. The vendor gives security for the return of the price in a proper case; 2. It has been stipulated that there shall be no suspension of payments even if there is such contingency. A mere trespass shall not authorize suspension of the payment of the price. However, if the fear of loss covers immovable property, the vendor may immediately sue for rescission: Art. 1591. Should the vendor have reasonable grounds to fear the loss of immovable property sold and its price, he may immediately sue for the rescission of the sale. Should such ground not exist, the provisions of Article 1191 shall be observed. (1503)

Length of suspension: until the seller caused the disturbance or danger to cease.

Art. 1592. In the sale of immovable property, even though it may have been stipulated that upon failure to pay the price at the time agreed upon the rescission of the contract shall of right take place, the vendee may pay, even after the expiration of the period, as long as no demand for rescission of the contract has been made upon him either judicially or by a notarial act. After the demand, the court may not grant him a new term. (1504a) Art. 1593. With respect to movable property, the rescission of the sale shall of right take place in the interest of the vendor, if the vendee, upon the expiration of the period fixed for the delivery of the thing, should not have appeared to receive it, or, having appeared, he should not have tendered the price at the same time, unless a longer period has been stipulated for its payment. (1505) CHAPTER 6 ACTIONS FOR BREACH OF CONTRACT OF SALE OF GOODS Art. 1594. Actions for breach of the contract of sale of goods shall be governed particularly by the provisions of this Chapter, and as to matters not specifically provided for herein, by other applicable provisions of this Title. (n) Art. 1595. Where, under a contract of sale, the ownership of the goods has passed to the buyer and he wrongfully neglects or refuses to pay for the goods according to the terms of the contract of sale, the seller may maintain an action against him for the price of the goods.

paragraph, are not applicable, the seller may offer to deliver the goods to the buyer, and, if the buyer refuses to receive them, may notify the buyer that the goods are thereafter held by the seller as bailee for the buyer. Thereafter the seller may treat the goods as the buyer's and may maintain an action for the price. (n) Art. 1596. Where the buyer wrongfully neglects or refuses to accept and pay for the goods, the seller may maintain an action against him for damages for nonacceptance. The measure of damages is the estimated loss directly and naturally resulting in the ordinary course of events from the buyer's breach of contract. Where there is an available market for the goods in question, the measure of damages is, in the absence of special circumstances showing proximate damage of a different amount, the difference between the contract price and the market or current price at the time or times when the goods ought to have been accepted, or, if no time was fixed for acceptance, then at the time of the refusal to accept. If, while labor or expense of material amount is necessary on the part of the seller to enable him to fulfill his obligations under the contract of sale, the buyer repudiates the contract or notifies the seller to proceed no further therewith, the buyer shall be liable to the seller for labor performed or expenses made before receiving notice of the buyer's repudiation or countermand. The profit the seller would have made if the contract or the sale had been fully performed shall be considered in awarding the damages. (n) Art. 1597. Where the goods have not been delivered to the buyer, and the buyer has repudiated the contract of sale, or has manifested his inability to perform his obligations thereunder, or has committed a breach thereof, the seller may totally rescind the contract of sale by giving notice of his election so to do to the buyer. (n) Art. 1598. Where the seller has broken a contract to deliver specific or ascertained goods, a court may, on the application of the buyer, direct that the contract shall be performed specifically, without giving the seller the option of retaining the goods on payment of damages. The judgment or decree may be unconditional, or upon such terms and conditions as to damages, payment of the price and otherwise, as the court may deem just. (n) Art. 1599. Where there is a breach of warranty by the seller, the buyer may, at his election: (1) Accept or keep the goods and set up against the seller, the breach of warranty by way of recoupment in diminution or extinction of the price; (2) Accept or keep the goods and maintain an action against the seller for damages for the breach of warranty; (3) Refuse to accept the goods, and maintain an action against the seller for damages for the breach of warranty; (4) Rescind the contract of sale and refuse to receive the goods or if the goods have already been received, return them or offer to return them to the seller and recover the price or any part thereof which has been paid. When the buyer has claimed and been granted a remedy in anyone of these ways, no other remedy can thereafter be granted, without prejudice to the provisions of the second paragraph of Article 1191.

Where, under a contract of sale, the price is payable on a certain day, irrespective of delivery or of transfer of title and the buyer wrongfully neglects or refuses to pay such price, the seller may maintain an action for the price although the ownership in the goods has not passed. But it shall be a defense to such an action that the seller at any time before the judgment in such action has manifested an inability to perform the contract of sale on his part or an intention not to perform it.

Where the goods have been delivered to the buyer, he cannot rescind the sale if he knew of the breach of warranty when he accepted the goods without protest, or if he fails to notify the seller within a reasonable time of the election to rescind, or if he fails to return or to offer to return the goods to the seller in substantially as good condition as they were in at the time the ownership was transferred to the buyer. But if deterioration or injury of the goods is due to the breach or warranty, such deterioration or injury shall not prevent the buyer from returning or offering to return the goods to the seller and rescinding the sale.

Although the ownership in the goods has not passed, if they cannot readily be resold for a reasonable price, and if the provisions of article 1596, fourth

Where the buyer is entitled to rescind the sale and elects to do so, he shall cease to be liable for the price upon returning or offering to return the

117


goods. If the price or any part thereof has already been paid, the seller shall be liable to repay so much thereof as has been paid, concurrently with the return of the goods, or immediately after an offer to return the goods in exchange for repayment of the price. Where the buyer is entitled to rescind the sale and elects to do so, if the seller refuses to accept an offer of the buyer to return the goods, the buyer shall thereafter be deemed to hold the goods as bailee for the seller, but subject to a lien to secure payment of any portion of the price which has been paid, and with the remedies for the enforcement of such lien allowed to an unpaid seller by Article 1526. (5) In the case of breach of warranty of quality, such loss, in the absence of special circumstances showing proximate damage of a greater amount, is the difference between the value of the goods at the time of delivery to the buyer and the value they would have had if they had answered to the warranty. (n) CHAPTER 7 EXTINGUISHMENT OF SALE Art. 1600. Sales are extinguished by the same causes as all other obligations, by those stated in the preceding articles of this Title, and by conventional or legal redemption. (1506)

apparent vendor may ask for the reformation of the instrument. (n)

Possible reason of the creditor to enter in to a sale with right of repurchase rather than mortgage: he wants to circumvent the law on

mortgage. 1. Sale would transfer ownership upon delivery. In mortgage, ownership remains with the mortgagor; 2. Buyer would already be entitled to the fruits and to possession. In mortgage, these remain with the mortgagor; 3. Upon default, after the lapse of the period, buyer’s ownership becomes absolute. In mortgage, there should be foreclosure and compliance with the procedures thereto. Moreover, creditor would not always be entitled to the property.

Why would debtor sign? “beggars can’t be choosers.” Burden of proof: ordinarily, seller a retro, who claims that the transaction

is an equitable mortgage. But, under Art. 1602 provides the circumstances where the PRESUMPTION that the transaction is an equitable mortgage would arise. As such, the creditor-buyer would have the burden of proof.

In case of doubt: equitable mortgage, under Art. 1603: Art. 1603. In case of doubt, a contract purporting to be a sale with right to repurchase shall be construed as an equitable mortgage. (n)

SECTION 1. - Conventional Redemption Art. 1601. Conventional redemption shall take place when the vendor reserves the right to repurchase the thing sold, with the obligation to comply with the provisions of Article 1616 and other stipulations which may have been agreed upon. (1507)

Right to repurchase: for a party to be exercise conventional redemption, the contract must have been a contract of sale with right to repurchase, or a pacto de retro sale.

Ownership: transfers to the vendee a retro upon delivery. However, this

ownership is not absolute but only conditional. This is because the seller a retro may be able to exercise the right to repurchase and the ownership of the buyer will be terminated.

Amount to be paid at the time the right is exercised: 1. 2.

The purchase price; Useful and necessary expenses (e.g., fencing of the land)

Art. 1602. The contract shall be presumed to be an equitable mortgage, in any of the following cases: (1) When the price of a sale with right to repurchase is unusually inadequate; (2) When the vendor remains in possession as lessee or otherwise; (3) When upon or after the expiration of the right to repurchase another instrument extending the period of redemption or granting a new period is executed; (4) When the purchaser retains for himself a part of the purchase price; (5) When the vendor binds himself to pay the taxes on the thing sold; (6) In any other case where it may be fairly inferred that the real intention of the parties is that the transaction shall secure the payment of a debt or the performance of any other obligation. In any of the foregoing cases, any money, fruits, or other benefit to be received by the vendee as rent or otherwise shall be considered as interest which shall be subject to the usury laws. (n)

Relevance: the parties may have intended the property as a security for a

pre-existing obligation. As such, by treating it as a mortgage, the supposed seller may still redeem the property regardless of the expiration of the period to repurchase agreed upon by the parties.

Remedy: of the seller is for reformation of the contract. Art. 1605. In the cases referred to in Articles 1602 and 1604, the

118


Art. 1604. The provisions of Article 1602 shall also apply to a contract purporting to be an absolute sale. (n) Art. 1606. The right referred to in Article 1601, in the absence of an express agreement, shall last four years from the date of the contract. Should there be an agreement, the period cannot exceed ten years. However, the vendor may still exercise the right to repurchase within thirty days from the time final judgment was rendered in a civil action on the basis that the contract was a true sale with right to repurchase. (1508a) PERIOD TO REDEEM: 1. No period – 4 years from the date of the contract; 2. Stipulation – not exceeding 10 years. BAR QUESTION: On January 2, 1980, A and B entered into a contract whereby A sold to B a parcel of land for and in consideration of P10,000.00. A reserving to himself the right to repurchase the same. Because they were friends, no period was agreed upon for the repurchase of the property. 1) Until when must A exercise his right of repurchase? 2) If A fails to redeem the property within the allowable period, what would you advise B to do for his better protection? ANSWER: 1) Since no period was agreed upon, Art. 1606 provides that the period to redeem shall be 4 years from the date of the contract. What if they agreed to a period of 25 years? Can A redeem on the 15 year? No more. The law provides for a maximum period of 10 years. The 25 year agreement was void. As such, A should have redeemed within the 10 year period. 2)

For A’s failure to redeem, B’s ownership from being conditional upon the exercise to right, becomes absolute. B would be entitled to registration. B should file an action for consolidation of title in order to effect such registration.

Art. 1607. In case of real property, the consolidation of ownership in the vendee by virtue of the failure of the vendor to comply with the provisions of article 1616 shall not be recorded in the Registry of Property without a judicial order, after the vendor has been duly heard. (n) Art. 1608. The vendor may bring his action against every possessor whose right is derived from the vendee, even if in the second contract no mention

should have been made of the right to repurchase, without prejudice to the provisions of the Mortgage Law and the Land Registration Law with respect to third persons. (1510) Art. 1609. The vendee is subrogated to the vendor's rights and actions. (1511) Art. 1610. The creditors of the vendor cannot make use of the right of redemption against the vendee, until after they have exhausted the property of the vendor. (1512) Art. 1611. In a sale with a right to repurchase, the vendee of a part of an undivided immovable who acquires the whole thereof in the case of article 498, may compel the vendor to redeem the whole property, if the latter wishes to make use of the right of redemption. (1513) Art. 1612. If several persons, jointly and in the same contract, should sell an undivided immovable with a right of repurchase, none of them may exercise this right for more than his respective share. The same rule shall apply if the person who sold an immovable alone has left several heirs, in which case each of the latter may only redeem the part which he may have acquired. (1514) Art. 1613. In the case of the preceding article, the vendee may demand of all the vendors or co-heirs that they come to an agreement upon the purchase of the whole thing sold; and should they fail to do so, the vendee cannot be compelled to consent to a partial redemption. (1515) Art. 1614. Each one of the co-owners of an undivided immovable who may have sold his share separately, may independently exercise the right of repurchase as regards his own share, and the vendee cannot compel him to redeem the whole property. (1516) Art. 1615. If the vendee should leave several heirs, the action for redemption cannot be brought against each of them except for his own share, whether the thing be undivided, or it has been partitioned among them. But if the inheritance has been divided, and the thing sold has been awarded to one of the heirs, the action for redemption may be instituted against him for the whole. (1517) Art. 1616. The vendor cannot avail himself of the right of repurchase without returning to the vendee the price of the sale, and in addition: (1) The expenses of the contract, and any other legitimate payments made by reason of the sale; (2) The necessary and useful expenses made on the thing sold. (1518) Art. 1617. If at the time of the execution of the sale there should be on the land, visible or growing fruits, there shall be no reimbursement for or prorating of those existing at the time of redemption, if no indemnity was paid by the purchaser when the sale was executed. Should there have been no fruits at the time of the sale and some exist at the time of redemption, they shall be prorated between the redemptioner and the vendee, giving the latter the part corresponding to the time he possessed the land in the last year, counted from the anniversary of the date of the sale. (1519a) Art. 1618. The vendor who recovers the thing sold shall receive it free from all charges or mortgages constituted by the vendee, but he shall respect the leases which the latter may have executed in good faith, and in accordance with the custom of the place where the land is situated. (1520) SECTION 2. - Legal Redemption TWO GROUPS OF PERSONS WHO WOULD HAVE RIGHT OF LEGAL REDEMPTION: 1. Co-owners – when one of the co-owners alienated his interest in the co-owned property by onerous title.

119


2.

Owners of adjoining lands

Subject property: In co-owners, the property may either be movable or immovable property. While owners of adjoining land refer only to lands.

Art. 1619. Legal redemption is the right to be subrogated, upon the same terms and conditions stipulated in the contract, in the place of one who acquires a thing by purchase or dation in payment, or by any other transaction whereby ownership is transmitted by onerous title. (1521a)

Onerous transfer: not only sale, although sale is the most common

transaction where right of redemption arises. Note that the law also provides “dation in payment” as a possible transaction where the right may arise. Thus, even barter may give rise to a right to redeem. If the transfer made is not onerous (like donation), there can be no right of redemption. Art. 1620. A co-owner of a thing may exercise the right of redemption in case the shares of all the other co-owners or of any of them, are sold to a third person. If the price of the alienation is grossly excessive, the redemptioner shall pay only a reasonable one. Should two or more co-owners desire to exercise the right of redemption, they may only do so in proportion to the share they may respectively have in the thing owned in common. (1522a) BAR QUESTION: Raul, Esther and Rufo inherited a 10 hectare land from their father. Before the land could be partitioned, Raul sold his hereditary right to Raffy, a stranger to the family for P5M. Do Esther and Rufo have a remedy on keeping the land within the family? ANSWER: Yes, The moment Raul sold his share, Esther and Rufo had a right of redemption. Within the required time, they may redeem Raul’s share by paying the P5M Raffy paid for Raul’s share. Multiple redemptioners: all co-owners may only do so in proportion to the share they respectively have in common. Note that in owners of adjoining lands, not all may redeem, in case there are multiple redemptioners, the one with the smallest land area will be prioritized. If the areas are the same, the first one to request would be prioritized. See Art.

1621, last paragraph

Amount to be paid: the amount actually paid for the share sold. Even if the amount indicated in the deed of sale is higher, the amount actually paid will be the redemption price. This applies if the amount that appears in the deed is unconscionable. The redemptioner cannot be compelled to pay the same. Spouses RAMON DOROMAL, SR., and ROSARIO SALAS, and Spouses RAMON DOROMAL, JR., and GAUDELIA VEGA, petitioners, vs. HON. COURT OF APPEALS and FILOMENA JAVELLANA, respondents. G.R. No. L-36083 September 5, 1975 FACTS: The subject land was originally decreed to the late Justice Antonio Horilleno, in 1916, under an OCT; but before he died, he executed a last will and testament attesting to the fact that it was a co-ownership between himself and his brothers and sisters, Luis, Soledad, Fe, Rosita, Carlos and Esperanza, all surnamed Horilleno, and since Esperanza had already died, she was succeeded by her only daughter and heir herein plaintiff, Filomena Javellana, in the proportion of 1/7 undivided ownership each. Even though their right had not as yet been annotated in the title, the coowners led by Carlos, and as to deceased Justice Antonio Horilleno, his daughter Mary, sometime since early 1967, had wanted to sell their shares, or if possible if Filomena Javellana were agreeable, to sell the entire property, and they hired an acquaintance Cresencia Harder, to look for buyers, and the latter came to interest defendants, the father and son, named Ramon Doromal, Sr. and Jr., and in preparation for the execution of the sale, since the brothers and sisters Horilleno were scattered in various parts of the country, Carlos in Ilocos Sur, Mary in Baguio, Soledad and Fe, in Mandaluyong, Rizal, and Rosita in Basilan City, they all executed various

powers of attorney in favor of their niece, Mary H. Jimenez, they also caused preparation of a power of attorney of identical tenor for signature by plaintiff, Filomena Javellana. It now turns out according to Exh. 3 that as early as 22 October, 1967, Carlos had received in check as earnest money from defendant Ramon Doromal, Jr., the sum of P5,000.00 and the price therein agreed upon was five (P5.00) pesos a square meter. At any rate, plaintiff not being agreeable, did not sign the power of attorney, and the rest of the co-owners went ahead with their sale of their 6/7. A TCT was issued to the co-owners for the 6/7 of the property which was then transferred to the Doromals and another TCT for the 1/7 in the name of Javellana. On 10 June, 1968, plaintiff Javellana’s lawyer Atty. Arturo Villanueva, came to the residence of the Doromals and made a formal offer to repurchase or redeem the 6/7 undivided share of the other co-owners for the sum of P30,000, which amount was tendered by the lawyer for legal redemption. Javellana filed a case against the Doromals asserting that, as a co-owner, she had the right to redeem the property at the price stipulated in the deed of sale, namely P30,000. In their answer, the defendants alleged that the plaintiff no longer had the right to redeem because he was informed of the intended sale of the 6/7 share belonging to the Horillenos; that if she thus had the right to redeem, she should pay P115,250 which was actually paid by the defendants to the co-owners. The trial court rendered judgment in favor of the Doromals. On appeal, the CA reversed the trial court holding that although respondent Javellana was informed of her co-owners' proposal to sell the land in question to petitioners she was, however, "never notified ... least of all, in writing", of the actual execution and registration of the corresponding deed of sale, hence, said respondent's right to redeem had not yet expired at the time she made her offer for that purpose thru her letter of June 10, 1968 delivered to petitioners on even date. ISSUE: WON notice was given to Javellana and the 30-day period to redeem already prescribed? HELD: No. The letters sent by Carlos Horilleno to respondent and dated January 18, 1968, Exhibit 7, and November 5, 1967, Exhibit 6, constituted the required notice in writing from which the 30-day period fixed in said provision should be computed. But to start with, there is no showing that said letters were in fact received by respondent and when they were actually received. Besides, petitioners do not pinpoint which of these two letters, their dates being more than two months apart, is the required notice. In any event, as found by the appellate court, neither of said letters referred to a consummated sale. As may be observed, it was Carlos Horilleno alone who signed them, and as of January 18, 1968, powers of attorney from the various co-owners were still to be secured. Indeed, the later letter of January 18, 1968 mentioned that the price was P4.00 per square meter whereas in the earlier letter of November 5, 1967 it was P5.00, as in fact, on that basis, as early as October 27, 1967, Carlos had already received P5,000 from petitioners supposedly as earnest money, of which, however, mention was made by him to his niece only in the later letter of January 18, 1968, the explanation being that "at later negotiation it was increased to P5.00 per square meter." (p. 4 of petitioners' brief as appellees in the Court of Appeals quoting from the decision of the trial court.) In other words, while the letters relied upon by petitioners could convey the idea that more or less some kind of consensus had been arrived at among the other co-owners to sell the property in dispute to petitioners, it cannot be said definitely that such a sale had even been actually perfected. The fact alone that in the later letter of January 18, 1968 the price indicated was P4.00 per square meter while in that of November 5, 1967, what was stated was P5.00 per square meter negatives the possibility that a "price definite" had already been agreed upon. While P5,000 might

120


have indeed been paid to Carlos in October, 1967, there is nothing to show that the same was in the concept of the earnest money contemplated in Article 1482 of the Civil Code, invoked by petitioner, as signifying perfection of the sale. Viewed in the backdrop of the factual milieu thereof extant in the record, We are more inclined to believe that the said P5,000 were paid in the concept of earnest money as the term was understood under the Old Civil Code, that is, as a guarantee that the buyer would not back out, considering that it is not clear that there was already a definite agreement as to the price then and that petitioners were decided to buy 6/7 only of the property should respondent Javellana refuse to agree to part with her 1/7 share. In the light of these considerations, it cannot be said that the Court of Appeals erred in holding that the letters aforementioned sufficed to comply with the requirement of notice of a sale by co-owners under Article 1623 of the Civil Code. We are of the considered opinion and so hold that for purposes of the co-owner's right of redemption granted by Article 1620 of the Civil Code, the notice in writing which Article 1623 requires to be made to the other co-owners and from receipt of which the 30-day period to redeem should be counted is a notice not only of a perfected sale but of the actual execution and delivery of the deed of sale. This is implied from the latter portion of Article 1623 which requires that before a register of deeds can record a sale by a co-owner, there must be presented to him, an affidavit to the effect that the notice of the sale had been sent in writing to the other co-owners. A sale may not be presented to the register of deeds for registration unless it be in the form of a duly executed public instrument. Moreover, the law prefers that all the terms and conditions of the sale should be definite and in writing. As aptly observed by Justice Gatmaitan in the decision under review, Article 1619 of the Civil Code bestows unto a co-owner the right to redeem and "to be subrogated under the same terms and conditions stipulated in the contract", and to avoid any controversy as to the terms and conditions under which the right to redeem may be exercised, it is best that the period therefor should not be deemed to have commenced unless the notice of the disposition is made after the formal deed of disposal has been duly executed. And it being beyond dispute that respondent herein has never been notified in writing of the execution of the deed of sale by which petitioners acquired the subject property, it necessarily follows that her tender to redeem the same made on June 10, 1968 was well within the period prescribed by law. Indeed, it is immaterial when she might have actually come to know about said deed, it appearing she has never been shown a copy thereof through a written communication by either any of the petitioners-purchasers or any of her co-owners-vendees. (Cornejo et al. vs.CA et al., 16 SCRA 775.) ISSUE2: WON Javellana should only pay the P30,000 stated in the Deed of Sale? HELD: Yes. As stated in the decision under review, the trial court found that "the consideration of P30,000 only was placed in the deed of sale to minimize the payment of the registration fees, stamps and sales tax." With this undisputed fact in mind, it is impossible for the Supreme Court to sanction petitioners' pragmatic but immoral posture. Being patently violative of public policy and injurious to public interest, the seemingly wide practice of understating considerations of transactions for the purpose of evading taxes and fees due to the government must be condemned and all parties guilty thereof must be made to suffer the consequences of their ill-advised agreement to defraud the state. Verily, the trial court fell short of its devotion and loyalty to the Republic in officially giving its stamp of approval to the stand of petitioners and even berating respondent Javellana as wanting to enrich herself "at the expense of her own blood relatives who are her aunts, uncles and cousins." On the contrary, said "blood relatives" should have been sternly told, as We here hold, that they are in pari-delicto with petitioners in committing tax evasion and should not receive any consideration from any court in respect to the money paid for the sale in dispute. Their situation is similar to that of parties to an illegal contract. Of course, the Court of Appeals was also eminently correct in its considerations supporting the conclusion that the redemption in controversy should be only for the price stipulated in the deed, regardless of what might

have been actually paid by petitioners that style inimitable and all his own, Justice Gatmaitan states those considerations thus:

4th — If it be argued that foregoing solution would mean unjust enrichment for plaintiff, it need only be remembered that plaintiff's right is not contractual, but a mere legal one, the exercise of a right granted by the law, and the law is definite that she can subrogate herself in place of the buyer, "upon the same terms and conditions stipulated in the contract," in the words of Art. 1619, and here the price "stipulated in the contract" was P30,000.00, in other words, if this be possible enrichment on the part of Filomena, it was not unjust but just enrichment because permitted by the law; if it still be argued that plaintiff would thus be enabled to abuse her right, the answer simply is that what she is seeking to enforce is not an abuse but a mere exercise of a right; if it be stated that just the same, the effect of sustaining plaintiff would be to promote not justice but injustice, the answer again simply is that this solution is not unjust because it only binds the parties to make good their solemn representation to possible redemptioners on the price of the sale, to what they had solemnly averred in a public document required by the law to be the only basis for that exercise of redemption; (Pp. 24-27, Record.)

1st — According to Art. 1619 "Legal redemption is the right to be subrogated, upon the same terms and conditions stipulated in the contract, in the place of one who acquires a thing by purchase or dation in payment, or by any other transaction whereby ownership is transmitted by onerous title." pp. 471-472, New Civil Code, and note that redemptioner right is to be

subrogated "upon the same terms and conditions stipulated in the contract."

and here, the stipulation in the public evidence of the contract, made public by both vendors and vendees is that the price was P30,000.00; 2nd — According to Art. 1620, "A co-owner of a thing may exercise the right of redemption in case the share of all the other co-owners or any of them, are sold to a third person. If the price of the alienation is grossly excessive, the redemptioner shall pay only a reasonable one. p. 472, New Civil Code,” from which it is seen that if the price paid is 'grossly excessive' redemptioner is required to pay only a reasonable one; not that actually paid by the vendee, going to show that the law seeks to protect redemptioner and converts his position into one not that of a contractually but of a legally subrogated creditor as to the right of redemption, if the price is not 'grossly excessive', what the law had intended redemptioner to pay can be read in Art. 1623. The right of a legal pre-emption or redemption shall not be exercised except within thirty (30) days from the notice in writing by the prospective vendor, or by the vendor as the case may be. The deed of sale shall not be recorded in the Registry of Property, unless accompanied by an affidavit of the vendor that he has given written notice thereof of all possible redemptioners.' p. 473, New Civil Code, if that be so that affidavit must have been intended by the lawmakers for a definite purpose, to argue that this affidavit has no purpose is to go against all canons of statutory construction, no law mandatory in character and worse, prohibitive should be understood to have no purpose at all, that would be an absurdity, that purpose could not but have been to give a clear and unmistakable guide to redemptioner, on how much he should pay and when he should redeem; from this must follow that that notice must have been intended to state the truth and if vendor and vendee should have instead, decided to state an untruth therein, it is they who should bear the consequences of having thereby misled the redemptioner who had the right to rely and act thereon and on nothing else; stated otherwise, all the elements of equitable estoppel are here since the requirement of the law is to submit the affidavit of notice to all possible redemptioners, that affidavit to be a condition precedent to registration of the sale therefore, the law must have intended that it be by the parties understood that they were there asking a solemn representation to all possible redemptioners, who upon faith of that are thus induced to act, and here worse for the parties to the sale, they sought to avoid compliance with the law and certainly refusal to comply cannot be rewarded with exception and acceptance of the plea that they cannot be now estopped by their own representation, and this Court notes that in the trial and to this appeal, plaintiff earnestly insisted and insists on their estoppel; 3rd — If therefore, here vendors had only attempted to comply with the law, they would have been obligated to send a copy of the deed of sale unto Filomena Javellana and from that copy, Filomena would have been notified that she should if she had wanted to redeem, offered no more, no less, that P30,000.00, within 30 days, it would have been impossible for vendors and vendees to have inserted in the affidavit that the price was truly P97,000.00 plus P18,250.00 or a total of P115,250.00; in other words, if defendants had only complied with the law, they would have been obligated to accept the redemption money of only P30,000.00;

121


WHEREFORE, the decision of the Court of Appeals is affirmed, with costs against petitioners.. Art. 1621. The owners of adjoining lands shall also have the right of redemption when a piece of rural land, the area of which does not exceed one hectare, is alienated, unless the grantee does not own any rural land. This right is not applicable to adjacent lands which are separated by brooks, drains, ravines, roads and other apparent servitudes for the benefit of other estates. If two or more adjoining owners desire to exercise the right of redemption at the same time, the owner of the adjoining land of smaller area shall be preferred; and should both lands have the same area, the one who first requested the redemption. (1523a)

Redemption in onerous disposal of rural lands; REQUISITES: 1. 2. 3.

The land is not more than 1 hectare; The grantee/buyer must have another rural land The land of the redemptioner and the land sought to be redeeemed must not be separated by brooks, ravines, roads (contiguous)

Multiple redemptioners: 1. 2.

The adjoining owner with the smaller area shall be preferred; If the same area, the one who first requested the redemption.

Art. 1622. Whenever a piece of urban land which is so small and so situated that a major portion thereof cannot be used for any practical purpose within a reasonable time, having been bought merely for speculation, is about to be re-sold, the owner of any adjoining land has a right of pre-emption at a reasonable price. If the re-sale has been perfected, the owner of the adjoining land shall have a right of redemption, also at a reasonable price. When two or more owners of adjoining lands wish to exercise the right of pre-emption or redemption, the owner whose intended use of the land in question appears best justified shall be preferred. (n)

Requisites in redemption of urban land: 1. 2.

The land is an urban land. The land area is so small and so situated that a major portion thereof cannot be used for any practical purpose within a reasonable time, having been bought merely for speculation.

Right of pre-emption: is different from the right of legal redemption. The former may be exercised even before the sale is perfected. The latter is exercised after the sale is perfected.

Multiple redemptioners/pre-emptioners: the one whose intended use is best justified shall be preferred.

Art. 1623. The right of legal pre-emption or redemption shall not be exercised except within thirty days from the notice in writing by the prospective vendor, or by the vendor, as the case may be. The deed of sale shall not be recorded in the Registry of Property, unless accompanied by an affidavit of the vendor that he has given written notice thereof to all possible redemptioners. The right of redemption of co-owners excludes that of adjoining owners. (1524a)

Period of redemption: 30 days from notice. When is notice? It need not come from the vendor himself. Notice constitutes the furnishing of the copy of the deed to the one who has a right to redeem.

This is because Art. 1619 defines Legal redemption as “the right to be subrogated, upon the same terms and conditions stipulated in the contract”. By furnishing the redemptioner a copy of the contract or deed, he may know what the terms and conditions are.

Period: begins to run upon giving of the written notice. BAR QUESTION: Betty and Lydia were co-owners of a parcel of land. Last January 1, 2001, when she paid her real estate tax, Betty discovered that Lydia had sold her share to Emma on November 10, 2000. The following day, Betty offered to redeem but the latter replied that her right to redeem had already prescribed. Is Emma correct? ANSWER: EMMA is not correct. Because the law provides 30 days from the time notice was given to the co-owner. In this problem, the 30 days had not even started to run because no notice was given. BAR QUESTION: Adella and Beth are co-owners of an undivided parcel of land. Beth sold her share to Sandro, who promptly told Adella of the sale and furnished the latter a copy of the deed of absolute sale. When Sandro presented the deed of absolute sale for registration, the register of deeds also notified Adella of the said sale, enclosing a copy of the deed with the notice. However, Adella ignored the notices. A year later, Sandro, the buyer, filed a petition for the partition of the property. Upon receipt of the summons, Adella immediately tendered the requisite amount for the redemption. Sandro contends that Adella lost her right of redemption after the expiration of 30days from her receipt of notice of sale given by him. May Adella still exercise her right of redemption? ANSWER: No. Even if the notice was not given by the VENDOR as stated under Art. 1623, the provision should not be interpreted so literally. Sandro, the buyer, already informed Adella through notice with a copy of the deed, twice. As interpredted by the SC in the case of DOROMAL vs. CA, the 30 day period will begin to run from the time a COPY of the DEED of SALE is given to the REDEMPTIONER. Not just any other writing. CASE: There was a sale of a parcel of land, and the adjoining lot owner, the parents of Dolores Banias, manifested their intention to redeem. But this Amador Barcellano, did not give written notice, only oral. The parties went to the Baranggay to solve their claims but nothing happened. More than 1 year after the sale to Barcellano, Dolores Banias expressed his intention to exercise her right of redemption. SC: A WRITTEN notice is required for the prescriptive period of 30 days to begin to run. B.

BARTER OR EXCHANGE

Art. 1638. By the contract of barter or exchange one of the parties binds himself to give one thing in consideration of the other's promise to give another thing. (1538a) Art. 1639. If one of the contracting parties, having received the thing promised him in barter, should prove that it did not belong to the person who gave it, he cannot be compelled to deliver that which he offered in exchange, but he shall be entitled to damages. (1539a)

122


Art. 1640. One who loses by eviction the thing received in barter may recover that which he gave in exchange with a right to damages, or he may only demand an indemnity for damages. However, he can only make use of the right to recover the thing which he has delivered while the same remains in the possession of the other party, and without prejudice to the rights acquired in good faith in the meantime by a third person. (1540a) Art. 1641. As to all matters not specifically provided for in this Title, barter shall be governed by the provisions of the preceding Title relating to sales. (1541a) C.

LEASE Title VIII. - LEASE CHAPTER 1 GENERAL PROVISIONS

Art. 1642. The contract of lease may be of things, or of work and service. (1542) KINDS OF LEASES: 1. Labor; 2. Involving household help; 3. Carriage; 4. Piece of work Jardin vs. NLRC: the drivers of Goodman taxicab complained about the P30 deducted from their salary purportedly for carwash of the taxicabs. What kind of relationship does the drivers and the operator have? SC: Lease of labor. The relationship between the drivers and the operator under the boundary system, is that of an employer-employee following the control test Art. 1643. In the lease of things, one of the parties binds himself to give to another the enjoyment or use of a thing for a price certain, and for a period which may be definite or indefinite. However, no lease for more than ninetynine years shall be valid. (1543a)

One of the parties binds himself: this makes the contract consensual. Even if the obligation involves delivery, it does not make the contract “real”.

To give to another the enjoyment or the use: this is the purpose of a

lease. This is likewise the purpose of commodatum. However, in lease it involves a “price certain”, which means the contract is essentially onerous. If the “lease” of thing is gratuitous, it is considered a commodatum. Art. 1644. In the lease of work or service, one of the parties binds himself to execute a piece of work or to render to the other some service for a price certain, but the relation of principal and agent does not exist between them. (1544a)

Essentially onerous: lease of service is essentially onerous in character. If the services are free, it could be another contract but not lease of service.

Principal-agent relationship: in order to be classified as a lease of service, there must NOT be a principal-agent relationship.

Art. 1645. Consumable goods cannot be the subject matter of a contract of lease, except when they are merely to be exhibited or when they are accessory to an industrial establishment. (1545a) SIMILARITIES AND DISTINCTIONS FROM OTHER CONTRACTS: 1. WITH SALE: they are both principal, consensual and essentially onerous, nominate, commutative and bilateral contracts. But, in lease the purpose is to give to another the ENJOYMENT or the USE, while in sales, the purpose is to TRANSFER OWNERSHIP.

Moreover, lease can cover things, rights or services. While sale can only cover things or rights. 2.

However, Lease is essentially onerous, while commodatum is essentially gratuitous.

BAR QUESTION: O verbally leased his house and lot to L for 2 years at a monthly rental of P250 a month. After the first year, O demanded a rental increase of P500 claiming that due to energy crisis, with a sudden increase in the price of oil, which no one expected, there was also a general increase in all of the prices. O proved an inflation rate of 100%. When L refused to vacate the house, O brought an action for ejectment. O denied that he agreed for the lease for 2 years.

Safety deposit boxes: a special kind of deposit since the depositor

Can the lessee testify on a verbal contract of lease?

WITH AGENCY vs. LEASE OF SERVICE: subject matter in both are “services”.

ANSWER: Yes. Even if the contract covers real property and the period is more than 2 years, the contract has been taken out of the operation of the Statute of Frauds by part performance. This is because it has been more than a year that O was receiving rentals, he cannot now claim that the contract is unenforceable since there was already part performance.

WITH COMMODATUM: the subject matter is a thing, the purpose is delivery of the thing for the use of the other.

does not have access to the box 24/7 which is usually inside the bank. Even if during banking hours, the depositor or even the officers of the bank will not have access to the box at any time. 3.

The distinction lies with the concept of “representation”. If there is no such right of representation, it cannot be considered an agency. NIELSON vs. LEPANTO MINING: Lepanto claims that its contract with Nielson is that of agency which Lepanto, as principal, can revoke anytime. Nielson, on the other hand, claims that it is a contract for lease of service. SC: Nielson is correct. There is no right of representation. In the contract, Nielson cannot even buy materials necessary for the operation of the mine without the consent of the Board of Directors. 4.

CONTRACT FOR A PIECE OF WORK vs. LEASE OF SERVICE: the main difference lies with the control of one party over the other. In a contract for a piece of work, the extent of control of the principal (employer) is limited to the end results. As to the method and manner used by the contractor, the principal or employer does not have control. The contractor is otherwise known as Independent Contractor.

ESSENTIAL REQUISITES OF A LEASE: 1. Consent of the contracting parties;

2.

in order for the contractor to be entitled to such:

Art. 1724. The contractor who undertakes to build a structure or any other work for a stipulated price, in conformity with plans and specifications agreed upon with the land-owner, can neither withdraw from the contract nor demand an increase in the price on account of the higher cost of labor or materials, save when there has been a change in the plans and specifications, provided: (1) Such change has been authorized by the proprietor in writing; and (2) The additional price to be paid to the contractor has been determined in writing by both parties. (1593a) BAR QUESTION: Lino entered into a written agreement for the repair of his private plane, with Aero Repair Works for P500K. Additional work was done by Aero, incurring an expense of P250K. Lino refused to pay the additional expense, interposing as a defense the absence of a written contract for the additional work done. Is the defense of Lino valid?

Who are prohibited from entering into a contract of lease? Art. 1490 and 1491 likewise applies to a contract of lease. As such, a husband and a wife which is prohibited from entering into a contract of sale are likewise prohibited from becoming lessees of each other.

ANSWER: YES. By express provision of the law, i.e., Art. 1724, the authorization of the additional work and the additional compensation must be both in writing to entitle the contractor to such additional compensation.

Art. 1646. The persons disqualified to buy referred to in Articles 1490 and 1491, are also disqualified to become lessees of the things mentioned therein. (n)

Art. 1647. If a lease is to be recorded in the Registry of Property, the following persons cannot constitute the same without proper authority: the husband with respect to the wife's paraphernal real estate, the father or guardian as to the property of the minor or ward, and the manager without special power. (1548a)

Subject matter – a thing, right or service.

In a lease of a thing, the subject matter must be NONFUNGIBLE: this is because there is an obligation to return the thing at the end of the lease term. The thing cannot be replaced by any other thing even if of the same or better quality.

Non-consumable: it follows, then, that the thing must not be consumable in order for the lessee to be able to return it. Otherwise, if the thing is consumable and used in accordance with its nature, then it would be consumed and nothing will be returned.

(Chung vs. Olanday Construction)

Art. 1648. Every lease of real estate may be recorded in the Registry of Property. Unless a lease is recorded, it shall not be binding upon third persons. (1549a)

Registration: is not a requirement for validity but for greater efficacy, in order to bind third persons.

Art. 1649. The lessee cannot assign the lease without the consent of the lessor, unless there is a stipulation to the contrary. (n)

Exception: a consumable may be the subject of a lease if it would only

ASSIGNMENT OF THE LEASE: the right to assign a lease is prohibited by the law but can be granted by stipulation.

Cause – essentially onerous. As to the lessor, it may be the rent, as to the lessee the use of the thing.

Art. 1650. When in the contract of lease of things there is no express prohibition, the lessee may sublet the thing leased, in whole or in part, without prejudice to his responsibility for the performance of the contract toward the lessor. (1550)

be used for exhibition or display. 3.

Formal Requirements for Contract for a Piece of Work: CHANGE ORDER OR VARIATION: Art. 1724 requires that the AUTHORIZATION for change of order and the ADDITIONAL COMPENSATION be both in writing,

FORM OF A LEASE: A lease being a consensual contract will not require any particular form for its validity. However, a contract of lease over a real property with a period more than one year must be IN WRITING in order to be enforceable under the Statute of Frauds. Subject to the exception of part performance.

123


SUBLEASE: the lessee has the right to sublease, by law but this right may be limited or removed by stipulation.

BAR QUESTION: Isaac leased the apartment of Dorotea for two years, 6 months later, Isaac subleased a portion of the apartment due to financial difficulties. Is the sublease valid? ANSWER: Yes. It is valid. For as long as the elements of valid sublease are present. BAR QUESTION: In January 1993, 4 Gives Corporation leased the entire floors of the GQS Tower Complex for 10 years for a monthly rental of P3M. It subleased 5 of the 12 floors to wholly owned subsidiaries. The lease contract expressly prohibits the assignment of the lease contract or any portion thereof. The rental value has increased by 40% since it was initially leased. Can the building owner asked for the cancellation of the contract for violation of the prohibition against assignment? ANSWER: No. The right to sublease is granted by law which may be limited by stipulation. The contract did not prohibit the lessee from subleasing, only assignment of the lease. As such, since there was no violation of the contract, there is no ground for cancellation of the contract. BAR QUESTION: A leased a parcel of land to B for 2 years. The lease contract did not contain any prohibition against assignment of the leasehold or sublease. B subleased the land to C. in turn, C assigned the lease to D. A filed an action for rescission on the ground that B has violated the terms and conditions of the lease. If you were the judge, how would you decide the case, particularly the validity of B’s sublease to C, and C’s assignment to D? ANSWER: B did not violate the terms and conditions of the contract since there was no prohibition against sublease and assignment. As such, since there was no prohibition, the law allows the lessee to sublease. UP Law Center: Assignment of the sublease by C to D is not valid since the law prohibits assignment of the lease without the express consent of the lessor, and in the problem, there was no such consent. Uribe: C did not assign the “lease”, he assigned a “sublease”. The rights of D are those of C. If the sublease to C is not prohibited, then the assignment to of the sublease to D should also not be prohibited. TEST to determine if sublease or assignment: If in the agreement, there is an absolute transfer of rights of the lessee to the third person, sich that the personality of the lessee would disappear dissociating himself from the lease, practically making the third person the new lessee – assignment of the lease. But, if in the agreement with the third person, the lessee retains a reversionary inerest, no matter how small – sublease. Thus, if the contract of lease was to expire June 1, 1967, and the lessee in the middle of the contract entered into an agreement with a person which will expire on May 31 of the same year. As such, upon expiration of the agreement, there will be left a day where the lessee would be reverted back to the status of a lessee, there is no absolute transfer of rights, the agreement is a sublease. (Manlapat vs. Salazar) If the lessee prohibits the sublessee from cutting down the trees in the leased premises, the agreement is a sublease since the lessee reserved rights in the contract. BAR QUESTION: A leased a condo unit to B for a period of 5 years. After 1 year, B trasferred his rights to C, for a period of 3 years, without the knowledge of A. The contract between B and C is? ANSWER: a Sublease. This is because after the expiration of B and C’s agreement, there will be 1 year left where B would revert to becoming a lessee. Art. 1651. Without prejudice to his obligation toward the sublessor, the sublessee is bound to the lessor for all acts which refer to the use and preservation of the thing leased in the manner stipulated between the lessor and the lessee. (1551)

124


Art. 1652. The sublessee is subsidiarily liable to the lessor for any rent due from the lessee. However, the sublessee shall not be responsible beyond the amount of rent due from him, in accordance with the terms of the sublease, at the time of the extrajudicial demand by the lessor. Payments of rent in advance by the sublessee shall be deemed not to have been made, so far as the lessor's claim is concerned, unless said payments were effected in virtue of the custom of the place. (1552a) Art. 1653. The provisions governing warranty, contained in the Title on Sales, shall be applicable to the contract of lease. In the cases where the return of the price is required, reduction shall be made in proportion to the time during which the lessee enjoyed the thing. (1553) SECTION 2. - Rights and Obligations of the Lessor and the Lessee Art. 1654. The lessor is obliged: (1) To deliver the thing which is the object of the contract in such a condition as to render it fit for the use intended; (2) To make on the same during the lease all the necessary repairs in order to keep it suitable for the use to which it has been devoted, unless there is a stipulation to the contrary; (3) To maintain the lessee in the peaceful and adequate enjoyment of the lease for the entire duration of the contract. (1554a)

To maintain the lessee in the peaceful and adequate enjoyment: covers only trespass in law which may arise from the defect in the title of the lessor. This obligation does not cover trespass in fact as provided under Art. 1664: Art. 1664. The lessor is not obliged to answer for a mere act of trespass which a third person may cause on the use of the thing leased; but the lessee shall have a direct action against the intruder. There is a mere act of trespass when the third person claims no right whatever. (1560a) The remedy of the lessee is to seek the help of police officers to remove the physical trespass. Plus, the lessee is actually obliged to inform the lessor about it: Art. 1663. The lessee is obliged to bring to the knowledge of the proprietor, within the shortest possible time, every usurpation or untoward act which any third person may have committed or may be openly preparing to carry out upon the thing leased. He is also obliged to advise the owner, with the same urgency, of the need of all repairs included in No. 2 of Article 1654. In both cases the lessee shall be liable for the damages which, through his negligence, may be suffered by the proprietor. If the lessor fails to make urgent repairs, the lessee, in order to avoid an imminent danger, may order the repairs at the lessor's cost. (1559a)

Failure to comply with no. 2 and 3 above: Suspension of the payments of rent: The remedy of the lessee is to suspend the payment of rent in the event that the lessor fails to make the necessary repairs or maintain the lessee in peaceful and adequate enjoyment of the property. Art. 1658. The lessee may suspend the payment of the rent in case the lessor fails to make the necessary repairs or to maintain the lessee in peaceful and adequate enjoyment of the property leased. (n) The lessee cannot seek extension of the lease period nor a reduction in the rent.

Extension: of the term of the lease is a matter left to the parties. The

proportion to the time - including the first forty days - and the part of the property of which the lessee has been deprived.

Reduction of rent: Lease of Rural Lands:

When the work is of such a nature that the portion which the lessee and his family need for their dwelling becomes uninhabitable, he may rescind the contract if the main purpose of the lease is to provide a dwelling place for the lessee. (1558a)

lessee can not demand an extension of the lease term even if the cause of his inability to use the property is an extraordinary fortuitous event, such as the Second World War. (Nielsen vs. Lepanto Mining)

Art. 1680. The lessee shall have no right to a reduction of the rent on account of the sterility of the land leased, or by reason of the loss of fruits due to ordinary fortuitous events; but he shall have such right in case of the loss of more than one-half of the fruits through extraordinary and unforeseen fortuitous events, save always when there is a specific stipulation to the contrary. Extraordinary fortuitous events are understood to be: fire, war, pestilence, unusual flood, locusts, earthquake, or others which are uncommon, and which the contracting parties could not have reasonably foreseen. (1575)

Right to a reduced rent: 1. 2.

In case of loss of more than ½ of the fruits; The cause of the loss is extraordinary and unforesen fortuitous events. Extraordinary fortuitous events are understood to be: fire, war, pestilence, unusual flood, locusts, earthquake, or others which are uncommon, and which the contracting parties could not have reasonably foreseen.

Note, however, that in the event of a partial loss on the thing, the lessee has the option to continue with the lease for a reduced rent under Art. 1655. (see Termination at the end of Lease below) Art. 1681. Neither does the lessee have any right to a reduction of the rent if the fruits are lost after they have been separated from their stalk, root or trunk. (1576) Art. 1656. The lessor of a business or industrial establishment may continue engaging in the same business or industry to which the lessee devotes the thing leased, unless there is a stipulation to the contrary. (n) Art. 1657. The lessee is obliged: (1) To pay the price of the lease according to the terms stipulated; (2) To use the thing leased as a diligent father of a family, devoting it to the use stipulated; and in the absence of stipulation, to that which may be inferred from the nature of the thing leased, according to the custom of the place; (3) To pay expenses for the deed of lease. (1555) Art. 1659. If the lessor or the lessee should not comply with the obligations set forth in Articles 1654 and 1657, the aggrieved party may ask for the rescission of the contract and indemnification for damages, or only the latter, allowing the contract to remain in force. (1556) Art. 1660. If a dwelling place or any other building intended for human habitation is in such a condition that its use brings imminent and serious danger to life or health, the lessee may terminate the lease at once by notifying the lessor, even if at the time the contract was perfected the former knew of the dangerous condition or waived the right to rescind the lease on account of this condition. (n) Art. 1661. The lessor cannot alter the form of the thing leased in such a way as to impair the use to which the thing is devoted under the terms of the lease. (1557a) Art. 1662. If during the lease it should become necessary to make some urgent repairs upon the thing leased, which cannot be deferred until the termination of the lease, the lessee is obliged to tolerate the work, although it may be very annoying to him, and although during the same, he may be deprived of a part of the premises. If the repairs last more than forty days the rent shall be reduced in

125


Art. 1665. The lessee shall return the thing leased, upon the termination of the lease, as he received it, save what has been lost or impaired by the lapse of time, or by ordinary wear and tear, or from an inevitable cause. (1561a) Art. 1666. In the absence of a statement concerning the condition of the thing at the time the lease was constituted, the law presumes that the lessee received it in good condition, unless there is proof to the contrary. (1562) Art. 1667. The lessee is responsible for the deterioration or loss of the thing leased, unless he proves that it took place without his fault. This burden of proof on the lessee does not apply when the destruction is due to earthquake, flood, storm or other natural calamity. (1563a) Art. 1668. The lessee is liable for any deterioration caused by members of his household and by guests and visitors. (1564a) Art. 1669. If the lease was made for a determinate time, it ceases upon the day fixed, without the need of a demand. (1565) TACITA RECONDUCCION: IMPLIED NEW LEASE: Art. 1670. If at the end of the contract the lessee should continue enjoying the thing leased for fifteen days with the acquiescence of the lessor, and unless a notice to the contrary by either party has previously been given, it is understood that there is an implied new lease, not for the period of the original contract, but for the time established in Articles 1682 and 1687. The other terms of the original contract shall be revived. (1566a)

Implied new lease: requisites: 1. 2. 3.

The lease contract already expired; The lessee continues enjoying possession of the thing leased for AT LEAST 15 days with the acquiesccence of the lessor No notice for the termination of the contract coming from the lessor or the lessee.

Period: is not the same as the original contract, but those estbalished under Art. 1682 and 1687, for rural and urban lands, respectively: 1.

Rural Lands: all the time necessary for the gathering of whole estate: a. May yield in one year; b. Yield once, although two or more years have to elapse Art. 1682. The lease of a piece of rural land, when its duration has not been fixed, is understood to have been for all the time necessary for the gathering of the fruits which the whole estate leased may yield in one year, or which it may yield once, although two or more years have to elapse for the purpose. (1577a)

2.

Urban Lands: a. Annual rent – year to year; b. Monthly – month to month; c. Weekly – week to week; d. Daily – day to day. However, the courts may fix a longer period, even if the rent is paid: a. Monthly – if the lessee has rented for more than 1 year; b. Weekly – if the lessee has rented for over 6 months; c. Daily – if the lessee has rented for more than 1 month. Art. 1687. If the period for the lease has not been fixed, it is understood to be from year to year, if the rent agreed upon is

annual; from month to month, if it is monthly; from week to week, if the rent is weekly; and from day to day, if the rent is to be paid daily. However, even though a monthly rent is paid, and no period for the lease has been set, the courts may fix a longer term for the lease after the lessee has occupied the premises for over one year. If the rent is weekly, the courts may likewise determine a longer period after the lessee has been in possession for over six months. In case of daily rent, the courts may also fix a longer period after the lessee has stayed in the place for over one month. (1581a)

Other Terms of the Lease: the last sentence of Art. 1670 provides that

“other terms of the original contract shall be revived.” – not to be interpreted literally. Despite Art. 1670, only those terms and conditions which are germane to the contract of lease are deemed renewed in an implied new lease. BAR QUESTION: Jan. 1, 1980, Nestor leased the fishpond of Mario for 3 years at a monthly rental of P1,000 with an option to purchase the same during the period of the lease for an amount of P500,000. At the expiration of the lease, Nestor was allowed by Mario to continue with the lease at the same rate. On June 15, 1983, Nestor tendered the amount of P500,000 to Mario and demanded that the latter execute the necessary deed of sale. Mario refused. Nestor filed an action for specific performance. Will the action prosper? HELD: No. When Nestor offered to purchase the lease, it was after the expiration of the lease contract for 3 years. Therefore, the option to buy already expired as well. Even if Nestor was allowed to continue with the lease, there was an implied new lease, the option to purchase is not revived. Despite Art. 1670, only those terms and conditions which are germane to the contract of lease are deemed renewed in an implied new lease. An option to buy is not germane to a contract of lease. Art. 1671. If the lessee continues enjoying the thing after the expiration of the contract, over the lessor's objection, the former shall be subject to the responsibilities of a possessor in bad faith. (n) Art. 1672. In case of an implied new lease, the obligations contracted by a third person for the security of the principal contract shall cease with respect to the new lease. (1567)

the purchaser knows of the existence of the lease. If the buyer makes use of this right, the lessee may demand that he be allowed to gather the fruits of the harvest which corresponds to the current agricultural year and that the vendor indemnify him for damages suffered. If the sale is fictitious, for the purpose of extinguishing the lease, the supposed vendee cannot make use of the right granted in the first paragraph of this article. The sale is presumed to be fictitious if at the time the supposed vendee demands the termination of the lease, the sale is not recorded in the Registry of Property. (1571a) THE BUYER IS BOUND TO RESPECT THE LEASE CONTRACT ON THE THING SOLD: 1. If there was a STIPULATION in the contract of SALE; 2. If the lease is REGISTERED – which would be notice to the buyer; 3. If the buyer had ACTUAL KNOWLEDGE of the lease contracts at the time of sale. Art. 1677. The purchaser in a sale with the right of redemption cannot make use of the power to eject the lessee until the end of the period for the redemption. (1572) Art. 1678. If the lessee makes, in good faith, useful improvements which are suitable to the use for which the lease is intended, without altering the form or substance of the property leased, the lessor upon the termination of the lease shall pay the lessee one-half of the value of the improvements at that time. Should the lessor refuse to reimburse said amount, the lessee may remove the improvements, even though the principal thing may suffer damage thereby. He shall not, however, cause any more impairment upon the property leased than is necessary. With regard to ornamental expenses, the lessee shall not be entitled to any reimbursement, but he may remove the ornamental objects, provided no damage is caused to the principal thing, and the lessor does not choose to retain them by paying their value at the time the lease is extinguished. (n)

Improvements; OPTION: is with the LESSOR, whether he will appropriate the improvement to himself or not. 1.

Art. 1673. The lessor may judicially eject the lessee for any of the following causes: (1) When the period agreed upon, or that which is fixed for the duration of leases under Articles 1682 and 1687, has expired; (2) Lack of payment of the price stipulated; (3) Violation of any of the conditions agreed upon in the contract; (4) When the lessee devotes the thing leased to any use or service not stipulated which causes the deterioration thereof; or if he does not observe the requirement in No. 2 of Article 1657, as regards the use thereof. The ejectment of tenants of agricultural lands is governed by special laws. (1569a) Art. 1674. In ejectment cases where an appeal is taken the remedy granted in Article 539, second paragraph, shall also apply, if the higher court is satisfied that the lessee's appeal is frivolous or dilatory, or that the lessor's appeal is prima facie meritorious. The period of ten days referred to in said article shall be counted from the time the appeal is perfected. (n) Art. 1675. Except in cases stated in Article 1673, the lessee shall have a right to make use of the periods established in Articles 1682 and 1687. (1570) Art. 1676. The purchaser of a piece of land which is under a lease that is not recorded in the Registry of Property may terminate the lease, save when there is a stipulation to the contrary in the contract of sale, or when

126


If the lessor wishes to appropriate to himself the said improvements: a. Necessary and useful improvement – pay ½ of the value at the time the lease is extinguished; b. Ornamental expenses – pay 100% of the value at the time the lease is extinguished. Note: in both cases, the value is to be reckoned at the TIME THE LEASE IS EXTINGUISHED, not based on the cost of the improvement.

2.

If the lessor does not wish to appropriate to himself the said improvements: a. The lessee may remove the improvement: 1) Necessary and useful improvement – even if it may cause damage to the leased property, provided no unnecessary damage is caused; 2) Ornamental expenses – if it would not cause damage to the principal thing – limited rght of removal. b. If the lessee refuses to remove, the lessor may have it demolished.

ART. 448 on BUILDER IN GOOD FAITH DOES NOT APPLY: a lessee is neither a builder nor a possessor in good faith – This principle of possessor in good faith naturally cannot apply to a lessee because as such lessee he knows that he is not the owner of the leased property. Neither can he deny the ownership or title of his lessor. Knowing that his occupation of the premises continues only during the life of the lease contract and that he must vacate the property upon termination of the lease or upon the violation by him of any of its terms, he introduces improvements on said property at his own risk in the sense that he cannot recover their value from the lessor, much less retain the premises until such reimbursement. Being mere lessees, respondents knew that their right to occupy the premises existed only for the duration of the lease. (Lopez v. Philippine & Eastern

Trading Co., Inc.) In Cortez v. Manimbo, the Court held that if the rule were otherwise, ‘it would always be in the power of the tenant to improve his landlord out of his property. Under Article 1678 of the Civil Code, the lessor has the primary right (or the first move) to reimburse the lessee for 50% of the value of the improvements at the end of the lease. If the lessor refuses to make the reimbursement, the subsidiary right of the lessee to remove the improvements, even though the principal thing suffers damage, arises.

(Cheng vs. Vittorio)

Note that under Art. 448, the BUILDER, PLANTER or SOWER as such must be IN THE CONCEPT OF AN OWNER. Thus, the lessee cannot be considered as such because he cannot even question the title of the lessor under Sec. 2(b) Rule 131 of the Rules of Court: "[o]nce a contact of lease is shown to exist between the parties, the lessee cannot by any proof, however strong, overturn the conclusive presumption that the lessor has a valid title to or a better right of possession to the subject premises than the lessee” BAR QUESTION: Anselmo is a registered owner of a land and a house that his friend Boboy occupied for a nominal rental, and on a condition that Boboy would vacate the property on demand. With Anselmo’s knowledge, Boboy introduced renovations consisting of an additional bedroom, a covered veranda, and a concrete fence, all at his own expense. Suddenly, Anselmo needed the property for his residence and thus asked Boboy to vacate the property and turn it over to him. Boboy failed to vacate the property prompting Anselmo to send him a written demand to vacate. In his own written reply, Boboy signified that he is ready to leave but Anselmo must first reimburse him the value of improvements on the property as he was a builder in good faith. Anselmo refused, insisting that Boboy cannot ask for reimbursement as he is a mere lessee. Boboy responded by removing the improvements and leaving the building in its original state. Resolving Boboy’s claim, that as a builder in good faith, he should be reimbursed the value of improvements he introduced. Resolve Boboy’s claim. ANSWER: There is a contract of lease. Boboy’s claim of being a builder a good faith is untenable because he did not make such improvements on the property as the owner thereof. Art. 448 applies only to a builder who was such in the concept of an owner. However, Boboy cannot be held liable for damages. Anselmo, as the lessor, already made a choice of NOT appropriating the improvements. As such, the lessee would have the right to remove the necessary and useful improvement even if it caused damage to the principal. So long as no unnecessary damage was caused. In the problem, there wasn’t even damage to the thing leased since it was stated that the building was left in its original state. Art. 1679. If nothing has been stipulated concerning the place and the time for the payment of the lease, the provisions or Article 1251 shall be observed as regards the place; and with respect to the time, the custom of the place shall be followed. (1574) RIGHT OF FIRST REFUSAL: This is different with Option to Buy. In latter, the lessee exercises such right to buy the property leased even if lessor does not want to sell. In the former, the seller is already selling property, and the lessee must be given the right to first refuse to buy same.

the the the the

This right is not provided for under the Civil Code, only under jurisprudence.

Conflicting court cases: Ang Yu Asuncion vs. CA: if the lessor sold the property without the

consent, or without informing the lessee: a. The lessee does not have the right to rescind the sale; b. The lessee cannot compel the lessor to sell to him the property; c. The lessee may be entitled to damages for the quasi-delictual act of the lessor.

127


In this case, the lessee was not allowed to rescind the sale since the buyer was not impleaded. Rescission of the sale would violate the buyer’s right to due process.

Equatorial Realty vs. Mayfair Theater: the lessee has a right to rescind

if the buyer is in bad faith, i.e., he had knowledge of the existence of the lease contract, and the lessee has the right to compel the lessor to sell to him. BAR QUESTION: Dax leased his house to Iris for a period of 2 years, at a rate of P25K monthly, payable annually in advance. The contract stipulated that it may be renewed for another 2 years by agreement of the parties. The contract also granted Iris a right of first refusal to purchase the property at anytime during the lease if Dax decided to sell the property at the same price or the property is offered for sale to another third party. 23 months after the execution of the lease contract, Dax sold the house to his mother for 2M. Iris claimed that the sale was a breach of her right of first refusal but Dax said that there was no breach because the property was sold to his mother who is not a third party. Iris filed an action to rescind the sale and asked Dax to sell the property to her. Alternatively, she asked the court to extend the lease for another two years for the same terms. CAN Iris seek rescission of the sale of the property to Dax’s mother? ANSWER: No. For rescission to be a remedy of the lessee in order to exercise his right of first refusal, there must ba showing that the buyer was in bad faith and the lessee has the burden of proving the same. In the problem, there is nothing that would indicate that the mother was in bad faith. As such, the presumption of good faith stands. Accordingly, Iris cannot seek the rescission of the sale. BAR QUESTION: Tess leased her 1,500 sqm lot in Antipolo city to Ruth for a period of 3 years from Jan 2010 to Feb. 2013. On March 19, 2011, Tess sent a letter to Ruth as follows: “I am offering you to buy the property you

are presently leasing at 5k per sqm of 7.5M. You can pay the installment price for two years without interest. I will give you a period of 1 year from the receipt of this letter to decide whether you will buy the property or not.”

After the expiration of the lease contract, Tess sold the property to her niece for a total consideration of P4M. Ruth filed a complaint for the annulment of sale, reconveyance and damages against Tess and her niece. Ruth alleged that the sale of the property to the niece violated her right to buy under the right of first refusal. Is the allegation Ruth tenable? ANSWER: No. What is involved in this problem is an option to buy, not the right of first refusal. It appears that Ruth did not exercise her option to buy because the lease term, which is also the period within which she can exercise such right, already expired. SECTION 3. - Special Provisions for Leases of Rural Lands Art. 1683. The outgoing lessee shall allow the incoming lessee or the lessor the use of the premises and other means necessary for the preparatory labor for the following year; and, reciprocally, the incoming lessee or the lessor is under obligation to permit the outgoing lessee to do whatever may be necessary for the gathering or harvesting and utilization of the fruits, all in accordance with the custom of the place. (1578a) Art. 1684. Land tenancy on shares shall be governed by special laws, the stipulations of the parties, the provisions on partnership and by the customs of the place. (1579a) Art. 1685. The tenant on shares cannot be ejected except in cases specified by law. (n) SECTION 4. - Special Provisions of the Lease of Urban Lands Art. 1686. In default of a special stipulation, the custom of the place shall be observed with regard to the kind of repairs on urban property for which the lessor shall be liable. In case of doubt it is understood that the repairs are chargeable against him. (1580a)

Art. 1688. When the lessor of a house, or part thereof, used as a dwelling for a family, or when the lessor of a store, or industrial establishment, also leases the furniture, the lease of the latter shall be deemed to be for the duration of the lease of the premises. (1582) CHAPTER 3 WORK AND LABOR SECTION 3. - Contract for a Piece of Work Art. 1713. By the contract for a piece of work the contractor binds himself to execute a piece of work for the employer, in consideration of a certain price or compensation. The contractor may either employ only his labor or skill, or also furnish the material. (1588a) Art. 1714. If the contractor agrees to produce the work from material furnished by him, he shall deliver the thing produced to the employer and transfer dominion over the thing. This contract shall be governed by the following articles as well as by the pertinent provisions on warranty of title and against hidden defects and the payment of price in a contract of sale. (n) Art. 1715. The contract shall execute the work in such a manner that it has the qualities agreed upon and has no defects which destroy or lessen its value or fitness for its ordinary or stipulated use. Should the work be not of such quality, the employer may require that the contractor remove the defect or execute another work. If the contract fails or refuses to comply with this obligation, the employer may have the defect removed or another work executed, at the contractor's cost. (n) Art. 1716. An agreement waiving or limiting the contractor's liability for any defect in the work is void if the contractor acted fraudulently. (n) Art. 1717. If the contractor bound himself to furnish the material, he shall suffer the loss if the work should be destroyed before its delivery, save when there has been delay in receiving it. (1589) Art. 1718. The contractor who has undertaken to put only his work or skill, cannot claim any compensation if the work should be destroyed before its delivery, unless there has been delay in receiving it, or if the destruction was caused by the poor quality of the material, provided this fact was communicated in due time to the owner. If the material is lost through a fortuitous event, the contract is extinguished. (1590a) Art. 1719. Acceptance of the work by the employer relieves the contractor of liability for any defect in the work, unless: (1) The defect is hidden and the employer is not, by his special knowledge, expected to recognize the same; or (2) The employer expressly reserves his rights against the contractor by reason of the defect. (n) Art. 1720. The price or compensation shall be paid at the time and place of delivery of the work, unless there is a stipulation to the contrary. If the work is to be delivered partially, the price or compensation for each part having been fixed, the sum shall be paid at the time and place of delivery, in the absence if stipulation. (n) Art. 1721. If, in the execution of the work, an act of the employer is required, and he incurs in delay or fails to perform the act, the contractor is entitled to a reasonable compensation. The amount of the compensation is computed, on the one hand, by the duration of the delay and the amount of the compensation stipulated, and on the other hand, by what the contractor has saved in expenses by reason of the delay or is able to earn by a different employment of his time and industry. (n) Art. 1722. If the work cannot be completed on account of a defect in the material furnished by the employer, or because of orders from the employer, without any fault on the part of the contractor, the latter has a

128


right to an equitable part of the compensation proportionally to the work done, and reimbursement for proper expenses made. (n) Art. 1723. The engineer or architect who drew up the plans and specifications for a building is liable for damages if within fifteen years from the completion of the structure, the same should collapse by reason of a defect in those plans and specifications, or due to the defects in the ground. The contractor is likewise responsible for the damages if the edifice falls, within the same period, on account of defects in the construction or the use of materials of inferior quality furnished by him, or due to any violation of the terms of the contract. If the engineer or architect supervises the construction, he shall be solidarily liable with the contractor. Acceptance of the building, after completion, does not imply waiver of any of the cause of action by reason of any defect mentioned in the preceding paragraph. The action must be brought within ten years following the collapse of the building. (n) BAR EXAM: O (lot owner), contracted with B (builder), to build a mall, designed by A (architect). A was paid a fee to supervise the construction and execution of his design. When completed, O accepted the work and occupied the same but within one year, it collapsed in an earthquake which destroyed only the building but not the surrounding buildings. The construction was faulty. The building costs P3M, but reconstruction would cost P10M. 1) 2)

What are the rights of O against A and B? Could O demand reconstruction of the building?

ANSWER: 1) O can hold A and B liable for damages. Even if the collapse was due to an earthquake, it was clear in the problem that the construction was faulty. Moreover, only the building of O collapse and not the surrounding buildings. As such, B, as the builder is liable for such faulty construction. On the other hand, A would be solidarily liable with B, since he supervised the construction. 2)

Yes. The law is clear that if the work is poorly done, the creditor has the right to have it undone at the expense of the debtor, plus damages. However, he cannot demand from A and B the reconstruction if the latter does not want, otherwise it would violate the proscription against involuntary servitude. O, however, can have the work done by another at the expense of A and B.

Art. 1725. The owner may withdraw at will from the construction of the work, although it may have been commenced, indemnifying the contractor for all the latter's expenses, work, and the usefulness which the owner may obtain therefrom, and damages. (1594a) Art. 1726. When a piece of work has been entrusted to a person by reason of his personal qualifications, the contract is rescinded upon his death. In this case the proprietor shall pay the heirs of the contractor in proportion to the price agreed upon, the value of the part of the work done, and of the materials prepared, provided the latter yield him some benefit. The same rule shall apply if the contractor cannot finish the work due to circumstances beyond his control. (1595) Art. 1727. The contractor is responsible for the work done by persons employed by him. (1596) Art. 1728. The contractor is liable for all the claims of laborers and others employed by him, and of third persons for death or physical injuries during the construction. (n) Art. 1729. Those who put their labor upon or furnish materials for a piece of work undertaken by the contractor have an action against the owner up

to the amount owing from the latter to the contractor at the time the claim is made. However, the following shall not prejudice the laborers, employees and furnishers of materials: (1) Payments made by the owner to the contractor before they are due; (2) Renunciation by the contractor of any amount due him from the owner. This article is subject to the provisions of special laws. (1597a)

Materialmen’s Lien: although there is no privity of contract between the

suppliers of labor and materials and the owner of the piece of work (since the owner only has a contract with the contractor, and the contractor to the suppliers), the latter may be held liable to the suppliers under the principle of unjust enrichment, since these materials and labor are incorporated in the piece of work.

Extent of liability; General Rule: the extent of the amount owing to the

contractor at the time of the demand, which is the total contract price (between the contractor and the owner) less any payments already made. This is the only amount by which the owner may be unjustly enriched if he is not made liable to the materialmen.

Exceptions: owner may be held liable even if he no longer owe anything to

the contractor 1. If he paid the contractor when his obligation was not yet due and demandable; 2. The owner is not liable to the contractor because the latter renounced the amount the owner owes him; 3. No bond was executed was executed to secure the claims of the materialmen (Performance Bond) – the owner and contractor are solidarily liable. Art. 1730. If it is agreed that the work shall be accomplished to the satisfaction of the proprietor, it is understood that in case of disagreement the question shall be subject to expert judgment. If the work is subject to the approval of a third person, his decision shall be final, except in case of fraud or manifest error. (1598a) Art. 1731. He who has executed work upon a movable has a right to retain it by way of pledge until he is paid. (1600) TERMINATION OF THE LEASE: 1.

2.

Death of the lessor or the lessee – as a rule, it does not extinguish the lease contract since this is not a purely personal contract, EXCEPT if it was stipulated that the rights under the lease contract are intransmissible; Loss of the thing subject of the contract of lease through a fortuitous event:

Art. 1655. If the thing leased is totally destroyed by a fortuitous event, the lease is extinguished. If the destruction is partial, the lessee may choose between a proportional reduction of the rent and a rescission of the lease. (n) BAR QUESTION: A is the owner of a lot on which he consstructed a building with a cost of P10M, B contributed P5M, provided the building as a whole would be leased to him for a period of 10 years at a renal of P100k. During the effectivity of the lease, the building was destroyed through a fortuitous event. Soon after, the workers of A collected the debris and constructed a new building. B then served notice that he would occupy the building being constructed for the unexpired portion of the lease since he contributed to the construction of the first building. A rejected. Did A do right in rejecting the demand? ANSWER: Yes. Because the contract has been terminated upon the loss of the thing subject of the lease, which is the building.

What if partial loss? The lessee has two options: 1. 2.

Demand for the reduction of the rent; Rescind the contract if the loss is substantial – consistent with the Art. 1911.

129


D.

AGENCY

DEFINITION: by a contract of agency, a person binds himself to render some service or to do something in representation or on behalf of another with the consent or authority of the latter. QUESTION: if my cousin would not be able to attend a wedding and ask me to go to such in his behalf, was there a contract of agency? ANSWER: No. The definition is so broad as to cover representations not contemplated by the Code Commission. The object or the purpose of the contract is to execution of a juridical act. As such, not all kinds of representations would not be an agency if it would not involve a juridical act. A juridical act is an act which would either create, modify or extinguish a legal relationship. Not social and political relationship. Example of a juridical act: act of buying. Where an agent is hired to buy something in behalf of the principal and the act of buying creates a legal relationship between the seller and the principal (not the agent). The act of the agent of paying for the thing sold, would extinguish the legal obligation of the principal, the act of paying is likewise a juridical act. “with the consent or representation of the latter”: redundancy because the beginning of the definition already mentions a contract.

Consensual: perfected by mere consent and does not require delivery or a certain form to be valid.

DISTINCTION WITH LEASE (or SALE): the cause in agency is presumed to be onerous, but it may be gratuitous. Lease or sale is essentially onerous. Who would have the burden of proof that an agency is gratuitous? Anyone who would claim that it is gratuitous since the law already presumes it to be with compensation. Why agent? Under Art. 1909, if the agent caused damaged to the principal, the liability may be mitigated if the agency is gratuitous. PREPARATORY: the agency is a contract which is not an end to itself, it is meant to enter into another contract. BAR QUESTION: Joan asked her friend Aiza to buy some groceries for her in the supermarket, was there a nominate contract entered into by Joan and Aiza? ANSWER: Yes, agency, provided Aiza agreed. Subject matter is a service, i.e., to buy some groceries. Purpose is to buy in behalf of Joan. This cannot be considered a lease of service, since the cause in lease of service cannot be gratuitous and there should have been no principal-agent relationship. DISTINCTION WITH LEASE OF SERVICE: in agency, there is right of representation. DISTINCTION WITH NEGOTIORUM GESTIO: there is right of representation in both, but the manner of creation is different: in agency, it is created by contact; in negotiorum gestio, it is created by law. Moreover, agency is fiduciary in character while negotiorum gestio is not. DISTINCTION WITH AGENCY TO SELL: effect of delivery of the thing from one thing to another: if there will be tranasfer of ownership at the time of delivery – sale; if there will not be a transfer of ownership, but only possession and right to sell – agency to sell. DISTINCTION WITH CONTRACT FOR A PIECE OF WORK: extent of control: in a contract for a piece of work, the control aspect is only as to the end result and does not include the manner the contractor will perform his obligation.

AS TO TERMINATION: just like any other contract involving trust and confidence, this may be terminated by the unilateral act of one of the parties without prejudice to the liability of the party who caused the termination: as to principal – revocation; as to agent – withdrawal. KINDS OF AGENCY: IN GENERAL: the relevance of this classification 1. Actual: Manner of Creation: a. express or b. implied (by the mere silence of one of the parties, like in the case of De la Pena vs. Hidalgo, where the principal did not repudiate the acts of the agent after knowing of the representation that the latter is acting as such). When the parties are present or absent: 1) Parties are both present: one of them delivered a SPA and the same was accepted without any objections, an agency is created by mere silence. 2) Parties are absent: A sent an email to B for the creation of agency, B did not reply, is there an agency? If the subject of the contract is a business he is habitually engaged in, yes. 2.

Apparent or Ostensible – Art. 1873 (Rallos vs. Yangco) Art. 1873. If a person specifi cally informs another or states by public advertisement that he has given a power of attorney to a third person, the latter thereby becomes a duly authorized agent, in the former case with respect to the person who received the special information, and in the latter case with regard to any person.

Accordingly, B leased A’s parcel of land in Manila to C for four years at P60,000 per year, payable annually in advance. Also, B leased A’s land in Caloocan to D without a fixed term for P3,000 per month, payable manually. All these contracts are entered into by B while A was in the hospital due to illness in the Makati Medical Center. Rule on the validity of the above contracts upon A, the principal. ANSWER: Despite the stipulation that the principal withholds no power from the agent, the agent’s power is limited only to acts of administration under Art. 1877 since the contract is couched in general terms. The lease contract to C: contract of lease involving a real property for more than 1 year – act of ownership. There being no Special Power of Attorney, this contract of lease is not binding, it is unenforceable upon A. The lease contract to D: contract of lease involving a real property with no period. Since the contract did not state a term, and the subject being an urban land (being situtated in Caloocan), the law fixes the term to be on a month-to-month basis since the payment of the rent is monthly. As such, the period of the lease is only one month. Therefore, it is merely an act of administration that does not require a Special Power of Attorney. The contract is binding upon the principal. ESSENTIAL ELEMENTS: 1. Consent of the principal and agent; If the agent is a minor the contract of sale (subject of the agency) was entered into: the contract is not considered voidable, the capacity of the principal is to be considered not that of the agent. Moreover, the buyer cannot invoke the agent’s minority as a ground for annulment, the minor is the only one who can invoke such incapacity.

The power shall continue to be in full force until the notice is rescinded in the same manner in which it was given. (n) PROBLEM: A company wrote a circular letter to its customers introducing a certain X as its duly authorized agent. One customer then dealt with the company thru X. One day, X’s authority was revoked, but the customer continued to deal thru X since it never was informed by circular or otherwise of the revocation. Is the Company still liable for X’s acts even after the revocation of the agency? ANSWER: Yes, for the customer was in good faith, not having been informed by circular or otherwise, of the revocation. (See Compania

Object: the execution of a juridical act. Cause: presumed to be for compensation, but may be gratuitous.

FORM: does not pertain to the agency itself, since no particular form is required for its VALIDITY. Under Art. 1869, a contract of agency may be oral, UNLESS THE LAW REQUIRES A SPECIFIC FORM.

Gen. de Tabacos v. Diaba, 20 Phil. 321 and Rallos v. Yangco, 20 Phil. 269).

Here, the SPECIFIC FORM does not affect validity, but enforceability, if it is not to be performed within one year, it will be covered by the Statute of Frauds.

Criticism of Justice JBL Reyes: the above should not be taken

Contracts entered into by the agent: may require specific form to be

literally. The principal may not be liable if the third person (or the customer in the above letter) had ACTUAL KNOWLEDGE, even if the customer was not informed of the termination in the same manner as the announcement of the agency. 3.

2. 3.

binding upon the principal. GENERAL RULE: no form is required. Except: 1. Art. 1874: sale of a piece of land or any interest therein: the authority of the agent shall be IN WRITING, otherwise the contract of sale shall be void.

Agency by Estoppel: a person may be held as a principal despite the lack of proof of the existence of agency if he clothed another person as if he had full powers as an agent, the principal would not, later on, be allowed to deny such, to the prejudice of a third person who relied on his conduct or representations. (Art. 1431 as discussed int eh case of Mac vs. Cams)

Agency is not void, only the contract of sale.

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.

CASE: Ana Marie Concepcion is a buyer of a parcel of land who claims to have fully paid the amount of such land to a certain Adoracion Losloso on the basis of a note by the seller-spouses that the payment be given to a certain “Dory”, who appepars to be Adoracion Losloso. The sellers on the other hand claim that there no full payment yet. SC: the note is sufficient authorization to collect.

SCOPE OF AUTHORITY OF AN AGENT: 1. Mere Administration 2. Act of Strict Dominion BAR QUESTION: A, as principal, appointed B as his agent, granting him general and unlimited management over A’s properties, stating that A withholds no power from B, and that the agent may execute acts as he may deem appropriate.

130


Note that the above provision covers a “piece or parcel of land.” Not immovable. As such, sale of condo, house or building is not covered by the provision. Sale of such without the agent’s authority in writing, will make it unenforceable upon the principal, not void.

CASE: Brigida Nido sold a parcel of land representing her daughter Srivastava. The authority of the mother was not put in writing. SC: By express provision of the law, the agent’s authority to sell the land must be in writing. As such, the sale of land is void. BAR QUESTION: Fe, Esperanza and Caridad inherited from their parents a 500 sqm lot which they leased to Maria for 3 years. One year

after, Fe claiming to have the authority from her siblings Esperanza and Caridad offered to sell the leased property to Maria which the latter accepted. The sale was not reduced into writing, but Maria made partial payments which Fe accepted and acknowledged. After giving full payment, Maria demanded the execution of a Deed of Absolute Sale which Esperanza and Caridad refused to do. Worse, Maria learned that the siblings sold the same property to Manuel. Maria filed a complaint for annulment of the sale with specific performance and damages. Decide the case.

2) 3) c.

ANSWER: The sale to Maria was only valid as to Fe’s share. Fe’s authority did not have her authority in writing to sell in behalf of her siblings. The sale did not bind the siblings, the sale of their share being void. 2.

Art. 1878: instances requiring a Special Power of Attorney. Art. 1878. Special power of attorney are necessary in the following cases: (1) To make such payments as are not usually considered as acts of administration; (2) To effect novations which put an end to obligations already in existence at the time the agency was constituted; (3) To compromise, to submit questions to arbitration, to renounce the right to appeal from a judgment, to waive objections to the venue of an action or to abandon a prescription already acquired; (4) To waive any obligation gratuitously; (5) To enter into any contract by which the ownership of an immovable is transmitted or acquired either gratuitously or for a valuable consideration; (6) To make gifts, except customary ones for charity or those made to employees in the business managed by the agent; (7) To loan or borrow money, unless the latter act be urgent and indispensable for the preservation of the things which are under administration; (8) To lease any real property to another person for more than one year; (9) To bind the principal to render some service without compensation; (10) To bind the principal in a contract of partnership; (11) To obligate the principal as a guarantor or surety; (12) To create or convey real rights over immovable property; (13) To accept or repudiate an inheritance; (14) To ratify or recognize obligations contracted before the agency; (15) Any other act of strict dominion.

ANSWER: If it is clear in the power of attorney that Nestor does not have authority to collect and Jesus did not demand for a copy of the power of attorney, Jesus will bear the loss.

Effect, if agent did not act within the scope of his authority: a.

As to the principal: as a rule, the contract is unenforceable and will not bind the principal, EXCEPT: 1) If the principal ratifies; 2) The principal is estopped as when he led the third person to believe that the agent had full powers – under Art. 1911, principal and agent are solidarily liable. 3) If the limitation could not have been known by the third person. If the authority is in writing and the third person relied on such. As a rule, the third person is not required to inquire into the scope of authority of the agent beyond the power of attorney as written.

b.

As to the third person: he may hold the agent liable, EXCEPT: 1) If the principal ratifies; or 2) The 3rd person is aware that the agent exceeded his authority. However, the agent may still be held liable if he undertook to secure the ratification of the principal. (Art. 1898)

2.

Agent must act in representation of the Principal

Agent must act within the scope of his authority

How to determine scope of authority: a.

The power of attorney itself: third person may demand the presentation of the power of attorney. Failure to do so, the third person dealing with the agent may be held negligent.

Katigbak vs. Tai Hing Company: the agent was authoried to sell properties of the principal and was able to do so. Thereafter, the principal does not want to recognize the transactions covering properties acquired after constitution of the agency. SC: the power of attorney contained a phrase “which might belong”. As such, the scope of the authority of the agent covers after acquired proeprties. “sell, buy, lease, let in relation to the good administration of the land” – the right to sell and buy does not pertain to the land itself since the power of the agent is qualified by the “good administration”. If the agent was authorized to sell the land itself, then there is no more land to administer. It must be interpreted as to pertain to selling the fruits of the land, buying the necessaries for the cultivation thereof, etc. b.

The law: 1) The power to sell does not include the power to mortgage.

(Art. 1879)

131


Jurisprudence: 1) Singjuco: the agent was authorized to sell parcels of land but entered into a contract of guaranty 2) Municipal Council of IloIlo vs. Evangelista: agent was hired to file cases to protect the interest of the principal which included hiring a lawyer. The agent not only hired but also paid the lawyer. Necessarily, the authority hire includes the authority to pay. 3) Insular Drug vs. PNB: a certain Forster was authorized to collect sums of money and checks from the clients of Insular Drug. Forster was able to deposit these checks to his personal account in PNB by asking his wife or secretary to indorse the checks to him. The authority to collect does not include the authority to indorse or encash checks. Those acts are responsible acts which require a power of attorney.

BAR QUESTION: Prime Realty Corporation appointed Nestor as the exclusive agent in the sale of lots of its newly developed subdivision. PRC told Nestor that he could not receive payments from the buyers. Nestor was able to sell 10 lots to Jesus and to collect DPs from said lots which was not turned over to PRC. Who shall bear the loss for Nestor’s failure to turn over the money? PRC or Jesus?

OBLIGATIONS OF AN AGENT: 1.

Acts as may be necessary conducive to the accomplishment of the purpose of the agency. (Art. 1881) Acts performed in a manner more advantageous to the principal than that specified by him. (Art. 1882)

(Art. 1900)

BAR QUESTION: CX executed a special power of attorney authorizing DY to secure a loan from any Bank and to mortgage his property covered by the owner’s copy of the certificate of title. In securing a loan from M Bank, DY did not specify that he was acting for CX in the transaction with said bank. Can M Bank hold CX liable? ANSWER: No. When DY did no specify that he was acting in behalf of CX, the Bank allowed him to borrow money on his own, since the Bank had no knowledge that he was merely acting as an agent. The agent must act not only within his scope, but also in representation of the principal. Under Art. 1883, if the agent did not act in representation of the principal, the latter and the third person would have no cause of action against each other. The transaction is deemed to be only between DY and M Bank. Even though there was property in the problem belonging to the principal, the same is not the object of the loan, which is the transaction entered into by the agent. Moreover, it does not appear that the principal’s property was mortgaged. Furthermore, even if the property was indeed mortgaged, DY acting as the owner thereof, the mortgage would have been invalid not

being the absolute owner of the property. On the other hand, if he mortgaged it as an agent, the mortgage would still not bind the principal, because the authority of the agent is to mortgage the property to secure the principal’s obligation not his own. (BPI vs. De Coster) As such, the rule applies that CX and the Bank will have no cause of action against each other. BPI vs. De Coster: Mrs. De Coster authorized her husband to mortgage her property to secure the fulfillment of her obligations to the bank. However, the Mr. mortgaged the property to secure the obligations of his own obligations. Mr. De Coster failed to pay his obligations to BPI and the latter foreclosed the mortgage. Mrs. De Coster opposed. SC: mortgage did not bind the principal since the mortgage’s purpose was to secure the obligations of the wife and not of the husband. The act of the husband was outside of his authority and as such, it did not bind the wife (principal).

BREACH OF FIDUCIARY DUTY: Domingo vs. Domingo: the principal Domingo (defendant) authorized plaintiff Domingo to sell a specific parcel of land. Pursuant to such, plaintiff was able to induce Oscar de Leon to buy the land. Oscar de Leon gave the agent as gift, which was not disclosed by the agent to the principal. Thereafter, the principal and Oscar de Leon was not able to agree on the price. They eventually agreed to remove the agent to save on commission, where the principal agreed to sell at the lower price acceptable to de Leon. The two dramatisized that the sale will not push through and the principal revoked the authority of the agent. The agent went to the Register of Deeds and discovered that there was a Deed of Sale where the principal sold the land to the wife of Oscar de Leon. The agent demanded for his commission claiming that the sale actually proceeded despite the fact that the buyer was the wife of de leon. Is the agent entitled to his commission? SC: No. He would have been entitled to the commission since the revocation of his authority was made in bad faith. However, he also failed to comply with his own obligation to deliver to the principal whatever was received through the agency, even if it does not pertain to the principal. By failing in his fiduciary duty, his commissions were deemed FORFEITED.

Appointment of SUBSTITUTE AGENT: Art. 1892. The agent may appoint a substitute if the principal has not prohibited him from doing so; but he shall be responsible for the acts of the substitute: (1) When he was not given the power to appoint one; (2) When he was given such power, but without designating the person, and the person appointed was notoriously incompetent or insolvent. All acts of the substitute appointed against the prohibition of the principal shall be void What if at the time the property is being managed by the substitute losses were incurred by the principal. Can the principal hold the agent or substitute liable? Even if there is no privity of contract, Art. 1893, provides the principal a cause of action. As such, the principal MAY hold the substitute liable, if the cause of the loss was due to his fault. However, he may not be held liable if he acted within his scope of authority, in good faith and diligently. This is because the agent is not the insurer of the principal’s success.

Agent is liable: 1. 2.

3. 4.

where he was authorized to do so, and the one appointed is the one instructed by the principal or a person not notoriously incompetent or insolvent.

Note however, that under Art. 1888, the agent must not carry out an agency if its execution would manifestly result in loss or damages to the principal. As such, if the agent knew of the notorious incompetence of the person designated, he must at least inform the principal.

Sub-agent: When an agent appoints a sub-agent, he is still the agent, as such he will be liable for the acts of such sub-agent. Unlike in appointment of a substitute, the agent no longer remains as such.

Art. 1893. In the cases mentioned in Nos. 1 and 2 of the preceding article, the principal may furthermore bring an action against the substitute with respect to the obligations which the latter has contracted under the substitution. COMMISSION AGENT: DEFENSE: as long as the agent performed his duties with the diligence required. As such, even if he was not able to comply with his obligation, say to sell the products of the principal, he will not be liable. Note that the agent is not the insurer of the business of the principal.

Guaranty Commission Agent: receives a guaranty commission, and as such, he bears the risk of collection. Accordingly, failure to collect from the buyers, he shall be liable to the principal.

RIGHTS AND OBLIGATIONS OF THE PRINCIPAL: 1. The principal must comply with the tranasctions entered into by the agent within the scope of his authority and in representation of the principal; 2. To REIMBURSE expenses incurred by the agent (including interest, Art. 19120, EXCEPT: a. Agent acted in contravention of the principal’s insstructions, unless the latter should wish to avail of the benefits derived from the contract; b. Expenses were due to the fault of the agent; c. Agent incurred them with knowledge that an unfavourable result would ensue; d. When it was stipulated that the expenses would be borne by the agent. (Art. 1918) 3.

Liable for damages to a third person whose contract is rejected when the same thing is the subject of incompatible contracts entered into by the agent and the principal to different persons. Agent is likewise liable if he acted in bad faith.

MODES OF EXTINGUISHMENT: (EDWARD) 1. Expiration of the term; 2. Death, Insolvency or Insanity of either of the parties; 3. Withdrawal of the agent; 4. Accomplishmetn of the object or purpose of the agency; 5. Revocation by the principal; 6. Dissolution of the firm or corporation which entrusted or accepted the agency.

Not exclusive: modes of extinguishment under OBLICON are likewise applicable.

When he appointed a substitute if prohibited; When the agent was not prohibited, he shall be responsible for the acts of the substitute if he was not given the power to appoint one – the liability attaches only when the substitute acted in bad faith, outside the scope of his authority or was negligent; When he was given the power to appoint a specific person but appointed another one; When he was given the power to appoint a substitute without specifying the person, but the person he appointed was notoriously incompetent or insolvent.

132

Agent NOT liable for the acts of the substitute: if he appoints one


Death of Principal: ordinarily, the agency is extingsuished since death of

one of the parties extinguishes this contract under Art. 1919. Moreover, the agency is representative in character, with the death of the principal, there is no one the agent can represent. EXCEPT: if the agency was constituted for the benefit of the common interest of the principal and the agent, or in the interest of the third person who has accepted the stipulation in his favor. In this case, the agency shall remain in full force and effect even after the death of the principal. (Art. 1930)

Art. 1931: is not an exception to the above. The act of the agent, without knowledge of the death of the principal, will still bind the estate of the principal. However, the agency is still extinguished.

BAR QUESTION: In a telephone conversation, A authorized B in 1950 to sell a parcel of land. A died in 1954. In 1956, heirs of A sold the same land to C. In 1957 B sold the same land to D. C did not register the sale. D who was not aware of the previous sale registered the land. Who has a better right to the land? ANSWER: C has a better right. B’s sale to D is void because his authority to sell is not in writing. With a SPA, who has a better right? Art. 1931 will be applicable. D has a better right. B did not have knowledge of the death of A. As such, the transaction entered into by B would still bind the principal (or in this case, his estate). As such, his sale to D was valid. D, registering the property first, in good faith, has a better right over C, following the rules on double sale under Art. 1544.

Continuation of the agent: As a general rule, the agent need no longer continue with the agency.

EXCEPTION: the agent should continue with tasks already begun and there would be danger (to the estate of the deceased or third persons).

Death of Agent: agency is representative in character, if the agent is dead, who will represent the principal? As such, the death of the agent would extinguish the agency.

Loss of the Thing subject of the Agency:

BAR QUESTION: Edgar gave to Mario a pendant with diamond to be sold or to be retruned on demand. On one evening in the 80s, Mario, wearing the necklace was robbed and the pendant was taken. The robbers were apprehended and during the pendency of the criminal case, Edgar initiated a complaint to recover from Mario the value of the pendant and damages. Mario interposed the defense of fortuitous event. Edgar contended that the defense is untenable because (1) Mario was negligent; and (2) there must be a prior conviction of robber before the defense can be availed of. Decide the case. ANSWER: 1. The criminality rate in the 80s was already high. As such, Mario is negligent to be wearing a necklace with diamonds at night time. 2. In Austria vs. CA, the court ruled that as a fortuitous event to be a defense, it is not required that the perpetrator be apprehended nor much worse, convicted. It is only necessary that the event was proven by preponderance of evidence. REVOCATION: the principal may revoke the agency at will.

What if with period? Sta. Marina vs. Barretto: even if there was a period

agreed upon by the parties, the principal can revoke the authority of such agent at any time because agency is based on trust and confidence.

Later on, Claparols revoked the authority of Collongco. The latter sued claiming that the agency is one coupled with interest. Is there a valid revocation? SC: Yes. A bilateral contract (loan) was dependent upon the agency. He would not have loaned money if the agency would not be constituted. Although the agency was one coupled with interest, there was still valid revocation because there was a just cause. In this case, the just cause is because Collongco sent to the banks derogatory letters which was the cause for the non-approval of Claparols’ loans. Moreover, there was testimony of one of the employees that he was asked by Collongo to pour acid to the machineries of the factory.

Just cause: there is no need for the principal to have a just cause to revoke the agency, such right being available at will. However, the principal cannot revoke the agency at will if it is coupled with interest. However still, if the principal revoked the agency, even if coupled with interest, the revocation may still be valid if there is just cause. 2.

It is the means of fulfilling an obligation already contracted;

BAR QUESTION: Richard sold a parcel of land to Leo for P100M payable in annual installments over a period of 10 years but title will remain with Richard until the price is fully paid. To enable Leo to pay the price, Richard gave him a power of attorney authorizing him to subdivide the land and sell the lands and to deliver the proceeds as payment for the land. 5 years later, Richard revoked the power of attorney and took over the sale of the subdivision lots himself. Is the revocation valid? ANSWER: No. The scenario pertains to an agency coupled with interest because it was constituted as a means of fulfilling an obligation which have already been contracted or previously been contracted, i.e., to pay the price. As such, as long as the interest is still existing, the principal cannot validly revoke the agency. 3.

A parter is appointed manager of a partnership in the contract of partnership and his removal from the management is unjustifiable.

BAR QUESTION: Joe Miguel, a well known treasure hunter in Mindanao, executed a SPA appointing his nephew John Paul as his attorney in fact to deal with treasure hunting activities on Joe Miguel’s land and to file charges against those who may enter it without the latter’s authority. JM agreed to pay 40% of the treasure that may be found on the land. Thereafter, JP filed a case against Lilo for illegally entering JM’s land. Subsequently, JP hired the services of Atty. Audrey agreeing to give the latter 30% of JM’s share in whatever treasure may be found on the land. Dissatisfied, however, with the strategies implemented by JP, JM revoked the SPA granted. Is the revocation proper? ANSWER: No. because the agency is one coupled with interest because a bilateral contract depends upon the agency, i.e., contract involving the legal services of Atty. Audrey. Thus, the principal cannot revoke the authority of the agency. E.

PARTNERSHIP

F.

CREDIT TRANSACTIONS

Abuse of Rights: The revocation must be made in good faith. Otherwise,

the principal may be liable for damages to the agent. Like in the case of Domingo vs. Domingo, where the principal revoked the agent’s authority for the purpose of avoiding paying him a commission.

Exceptions (Agency coupled with interest): the principal cannot revoke the agency at will if: 1. A bilateral contract depends upon it

CASE: Collongco vs. Claparols: Claparols is the owner of a factory and badly needed funds for his business to survive. He tried to obtain loans from banks, but he was rejected. Collongco offered to lend money to Claparols on the condition that, among others, he should be appointed as agent of Claparols to obtain the bills of lading upon shipment to buyers and to market the products.

133


Civil Law - Obligations & Contracts - Soriano Notes (Uribe Civil Law Review)

Recommend Documents