20120612140639870_Civil Law Volume III (Obligation and Contracts)

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TABLE OF CONTENTS

BOOK IVOBLIGATIONS AND CONTRACTS

TITLE I — OBLIGATIONS

Chapter 1 — GENERAL PROVISIONS

Article 1156 ........................................................................... 1Article 1157 ........................................................................... 1Article 1158 ........................................................................... 1Article 1159 ........................................................................... 1Article 1160 ........................................................................... 1Article 1161 ........................................................................... 1Article 1162 ........................................................................... 2

Chapter 2 — NATURE AND EFFECTOF OBLIGATIONS

Article 1163 ........................................................................... 4Article 1164 ........................................................................... 4Article 1165 ........................................................................... 4Article 1166 ........................................................................... 4Article 1167 ........................................................................... 4Article 1168 ........................................................................... 4Article 1169 ........................................................................... 4Article 1170 ........................................................................... 5Article 1171 ........................................................................... 5Article 1172 ........................................................................... 5Article 1173 ........................................................................... 5Article 1174 ........................................................................... 6Article 1175 ........................................................................... 6Article 1176 ........................................................................... 6Article 1177 ........................................................................... 6Article 1178 ........................................................................... 6

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Chapter 3 — DIFFERENT KINDSOF OBLIGATIONS

Section 1 — Pure and Conditional Obligations

Article 1179 ........................................................................... 27Article 1180 ........................................................................... 28Article 1181 ........................................................................... 28Article 1182 ........................................................................... 28Article 1183 ........................................................................... 28Article 1184 ........................................................................... 28Article 1185 ........................................................................... 28Article 1186 ........................................................................... 29Article 1187 ........................................................................... 29Article 1188 ........................................................................... 29Article 1189 ........................................................................... 29Article 1190 ........................................................................... 30Article 1191 ........................................................................... 30Article 1192 ........................................................................... 31

Section 2 — Obligations with a Period

Article 1193 ........................................................................... 38Article 1194 ........................................................................... 39Article 1195 ........................................................................... 39Article 1196 ........................................................................... 39Article 1197 ........................................................................... 39Article 1198 ........................................................................... 39

Section 3 — Alternative Obligations

Article 1199 ........................................................................... 43Article 1200 ........................................................................... 43Article 1201 ........................................................................... 44Article 1202 ........................................................................... 44Article 1203 ........................................................................... 44Article 1204 ........................................................................... 44Article 1205 ........................................................................... 44Article 1206 ........................................................................... 45

Section 4 — Joint and Solidary Obligations


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Article 1213 ........................................................................... 49Article 1214 ........................................................................... 49Article 1215 ........................................................................... 49Article 1216 ........................................................................... 49Article 1217 ........................................................................... 50Article 1218 ........................................................................... 50Article 1219 ........................................................................... 50Article 1220 ........................................................................... 50Article 1221 ........................................................................... 50Article 1222 ........................................................................... 51

Section 5 — Divisible and IndivisibleObligations

Article 1223 ........................................................................... 55Article 1224 ........................................................................... 56Article 1225 ........................................................................... 56

Section 6 — Obligations with aPenal Clause

Article 1226 ........................................................................... 57Article 1227 ........................................................................... 57Article 1228 ........................................................................... 58Article 1229 ........................................................................... 58Article 1230 ........................................................................... 58

Chapter 4 — EXTINGUISHMENT OFOBLIGATIONS

GENERAL PROVISIONS

Article 1231 ........................................................................... 61

Section 1 — Payment or Performance


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Article 1242 ........................................................................... 63Article 1243 ........................................................................... 63Article 1244 ........................................................................... 63Article 1245 ........................................................................... 64Article 1246 ........................................................................... 64Article 1247 ........................................................................... 64Article 1248 ........................................................................... 64Article 1249 ........................................................................... 64Article 1250 ........................................................................... 65Article 1251 ........................................................................... 65Article 1252 ........................................................................... 78Article 1253 ........................................................................... 78Article 1254 ........................................................................... 78Article 1255 ........................................................................... 80Article 1256 ........................................................................... 81Article 1257 ........................................................................... 82Article 1258 ........................................................................... 82Article 1259 ........................................................................... 82Article 1260 ........................................................................... 82Article 1261 ........................................................................... 82

Section 2 — Loss of the Thing Due


Section 3 — Condonation or Remissionof the Debt


Section 4 — Confusion or Mergerof Rights


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Section 5 — Compensation

Article 1278 ........................................................................... 92Article 1279 ........................................................................... 92Article 1280 ........................................................................... 92Article 1281 ........................................................................... 93Article 1282 ........................................................................... 93Article 1283 ........................................................................... 93Article 1284 ........................................................................... 93Article 1285 ........................................................................... 93Article 1286 ........................................................................... 93Article 1287 ........................................................................... 93Article 1288 ........................................................................... 94Article 1289 ........................................................................... 94Article 1290 ........................................................................... 94

Section 6 — Novation


TITLE II — CONTRACTS



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Chapter 2 — ESSENTIAL REQUISITESOF CONTRACTS

GENERAL PROVISIONS

Article 1318 ........................................................................... 119Article 1319 ........................................................................... 123Article 1320 ........................................................................... 123Article 1321 ........................................................................... 123Article 1322 ........................................................................... 123Article 1323 ........................................................................... 123Article 1324 ........................................................................... 123Article 1325 ........................................................................... 123Article 1326 ........................................................................... 124Article 1327 ........................................................................... 124Article 1328 ........................................................................... 124Article 1329 ........................................................................... 124Article 1330 ........................................................................... 124Article 1331 ........................................................................... 124Article 1332 ........................................................................... 124Article 1333 ........................................................................... 124Article 1334 ........................................................................... 125Article 1335 ........................................................................... 125Article 1336 ........................................................................... 125Article 1337 ........................................................................... 125Article 1338 ........................................................................... 125Article 1339 ........................................................................... 125Article 1340 ........................................................................... 125Article 1341 ........................................................................... 126Article 1342 ........................................................................... 126Article 1343 ........................................................................... 126Article 1344 ........................................................................... 126Article 1345 ........................................................................... 126Article 1346 ........................................................................... 126Article 1347 ........................................................................... 133Article 1348 ........................................................................... 133Article 1349 ........................................................................... 133Article 1350 ........................................................................... 134Article 1351 ........................................................................... 134Article 1352 ........................................................................... 134Article 1353 ........................................................................... 134Article 1354 ........................................................................... 135Article 1355 ........................................................................... 135

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Chapter 3 — FORM OF CONTRACTS


Chapter 4 — REFORMATION OF INSTRUMENTS (n)

Article 1359 ........................................................................... 143Article 1360 ........................................................................... 143Article 1361 ........................................................................... 143Article 1362 ........................................................................... 143Article 1363 ........................................................................... 144Article 1364 ........................................................................... 144Article 1365 ........................................................................... 144Article 1366 ........................................................................... 144Article 1367 ........................................................................... 144Article 1368 ........................................................................... 144Article 1369 ........................................................................... 144

Chapter 5 — INTERPRETATIONOF CONTRACTS


Chapter 6 — RESCISSIBLE CONTRACTS


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Chapter 7 — VOIDABLE CONTRACTS


Chapter 8 — UNENFORCEABLECONTRACTS (n)


Chapter 9 — VOID OR INEXISTENTCONTRACTS


TITLE III — NATURAL OBLIGATIONS

Article 1423 ........................................................................... 176Article 1424 ........................................................................... 176

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TITLE IV — ESTOPPEL (n)

Article 1431 ........................................................................... 180Article 1432 ........................................................................... 180Article 1433 ........................................................................... 180Article 1434 ........................................................................... 180Article 1435 ........................................................................... 180Article 1436 ........................................................................... 180Article 1437 ........................................................................... 180Article 1438 ........................................................................... 181Article 1439 ........................................................................... 181

TITLE V — TRUSTS



Chapter 2 — EXPRESS TRUSTS

Article 1443 ........................................................................... 192Article 1444 ........................................................................... 192Article 1445 ........................................................................... 192Article 1446 ........................................................................... 192

Chapter 3 — IMPLIED TRUSTS

Article 1447 ........................................................................... 193Article 1448 ........................................................................... 193Article 1449 ........................................................................... 194Article 1450 ........................................................................... 194Article 1451 ........................................................................... 194Article 1452 ........................................................................... 194Article 1453 ........................................................................... 194Article 1454 ........................................................................... 194Article 1455 ........................................................................... 194Article 1456 ........................................................................... 195Article 1457 ........................................................................... 195

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SPECIAL CONTRACTS

TITLE VI — SALES

Chapter 1 — NATURE AND FORMOF THE CONTRACT

Article 1458 ........................................................................... 199Article 1459 ........................................................................... 199Article 1460 ........................................................................... 199Article 1461 ........................................................................... 199Article 1462 ........................................................................... 200Article 1463 ........................................................................... 200Article 1464 ........................................................................... 200Article 1465 ........................................................................... 200Article 1466 ........................................................................... 200Article 1467 ........................................................................... 200Article 1468 ........................................................................... 201Article 1469 ........................................................................... 201Article 1470 ........................................................................... 201Article 1471 ........................................................................... 201Article 1472 ........................................................................... 201Article 1473 ........................................................................... 201Article 1474 ........................................................................... 202Article 1475 ........................................................................... 202Article 1476 ........................................................................... 202Article 1477 ........................................................................... 203Article 1478 ........................................................................... 203Article 1479 ........................................................................... 203Article 1480 ........................................................................... 203Article 1481 ........................................................................... 203Article 1482 ........................................................................... 203Article 1483 ........................................................................... 204Article 1484 ........................................................................... 204Article 1485 ........................................................................... 204Article 1486 ........................................................................... 204Article 1487 ........................................................................... 204Article 1488 ........................................................................... 204

Chapter 2 — CAPACITY TO BUY OR SELL


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Chapter 3 — EFFECTS OF THE CONTRACTWHEN THE THING SOLD HAS BEEN LOST

Article 1493 ........................................................................... 224Article 1494 ........................................................................... 224

Chapter 4 — OBLIGATIONS OF THE VENDOR

Section 1 — General Provisions

Article 1495 ........................................................................... 224Article 1496 ........................................................................... 224

Section 2 — Delivery of the Thing Sold

Article 1497 ........................................................................... 225Article 1498 ........................................................................... 225Article 1499 ........................................................................... 225Article 1500 ........................................................................... 225Article 1501 ........................................................................... 225Article 1502 ........................................................................... 225Article 1503 ........................................................................... 226Article 1504 ........................................................................... 227Article 1505 ........................................................................... 227Article 1506 ........................................................................... 228Article 1507 ........................................................................... 230Article 1508 ........................................................................... 230Article 1509 ........................................................................... 231Article 1510 ........................................................................... 231Article 1511 ........................................................................... 231Article 1512 ........................................................................... 232Article 1513 ........................................................................... 232Article 1514 ........................................................................... 232Article 1515 ........................................................................... 233Article 1516 ........................................................................... 233Article 1517 ........................................................................... 233Article 1518 ........................................................................... 233Article 1519 ........................................................................... 234Article 1520 ........................................................................... 234Article 1521 ........................................................................... 244Article 1522 ........................................................................... 245Article 1523 ........................................................................... 245Article 1524 ........................................................................... 246Article 1525 ........................................................................... 246Article 1526 ........................................................................... 246Article 1527 ........................................................................... 247Article 1528 ........................................................................... 247Article 1529 ........................................................................... 247

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Article 1530 ........................................................................... 248Article 1531 ........................................................................... 248Article 1532 ........................................................................... 249Article 1533 ........................................................................... 249Article 1534 ........................................................................... 250Article 1535 ........................................................................... 251Article 1536 ........................................................................... 251Article 1537 ........................................................................... 251Article 1538 ........................................................................... 251Article 1539 ........................................................................... 251Article 1540 ........................................................................... 252Article 1541 ........................................................................... 252Article 1542 ........................................................................... 252Article 1543 ........................................................................... 252Article 1544 ........................................................................... 253Article 1545 ........................................................................... 264Article 1546 ........................................................................... 264Article 1547 ........................................................................... 265

Subsection 1 — Warranty in Caseof Eviction


Subsection 2 — Warranty Against HiddenDefects of or Encumbrances Upon

the Thing Sold


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Chapter 5 — OBLIGATIONS OF THEVENDEE

Article 1582 ........................................................................... 281Article 1583 ........................................................................... 281Article 1584 ........................................................................... 281Article 1585 ........................................................................... 282Article 1586 ........................................................................... 282Article 1587 ........................................................................... 282Article 1588 ........................................................................... 282Article 1589 ........................................................................... 282Article 1590 ........................................................................... 286Article 1591 ........................................................................... 287Article 1592 ........................................................................... 287Article 1593 ........................................................................... 287

Chapter 6 — ACTIONS FOR BREACH OFCONTRACT OF SALE OF GOODS


Chapter 7 — EXTINGUISHMENTOF SALE

Article 1600 ........................................................................... 313

Section 1 — Conventional Redemption

Article 1601 ........................................................................... 313Article 1602 ........................................................................... 313

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Article 1603 ........................................................................... 314Article 1604 ........................................................................... 314Article 1605 ........................................................................... 314Article 1606 ........................................................................... 314Article 1607 ........................................................................... 315Article 1608 ........................................................................... 315Article 1609 ........................................................................... 315Article 1610 ........................................................................... 315Article 1611 ........................................................................... 315Article 1612 ........................................................................... 315Article 1613 ........................................................................... 315Article 1614 ........................................................................... 316Article 1615 ........................................................................... 316Article 1616 ........................................................................... 316Article 1617 ........................................................................... 316Article 1618 ........................................................................... 316

Section 2 — Legal Redemption


Chapter 8 — ASSIGNMENT OF CREDITSAND OTHER INCORPOREAL RIGHTS

Article 1624 ........................................................................... 330Article 1625 ........................................................................... 330Article 1626 ........................................................................... 330Article 1627 ........................................................................... 330Article 1628 ........................................................................... 330Article 1629 ........................................................................... 331Article 1630 ........................................................................... 331Article 1631 ........................................................................... 331Article 1632 ........................................................................... 331Article 1633 ........................................................................... 331Article 1634 ........................................................................... 331Article 1635 ........................................................................... 332


Article 1636 ........................................................................... 335Article 1637 ........................................................................... 336

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TITLE VII — BARTER OR EXCHANGE


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Volume III

(Articles 1156-1641)

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1

BOOK IV

OBLIGATIONS AND CONTRACTS

TITLE I. OBLIGATIONS

Chapter 1

General Provisions

Article 1156. An obligation is a juridical necessityto give, to do or not to do. (n)

Art. 1157. Obligations arise from:

(1) Law;

(2) Contracts;

(3) Quasi-contracts;

(4) Acts or omissions punished by law; and

(5) Quasi-delicts. (1089a)

Art. 1158. Obligations derived from law are notpresumed. Only those expressly determined in thisCode or in special laws are demandable, and shall beregulated by the precepts of the law which establishesthem; and as to what has not been foreseen, by theprovisions of this Book. (1090)

Art. 1159. Obligations arising from contracts havethe force of law between the contracting parties andshould be complied with in good faith. (1091a)

Art. 1160. Obligations derived from quasi-contractsshall be subject to the provisions of Chapter 1, TitleXVII, of this Book. (n)

Art. 1161. Civil obligations arising from criminaloffenses shall be governed by the penal laws, subject

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to the provisions of Article 2177, and of the pertinentprovisions of Chapter 2, Preliminary Title, on HumanRelations, and of Title XVIII of this Book, regulatingdamages. (1092a)

Art. 1162. Obligations derived from quasi-delictsshall be governed by the provisions of Chapter 2, TitleXVII of this Book, and by special laws. (1093a)

Concept and Birth of Obligations

An obligation, a “juridical necessity to give, to do ornot to do,” is constituted upon the concurrence of theessential elements thereof, viz.: (a) the vinculum juris orjuridical tie which is the efficient cause established bythe various sources of obligations (law, contracts, quasi-contracts, delicts, and quasi-delicts); (b) the object whichis the prestation or conduct required to be observed (togive, to do, or not to do); and (c) the subject-persons who,viewed from the demandability of the obligations, are theactive (obligee) and the passive (obligor) subjects.

The juridical tie binding the active and the passivesubjects together is created by any of the sources ofobligations expressed in Article 1157 of the Code (Leungvs. O’Brien, 38 Phil. 182), to wit:

(1) Law — Obligations ex lege or those derived fromlaw are not presumed. Only those expresslystated by the Code or by special laws aredemandable. They shall be regulated by theprecepts of the law which establishes them, andas to what has been foreseen, by the provisionsof the Code on Obligations and Contracts (seeArt. 1158, Civil Code; Bautista vs. F.O. Borromeo,Inc., 30 SCRA 119).

(2) Contracts — A contract is a meeting of the mindsbetween two persons whereby one binds himselfto the other to give something or to render someservice (Art. 1305, Civil Code). Obligationsarising from contracts have the force of law

Arts. 1156-1162

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between the contracting parties and should becomplied with in good faith (Art. 1159; see Art.1308, Civil Code; see also Maritime Company ofthe Philippines vs. Reparations Commission, 40SCRA 170).

(3) Quasi-contracts — Quasi-contracts are certainlawful, voluntary and unilateral acts which giverise to a juridical relation to the end that noperson may unjustly enrich himself at theexpense of another (Art. 2142, Civil Code).Obligations derived from quasi-contracts basedon the presumed will of the parties aredemandable (see Title XVII, infra.; Cf. Art. 1160,Civil Code).

(4) Acts or omissions punished by law — Civil obli-gations arising from criminal offenses aregoverned by the penal laws, subject to theprovisions of Article 2177 and other pertinentprovisions of the Civil Code (see PreliminaryTitle on Human Relations, supra., and Title XVII,infra.; Tejuco vs. Squibb & Sons, 103 Phil. 594;Art. 1161, Civil Code).

(5) Quasi-delicts — Quasi-delicts are extra-con-tractual relations resulting from certain acts oromissions causing damage to another, therebeing fault or negligence on the part of the per-son responsible therefor (see Art. 2176, CivilCode). Obligations may be derived from suchquasi-delicts (see Title XVII, infra.; Barredo vs.Garcia, 73 Phil. 607; Art. 1162, Civil Code).

These sources of patrimonial obligations, asdistinguished from those that are correlatively due orarising from purely personal and intransmissible rights,are said to be exclusive (see Sagrado Orden de Predi-cadores vs. NACOCO, 91 Phil. 503) and so of the essencethat those sources, independently, can justifiably be calledthe fourth element of obligations.

Arts. 1156-1162 OBLIGATIONS AND CONTRACTSTitle I. Obligations

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Chapter 2

Nature and Effect of Obligations

Art. 1163. Every person obliged to give somethingis also obliged to take care of it with the properdiligence of a good father of a family, unless the law orthe stipulation of the parties requires another standardof care. (1094a)

Art. 1164. The creditor has a right to the fruits ofthe thing from the time the obligation to deliver it arises.However, he shall acquire no real right over it until thesame has been delivered to him. (1095)

Art. 1165. When what is to be delivered is adeterminate thing, the creditor, in addition to the rightgranted him by Article 1170, may compel the debtor tomake the delivery.

If the thing is indeterminate or generic, he mayask that the obligation be complied with at the expenseof the debtor.

If the obligor delays, or has promised to deliverthe same thing to two or more persons who do nothave the same interest, he shall be responsible forfortuitous event until he has effected the delivery. (1096)

Art. 1166. The obligation to give a determinatething includes that of delivering all its accessions andaccessories, even though they may not have beenmentioned. (1097a)

Art. 1167. If a person obliged to do somethingfails to do it, the same shall be executed at his cost.

This same rule shall be observed if he does it incontravention of the tenor of the obligation.Furthermore, it may be decreed that what has beenpoorly done be undone. (1098)

Art. 1168. When the obligation consists in notdoing, and the obligor does what has been forbiddenhim, it shall also be undone at his expense. (1099a)

Art. 1169. Those obliged to deliver or to do some-thing incur in delay from the time the obligee judicially

Arts. 1163-1169

5

or extrajudicially demands from them the fulfillment oftheir obligation.

However, the demand by the creditor shall not benecessary in order that delay may exist:

(1) When the obligation or the law expressly sodeclares; or

(2) When from the nature and circumstances ofthe obligation it appears that the designation of thetime when the thing is to be delivered or the service isto be rendered was a controlling motive for theestablishment of the contract; or

(3) When demand would be useless, as whenthe obligor has rendered it beyond his power toperform.

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

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

Art. 1171. Responsibility arising from fraud isdemandable in all obligations. Any waiver of an actionfor future fraud is void. (1102a)

Art. 1172. Responsibility arising from negligencein the performance of every kind of obligation is alsodemandable, but such liability may be regulated by thecourts, according to the circumstances. (1103)

Art. 1173. The fault or negligence of the obligorconsists in the omission of that diligence which isrequired by the nature of the obligation andcorresponds with the circumstances of the persons, ofthe time and of the place. When negligence shows badfaith, the provisions of Articles 1171 and 2201, para-graph 2, shall apply.


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

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

Art. 1175. Usurious transactions shall be governedby special laws. (n)

Art. 1176. The receipt of the principal by thecreditor, without reservation with respect to the interest,shall give rise to the presumption that said interesthas been paid.

The receipt of a later installment of a debt withoutreservation as to prior installments, shall likewise raisethe presumption that such installments have been paid.(1110a)

Art. 1177. The creditors, after having pursued theproperty in possession of the debtor to satisfy theirclaims, may exercise all the rights and bring all theactions of the latter for the same purpose, save thosewhich are inherent in his person; they may also impugnthe acts which the debtor may have done to defraudthem. (1111)

Art. 1178. Subject to the laws, all rights acquiredin virtue of an obligation are transmissible, if there hasbeen no stipulation to the contrary. (1112)

Compliance with Obligations

Basically, the standard norm in the observance of anobligation by both the active and passive subjects may besaid to be that which Article 19 of the Code prescribes,viz.: “Every person must, in the exercise of his rights andin the performance of his duties, act with justice, giveeveryone his due, and observe honesty and good faith.”

Arts. 1163-1178

7

(1) In Obligations to Give

Every person obliged to give a determinate thingmust deliver, and the obligee may compel the delivery of,that itself which was promised, and the obligor cannotsubstitute it unless the obligee agrees (Art. 1244, inrelation to Art. 1165, Civil Code) or the right is reservedsuch as in alternative obligations (see infra.). The obligoris also obliged to take care of the things with the properdiligence of a good father of a family, unless the law or thestipulation of the parties requires another standard ofcare (see Art. 1163, Civil Code; E. Razon, Inc. vs. Court ofAppeals, 161 SCRA 356). The obligation to give a deter-minate thing includes that of delivering all its accessionsand accessories, even though they may not have beenmentioned (Art. 1166, Civil Code).

The creditor has a right to the fruits of the thingfrom the time the obligation to deliver it arises. He shall,however, acquire no real right (including ownership ortitle) over it until the same has been delivered to him(Art. 1164, Civil Code; Cruzado vs. Bustos, 34 Phil. 17;see Art. 1187, infra., as regards conditional obligations).

If the thing to be delivered is generic, the obligormust deliver a thing of the quality specified; if none isfixed, he must deliver one of average quality, nor can theobligee demand one of superior quality. The creditor mayask that the obligation be complied with at the expense ofthe debtor (see Art. 1246 and 1165, Civil Code).

(2) In Obligations to Do

If a person is obliged to do something, it must bedone as so promised, and it cannot be substituted byanother act or forbearance against the obligee’s will (seeArt. 1244, Civil Code). If the obligor fails to do it, thesame shall be executed at his cost (see Chavez vs. Gonzales,32 SCRA 547) albeit he may not be compelled to do sopersonally or by himself. This same rule shall be observedif he does it in contravention of the tenor of the obligation.


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Furthermore, it may be decreed that what has been poorlydone be undone (see Art. 1167, Civil Code).

(3) In Obligations Not to Do

When the obligation consists in not doing, and theobligor does what has been forbidden him, it shall beundone at his expense (see Art. 1168, Civil Code; Cui vs.Chan, 41 Phil. 523).

Breach of Obligations

Subject to such exceptions or qualifications as thelaw or the parties themselves may provide, obligationsmust be complied with precisely (“identity of obligations”)and completely (“integrity of obligations”) as promised orrequired. The receipt, however, of the principal by thecreditor, without reservation with respect to the interest,shall give rise to the presumption that said interest hasbeen paid. The receipt of a later installment of a debt,without reservation as to prior installments, shall likewiseraise the presumption that such installments have beenpaid (Art. 1176, Civil Code; for further discussions onPayment or Performance, see infra.).

Those who in the performance of their obligationsare guilty of fraud, negligence, or delay, and those who inany manner contravene the tenor thereof, are liable fordamages without the need for a contractual stipulationor prior agreement thereon (see Art. 1170, Civil Code;Boysaw vs. Interphil Promotions, Inc., 148 SCRA 635;Arrieta vs. NARIC, 10 SCRA 79; CMS Investments andManagement Corp. vs. Intermediate Appellate Court, 139SCRA 75; Magat vs. Medialdea, 121 SCRA 418).

Fraud

Responsibility arising from fraud (malice) is demand-able in all obligations. Any waiver of an action for futurefraud is void (Art. 1171, Civil Code).

Arts. 1163-1178

9

Fraud, in the context of its use as a mode of breachingan obligation, is bad faith in the performance of anobligation, oftentimes referred to as malice (see Flores vs.Miranda, 105 Phil. 266), as distinguished from fraud inthe celebration of contracts, also commonly known asdeceit (dolo) which may constitute a ground for annulmentof the contract if substantial (dolo causante) or whichmay merely call for a reparation for damages if incidental(dolo incidente), such as when, although fraud is absentor not exercised, the other party would have nonethelessentered into the agreement on significantly the sameterms.

Negligence

Responsibility arising from negligence in the per-formance of every kind of obligation is also demandable,but such liability may be regulated by the courts, accordingto the circumstances of each case (Art. 1172, Civil Code;E. Razon, Inc. vs. Court of Appeals, supra.).

The fault or negligence (culpa) of the obligor consistsin the omission of that diligence which is required by thenature of the obligation and corresponds with thecircumstances of the persons, of the time, and of the place.If the law or contract does not state the diligence which isto be observed in the performance, that which is expectedof a good father of a family shall be required (Art. 1173,Civil Code). Gross or reckless imprudence could amountto or be indicative of bad faith that can call for theapplication of the provisions of Article 1171 on Fraud andArticle 2201, 2nd paragraph, on Damages.

Negligence in the performance of obligations, ingeneral, although akin in many respects to, is not exactlythe same as, culpa contractual. The source of liability inculpa contractual being contracts exclusively, the rule onthe privity or relativity of contracts applicable to liabilityin culpa contractual may not accurately be pertinent to


10 CIVIL LAW

culpa in the performance of obligations derived from othersources such as law. Neither is negligence in theperformance of an obligation and culpa contractual, onthe one hand, to be likened to culpa aquiliana, on theother, which is the negligence referred to as a quasi-delict(Art. 2176, Civil Code) as a source of an obligation (Art.1157, Civil Code). The distinctions between culpacontractual and culpa aquiliana (see Cangco vs. ManilaRailroad Co., 38 Phil. 769; Rakes vs. AG & P, 7 Phil. 359)may be exemplified in the following illustrative appli-cation:

Facts

Two taxicabs, one owned and operated by “X & Co.”and the other by “Y & Co.,” have figured in a collision.Both drivers of the taxicabs are negligent. As a result ofthe incident, “A,” a passenger of the taxicab owned andoperated by “X & Co.,” suffers injuries. He institutes anaction for damages against “X & Co.,” “Y & Co.,” and thetwo drivers.

Basic differences in the Liabilities of the SeveralDefendants

(1) The primary (principal) cause of action by “A”against “X & Co.” is culpa contractual and thesource of liability against all others is culpaaquiliana (also culpa criminal in the case of thedrivers).

(2) “X & Co.” may not raise the defense of duediligence in the selection (culpa in eligiendo)and supervision (culpa in vigilando) of itsemployees, although “Y & Co.” may do so (DeGuia vs. Manila Electric Co., 40 Phil. 706).

(3) In case direct evidence is bereft of the existenceor non-existence of negligence, “X & Co.” canstill be held liable, since fault or negligence ispresumed in culpa contractual; in culpa aqui-liana, fault or negligence must, as a rule, beestablished.

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(4) In culpa contractual, the privity of contractswould bar non-successors from claiming from“X & Co.” (in case “A” dies); in culpa aquiliana,relatives and dependents (although non-heirs)may claim damages.

Discussions

(1) Although the cause of action against “X & Co.”is basically one of breach of contract (culpacontractual), the factual circumstances, however,would also point to the existence of tort as amode of breach. Where, without a pre-existingcontract between two parties, an act or omissioncould have nevertheless constituted an action-able tort between them, the mere existence thenof a contract between such parties will notmilitate against the application of the rules ontort liability or even the predominance of tort inthe resolution of the case (see Singson vs. BPI,23 SCRA 1117; Air France vs. Carrascoso, 18SCRA 155). Accordingly, “X & Co.” could becomea joint tortfeasor with the other defendants,rendering themselves solidarily liable (Art. 2194,Civil Code). Likewise, the possibility of “Y &Co.” being liable for moral damages for the injuryof “A” because of quasi-delict under Article 2219of the Civil Code may not altogether be dis-counted in appropriate cases.

(2) While “X & Co.” may not raise the defense ofdue diligence in the selection and supervision ofits employees as against its passenger “A” (thelatter’s cause of action still being basically oneof culpa contractual), the proof of such diligence,however, is not all that immaterial orinconsequential. Once established, such duediligence will work to operate an extenuation ofany possible tort liability, and “X & Co.” couldno longer be considered a joint tortfeasor. In


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this case, neither liability under Article 2194 ofthe Civil Code nor liability for moral damagesto “A” under Article 2219 of the same Code (inthe absence of gross negligence amounting tobad faith) would be applicable. “X & Co.,”however, would still be liable but purely on thebasis of culpa contractual.

(3) If the drivers of the colliding vehicles were con-victed in a criminal case for their negligence, “X& Co.” and “Y & Co.,” being both engaged in anindustry, can be held liable subsidiarily for theirrespective drivers’ civil liability (Arts. 100-103,Revised Penal Code).

In FGU Insurance Corporation vs. G.P. SarmientoTrucking Corp., G.R. No. 141910, 06 August 2002, theSupreme Court said:

“In culpa contractual, upon which the action ofpetitioner rests as being the subrogee of ConcepcionIndustries, Inc., the mere proof of the existence ofthe contract and the failure of its compliance justify,prima facie, a corresponding right of relief. The law,recognizing the obligatory force of contracts, will notpermit a party to be set free from liability for anykind of misperformance of the contractual undertak-ing or a contravention of the tenor thereof. A breachupon the contract confers upon the injured party avalid cause for recovering that which may have beenlost or suffered. The remedy serves to preserve theinterests of the promisee that may include his “ex-pectation interest,” which is his interest in havingthe benefit of his bargain by being put in as good aposition as he would have been in had the contractbeen performed, or his “reliance interest,” which ishis interest in being reimbursed for loss caused byreliance on the contract by being put in as good aposition as he would have been in had the contractnot been made; or his “restitution interest,” which is

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his interest in having restored to him any benefitthat he has conferred on the other party. Indeed,agreements can accomplish little, either for theirmakers or for society, unless they are made the basisfor action. The effect of every infraction is to create anew duty, that is, to make recompense to the onewho has been injured by the failure of another toobserve his contractual obligation unless he can showextenuating circumstances, like proof of his exerciseof due diligence (normally that of the diligence of agood father of a family or, exceptionally by stipula-tion or by law such as in the case of common carri-ers, that of extraordinary diligence) or of the attend-ance of fortuitous event, to excuse him from his en-suing liability.

“Respondent trucking corporation recognizes theexistence of a contract of carriage between it andpetitioner’s assured, and admits that the cargoes ithas assumed to deliver have been lost or damagedwhile in its custody. In such a situation, a default on,or failure of compliance with, the obligation – in thiscase, the delivery of the goods in its custody to theplace of destination — gives rise to a presumption oflack of care and corresponding liability on the part ofthe contractual obligor the burden being on him toestablish otherwise. GPS has failed to do so.

“Respondent driver, on the other hand, withoutconcrete proof of his negligence or fault, may nothimself be ordered to pay petitioner. The driver, notbeing a party to the contract of carriage betweenpetitioner’s principal and defendant, may not be heldliable under the agreement. A contract can only bindthe parties who have entered into it or their succes-sors who have assumed their personality or theirjuridical position. Consonantly with the axiom resinter alios acta aliis neque nocet prodest, such con-tract can neither favor nor prejudice a third person.Petitioner’s civil action against the driver can only


14 CIVIL LAW

be based on culpa aquiliana, which, unlike culpacontractual, would require the claimant for damagesto prove negligence or fault on the part of the de-fendant.

“A word in passing. Res ipsa loquitur, a doctrinebeing invoked by petitioner, holds a defendant liablewhere the thing which caused the injury complainedof is shown to be under the latter’s management andthe accident is such that, in the ordinary course ofthings, cannot be expected to happen if those whohave its management or control use proper care. Itaffords reasonable evidence, in the absence of expla-nation by the defendant, that the accident arose fromwant of care. It is not a rule of substantive law and,as such, it does not create an independent ground ofliability. Instead, it is regarded as a mode of proof, ora mere procedural convenience since it furnishes asubstitute for, and relieves the plaintiff of, the bur-den of producing specific proof of negligence. Themaxim simply places on the defendant the burden ofgoing forward with the proof. Resort to the doctrine,however, may be allowed only when (a) the event isof a kind which does not ordinarily occur in the ab-sence of negligence; (b) other responsible causes, in-cluding the conduct of the plaintiff and third per-sons, are sufficiently eliminated by the evidence; and(c) the indicated negligence is within the scope of thedefendant’s duty to the plaintiff. Thus, it is not ap-plicable when an unexplained accident may be at-tributable to one of several causes, for some of whichthe defendant could not be responsible.

“Res ipsa loquitur generally finds relevancewhether or not a contractual relationship exists be-tween the plaintiff and the defendant, for the infer-ence of negligence arises from the circumstances andnature of the occurrence and not from the nature ofthe relation of the parties. Nevertheless, the require-ment that responsible causes other than those due

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to defendant’s conduct must first be eliminated, forthe doctrine to apply, should be understood as beingconfined only to cases of pure (non-contractual) tortsince obviously the presumption of negligence inculpa contractual, as previously so pointed out, im-mediately attaches by a failure of the covenant or itstenor. In the case of the truck driver, whose liabilityin a civil action is predicated on culpa acquiliana,while he admittedly can be said to have been incontrol and management of the vehicle which fig-ured in the accident, it is not equally shown, how-ever, that the accident could have been exclusivelydue to his negligence, a matter that can allow, forth-with, res ipsa loquitur to work against him.’’

Fortuitous Event

No person shall be responsible for those events whichcould not be foreseen (accident) or which, though fore-seen, are inevitable (force majeure), collectively referredto simply as “fortuitous event” (see Art. 1174, Civil Code).

In order that a fortuitous event can be the basis ofexemption from liability, a number of circumstances mustbe shown. The Supreme Court, in Lasam vs. Smith (45Phil. 657; reiterated in Austria vs. Court of Appeals, 39SCRA 527; Servando vs. Phil. Steam Navigation, 117SCRA 832), has held:

“In discussing and analyzing the term “caso for-tuito the Encyclopedia Juridica Española says: ‘In alegal sense and, consequently, also in relation to con-tract, a caso fortuito presents the following essentialcharacteristics: (1) The cause of the unforeseen andunexpected occurrence, or of the failure of the debtorto comply with his obligation, must be independentof the human will; (2) It must be impossible to fore-see the event which constitutes the caso fortuito, orif it can be foreseen, it must be impossible to avoid;(3) The occurrence must be such as to render it im-


16 CIVIL LAW

possible for the debtor to fulfill his obligation in anormal manner; and (4) The obligor (debtor) must befree from any participation in the aggravation of theinjury resulting to the creditor (EncyclopediaJuridica Española, 309).”

There is no caso fortuito where a ship captain pro-ceeded en route despite a typhoon advice close to the areawhere the vessel will pass. In Pedro Vasquez vs. Court ofAppeals (138 SCRA 553), it appeared that when a ship,owned and operated by private respondent, had left Ma-nila for Cebu, its officers were aware that a typhoon wasbuilding up in Mindanao. Good weather prevailed untilthe vessel reached Romblon. Upon passing TanguinguiIsland, however, the weather suddenly changed. Althoughthe officers knew that the island was within the typhoonzone, they still decided to proceed on course. Visibilitydropped to zero. The ship struck a reef and sank. Thepetitioners herein, relatives of some of the passengers,sued the respondent for damages. The respondent pleadedforce majeure. The Supreme Court has ruled:

“To constitute a caso fortuito that would exempta person from responsibility, it is necessary that (1)the event must be independent of the human will;(2) the occurrence must render it impossible for thedebtor to fulfill the obligation in a normal manner;and that (3) the obligor must be free of participationin, or aggravation of, the injury to the creditor.” x x x

“Under the circumstances, while, indeed, thetyphoon was an inevitable occurrence, yet, havingbeen kept posted on the course of the typhoon byweather bulletin at intervals of six hours, the captainand crew were well aware of the risk they were takingas they hopped from island to island from Romblonup to Tanguingui. They held frequent conferences,and oblivious of the utmost diligence required of verycautious persons, they decided to take a calculatedrisk. In so doing, they failed to observe that extra-

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ordinary diligence required of them explicitly by lawfor the safety of the passengers transported by themwith due regard for all circumstances and unneces-sarily exposed the vessel and passengers to the tragicmishap. They failed to overcome that presumptionof fault or negligence that arises in cases of death orinjuries to passengers.” (see also Nakpil & Sons vs.Court of Appeals, 144 SCRA 596).

A decision that has received critical attention is thecase of Overseas Bank vs. Court of Appeals (105 SCRA 49,113 SCRA 778), the Supreme Court there holding that abank should not be made liable to pay interest on depositsduring the period that its operations are orderedsuspended by the Monetary Board of the Central Bank.The criticism lies mainly on the thesis that (a) the rulingappears to have misapplied fortuitous event which, inthis context, can merely be a causative factor to loss as amode of extinguishing an obligation to deliver a specificthing but never as the mode itself and (b) the fact that anobligation to pay money (a “genus”) is incapable of being“lost.” In any event, the Supreme Court has felt that itwould be “utterly unfair to require such a bank to pay thestipulated interest for what enables a bank to do so is itsability to generate funds from its authorized operations.”If the situation cannot, strictly speaking, be legally termedas force majeure, it should be held, as a matter of simpleequity, that it be treated as such, and that “conventionalwisdom dictates this inexorable and just conclusion.” (Butsee Central Bank of the Philippines vs. Court of Appeals,139 SCRA 46).

Mechanical defects of carriers have been held not toconstitute fortuitous event (Sweet Lines vs. Court ofAppeals, 121 SCRA 769; Sons vs. Cebu Autobus, 94 Phil,892; Landingin vs. Pangasinan Transp. Co., 22 SCRA284; Necessito vs. Paras, 104 SCRA Phil. 75). A tire blow-out, that causes a public utility jeep to jump into a ditch,has been ruled to be insufficient to overcome thepresumption of negligence. The fact alone that the tire


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may have still been good because its grooves are stillvisible does not make the explosion a fortuitous event. Ifthere is no evidence that the driver has taken due pre-cautions to compensate for any condition liable to causeaccidents, such as the road condition, a tire blow-out couldnot unlikely be caused, for instance, by too much airpressure, overloading or speeding at the time of theaccident (Juntilla vs. Fontanar, L-45637, 31 May 1985).

The existence of a fortuitous event negates theliability that might otherwise arise in the breach of obli-gations. In Victorias Planters Assn., Inc. vs. Victorias Mill-ing Co., Inc. (97 Phil. 318), the Supreme Court has elabo-rated, thusly:

“Fortuitous event relieves the obligor from ful-filling a contractual obligation (Art. 1105, old CivilCode; Art. 1174, new Civil Code). The stipulation inthe contract that in the event of force majeure thecontract shall be deemed suspended during saidperiod does not mean that the happening of any ofthose events stops the running of the period agreedupon. It only relieves the parties from the fulfillmentof their delivering sugar cane and the respondentcentral from milling it. In order that the respondentcentral may be entitled to demand from thepetitioners the fulfillment of their part in thecontracts, the latter must have been able to performit but failed or refused to do so and not when theywere prevented by force majeure such as war. Torequire the petitioners to deliver the sugar cane whichthey failed to deliver during the six years is to demandfrom them the fulfillment of an obligation which wasimpossible of performance at the time it became due.Nemo tenetur ad impossibilia. The respondent centralnot being entitled to demand from the petitionersthe performance of the latter’s part of the contractsunder those circumstances cannot later on demandits fulfillment. The performance of what the law haswritten of cannot be demanded and required. The

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prayer that the petitioners be compelled to deliversugar cane for six years to make up for what theyfailed to deliver, the fulfillment of which was im-possible, if granted, would in effect be an extensionof the terms of the contracts entered into by andbetween the parties.”

Fortuitous events will not extenuate liability (a) incases expressly specified by law, such as when the obligoris in default or has promised to deliver the same thing totwo or more persons who do not have the same interest(see Art. 1165, Civil Code); (b) when it is otherwise dec-lared by stipulation (see Insular Government vs. Punzalan,7 Phil. 546); or (c) when the nature of the obligationrequires the assumption of risk, such as in the aleatorycontract of insurance (see Art. 1174, Civil Code).

Delay

Those obliged to deliver or to do something but failincur delay (“mora”) from the time the obligee judiciallyor extrajudicially demands from them the fulfillment oftheir matured obligation (see Art. 1169, Civil Code).Without such demand, the mere non-performance of theobligation on the time fixed therefor does not necessarilyput the obligor in default (see Rose Packing Company,Inc. vs. Court of Appeals, 167 SCRA 309; Adiarte vs. Courtof Appeals, 92 Phil. 758). A demand before the maturityof the obligation is ineffective. Demand, however, by thecreditor shall not be necessary in order that delay mayexist when —

a. the obligation or the law expressly so declares(see Siulong & Co. vs. Ylagan, 43 Phil. 393); or

b. from the nature and the circumstances of theobligation it appears that the designation of thetime when the thing is to be delivered or theservice is to be rendered was a controlling motivefor the establishment of the contract (see Hanlonvs. Hausserman, 40 Phil. 796); or


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c. the demand would be useless, as when the obli-gor has rendered it beyond his power to perform(see Art. 1169, Civil Code; CETUS Dev., Inc. vs.Court of Appeals, 176 SCRA 72).

In reciprocal obligations, neither party incurs in de-lay if the other does not comply or is not ready to complyin a proper manner with what is incumbent upon him.From the moment one of the parties fulfills his obliga-tion, delay by the other begins (see Art. 1169, Civil Code;Cf. Alano vs. Cortes, 110 Phil. 74; Central Bank of thePhilippines vs. Court of Appeals, 139 SCRA 46; Limjucovs. Court of Appeals, 37 SCRA 663).

Delay or mora has generally been categorizedinto —

(1) Mora solvendi (delay of the debtor)

a. Mora solvendi ex persona (when demand isnecessary)

b. Mora solvendi ex re (when demand is unne-cessary)

(2) Mora accipiendi (delay of the creditor; seeVillaruel vs. Manila Motor Co., 104 Phil. 926).

(3) Compensatio morae (mutual delay of parties thatwould cancel the effects of delay by said parties).

Delay has the effect of rendering liable the guiltyparty for damages that the other might suffer (PNCC vs.NLRC, 172 SCRA 887), as well as of being responsibleeven for a fortuitous event, inclusive of the assumption ofany risk of loss (see Arts. 1165 and 1170, Civil Code).

Contravention of Tenor of Obligations

The faithful observance of an obligation according toits tenor is mandated by law; an unexcused failure thereofrenders the obligor liable for losses and damages that arecaused thereby (see Art. 1170, Civil Code; Arrieta vs.NARIC, 10 SCRA 79).

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Remedies for Breach of Obligations

Appropriate legal remedies are available in order toallow redress upon the breach of obligations. The leni-ency or laxity of the party entitled to enforce the obliga-tion does not diminish his rights thereunder (NationalPower Corporation vs. EIN Chem. Corporation, 145 SCRA529).

The judicial remedies, in general, would include: (a)The principal remedies (i) of specific performance in obli-gations to give specific things (Articles 1165 and 1167 ofthe Civil Code), substitute performance in an obligationto do or to deliver generic things (Article 1165 of the CivilCode) and equivalent performance for damages (Articles1168 and 1170 of the Civil Code); and (ii) of rescission orresolution of reciprocal obligations; and (b) the subsidi-ary remedies that may be availed of when the principalremedies are unavailable or ineffective such as (i) accionsubrogatoria or subrogatory action (Article 1177 of theCivil Code; see also Articles 1729 and 1893 of the CivilCode); and (ii) accion pauliana or rescissory action (Arti-cles 1177 and 1381 of the Civil Code). And, in order tosecure the integrity of final judgments, such ancillaryremedies as attachments, replevin, garnishments, receiv-ership, examination of the debtor, and similar remedies,are additionally provided for in procedural law.

The creditors, after having pursued the property inpossession of the debtor to satisfy their claims, may exer-cise all the rights and bring all the actions of the latterfor the same purpose save those which are inherent in hisperson; they may also impugn the acts which the debtormay have done to defraud them (Art. 1177, Civil Code;Gold Star Mining Co., Inc. vs. Lim-Jimena, 25 SCRA597; Pascual vs. Secretary of Public Works, 110 Phil. 331).Subject to applicable laws, all rights acquired by virtue ofan obligation, are transmissible if there has been no stipu-lation to the contrary (Art. 1178, Civil Code; see Bastidavs. Dy Buncio & Co., Inc., 93 Phil. 195).


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The principal remedies open to an obligee, upon thebreach of an obligation, are generally judicial in natureand must be independently sought in litigation, i.e., anaction for performance (specific, substitute or equivalent)or rescission (resolution) of a reciprocal obligation. Theright to rescind (resolve) is recognized in reciprocal obli-gations; it is implicit, however, in third paragraph of Ar-ticle 1191 of the Civil Code that the rescission there con-templated can only be invoked judicially. Hence, the merefailure of a party to comply with what is incumbent uponhim does not ipso jure produce the rescission (resolution)of the obligation.

Exceptionally, under the law and, to a limited de-gree, by agreement of the parties, extrajudicial remediesmay become available such as, in the latter case, an op-tion to rescind or terminate a contract upon the violationof a resolutory facultative condition. In the case oflease agreements, despite the absence of an explicit stipu-lation, that option has been reserved by law in favor of alessee under Article 1673 of the Civil Code by providingthat the lessor may judicially eject the lessee for, amongother grounds, a violation of any of the conditions agreedupon in the contract. The provision, read in conjunctionwith Section 2, Rule 70, of the 1997 Rules of Civil Proce-dure, would , absent a contrary stipulation, merely re-quire a written demand on the lessee to pay or to complywith the conditions of the lease and to vacate the premisesprior to the institution of an action for ejectment. Theabove provisions, in effect, authorizes the lessor to termi-nate extrajudicially the lease (with the same effect asrescission) by simply serving due notice to the lessee.

Extrajudicial Remedies

Extrajudicial remedies (remedies that may beexercised without need of resorting to court action) maybe available or resorted to —

(1) When the law expressly grants such remediessuch as in the case of the rights of an unpaid

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seller of personal property (Arts. 1526, et seq.and 1593, Civil Code, where a reservation torescind by mere notice, although preferable, isnot indispensable); or

(2) When the right is reserved by a party in anagreement (see De Motors Corp. vs. Sanson, G.R.No. 55655, 8 February 1989; but see Bacolod-Murcia Co. vs. Court of Appeals, 182 SCRA 24)such as in the sale of real property (see Art.1592, Civil Code) and, in general, in an optionto terminate or rescind a contract upon the vio-lation of a resolutory facultative condition(Consing vs. Jamandre, 64 SCRA 1; De la RamaSteamship Co. vs. Tan, 99 Phil. 1034; Angelesvs. Calasanz, 135 SCRA 323; Ponce Enrile vs.Court of Tax Appeals, 29 SCRA 504).

Notice of resolution, however, must be given to theother party when the right is exercised (Banez vs. Courtof Appeals, 59 SCRA 15; Palay, Inc. vs. Clave, 124 SCRA638). But whether the extrajudicial remedy is granted bylaw or by agreement, its exercise may be subject to judi-cial scrutiny at the instance of the other party (see Conso-lidated Plywood Industries vs. IFC Leasing, 149 SCRA448; University of the Philippines vs. De los Angeles, 35SCRA 102). Similarly, resort to courts may be necessarywhen the right involves the retaking of property which isnot voluntarily surrendered by the other party, this rulebeing predicated on the thesis that no one should takethe law into his own hands (see Zulueta vs. Mariano, 111SCRA 206).

Judicial Remedies

The judicial remedies may be grouped into —

(1) Principal Remedies

a. Action for specific performance in obligations togive specific things (Arts. 1165 and 1167, CivilCode), substitute performance in an obligation


24 CIVIL LAW

to do (since the obligor cannot be compelled tohimself perform the undertaking) or to delivergeneric things (Art. 1165, Civil Code), or equi-valent performance for damages (Arts. 1168 and1170, Civil Code); or

b. Rescission (resolution) of a reciprocal obligation(Boysaw vs. Interphil Promotions, supra.) unlessthere is a just cause to fix a period (see Univer-sal Corporation vs. Court of Appeals, 33 SCRA1). In reciprocal obligations, the obligation orpromise of each party is the consideration forthat of the other and until one has done or isready to do his part the other incurs no default(Central Bank vs. Court of Appeals, 139 SCRA46).

These remedies are not cumulative but alternative(Osario vs. Bennet, 41 Phil. 301; see Rose Packing Com-pany, Inc. vs. Court of Appeals, supra.; Bacordo vs.Alcantara, 14 SCRA 730). If, however, fulfillment becomesimpossible, the injured party may still seek rescissioneven after he has chosen specific performance (Ayson-Simon vs. Adamos, 131 SCRA 439). The court shall de-cree rescission where fulfillment is prohibited by lawfulauthority (see Central Bank vs. Court of Appeals, supra).The right to rescind is not absolute; rescission of a con-tract will not be permitted for a slight or casual breach,but only for such substantial and fundamental breach aswould defeat the very object of the parties in making theagreement (Ocampo vs. Co, 52 SCAD 610, 233 SCRA 551;Laforteza vs. Machuca, 127 SCAD 798, 333 SCRA 643).The court may instead grant a period (Gaboya vs. Cui, 38SCRA 85; Angeles vs. Calasanz, 135 SCRA 323). Withouta just cause, however, there would be no reason to fix aperiod (Roman vs. Court of Appeals, 137 SCRA 563; seeArticle 1191, Civil Code). Until the obligation is resolved,the parties are obligated to perform under the old termsof their reciprocal obligations (Delta Motors Corporationvs. Genuino, 170 SCRA 29).

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Article 1191 of the Civil Code contemplates judicialaction, and a court decree is the only operative act thatcan result in the resolution of the obligation (Ocejo vs.International Banking Corp., 37 Phil. 631; Republic vs.Hospital de San Juan de Dios, 84 Phil. 820; Tan vs. Courtof Appeals, 175 SCRA 656). Thus, a seller cannot unilat-erally and extrajudicially rescind a contract of sale wherethere is no express stipulation to that effect (Laforteza vs.Machuca, 333 SCRA 643; Co vs. Court of Appeals, 312SCRA 528). In a contract containing a resolutory faculta-tive condition to rescind in the event of breach, judicialrecourse would be unnecessary although the act of can-cellation, which must be known to the other party, couldlater be subject to judicial scrutiny and review (see Ange-les vs. Calasanz, supra.; Cruz vs. Intermediate AppellateCourt, 180 SCRA 703; see also discussion on Extrajudi-cial Remedies, supra.). The object of judicial review incontracts providing for automatic revocation in case ofviolation of the terms thereof is not to obtain a courtdeclaration rescinding a contract which is already deemedrescinded by virtue of an agreement, but to determinewhether or not the rescission has been proper. Wheresuch propriety is sustained, the court decision will bemerely declaratory of revocation and is not itself to bedeemed the revocatory act (Spouses Pangilinan vs. Courtof Appeals, 87 SCAD 468, 279 SCRA 590).

An interesting ruling case was that of Central Bankof the Philippines vs. Court of Appeals (supra.). In April of1965, Island Savings Bank had approved the loan appli-cation of P80,000 of Sulpicio M. Tolentino who correspond-ingly executed a real estate mortgage over his 100-hec-tare land. In May of 1965, the bank released only P17,000payable within three years at semi-annual installments.The bank failed to make further releases until the Cen-tral Bank prohibited it from making new loans and in-vestments and ultimately prohibited it from doing busi-ness. The acting superintendent of banks was put incharge of the bank. In 1968, the bank, in view of the non-payment of the P17,000 released amount, filed an appli-


26 CIVIL LAW

cation for the extrajudicial foreclosure of the mortgage.Tolentino filed a petition for injunction, specific perform-ance or rescission and damages. The case reached theSupreme Court, which held:

“Since Island Savings Bank was in default infulfilling its reciprocal obligation under their loanagreement, Sulpicio M. Tolentino, under Article 1191of the Civil Code, may choose between specific per-formance or rescission with damages in either cases.But since Island Savings Bank is now prohibitedfrom doing business by Monetary Board ResolutionNo. 967, WE cannot grant specific performance infavor of Sulpicio M. Tolentino.

Rescission is the only alternative remedy left.WE rule, however, that rescission is only for theP63,000 balance of the P80,000 loan, because thebank is in default only insofar as such amount isconcerned , as there is no doubt that the bank failedto give P63,000. x x x”

The general provisions of Article 1191 are inapplica-ble if what might be thought to be reciprocal obligationsare really separate and distinct obligations (see Songcuanvs. Intermediate Appellate Court, 191 SCRA 28) or wherespecific remedies are provided for in certain juridical re-lations such as Article 1786 and Article 1788 on partner-ships (Sancho vs. Lizarrage, 55 Phil. 601). The remedieson a secured debt have been held to be either an action tocollect or to foreclose (Caltex vs. Intermediate AppellateCourt, 176 SCRA 741). In the Margarita Suria case (Suriavs. Intermediate Appellate Court, 151 SCRA 661), theSupreme Court, denying the resolution of an obligationsecured by a mortgage, has ruled that foreclosure shouldbe the proper remedy. It might be submitted, however,that the remedies for the breach of an obligation are notnecessarily lost by the availability of accessory undertak-ings which are not themselves constitutive nor in thenature of alternative obligations.

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(2) Subsidiary Remedies (where the principal remediesare unavailable or ineffective)

a. Accion subrogatoria (subrogatory action) — anaction against the debtor’s debtor (see Art. 1177,Civil Code, supra.), although, exceptionally, thelaw permits a direct action against the lattersuch as in actions by workers against the ownerin contracts for a piece of work (Art. 1729, CivilCode), and by the principal against the sub-agent (Art. 1893, Civil Code).

b. Accion pauliana (rescissory action) — an actionto rescind contracts entered into by the debtorin fraud of creditors (Arts. 1177 and 1381, CivilCode).

(3) Ancillary Remedies

Remedial law or procedural rules provide cer-tain remedies, such as attachments, replevin,garnishment, receivership, examination of the debtorand similar other remedies, in order to secure theintegrity of final judgments.

Chapter 3

Different Kinds of Obligations

The Civil Code classifies obligations primarily into(a) pure and conditional (Arts. 1179-1192), (b) with a pe-riod (Arts. 1193-1198), (c) alternative (Arts. 1199-1206),(d) joint and solidary (Arts. 1207-1222), (e) divisible andindivisible (Arts. 1223-1225), and (f) with a penal clause(Arts. 1226-1230).

Section 1 — Pure and Conditional Obligations

Art. 1179. Every obligation whose performancedoes not depend upon a future or uncertain event, orupon a past event unknown to the parties, is demand-able at once.

Art. 1179 OBLIGATIONS AND CONTRACTSTitle I. Obligations

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Every obligation which contains a resolutory con-dition shall also be demandable, without prejudice tothe effects of the happening of the event. (1113)

Art. 1180. When the debtor binds himself to paywhen his means permit him to do so, the obligationshall be deemed to be one with a period, subject to theprovisions of Article 1197. (n)

Art. 1181. In conditional obligations, the acquisi-tion of rights, as well as the extinguishment or loss ofthose already acquired, shall depend upon the happen-ing of the event which constitutes the condition. (1114)

Art. 1182. When the fulfillment of the conditiondepends upon the sole will of the debtor, the condi-tional obligation shall be void. If it depends uponchance or upon the will of a third person, the obliga-tion shall take effect in conformity with the provisionsof this Code. (1115)

Art. 1183. Impossible conditions, those contraryto good customs or public policy and those prohibitedby law shall annul the obligation which depends uponthem. If the obligation is divisible, that part thereofwhich is not affected by the impossible or unlawfulcondition shall be valid.

The condition not to do an impossible thing shallbe considered as not having been agreed upon. (1116a)

Art. 1184. The condition that some event happenat a determinate time shall extinguish the obligation assoon as the time expires or if it has become indubita-ble that the event will not take place. (1117)

Art. 1185. The condition that some event will nothappen at a determinate time shall render the obliga-tion effective from the moment the time indicated haselapsed, or if it has become evident that the eventcannot occur.

If no time has been fixed, the condition shall bedeemed fulfilled at such time as may have probablybeen contemplated, bearing in mind the nature of theobligation. (1118)

Arts. 1180-1185

29

Art. 1186. The condition shall be deemed fulfilledwhen the obligor voluntarily prevents its fulfillment.(1119)

Art. 1187. The effects of a conditional obligationto give, once the condition has been fulfilled, shallretroact to the day of the constitution of the obligation.Nevertheless, when the obligation imposes reciprocalprestations upon the parties, the fruits and interestsduring the pendency of the condition shall be deemedto have been mutually compensated. If the obligationis unilateral, the debtor shall appropriate the fruits andinterests received, unless from the nature and circum-stances of the obligation it should be inferred that theintention of the person constituting the same was dif-ferent.

In obligations to do and not to do, the courts shalldetermine, in each case, the retroactive effect of thecondition that has been complied with. (1120)

Art. 1188. The creditor may, before the fulfillmentof the condition, bring the appropriate actions for thepreservation of his right.

The debtor may recover what during the sametime he has paid by mistake in case of a suspensivecondition. (1121a)

Art. 1189. When the conditions have been imposedwith the intention of suspending the efficacy of an ob-ligation to give, the following rules shall be observedin case of the improvement, loss or deterioration ofthe thing during the pendency of the condition:

(1) If the thing is lost without the fault of thedebtor, the obligation shall be extinguished;

(2) If the thing is lost through the fault of thedebtor, he shall be obliged to pay damages; it is under-stood that the thing is lost when it perishes, or goes outof commerce, or disappears in such a way that its exist-ence is unknown or it cannot be recovered;

(3) When the thing deteriorates without the faultof the debtor, the impairment is to be borne by thecreditor;


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(4) If it deteriorates through the fault of thedebtor, the creditor may choose between the rescis-sion of the obligation and its fulfillment, with indem-nity for damages in either case;

(5) If the thing is improved by its nature, or bytime, the improvement shall inure to the benefit of thecreditor;

(6) If it is improved at the expense of the debtor,he shall have no other right than that granted to theusufructuary. (1122)

Art. 1190. When the conditions have for their pur-pose, the extinguishment of an obligation to give, theparties upon the fulfillment of said conditions, shallreturn to each other what they have received.

In case of the loss, deterioration or improvementof the thing, the provisions which, with respect to thedebtor, are laid down in the preceding article shall beapplied to the party who is bound to return.

As for obligations to do and not to do, the provi-sions of the second paragraph of Article 1187 shall beobserved as regards the effect of the extinguishmentof the obligation. (1123)

Art. 1191. The power to rescind obligations is im-plied in reciprocal ones, in case one of the obligorsshould not comply with what is incumbent upon him.

The injured party may choose between thefulfillment and the rescission of the obligation, withthe payment of damages in either case. He may alsoseek rescission, even after he has chosen fulfillment,if the latter should become impossible.

The court shall decree the rescission claimed, un-less there be just cause authorizing the fixing of a pe-riod.

This is understood to be without prejudice to therights of third persons who have acquired the thing, inaccordance with Articles 1385 and 1388 and the Mort-gage Law. (1124)

Arts. 1190-1191

31

Art. 1192. In case both parties have committed abreach of the obligation, the liability of the first infrac-tor shall be equitably tempered by the courts. If it can-not be determined which of the parties first violatedthe contract, the same shall be deemed extinguished,and each shall bear his own damages. (n)

A pure obligation is one whose performance does notdepend upon a condition or a period. A condition is afuture and uncertain event, or a past event unknown tothe parties (the condition being the parties’ later becom-ing aware or coming to know of the past event). A periodor a term is a day certain — that which must necessarilycome — although it may not be known when (see Arts.1173 and 1193, Civil Code). When an obligation is subjectneither to a condition nor to a period, it is demandable atonce (see Art. 1179, Civil Code; Schenker vs. Gemperle, 5SCRA 1042). An obligation which contains a resolutorycondition shall also be demandable, without prejudice tothe effects of the happening of the event (Art. 1179, CivilCode).

In conditional obligations, the acquisition of rights(suspensive), or the extinguishments or loss of those al-ready acquired (resolutory), shall depend upon the hap-pening of the event which constitutes the condition (Art.1181, Civil Code). But when the debtor binds himself topay when his means permit him to do so, the obligationshall be deemed to be one with a period, subject to theprovisions of Article 1197 (Art. 1180, Civil Code), revok-ing the rule under the regime of the old Civil Code (Bergvs. Magdalena Estates, Inc., 92 Phil. 1101).

The condition is suspensive when the acquisition ofrights or demandability of the obligation must await theoccurrence of the condition (People vs. Capule, 65 Phil.582); it is resolutory when the obligation is at once dueand demandable (Art. 1179, Civil Code; Villanueva vs.Girged, 110 Phil. 478) but the right is extinguished orlost upon the fulfillment of the condition (see Art. 1181,


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Civil Code). The non-payment of the purchase price in asale is a resolutory condition, for which the remedy couldeither be specific performance or rescission under Article1191 (Central Bank of the Philippines vs. Bichara, 123SCAD 697, 328 SCRA 807).

The condition that some event happen at a deter-minate time shall extinguish the obligation as soon asthe time expires or if it has become indubitable that theevent will not take place (Art. 1184, Civil Code; see LuzonBrokerage Co., Inc. vs. Maritime Shipping Co., Inc., 46SCRA 381). The condition that some event will not happenat a determinate time shall render the obligation effec-tive the moment the time indicated has elapsed, or if ithas become evident that the event cannot occur. If notime has been fixed, the condition shall be deemed ful-filled at such time as may have probably been contem-plated, bearing in mind the nature of the obligation (Art.1185, Civil Code). The condition shall be deemed fulfilledwhen the obligor voluntarily prevents its fulfillment (Art.1186, Civil Code; Recto vs. Harden, 100 Phil. 427; Philip-pine Long Distance Telephone Co. vs. Jeturan, 97 Phil.981).

Potestative, Casual, and Mixed Conditions

A condition is potestative when its fulfillmentdepends upon the will of the parties; it is casual whenits occurrence depends upon chance or the will of a thirdperson or stranger; and it is mixed when it is partlypotestative and partly casual.

When the fulfillment of the condition depends uponthe sole will of the debtor, the conditional obligation shallbe void. If it depends upon chance or upon the will of athird person, or partly upon chance or will of a thirdperson and partly upon the will of the parties, the obliga-tion shall take effect (see Art. 1182, Civil Code; SmithBell & Co. vs. Motti, 44 Phil. 874; Hermosa vs. Longra, 93Phil. 971; Romero vs. Court of Appeals, G.R. 107207, 23

Arts. 1179-1192

33

November 1995). In a suspensive potestative conditiondependent upon the sole will of the debtor, the wholeobligation becomes void (Trillana vs. Quezon College, Inc.,93 Phil. 393), but not when such condition is resolutory(Art. 1113, Civil Code; Taylor vs. Uy, 43 Phil. 873). InLiebenow vs. Philippine Vegetable Oil Co. (39 Phil. 60), onthe legal effect of a stipulation in an employment con-tract that the employee would be entitled to such amount,in addition to his fixed salary, by way of bonus as theBoard of Directors might see fit to grant, the SupremeCourt held:

“We see no reason to doubt that a promise ofthis character creates a legal obligation binding uponthe promissor, although in its actual results it maynot infrequently prove to be illusory. Such a promiseis not, in our opinion, nugatory, under Article 1115 ofthe Civil Code, as embodying a condition precedentexclusively upon the will of the obligor. Nor can it beheld invalid under Article 1256 of the same Code,which declares that the validity and performance ofa contract cannot be left to the will of one of thecontracting parties. The uncertainty of the amountto be paid by way of bonus is also no obstacle to thevalidity of the contract (Art. 1273, Civil Code), sincethe contract itself specifies the manner in which theamount payable is to be determined, namely, by theexercise of the judgment and discretion of the em-ployer.”

Where the potestative condition is imposed, not onthe birth of the obligation but on its fulfillment, only thecondition must be deemed avoided, leaving unaffectedthe obligation itself (see Osmeña vs. Rama, 14 Phil. 99).Thus, the condition to pay a previously contracted in-debtedness when the debtor decides to sell his house,although itself void as being potestative and exclusivelydependent on his will, does not invalidate the pre-exist-ing obligation itself (see Trillana vs. Quezon College, Inc.,93 Phil. 383). In Tible vs. Aquino (65 SCRA 207), the con-


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dition that payment of a promissory note shall depend onwhether or not the obligor “will operate concession” wassimilarly declared void as being solely dependent on thewill of the debtor but not the obligation under the pro-missory note itself. When such obligation relates to thepayment, not the constitution, of an obligation, it wouldseem preferrable to apply Article 1180, in relation toArticle 1197, instead of Article 1182, of the Code and toconstrue the condition as a period, authorizing therebythe courts to fix it if the parties themselves fail to do so.In Patente vs. Omega (93 Phil. 218), the Supreme Courthas ruled:

“Article 1115 (now Art. 1180) of the Civil Codeprovides: ‘When the fulfillment of a condition dependsupon the exclusive will of the debtor, the conditionalobligation shall be void.’ It should be void and of noeffect because if the will of the debtor be compliedwith, the collection would be impossible, and theright of the creditor illusory. The condition beingdeclared void, should the obligation be likewise de-clared pure and unconditional? We believe not. If, byinadvertence or ignorance, the parties agree on acondition of payment contrary to law, why, upon theannulment of the condition, should the principalobligation be converted to pure, immediatelydemandable, when the original intention was to grantthe debtor time for payment? To declare the obligationpure is to impose a judgment completely distinctfrom that agreed upon; another term should bedetermined compatible with the law and the will ofthe parties, and it is evident that a new conditionshould not depend solely on the creditor; it is likewiseunjust to leave it to the exclusive will of the debtor,as to leave it to the sole discretion of the creditor.The Court should determine the period taking intoconsideration the circumstances under which the loanwas granted (Art. 1128 now Art. 1197). Therefore, weconclude that when the period of payment in an obli-

Arts. 1179-1192

35

gation is left to the exclusive will of the debtor, saidcondition should be annulled; but its annulment doesnot convert the obligation into simple or uncondi-tional; and the remedy of the creditor in such case isto ask the Court to fix the period of payment. As theplaintiff claims payment of an obligation withoutfirst having obtained from the Court an order to fixthe period of payment, the filing of the complaint ispremature.”

Impossible Conditions

Impossible conditions, those contrary to good cus-toms or public policy, and those prohibited by law shallannul the obligation which depends upon them. If theobligation is divisible, that part thereof which is not af-fected by the impossible or unlawful condition shall bevalid. The condition not to do an impossible thing shall beconsidered as not having been agreed upon (Art. 1183,Civil Code; Litton vs. Luzon Surety Co., Inc., 90 Phil.783). In the law on donations, and so in testamentarysuccession as well, such conditions are simply disregardedand considered not imposed (Arts. 727 and 873, CivilCode).

Effects of Conditions

The effects of a conditional obligation to give, oncethe condition has been fulfilled, shall retroact to the dayof the constitution of the obligation but not as to suchfruits and interests meanwhile accruing. The fruits andinterests during the pendency of the condition shall bedeemed to have been mutually compensated when theobligation imposes reciprocal prestations upon the par-ties. If the obligation is unilateral, the debtor shall ap-propriate the fruits and interests received, unless fromthe nature and circumstances of the obligation it shouldbe inferred that the intention of the person constitutingthe same was different (see Art. 1187, Civil Code). Inobligations to do and not to do, the courts shall determine


36 CIVIL LAW

in each case the retroactive effect of the condition thathas been complied with (Art. 1187, Civil Code; see PLDTvs. Jeturian, 97 Phil. 981).

The creditor may, before the fulfillment of the condi-tion, bring the appropriate actions for the preservation ofhis right. The debtor may recover that which during thesame time he had paid by mistake in case of a suspensivecondition (Art. 1188, Civil Code).

When the conditions have been imposed with theintention of suspending the efficacy of an obligation togive, the following rules shall be observed in case of theimprovement, loss or deterioration of the thing duringthe pendency of the condition:

(1) If the thing is lost without the fault of the debtor,the obligation shall be extinguished;

(2) If the thing is lost through the fault of the debtor,he shall be obliged to pay damages; it is under-stood that the thing is lost when it perishes, orgoes out of commerce, or disappears in such away that its existence is unknown or it cannotbe recovered;

(3) When the thing deteriorates without the faultof the debtor, the impairment is to be borne bythe creditor;

(4) If it deteriorates through the fault of the debtor,the creditor may choose between the rescissionof the obligation and its fulfillment withindemnity for damages in either case;

(5) If the thing is improved by its nature, or bytime, the improvement shall inure to the benefitof the creditor;

(6) If it is improved at the expense of the debtor, heshall have no other right than that granted tothe usufructuary (Art. 1189, Civil Code; seeLaureta vs. Mata, 44 Phil. 668).

Arts. 1179-1192

37

When the conditions have for their purpose the ex-tinguishment of an obligation to give, the parties, uponthe fulfillment of said conditions, shall return to eachother what they have received. In case of the loss, dete-rioration or improvement of the thing, the provisionswhich, with respect to the debtor, are laid down in Article1189 (supra.), shall be applied to the party who is boundto return. As for obligations to do and not to do, theprovisions of the second paragraph of Article 1187 (su-pra.) shall be observed as regards the effect of theextinguishments of the obligation (Art. 1190, Civil Code).

In reciprocal obligations, the power to rescind is im-plied in case one of the obligors should not comply withwhat is incumbent upon him and the other is ready, thetwo parties being obligors and obligees of each other. Theinjured party may choose between the fulfillment and therescission of the obligation, with the payment of damagesin either case. These remedies are alternative, not cumu-lative (Ramirez vs. Court of Appeals, 98 Phil. 225), butrescission may still be sought even after fulfillment ischosen if, and within four years after, the latter shouldbecome impossible (Matute vs. Cheong, 37 Phil. 372; Ayson-Simon vs. Adamos, 131 SCRA 439). The court shall de-cree the rescission claimed, unless there be just causeauthorizing the fixing of a period such as when the breachis not “so substantial and fundamental as to defeat theobject of the parties in making the agreement” (Banahaw,Inc. vs. Dejarme, 55 Phil. 338, cited in Gaboya vs. Cui, 38SCRA 85; see also Angeles vs. Calasanz, supra.). In anycase, these remedies are without prejudice to the rightsof third persons (see Art. 1191, Civil Code).

The breach contemplated in Article 1191 of the CivilCode is the obligor’s failure to comply with an obligationalready extant, not a failure of a condition to render bind-ing that obligation (Padilla vs. Court of Appeals, 328SCRA 434; Ong vs. Court of Appeals, 310 SCRA 1; Odys-sey Park vs. Court of Appeals, 87 SCAD 735, 280 SCRA


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253). In a contract to sell real property on installments,the full payment of the purchase price is a positivesuspensive condition, the failure of which is not consid-ered a breach, casual or serious, but simply an eventwhich prevents the obligation of the vendor to conveytitle from acquiring any obligatory force. It is an oft-repeated rule that there can be no rescission of an obliga-tion that is still non-existent, such as when the suspensivecondition has yet to happen (Rillo vs. Court of Appeals,83 SCAD 905, 274 SCRA 461).

The liability of the first infractor shall be equitablytempered by the courts in case both parties have commit-ted a breach of the obligation. If it cannot be determinedwhich of the parties first violated the contract, the sameshall be deemed extinguished, and each shall bear hisown damages (Art. 1192, Civil Code; see Camus vs. Price,Inc., 5 SCRA 581).

While damages may be assessed in favor of the preju-diced party, only those kinds of damages consistent withthe remedy of rescission may be granted, keeping in mindthat had the parties opted for specific performance, otherkinds of damages would have been called for which areabsolutely distinct from those kinds of damages accruingby reason of rescission (Asuncion vs. Evangelista, 114SCAD 384, 316 SCRA 848).

Section 2 — Obligations with a Period

Art. 1193. Obligations for whose fulfillment a daycertain has been fixed, shall be demandable only whenthat day comes.

Obligations with a resolutory period take effect atonce, but terminate upon arrival of the day certain.

A day certain is understood to be that which mustnecessarily come, although it may not be known when.

If the uncertainty consists in whether the day willcome or not, the obligation is deemed conditional, and

Art. 1193

39

it shall be regulated by the rules of the preceding Sec-tion. (1125a)

Art. 1194. In case of loss, deterioration or improve-ment of the thing before the arrival of the day certain,the rules in Article 1189 shall be observed. (n)

Art. 1195. Anything paid or delivered before thearrival of the period, the obligor being unaware of theperiod or believing that the obligation has become dueand demandable, may be recovered, with the fruits andinterests. (1126a)

Art. 1196. Whenever in an obligation a period isdesignated, it is presumed to have been established forthe benefit of both the creditor and the debtor, unlessfrom the tenor of the same or other circumstances itshould appear that the period has been established infavor of one or of the other. (1127)

Art. 1197. If the obligation does not fix a period,but from its nature and the circumstances it can beinferred that a period was intended, the courts may fixthe duration thereof.

The courts shall also fix the duration of the pe-riod when it depends upon the will of the debtor.

In every case, the courts shall determine such pe-riod as may under the circumstances have been prob-ably contemplated by the parties. Once fixed by thecourts, the period cannot be changed by them. (1128a)

Art. 1198. The debtor shall lose every right to makeuse of the period:

(1) When after the obligation has been con-tracted, he becomes insolvent, unless he gives a guar-anty or security for the debt;

(2) When he does not furnish to the creditor theguaranties or securities which he has promised;

(3) When by his own acts he has impaired saidguaranties or securities after their establishment, andwhen through a fortuitous event they disappear, unlesshe immediately gives new ones equally satisfactory;


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(4) When the debtor violates any undertaking, inconsideration of which the creditor agreed to the pe-riod;

(5) When the debtor attempts to abscond. (1129a)

Obligations subject to a suspensive period or forwhose fulfillment a day certain has been fixed shall bedemandable only when that day comes (ex die). Obliga-tions with a resolutory period take effect at once, butterminate upon arrival of the day certain (in diem). A daycertain is understood to be that which must necessarilycome, although it may not be known when. If the uncer-tainty consists in whether the day will come or not, theobligation is considered conditional and shall be regu-lated by the rules on conditional obligations (see Art.1193, Civil Code; Cf. Caldero vs. Carrion, 107 Phil. 549;Berg vs. Magdalena Estates, Inc., 92 Phil. 110).

In case of loss, deterioration or improvement of thething before the arrival of the day certain, the rules inArticle 1189 (supra.) shall be observed (Art. 1194, CivilCode).

Anything paid or delivered before the arrival of theperiod, the obligor being unaware of the period or believ-ing that the obligation has become due and demandable,may be recovered, with the fruits and interest (Art. 1195,Civil Code). Dr. A. Tolentino and Dr. A. Padilla have ex-pressed the view that the premature payment could begoverned by the rules on solutio indebiti (see Arts. 2159-2160, Civil Code, infra.). Justice E. Caguio has taken theposition that since the obligation is, in fact, owing, al-though not yet demandable, solutio indebiti would beinapplicable. Under Article 1164, the “creditor has a rightto the fruits of the thing from the time the obligation todeliver it arises.” In a conditional obligation, the rights ofthe parties over the fruits is rather explicit (see Art. 1187,Civil Code, supra.); the matter, unfortunately, is not thatdefined in an obligation with a term. It would seem, how-ever, that the obligation to deliver (to give) meant by

Arts. 1193-1198

41

Article 1164 is really when it is constituted, rather thanwhen the delivery can be demanded. Justices JBL Reyesand R. Puno would appear to have this view.

When Courts May Fix Period

If the obligation does not fix a period, but from itsnature and circumstances it can be inferred that a periodhas been intended, the courts may fix the duration thereof.The courts shall also fix the duration of the period whenit depends upon the will of the debtor. The courts shalldetermine in every case such period as may under thecircumstances have been probably contemplated by theparties. Once fixed by the courts, the period cannot bechanged by them (see Art. 1197, Civil Code; GregorioAraneta, Inc. vs. Phil. Sugar Est. Dev., 20 SCRA 330;Gonzales vs. Jose, 66 Phil. 369; Concepcion vs. People, 74Phil. 63; Patente vs. Omega, 93 Phil. 218; Cf. Arts. 1180,1191 [supra.], 1682, 1687, Civil Code), unless by a new ornovatory agreement (see Salvante vs. Cruz, 88 Phil. 236).

In the foregoing cases, no cause of action to demandperformance exists until after the period is fixed, sincebefore that, the obligation is technically not yet due anddemandable (Calero vs. Carrion, L-13246, 30 March 1960).In Borromeo vs. Court of Appeals (47 SCRA 65), the Su-preme Court has implicitly held that the courts may fixsuch period not necessarily in a separate action but con-currently in the judicial demand for performance itselfupon the justification that technicalities should not sub-ordinate practical and substantial justice (see alsoGregorio Araneta, Inc. vs. Philippine Sugar DevelopmentCo., Ltd., 20 SCRA 330; Chavez vs. Gonzales, 32 SCRA547). In Buccat vs. Dispo (160 SCRA 240), the Court hasruled that when a lease is for an indefinite period (i.e.,“as long as the land will serve the purpose for which it isintended as a school site x x x”), the right of action for thefixing of the period (Art. 1197, Civil Code), where thevalidity of the lease is questioned in court, should bereckoned not when the parties entered into the contract


42 CIVIL LAW

but when the decision of the court upholding the validityof the contract is promulgated.

Benefit or Use of the Period

Whenever in an obligation a period is designed, it ispresumed to have been established for the benefit of boththe creditor and the debtor, unless from the tenor of thesame or other circumstances it should appear that theperiod has been established in favor of one or of the other(Art. 1196, Civil Code; see Pastor vs. Gaspar, 2 Phil. 392;Sarmiento vs. Villasenor, 43 Phil. 880; Abesamis vs.Woodcraft, Ltd., 30 SCRA 372). Thus, neither may thecreditor demand nor the debtor tender the performanceof the obligation before the arrival of the period, unlessthe contrary intention appears such as when the pay-ment is to be made “on or before” a certain period whichwould indicate its being for the debtor’s benefit.

Fortuitous event has been held to relieve the obligorfrom fulfilling his obligation during the time that theevent prevents due compliance; the duration thereof, how-ever, does not correspondingly extend the term or periodof the obligation (see Victoria Planters vs. Victorias Mill-ing, 97 Phil. 318).

The debtor shall lose every right to make use of theperiod: (1) when he becomes insolvent after the obliga-tion has been contracted, unless he gives a guaranty orsecurity for the debt; (2) when he does not furnish to thecreditor the guaranties or securities which he has prom-ised; (3) when by his own acts he has impaired saidguaranties or securities after their establishment, andwhen through fortuitous event they disappear, unless heimmediately gives new ones equally satisfactory; (4) whenthe debtor violates any undertaking, in consideration ofwhich the creditor agreed to the period; and (5) when thedebtor attempts to abscond (Art. 1198, Civil Code; seeVisayan Distributors, Inc. vs. Flores, 92 Phil. 145; DaguhoyEnt. vs. Ponce, 96 Phil. 15; Song Fo & Co., vs. Oria, 33Phil. 3; Recto vs. Harden, 100 Phil. 427).

Arts. 1193-1198

43

Grace Period

A grace period is a right, not an obligation, of thedebtor. When unconditionally conferred, the grace periodis effective without further need of demand either callingfor the payment of the obligation or for honoring theright. The grace period must not be likened to an obliga-tion the non-payment of which, under Article 1169 of theCivil Code, would generally still require judicial or extra-judicial demand before “default’’ can be said to arise. Thoseobliged to deliver or to do something incur in delay fromthe time the obligee judicially or extrajudicially demandsfrom them the fulfillment of their obligation. The de-mand by the creditor, however, shall not be necessary inorder that delay may exist: (1) When the obligation or thelaw expressly so declares; or (2) When from the natureand the circumstances of the obligation it appears thatthe designation of the time when the thing is to be deliv-ered or the service is to be rendered was a controllingmotive for the establishment of the contract; or (3) Whendemand would be useless, as when the obligor has ren-dered it beyond his power to perform. In reciprocal obli-gations, neither party incurs in delay if the other doesnot comply or is not ready to comply in a proper mannerwith what is incumbent upon him. From the moment oneof the parties fulfills his obligation, delay by the otherbegins (Bricktown Development Corp. [its new corporatename Multinational Realty Development Corporation] andMariano Z. Veralde vs. Amor Tierra Development Corp.and the Court of Appeals, G.R. No. 112182, 12 December1994, 239 SCRA 126).

Section 3 — Alternative Obligations

Art. 1199. A person alternatively bound by differ-ent prestations shall completely perform one of them.

The creditor cannot be compelled to receive partof one and part of the other undertaking. (1131)

Art. 1200. The right of choice belongs to the debtor,unless it has been expressly granted to the creditor.


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The debtor shall have no right to choose thoseprestations which are impossible, unlawful or whichcould not have been the object of the obligation. (1132)

Art. 1201. The choice shall produce no effect ex-cept from the time it has been communicated. (1133)

Art. 1202. The debtor shall lose the right of choicewhen among the prestations whereby he is alterna-tively bound, only one is practicable. (1134)

Art. 1203. If through the creditor’s acts the debtorcannot make a choice according to the terms of theobligation, the latter may rescind the contract with dam-ages. (n)

Art. 1204. The creditor shall have a right to in-demnity for damages when, through the fault of thedebtor, all the things which are alternatively the objectof the obligation have been lost, or the compliance ofthe obligation has become impossible.

The indemnity shall be fixed taking as a basis thevalue of the last thing which disappeared, or that ofthe service which last became impossible.

Damages other than the value of the last thing orservice may also be awarded. (1135a)

Art. 1205. When the choice has been expresslygiven to the creditor, the obligation shall cease to bealternative from the day when the selection has beencommunicated to the debtor.

Until then the responsibility of the debtor shall begoverned by the following rules:

(1) If one of the things is lost through a fortui-tous event, he shall perform the obligation by deliver-ing that which the creditor should choose from amongthe remainder, or that which remains if only one sub-sists;

(2) If the loss of one of the things occurs throughthe fault of the debtor, the creditor may claim any ofthose subsisting, or the price of that which, throughthe fault of the former, has disappeared, with a right todamages;

Arts. 1201-1205

45

(3) If all the things are lost through the fault ofthe debtor, the choice by the creditor shall fall uponthe price of any one of them, also with indemnity fordamages.

The same rules shall be applied to obligations todo or not to do in case one, some or all of theprestations should become impossible. (1136a)

Art. 1206. When only one prestation has beenagreed upon, but the obligor may render another insubstitution, the obligation is called facultative.

The loss or deterioration of the thing intended asa substitute, through the negligence of the obligor, doesnot render him liable. But once the substitution hasbeen made, the obligor is liable for the loss of thesubstitute on account of his delay, negligence or fraud.(n)

There may be one or several objects or prestations inan obligation; where there are two or more, the prestationsmay be conjunctive, in which case both or all must becomplied with; alternative, in which case the obligor shallcompletely perform one of the alternatives (Art. 1199,Civil Code); and facultative, in which case one prestationis due but the obligor may render another in substitution(Art. 1206, Civil Code).

Alternative Prestations at Debtor’s Choice

In alternative obligations, the right of choice belongsto the debtor, unless it has been expressly granted to thecreditor (Art. 1200, Civil Code). The creditor may not becompelled to receive part of one and part of the otherundertaking (Art. 1199, Civil Code). When the debtor hasthe right of choice, he cannot choose those prestationswhich are impossible, unlawful or which could not havebeen the object of the obligation (see Art. 1200, CivilCode). The choice shall produce no effect except from thetime it has been communicated (Art. 1201, Civil Code),and it is binding once made (Reyes vs. Martinez, 55 Phil.


46 CIVIL LAW

492). The debtor shall lose the right of choice when amongthe prestations, whereby he is immediately bound, onlyone is practicable (Art. 1202, Civil Code). If through thecreditor’s acts the debtor cannot make a choice accordingto the terms of the obligation, the latter may rescind thecontract with damages (Art. 1203, Civil Code).

The creditor shall have a right to indemnity for dam-ages when, through the fault of the debtor, all the thingswhich are alternatively the object of the obligation havebeen lost, or the compliance of the obligation has becomeimpossible. The indemnity shall be fixed, taking as abasis the value of the last thing which disappeared orthat of the service which last becomes impossible. Dam-ages other than the value of the last thing or service mayalso be awarded (Art. 1204, Civil Code). It is logical thatthe law points to the last thing or the service which lastbecame impossible since until the choice is made by thedebtor, the risks and benefits on the different objects ofthe obligation, except the one that is finally and properlychosen (the effect of which choice retroacts to the date ofthe constitution of the obligation) or last to disappear orto become impossible, as the case may be, would solely befor the debtor’s account.

Alternative Obligations at Creditor’s Choice

When the choice has been expressly given to thecreditor, the obligation shall cease to be alternative fromthe day when the selection has been communicated to thedebtor. Until then, the responsibility of the debtor shallbe governed by the following rules:

(1) If one of the things is lost through a fortuitousevent, he shall perform the obligation by deliv-ering that which the creditor should choose fromamong the remainder, or that which remains ifonly one subsists;

(2) If the loss of one of the things occurs throughthe fault of the debtor, the creditor may claim

Arts. 1199-1206

47

any of those subsisting, or the price of thatwhich, through the fault of the former, has dis-appeared, with a right to damages;

(3) If all the things are lost through the fault of thedebtor, the choice by the creditor shall fall uponthe price of any one of them, also with indem-nity for damages;

(4) If all the things are lost through a fortuitousevent, the obligation is extinguished subject tothe exceptional cases when the obligor rendershimself liable even for a fortuitous event.

The same rules shall be applied to obligations to door not to do in case one, some, or all of the prestationsshould become impossible (Art. 1205, Civil Code).

In ordinary alternative obligations, a mere choicecategorically and unequivocally made and then commu-nicated by the person entitled to exercise the option con-cludes the parties. The creditor may not thereafter exer-cise any other option, unless the chosen alternative provesto be ineffectual or unavailing due to no fault on his part.This rule, in essence, is the difference between alterna-tive obligations, on the one hand, and alternative rem-edies, upon the other hand, where, in the latter case, thechoice generally becomes conclusive only upon the exer-cise of the remedy. For instance, in one of the remediesexpressed in Article 1484 of the Civil Code, it is onlywhen there has been a foreclosure of the chattel mort-gage that the vendee-mortgagor would be permitted toescape from a deficiency liability. Thus, if the case is onefor specific performance, even when this action is se-lected after the vendee has refused to surrender the mort-gaged property to permit an extrajudicial foreclosure, thatproperty may still be levied on execution and an aliaswrit may be issued if the proceeds thereof are insufficientto satisfy the judgment credit. So, also, a mere demand tosurrender the object which is not heeded by the mortga-gor will not amount to a foreclosure, but the repossession


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thereof by the vendor-mortgagee would have the effect offoreclosure (Daniel L. Borbon II and Francisco L. Borbonvs. Servicewide Specialists, Inc. and Hon. Court of Ap-peals, G.R. No. 106418, 11 July 1996, 258 SCRA 634).

Facultative Obligations

When only one prestation has been agreed upon, butthe obligor may render another in substitution, the obli-gation is called facultative. The loss or deterioration ofthe thing intended as a substitute, through the negli-gence of the obligor, does not render him liable. But oncethe substitution has been made, the obligor is liable forthe loss of the substitute on account of his delay, negli-gence or fraud (Art. 1205, Civil Code; Quizana vs.Redugerio, 94 Phil. 218). Unless and until the debtor(with whom the option always lies) makes the substitu-tion by communicating that decision to the creditor, thereis but one prestation (the principal), in legal contempla-tion, and the loss, deterioration or improvement of thesubstitute would have no bearing on the rights and obliga-tions of the parties. Conversely, once substitution is made,anything that may thenceforth affect the principal (origi-nal) prestation would be of no legal consequence to theobligation.

Section 4 — Joint and Solidary Obligations

Art. 1207. The concurrence of two or more credi-tors or of two or more debtors in one and the sameobligation does not imply that each one of the formerhas a right to demand, or that each of the latter isbound to render, entire compliance with the prestations.There is a solidary liability only when the obligationexpressly so states, or when the law or the nature ofthe obligation requires solidarity. (1137a)

Art. 1208. If from the law, or the nature or thewording of the obligations to which the preceding arti-cle refers the contrary does not appear, the credit ordebt shall be presumed to be divided into as many

Arts. 1207-1208

49

equal shares as there are creditors or debtors, the cred-its or debts being considered distinct from one an-other, subject to the Rules of Court governing the mul-tiplicity of suits. (1138a)

Art. 1209. If the division is impossible, the right ofthe creditors may be prejudiced only by their collectiveacts, and the debt can be enforced only by proceedingagainst all the debtors. If one of the latter should beinsolvent, the others shall not be liable for his share.(1139)

Art. 1210. The indivisibility of an obligation doesnot necessarily give rise to solidarity. Nor does soli-darity of itself imply indivisibility.

Art. 1211. Solidarity may exist although the credi-tors and the debtors may not be bound in the samemanner and by the same periods and conditions. (1140)

Art. 1212. Each one of the solidary creditors maydo whatever may be useful to the others, but not any-thing which may be prejudicial to the latter. (1141a)

Art. 1213. A solidary creditor cannot assign hisrights without the consent of the others. (n)

Art. 1214. The debtor may pay any one of thesolidary creditors; but if any demand, judicial or extra-judicial, has been made by one of them, payment shouldbe made to him. (1142a)

Art. 1215. Novation, compensation, confusion orremission of the debt, made by any of the solidarycreditors or with any of the solidary debtors, shall ex-tinguish the obligation, without prejudice to the provi-sions of Article 1219.

The creditor who may have executed any of theseacts, as well as he who collects the debt, shall beliable to the others for the share in the obligation cor-responding to them. (1143)

Art. 1216. The creditor may proceed against anyone of the solidary debtors or some or all of themsimultaneously. The demand made against one of themshall not be an obstacle to those which may subse-


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quently be directed against the others, so long as thedebt has not been fully collected. (1144a)

Art. 1217. Payment made by one of the solidarydebtors extinguishes the obligation. If two or moresolidary debtors offer to pay, the creditor may choosewhich 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 thepayment is made before the debt is due, no interest forthe intervening period may be demanded.

When one of the solidary debtors cannot, becauseof his insolvency, reimburse his share to the debtorpaying the obligation, such share shall be borne by allhis co-debtors, in proportion to the debt of each. (1145a)

Art. 1218. Payment by a solidary debtor shall notentitle him to reimbursement from his co-debtors ifsuch payment is made after the obligation has pre-scribed or become illegal. (n)

Art. 1219. The remission made by the creditor ofthe share which affects one of the solidary debtorsdoes not release the latter from his responsibility to-wards the co-debtors, in case the debt had been totallypaid by anyone of them before the remission was ef-fected. (1146a)

Art. 1220. The remission of the whole obligation,obtained by one of the solidary debtors, does not enti-tle him to reimbursement from his co-debtors. (n)

Art. 1221. If the thing has been lost or if theprestation has become impossible without the fault ofthe solidary debtors, the obligation shall be extin-guished.

If there was fault on the part of any one of them, allshall be responsible to the creditor, for the price andthe payment of damages and interest, without prejudiceto their action against the guilty or negligent debtor.

If through a fortuitous event, the thing is lost orthe performance has become impossible after one of

Arts. 1217-1221

51

the solidary debtors has incurred in delay through thejudicial or extrajudicial demand upon him by the credi-tor, the provisions of the preceding paragraph shallapply. (1147a)

Art. 1222. A solidary debtor may, in actions filedby the creditor, avail himself of all defenses which arederived from the nature of the obligation and of thosewhich are personal to him, or pertain to his own share.With respect to those which personally belong to theothers, he may avail himself thereof only as regardsthat part of the debt for which the latter are responsi-ble. (1148a)

The plurality of subjects, whether it exists amongthe active (creditors) or the passive (debtors) subjects orboth, may result in joint or solidary obligations. A solidaryobligation (mancomunidad solidaria, in solidum, or “jointand several”) arises when each of the creditors has aright to demand, or that each of the debtors is bound torender, entire compliance with the prestation (see Art.1207, Civil Code). In a joint obligation (mancomunidadsimple, or pro rata), however, the credit or debt is deemeddivided into as many equal shares as there are creditorsor debtors to each other, each resulting credit or debtbeing considered distinct from one another (see Art. 1208,Civil Code).

Solidarity is not presumed (World Wide Insurance &Surety vs. Jose, 96 Phil. 45); solidary obligations existonly if (a) expressed by law, such as the liability of jointtort-feasors under Article 1294, the civil liability of co-perpetrators of felonies under Article 112 of the RevisedPenal Code and the liability of two or more promissors innegotiable instruments who use “I” instead of “We” inexpressing their “promise” under Section 17 of the Nego-tiable Instruments Law (see also Arts. 1824, 1911, 1915,1945, 1946 and 2157, Civil Code); (b) stipulated by theparties, such as by using “solidary,” “individually andcollectively,” “joint and several,” “individual and joint” orequivalent terms or statements that would denote any


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one of the obligor’s liability to perform the whole obliga-tion (see Ronquillo vs. Court of Appeals, 132 SCRA 274);or (c) when the nature of the obligation calls for solidar-ity by its very essence (Art. 1208, Civil Code). The indivi-sibility of an obligation does not necessarily give rise tosolidarity. Nor does not solidarity of itself imply indivis-ibility (Art. 1210, Civil Code). But solidarity may existamong creditors (active solidarity) and/or among debtors(passive solidarity).

Illustrative Application

A, B, and C owe P9,000 to X, Y and Z. Who candemand up to how much and against whom the paymentof the obligation?

(1) If A, B, and C are joint debtors and X, Y, and Zare likewise joint creditors, X, Y, and Z may each demandP1,000 only from each debtor; hence, X may demandP1,000 from A, P1,000 from B and P1,000 from C; Y maydemand P1,000 from A, P1,000 from B and P1,000 fromC; and Z may demand P1,000 from A, P1,000 from B, andP1,000 from C (Romulo vs. Desalla, 108 Phil. 346).

If the obligation is indivisible, like an obligation todeliver a horse, then the demand can be made, and thecompliance shall be met, only by their collective acts;hence, X, Y, and Z, acting collectively, may demand thedelivery of the horse from A, B, and C, collectively (seeArt. 1209).

The inability or failure of a debtor to comply withthe obligation converts the indivisible prestation to oneof indemnity for damages; the debtors who may havebeen ready to fulfill the prestation are liable only to theextent of their corresponding portion of the price of thething or value of the service in which the obligation con-sists (see Art. 1224, Civil Code).

(2) If A, B, and C are solidary debtors and X, Y, andZ are solidary creditors, any one, any two or all of the

Arts. 1207-1222

53

creditors X, Y, and Z may demand the entire sum of P9,000from any one, any two, or all of the debtors A, B, and C(see Art. 1216, Civil Code; see also Imperial InsuranceInc. vs. David, 133 SCRA 317 and PNB vs. IndependentPlanters Assn., 122 SCRA 113).

Payment to one of the solidary creditors made byone of the solidary debtors extinguishes the obligation. Iftwo or more solidary debtors offer to pay, the creditor towhom the offers are made may choose which offer toaccept (see Article 1217, Civil Code; Camus vs. Court ofAppeals, 107 Phil. 4).

While the debtor may pay any one of the solidarycreditors, if any demand, judicial or extrajudicial, hasbeen made by one of them, however, payment should bemade to him (see Art. 1214, Civil Code).

The same rules apply if the obligation is indivisible,e.g., to deliver a horse; in this case, the default of one ofthe solidary debtors renders all of them liable as far asthe creditors are concerned, although among the debtorsthemselves, the non-defaulting debtors may proceedagainst the defaulting debtor.

(3) If A, B, and C are joint debtors and X, Y, and Zare solidary creditors, any one, any two or all of the credi-tors may demand P3,000 only from each of the joint debt-ors, i.e., P3,000 from A, P3,000 from B, and P3,000 fromC.

If the prestation is indivisible, the demand by any,some or all of the creditors must be made against A, B,and C, collectively. Art. 1224 would be applicable whereone or some but not all are not ready to fulfill the obliga-tion.

(4) If A, B, and C are solidary debtors and X, Y, andZ are joint creditors, each of the creditors may only de-mand P3,000 each from any one, any two or all of thedebtors; hence, X may demand P3,000 from any one, anytwo or all three of the debtors A, B, and C; Y and Z may


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proceed on their respective shares of P3,000 against anyone, any two or all three of the debtors.

Additional Rules on Solidary Obligations

A solidary creditor cannot assign his rights withoutthe consent of the other solidary creditors (Art. 1123,Civil Code). Each one of the solidary creditors may dowhatever may be useful to the others, but not anythingwhich may be prejudicial to the latter (Art. 1212, CivilCode). This provision is intended primarily for the solidarycreditors among themselves and not as far as such ac-tions might affect the debtors.

Novation, compensation, confusion or remission ofthe debt, made by any of the solidary creditors or withany of the solidary debtors on grounds not personal to thelatter (see Universal Motors Corporation vs. Court of Ap-peals, 205 SCRA 448), shall extinguish the obligation,without prejudice to the provisions of Article 1219 (in-fra.). The creditor who may have executed any of theseacts, as well as he who collects the debt, shall be liable tothe others for the share in the obligation correspondingto them (Art. 1215, Civil Code). The remission made bythe creditor of the share which affects one of the solidarydebtors does not release the latter from his responsibilitytowards the co-debtors, in case the debt had been totallypaid by anyone of them before the remission was effected(Art. 1219, Civil Code). The remission of the whole obli-gation, obtained by one of the solidary debtors, does notentitle him to reimbursement from his co-debtors (Art.1220, Civil Code).

He who makes the payment may claim from his co-debtors only the share which corresponds to each, withthe interest for the payment already made. If the pay-ment is made before the debt is due, no interest for theintervening period may be demanded. When one of thesolidary debtors cannot, because of his insolvency, reim-burse his share to the debtor paying the obligation, such

Arts. 1207-1222

55

share shall be borne by all his co-debtors, in proportion tothe debt of each (Art. 1217, Civil Code). Payment by asolidary debtor shall not entitle him to reimbursementfrom his co-debtors if such payment is made after theobligation has prescribed or become illegal (Art. 1218,Civil Code).

If the thing has been lost or if the prestation hasbecome impossible without the fault of the solidary debt-ors, the obligation shall be extinguished. If there wasfault on the part of any one of them, all shall be responsi-ble to the creditor for the price and payment of damagesand interest, without prejudice to their action againstthe guilty or negligent debtor. If through a fortuitousevent, the thing is lost or the performance has becomeimpossible after one of the solidary debtors has incurredin delay through the judicial or extrajudicial demandupon him by the creditor, the provisions of the precedingparagraph shall apply (Art. 1221, Civil Code). The ruleapplies only to the debtors among themselves. Insofar asthe creditors are concerned, the default of one solidarydebtor is default by the other solidary debtors.

A solidary debtor may, in actions filed by the credi-tor, avail himself of all defenses which are derived fromthe nature of the obligation and of those which are per-sonal to him, or pertain to his own share. With respect tothose which personally belong to the others, he may availhimself thereof only as regards that part of the debt forwhich the latter are responsible (Art. 1222, Civil Code;see Chinese Chamber of Commerce vs. Pua, 16 Phil. 406;Inchausti vs. Yulo, 34 Phil. 978; Luzon Surety Co. vs.Marbella, 109 Phil. 734).

Section 5 — Divisible and IndivisibleObligations

Art. 1223. The divisibility or indivisibility of thethings that are the object of obligations in which thereis only one debtor and only one creditor does not alter


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or modify the provisions of Chapter 2 of this Title.(1149)

Art. 1224. A joint indivisible obligation gives riseto indemnity for damages from the time anyone of thedebtors does not comply with his undertaking. Thedebtors who may have been ready to fulfill their prom-ises shall not contribute to the indemnity beyond thecorresponding portion of the price of the thing or ofthe value of the service in which the obligation con-sists. (1150)

Art. 1225. For the purposes of the preceding arti-cles, obligations to give definite things and those whichare not susceptible of partial performance shall bedeemed to be indivisible.

When the obligation has for its object the exe-cution of a certain number of days of work, the accom-plishment of work by metrical units, or analogous thingswhich by their nature are susceptible of partial per-formance, it shall be divisible.

However, even though the object or service maybe physically divisible, an obligation is indivisible if soprovided by law or intended by the parties.

In obligations not to do, divisibility or indivisibil-ity shall be determined by the character of theprestation in each particular case. (1151a)

An obligation may be divisible or indivisible. It isindivisible when the object or service which is the subjectmatter of the prestation is not susceptible of partial com-pliance either because of its nature (physical) or becauseit is provided by law (legal) or it is intended by the parties(contractual). Generally, obligations are indivisible sincethe integrity of obligations requires their payment or per-formance completely (see Arts. 1233 and 1248, Civil Code).

Obligations to give definite things and those whichare not susceptible of partial performance are deemed tobe indivisible. When the obligation has for its object theexecution of a certain number of days of work, the

Arts. 1223-1225

57

accomplishment of work by metrical units, or analogousthings which by their nature are susceptible of partialperformance, it shall be divisible. Even when the objector service may be physically divisible, an obligation isindivisible if it is so provided by law or so intended by theparties. In obligations not to do, divisibility or indivisibil-ity shall be determined by the character of the prestationin each particular case (see Art. 1225, Civil Code). Thedivisibility or indivisibility of the things that are the ob-ject of obligations in which there is only one debtor andonly one creditor does not alter or modify the governingrules on the nature and effect of obligations (see Chapter2, supra.; Art. 1223, Civil Code).

A joint indivisible obligation gives rise to indemnityfor damages from the time anyone of the debtors does notcomply with his undertaking. The debtors who may havebeen ready to fulfill their promises shall not contribute tothe indemnity beyond the corresponding portion of theprice of the things or of the value of the service in whichthe obligation consists (Art. 1224, Civil Code). In a solidaryindivisible obligation, the indemnity for damages is de-mandable against the other solidary debtors but thelatter cannot seek indemnification against the defaultingsolidary debtor.

Section 6 — Obligations with a Penal Clause

Art. 1226. In obligations with a penal clause, thepenalty shall substitute the indemnity for damages andthe payment of interests in case of noncompliance, ifthere is no stipulation to the contrary. Nevertheless,damages shall be paid if the obligor refuses to pay thepenalty or is guilty of fraud in the fulfillment of theobligation.

The penalty may be enforced only when it is de-mandable in accordance with the provisions of thisCode. (1152a)

Art. 1227. The debtor cannot exempt himself fromthe performance of the obligation by paying the pen-


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alty, save in the case where this right has been expresslyreserved for him. Neither can the creditor demand thefulfillment of the obligation and the satisfaction of thepenalty at the same time, unless this right has beenclearly granted him. However, if after the creditor hasdecided to require the fulfillment of the obligation, theperformance thereof should become impossible with-out his fault, the penalty may be enforced. (1153a)

Art. 1228. Proof of actual damages suffered bythe creditor is not necessary in order that the penaltymay be demanded. (n)

Art. 1229. The judge shall equitably reduce thepenalty when the principal obligation has been partlyor irregularly complied with by the debtor. Even if therehas been no performance, the penalty may also bereduced by the courts if it is iniquitous or unconscion-able. (1154a)

Art. 1230. The nullity of the penal clause does notcarry with it that of the principal obligation.

The nullity of the principal obligation carries withit that of the penal clause. (1155)

An obligation with a penal clause is one that containsan accessory undertaking, primarily intended to inducefaithful performance of the principal prestation that be-comes due and demandable under the terms thereof, asand when there arises a breach of the obligation.

A penalty clause, expressly recognized by law, is anaccessory undertaking to assume greater liability on thepart of an obligor in case of breach of an obligation. Itfunctions to strengthen the coercive force of the obliga-tion and to provide, in effect, for what could be the liqui-dated damages resulting from such a breach. The obligorwould then be bound to pay the stipulated indemnitywithout the necessity of proof on the existence and on themeasure of damages caused by the breach. Although acourt may not at liberty ignore the freedom of the partiesto agree on such terms and conditions as they see fit that

Arts. 1226-1230

59

contravene neither law nor morals, good customs, publicorder or public policy, a stipulated penalty, nevertheless,may be equitably reduced by the courts if it is iniquitousor unconscionable or if the principal obligation has beenpartly or irregularly complied with (Ligutan vs. Court ofAppeals, G.R. No. 138677, 12 February 2002, 376 SCRA560).

Effects

Under Article 1226, in obligations with a penal clause,the penalty shall substitute the indemnity for damagesand the payment of interest in case of non-compliance,except: (1) when the contrary is stipulated; (2) when thedebtor refuses to pay the penalty in the obligation inwhich case the creditor is entitled to interest on theamount of the penalty in accordance with Article 2209;and (3) when the obligor is guilty of fraud in the fulfillmentof the obligation (Country Bankers, Ins. vs. Court of Ap-peals, 201 SCRA 458; Pamintuan vs. Court of Appeals, 94SCRA 556; Cabarroguis vs. Vicente, 107 Phil. 340). Thepenalty may be enforced only when it is demandable inaccordance with the provisions of the Code (Art. 1226,Civil Code; Araneta vs. Paterno, 91 Phil. 686).

The debtor cannot exempt himself from the perform-ance of the obligation by paying the penalty, save in thecase where this right has been expressly reserved for him(Vitug-Dimatulac vs. Coronel, 40 Phil. 686). Neither canthe creditor demand the fulfillment of the obligation andthe satisfaction of the penalty at the same time, unlessthis right has been clearly granted to him. If, however,after the creditor has decided to require the fulfillment ofthe obligation, the performance thereof should becomeimpossible without his fault, the penalty may be enforced(see Art. 1227, Civil Code).

Proof of actual damages suffered by the creditor isnot necessary in order that the penalty may be demanded(Art. 1228, Civil Code; Palacios vs. Cavite, 12 Phil. 140).


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The court shall equitably reduce the penalty when theprincipal obligation has been partly or irregularly com-plied with by the debtor. Even if there has been no per-formance, the penalty may also be reduced by the court ifit is iniquitous or unconscionable (Art. 1229, Civil Code;see Makati Dev. Corporation vs. Empire Ins. Co. Inc., 20SCRA 557). The question of whether a penalty is reason-able or iniquitous can be partly subjective and partlyobjective. Its resolution would depend on such factors as,but not necessarily confined to, the type, extent and pur-pose of the penalty, the nature of the obligation, the modeof breach and its consequences, the supervening reali-ties, the standing and relationship of the parties, and thelike, the application of which, by and large, is addressedto the sound discretion of the court. In Rizal CommercialBanking Corp. vs. Court of Appeals, just an example, theCourt has tempered the penalty charges after taking intoaccount the debtor’s pitiful situation and its offer to set-tle the entire obligation with the creditor bank. The stipu-lated penalty might likewise be reduced when a partialor irregular performance is made by the debtor. The stipu-lated penalty might even be deleted such as when therehas been substantial performance in good faith by theobligor, when the penalty clause itself suffers from fatalinfirmity, or when exceptional circumstances so exist asto warrant it. (Ligutan vs. Court of Appeals, G.R. 138677,12 February 2002). The power of the courts to reducepenalties is inapplicable to final and executory judgments(Comm. Credit Corp. vs. Court of Appeals, 169 SCRA 1).These provisions hardly make any real difference betweenpenalty and liquidated damages (governed by Arts. 2226-2228, Civil Code) as far as their legal consequences areconcerned (Lambert vs. Fox, 26 Phil. 288) although theCivil Code deals primarily with these two matters sepa-rately (Joe’s Radio vs. Alto Electronics, 104 Phil. 333).

The nullity of the penal clause does not carry with itthe nullity of the principal obligation, but the nullity ofthe principal obligation carries with it that of the penal

Arts. 1226-1230

61

clause (see Art. 1230, Civil Code). Where the penalty is anullity, Article 1229 of the Civil Code would obviously beinapplicable.

Chapter 4

Extinguishment of Obligations

General Provisions

Art. 1231. Obligations are extinguished:

(1) By payment or performance;

(2) By the loss of the thing due;

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

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

(5) By compensation;

(6) By novation.

Other causes of extinguishment of obligations,such as annulment, rescission, fulfillment of a reso-lutory condition, and prescription, are governed else-where in this Code. (1156a)

Modes of Extinguishing Obligations

Obligations are extinguished: (1) by payment or per-formance; (2) by the loss of the thing due; (3) by thecondonation or remission of the debt; (4) by the confusionor merger of the rights of creditor and debtor; (5) bycompensation; and (6) by novation.

Other causes of extinguishments of obligations in-clude annulment, rescission, fulfillment of a resolutorycondition, and prescription (see Art. 1231, Civil Code).The enumeration under Article 1231 is not exclusive (seeTejuco vs. E.R. Squib & Sons, 103 Phil. 594); death andfortuitous event, among other causes, as well as dischargein insolvency and discharge of a negotiable instrumentunder special laws, may also be cited. Mutual desistance,


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said the Supreme Court in Saura Import & Export Co. vs.DBP (44 SCRA 445), is likewise a mode of extinguishingobligation.

Section 1 — Payment or Performance

Art. 1232. Payment means not only the delivery ofmoney but also the performance, in any other manner,of an obligation. (n)

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

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

Art. 1235. When the obligee accepts the perfor-mance, knowing its incompleteness or irregularity, andwithout expressing any protest or objection, the obliga-tion is deemed fully complied with. (n)

Art. 1236. The creditor is not bound to accept pay-ment or performance by a third person who has nointerest in the fulfillment of the obligation, unless thereis a stipulation to the contrary.

Whoever pays for another may demand from thedebtor what he has paid, except that if he paid withoutthe knowledge or against the will of the debtor, he canrecover only insofar as the payment has been benefi-cial to the debtor. (1158a)

Art. 1237. Whoever pays on behalf of the debtorwithout the knowledge or against the will of the latter,cannot compel the creditor to subrogate him in hisrights, such as those arising from a mortgage, guar-anty, or penalty. (1159a)

Art. 1238. Payment made by a third person whodoes not intend to be reimbursed by the debtor isdeemed to be a donation, which requires the debtor’s

Arts. 1232-1238

63

consent. But the payment is in any case valid as to thecreditor who has accepted it. (n)

Art. 1239. In obligations to give, payment madeby one who does not have the free disposal of thething due and capacity to alienate it shall not be valid,without prejudice to the provisions of Article 1427 un-der the Title on “Natural Obligations.” (1160a)

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

Art. 1241. Payment to a person who is incapa-citated to administer his property shall be valid if hehas kept the thing delivered, or insofar as the paymenthas been beneficial to him.

Payment made to a third person shall also be validinsofar as it has redounded to the benefit of the credi-tor. Such benefit to the creditor need not be proved inthe following cases:

(1) If after the payment, the third person acquiresthe creditor’s rights;

(2) If the creditor ratifies the payment to the thirdperson;

(3) If by the creditor’s conduct, the debtor hasbeen led to believe that the third person had authorityto receive the payment. (1163a)

Art. 1242. Payment made in good faith to any per-son in possession of the credit shall release the debtor.(1164)

Art. 1243. Payment made to the creditor by thedebtor after the latter has been judicially ordered toretain the debt shall not be valid. (1165)

Art. 1244. The debtor of a thing cannot compelthe creditor to receive a different one, although thelatter may be of the same value as, or more valuablethan that which is due.


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In obligations to do or not to do, an act orforbearance cannot be substituted by another act orforbearance against the obligee’s will. (1166a)

Art. 1245. Dation in payment, whereby property isalienated to the creditor in satisfaction of a debt inmoney, shall be governed by the law on sales. (n)

Art. 1246. When the obligation consists in the de-livery of an indeterminate or generic thing, whose qual-ity and circumstances have not been stated, the credi-tor cannot demand a thing of superior quality. Neithercan the debtor deliver a thing of inferior quality. Thepurpose of the obligation and other circumstances shallbe taken into consideration. (1167a)

Art. 1247. Unless it is otherwise stipulated, theextrajudicial expenses required by the payment shallbe for the account of the debtor. With regard to judicialcosts, the Rules of Court shall govern. (1168a)

Art. 1248. Unless there is an express stipulationto that effect, the creditor cannot be compelled par-tially to receive the prestations in which the obligationconsists. Neither may the debtor be required to makepartial payments.

However, when the debt is in part liquidated andin part unliquidated, the creditor may demand and thedebtor may effect the payment of the former withoutwaiting for the liquidation of the latter. (1169a)

Art. 1249. The payment of debts in money shallbe made in the currency stipulated, and if it is notpossible to deliver such currency, then in the currencywhich is legal tender in the Philippines.

The delivery of promissory notes payable to or-der, or bills of exchange or other mercantile documentsshall produce the effect of payment only when theyhave been cashed, or when through the fault of thecreditor they have been impaired.

In the meantime, the action derived from the origi-nal obligation shall be held in abeyance. (1170)

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Art. 1250. In case an extraordinary inflation or de-flation of the currency stipulated should supervene, thevalue of the currency at the time of the establishment ofthe obligation shall be the basis of payment, unlessthere is an agreement to the contrary. (n)

Art. 1251. Payment shall be made in the placedesignated in the obligation.

There being no express stipulation and if the un-dertaking is to deliver a determinate thing, the pay-ment shall be made wherever the thing might be at themoment the obligation was constituted.

In any other case the place of payment shall bethe domicile of the debtor.

If the debtor changes his domicile in bad faith orafter he has incurred in delay, the additional expensesshall be borne by him.

These provisions are without prejudice to venueunder the Rules of Court. (1171a)

Payment means not only the delivery of money butalso the performance, in any other manner, of an obliga-tion (Art. 1232, Civil Code). Payment or performance, ifproperly made, puts an end to obligations. At times, how-ever, it may itself also create or give rise to a new juridi-cal relation, such as in legal subrogation or in payment toa third person in possession of the credit, in which casespayment may also be considered as a juridical act and nota mere event or fact by which normally it is character-ized.

Integrity of Payment

A debt shall not be understood to have been paidunless the thing or service in which the obligation con-sists has been completely delivered or rendered, as thecase may be (Art. 1233, Civil Code). The creditor cannotbe compelled to receive the prestation partially, and nei-ther may the debtor be required to make partial pay-ments (see Art. 1248, Civil Code). The burden of proof of


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payment lies with the debtor (Pinon vs. De Osorio, 30Phil. 365; however, see presumption of payment of inter-est and installments under Art. 1176, supra.).

Some exceptions from strict integrity of payment areprovided for by law: The first is when the obligation hasbeen substantially performed in good faith, in which casethe obligor may recover as though there has been a strictand complete fulfillment, less damages suffered by theobligee (see Art. 1234, Civil Code; JM Tuason & Co. vs.Javier, 31 SCRA 829); the second is when the obligee ac-cepts the performance, knowing its incompleteness or ir-regularity, and without expressing any protest or objec-tion, in which case the obligation is deemed fully compliedwith (Art. 1235, Civil Code; see Joe’s Radio vs. Alto Elec-tronics, 104 Phil. 333), but a mere receipt of payment isnot necessarily acceptance (see Esguerra vs. Villanueva,21 SCRA 1314); the third is when there is an express stipu-lation; and the fourth is when the debt is in part liqui-dated and in part unliquidated (Art. 1248, Civil Code).

The Payor and the Payee

Normally, payment is made by the debtor and to thecreditor or by and to their respective agents or succes-sors-in-interest; such, however, is not always the case. Inthese cases, generally, the rules may be said to be asfollows:

(1) In the case of payors

(a) If payment is made by the debtor, his agent orsuccessor-in-interest, the obligation is simplyextinguished, and the payment does not giverise to a new juridical relation, subject to cer-tain exceptions such as in dation in paymentwhere implied warranties may become opera-tive (see Art. 1245, Civil Code).

(b) If payment is made by a third person interestedin the fulfillment of an obligation (such as by a

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guarantor or surety or by a creditor paying apreferred creditor), the obligation is extin-guished. In turn, he can be subrogated to therights of the creditor (see Art. 1237, also Art.1302, Civil Code; BPI vs. McCoy, 52 Phil. 831).

(c) If payment is tendered or made by a third per-son not interested in the fulfillment of an obli-gation —

(i) The creditor is not bound to accept pay-ment, unless there is a stipulation to thecontrary (see Art. 1236, Civil Code);

(ii) If accepted, the payor may demand whathe has paid (reimbursement), except thatif he paid without the knowledge or againstthe will of the debtor, in which case he canrecover only insofar as the payment hasbeen beneficial to the debtor (see Art. 1236,Civil Code) at the time payment is made(RFC vs. Court of Appeals, 94 Phil. 985),and he cannot compel the creditor to sub-rogate him in his rights, such as those aris-ing from a mortgage, guaranty, or penalty(Art. 1237, Civil Code). Legal subrogationis presumed when payment is made withthe express or tacit approval of the debtor(Art. 1302, Civil Code). These rules are in-applicable to the exercise of the right ofrepurchase which is not a debt but a right(Gonzaga vs. Garcia, 27 Phil. 7).

(iii) Payment made by a third person who doesnot intend to be reimbursed by the debtoris deemed to be a donation, which requiresthe debtor’s consent; the payment, however,is in any case valid as to the creditor whohas accepted it (Art. 1238, Civil Code).

In obligations to give, payment must be made by onewho has the free disposal of the thing due and capacity to


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alienate; otherwise, it shall not be valid, without preju-dice to the provisions of Article 147 (infra.) under theTitle on “Natural Obligations” (see Art. 1239, Civil Code).

(2) In the case of payees

(a) Payment should be made to the person in whosefavor the obligation has been constituted, or hissuccessor-in-interest, or any person authorizedto receive it (see Art. 1240, Civil Code; see Bancode Oro vs. Equitable Bank, 157 SCRA 188;Aranas vs. Tutaan, 127 SCRA 838; Tuason vs.Zamora & Sons, 2 Phil. 305). Payment to a per-son who is incapacitated to administer his prop-erty shall be valid if he has kept the thing deliv-ered, or insofar as the payment has been benefi-cial to him (see Art. 1241, Civil Code). Paymentmade to the creditor by the debtor after thelatter has been judicially ordered to retain thedebt shall not be valid (Art. 1243, Civil Code).

(b) Payment to a third person shall be valid insofaras it has redounded to the benefit of the credi-tor. Such benefit to the creditor need not beproved (a) if after the payment, the third personacquires the creditor’s rights; (b) if the creditorratifies the payment to a third person; or (c) ifby the creditor’s conduct, the debtor has beenled to believe that the third person had author-ity to receive the payment (Art. 1241, Civil Code).

(c) Payment made in good faith to any person inpossession of the credit shall release the debtor(Art. 1242, Civil Code). The term “credit” doesnot necessarily mean the document evidencingthe right. A “person in possession of the credit”refers to a person who is not the creditor butwho, on the face of the instrument, appears tobe the rightful holder thereof. In negotiable in-struments, that person would be the possessor

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of a bearer instrument who is neither the law-ful holder (creditor) thereof nor the latter’sagent. Exceptionally, it might likewise refer toa person in possession of an instrument pay-able to the order of another person where boththeir names are completely identical.

Identity of Payment

The identity of payment requires that the very thing,service or forbearance, as the object of the prestation,must be performed or observed. The debtor of a thingcannot compel the creditor to receive a different one, al-though the latter may be of the same value as, or morevaluable than, that which is due. In obligations to do ornot to do, an act or forbearance cannot be substituted byanother act or forbearance against the obligee’s will (Art.1244, Civil Code; see Florentino vs. PNB, 98 Phil. 99).

The parties may agree on dation in payment wherebyproperty is alienated to the creditor in satisfaction of adebt in money; in this case, the payment shall be gov-erned by the law on sales (see Art. 1245, Civil Code). Toconstitute dation in payment, however, the true inten-tion of the parties, express or implied, must be clear(Filinvest vs. Philippine Acetylene Co., 111 SCRA 421; seealso Lopez vs. Court of Appeals, 114 SCRA 671). Dacionen pago requires a transfer of ownership of the thing(PNB vs. Pineda, 197 SCRA 1).

When the obligation consists in the delivery of anindeterminate or generic thing, whose quality and cir-cumstances have not been stated, the creditor cannotdemand a thing of superior quality. Neither can the debtordeliver a thing of inferior quality. The purpose of theobligation and other circumstances shall be taken intoconsideration in resolving the matter (Art. 1246, CivilCode).

Unless it is otherwise provided, the extrajudicialexpenses required by the payment shall be for the account


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of the debtor. With regard to judicial costs, the Rules ofCourt shall govern (Art. 1247, Civil Code).

Uniform Currency Act and Art. 1249

In money obligations, the Civil Code provides:

Art. 1249. The payment of debts in money shallbe made in the currency stipulated, and if it is notpossible to deliver such currency, then in the cur-rency which is the legal tender in the Philippines.

The delivery of promissory notes payable to or-der, or bills of exchange or other mercantile docu-ments shall produce the effect of payment only whenthey have been cashed or when through the fault ofthe creditor they may have been impaired.

In the meantime, the action derived from theoriginal obligation shall be held in abeyance.

The first part of the above article was modified byRepublic Act No. 529 (approved on June 16, 1950), asamended by Republic Act No. 4100. The amendatory lawwas itself repealed by Republic Act No. 8183 (“An ActRepealing Republic Act Numbered Five Hundred Twenty-Nine, As Amended, entitled An Act to Assure the UniformValue of Philippine Coin and Currency”), approved onJune 11, 1996. The then R.A. No. 529 declared null andvoid any provision in an obligation contracted in thePhilippines that would require payment (a) in gold or inforeign currency, or (b) in Philippine currency measuredin gold or in foreign exchange. The obligation itself wasvalid, and it was to be discharged by payment in legaltender. Any other domestic obligation incurred was to bedischarged in Philippine legal tender.

Under R.A. No. 8183, obligations contracted in thePhilippines can be denominated and valued at anyconvertible currency acceptable to the Bangko Sentral ngPilipinas. Its essence is to allow parties to agree on what

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currency they wish to utilize in their business trans-actions.

The former doctrine under R.A. No. 529 was that thelegal tender should be measured in the prevailing rate ofexchange at the time the obligation was incurred (Arrietavs. NARIC, 10 SCRA 74). It was subsequently held, how-ever, that if the obligation was incurred after the enact-ment of R.A. No. 529, the rate of exchange should be thatprevailing at the time of payment since the law itself didnot provide for the rate of exchange for the payment ofsuch obligation (Kalalo vs. Luz, 34 SCRA 337). In Poncevs. Court of Appeals (90 SCRA 533), the Supreme Courtreiterated the rule by holding that when the obligationwas incurred in, or based on, foreign exchange, the legaltender to be paid would be at the rate of exchange pre-vailing at the time of payment.

In General Insurance & Surety Corp. vs. Union Insur-ance Society of Canton, Ltd. (179 SCRA 530, elaboratedin Republic Resources Dev. Corp. vs. Court of Appeals,203 SCRA 164, and San Buenaventura vs. Court of Ap-peals, 181 SCRA 197), the Court held:

(a) If the obligation was incurred prior to the en-actment of R.A. No. 569 and required paymentin a particular kind of coin or currency otherthan the Philippine currency, the same shall bedischarged in Philippine currency at the pre-vailing rate of exchange at the time the obliga-tion was incurred, except in case of a loan madein a foreign currency in which event the rate ofexchange prevailing at the stipulated date ofpayment shall prevail.

(b) If, however, the obligation was incurred afterthe enactment of R.A. No. 529, the provision ofthe law which requires payment at the prevail-ing rate of exchange when the obligation wasincurred cannot be applied. R.A. No. 529 doesnot provide for the payment of obligation after


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the enactment of the said Act. Logically, there-fore, the rate of exchange shall be that prevail-ing at the time of payment rather than on thedate of incurrence.

R.A. No. 529, concededly, left some gaps on its properapplication. While it did fail to provide for the payment ofobligations incurred after its effectivity, it indeed seemedlogical to conclude that the law meant to apply the rate ofexchange prevailing at the time of payment but only toobligations incurred in, or based on, foreign currency.This view was also just and fair in that it maintains andpreserves the real value of the foreign exchange-incurredobligation to the date of its payment. When, however, theobligation was incurred in Philippine currency, thereshould be no need for the law to still make any referenceto any rate of exchange or to a measure of value in foreigncurrency in its payment. The obligation should insteadbe then understood to be payable in the same amount ofPhilippine currency conformably with Article 1250 of theCivil Code. An adjustment in value, under this provision,could only be made in the event of extraordinary inflationor deflation and only if the parties did not stipulate againstsuch adjustment. To assume otherwise would be to defeatthe clear intendment of the law for not only did RepublicAct No. 529 prohibit a stipulation requiring payment inforeign currency or in gold but likewise a stipulation pro-viding for payment in Philippine currency measured inits value in gold or in foreign currency.

To exemplify the measure of payment of obligationsincurred after the effectivity of the law then in force un-der this view —

(1) If incurred in Philippine currency, no adjust-ment was to be made (hence, if P10,000 wasborrowed, payable in a foreign currency, thesame amount of P10,000 would be due uponpayment irrespective of any change in the ratesof exchange prevailing at the time the obliga-

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tion was constituted and the time it is paid)except to the extent that Article 1250 of theCivil Code on extraordinary inflation or defla-tion could apply;

(2) If incurred in foreign currency or in Philippinecurrency but based on foreign exchange values,the payment would be made in the Philippinecurrency measured at the rate of exchange pre-vailing at the time of payment (hence, a $1 obli-gation incurred at a time when the rate of ex-change was $1:P10 and when payable the ratebecomes $1:P20, would be paid in Philippinecurrency at P20).

The excepted transactions under R.A. No. 529 in-cluded: (a) transactions involving identifiable funds offoreign governments and international financial institu-tions; (b) transactions affecting high priority economicprojects financed by or through foreign funds; (c) forwardexchange transactions between banks or between banksand other persons; and (d) import-export and other inter-national banking, financial investment and industrialtransactions (see Zagala vs. Jimenez, 152 SCRA 147).

The second part of Article 1249 relates to paymentsin mercantile documents. A negotiable instrument, likesome other mercantile documents, may be a medium ofexchange but is not quite legal tender for the payment ofmoney obligations (Belisario vs. Natividad, 60 Phil. 156).The established jurisprudence is that a creditor may notbe compelled to accept payment in mercantile documents(see Soco vs. Militante, 123 SCRA 160; Villanueva vs.Santos, 67 Phil. 648); an acceptance thereof, however, bythe creditor may produce the effect of payment under thecircumstances declared by Article 1249 of the Civil Code,that is, upon the mercantile documents being cashed orby its impairment due to the creditor’s fault.

In New Pacific Timber vs. Seneris (101 SCRA 684),the Supreme Court considered it unjustified for a cash-


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ier’s check to be rejected by a judgment creditor as pay-ment of the redemption price by the debtor of the prop-erty levied on execution by the sheriff. Citing Section 63of the Central Bank Act (to the effect that a check whichwould have been cleared and credited to the account ofthe creditor should be equivalent to a delivery to thecreditor of cash in an amount equal to the amount cred-ited to the latter’s account), the tribunal ruled that theact of the holder who would procure that check to becertified operates as an assignment of funds to the credi-tor.

It would seem, however, that the cited provision ofthe Central Bank Act might be pertinent, if at all, onlywhen the creditor has an account with the same bank.Under Section 189 of the Negotiable Instruments Law,the certification by the bank merely operates as an as-signment of funds to the credit of the drawer, not thepayee. Perhaps, Article 19 of the Code should have enoughjustification for the Court’s conclusion. But whatevermisimpression one might gather from the language of theabove case, subsequent decisions of the Court make itcrystal clear that a check, whether a manager’s check oran ordinary check, is not legal tender and an offer of acheck in payment of a debt is not a valid tender of pay-ment and may be refused receipt by the creditor (RomanCatholic Church vs. Court of Appeals, G.R. No. 72110, 16November 1990). When accepted, however, it can becomeeffective as a means of payment subject to the conditionsexpressed in Article 1249 of the Civil Code (see Fortunadovs. Court of Appeals, 196 SCRA 269).

The rules do not necessarily apply in the exercise ofa right. Thus, in Leticia Co vs. PNB (114 SCRA 842), theCourt has ruled that the use by a mortgagor of a bankmanager’s check is a valid means to exercise the redemp-tion right.

In NAMARCO vs. FUND (49 SCRA 238), the Sup-reme Court has said that Article 1249 of the Civil Code,

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providing that the delivery of notes, bills or other mer-cantile documents shall produce the effect of paymentwhen impaired by the creditor’s fault, does not apply to acheck issued by the debtor himself, since no prejudice tohim can result thereby. This is to say that an issuer of anegotiable instrument, to the extent that he is not preju-diced, may be required to re-issue a replacement of theimpaired or lost instrument.

Extraordinary Inflation or Deflation

The term “extraordinary” inflation or deflation isexplained in Filipino Pipe and Foundry Corp. vs. MWSS(161 SCRA 32) thusly: Extraordinary inflation (or defla-tion) exists when “there is a decrease or increase in thepurchasing power of the Philippine currency which isunusual or beyond the common fluctuation in the valueof said currency, and such decrease or increase could nothave been reasonably foreseen or was manifestly beyondthe contemplation of the parties at the time of the estab-lishment of the obligation.” An example of extraordinaryinflation, the Court has observed, is the situation thathas happened to the Deutchmark:

“More recently, in the 1920’s Germany expe-rienced a case of hyperinflation. In early 1921, thevalue of the German mark was 4.2 to the U.S. Dol-lar. By May of the same year, it had stumbled to 62to the U.S. Dollar. And as prices went by rapidly, sothat by October 1923, it had reached 4.2 trillion tothe U.S. Dollar” (Bernardo M. Villegas & Victor R.Abola, Economics, An Introduction [Third Edition]).

In Huibonhoa vs. Court of Appeals (117 SCAD 281,320 SCRA 625), the Court has expressed that there isinflation when there appears to be an increase in thevolume of money and credit relative to available goods,resulting in a substantial and continuing rise in the gen-eral price level. The decline in the purchasing power ofthe Philippine currency is of judicial notice and cannot be


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considered unforeseeable, for this is simply a universaltrend that has not spared our country. The party allegingthe supervening event of extraordinary inflation mustlay down the factual basis for the application of Article1250 because the same is never assumed (Singson vs.Caltex, 134 SCAD 219, 342 SCRA 91). Article 1250 of theCivil Code needs an official declaration of inflation ordeflation, as the case may be, by competent governmentauthorities for the law to apply (Mobile Oil Philippinesvs. Court of Appeals, 180 SCRA 651; Hahn vs. Court ofAppeals, G.R. No. 55372, 31 March 1989).

Article 1250 does not apply in non-contractual obli-gations. Accordingly, no adjustment would be authorizedin obligations arising from tort (Velasco vs. Meralco, 42SCRA 556), in expropriation proceedings (Commissionerof Public Highways vs. Burgos, 96 SCRA 831), and in thesubrogatory rights of an insurer against the person whosenegligence or fault has caused the insurer’s liability (St.Paul Insurance vs. Macondray & Co., 70 SCRA 122),these obligations not being contractual in nature. In Com-missioner of Public Highways vs. Francisco Burgos (96SCRA 831), the Court has ruled that Article 1250 of theCivil Code seems to be the only provision in our statuteswhich provides for payment of an obligation in an amountdifferent from what has been agreed upon by the partiesbecause of the supervening of extraordinary inflation ordeflation. It is clear that the provisions of the said articleapplies only to cases where a contract or agreement isinvolved. It does not apply where the obligation to payarises from law, independent of contract. The taking ofprivate property by the government in the exercise of itspower of eminent domain does not give rise to a contrac-tual obligation. Moreover, the law clearly provides thatthe value of the currency at the time of the establishmentof the obligation shall be the basis of payment which, incases of expropriation, would be the value of the peso atthe time of the taking of property when the obligation ofthe government to pay arises.

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In fine, Article 1250 would apply in order to warranta revaluation or devaluation of the obligation (adjustedaccording to present values) when the following condi-tions concur —

(1) existence of extraordinary inflation or deflationof the currency stipulated;

(2) an obligation to pay a sum certain in money;

(3) the obligation is contractual in nature; and

(4) there exists no stipulation to the contrary.

When the above conditions concur, an adjustmentshall be made so that “the value of the currency at thetime of the establishment of the obligation shall be thebasis of payment.” Hence, if P1 were required to pur-chase a specific thing at the time a contractual obligationis constituted and at the time of payment as a result ofextraordinary inflation one would need P10 to buy thesame thing, then the amount to be paid thereupon, un-less otherwise stipulated, shall be P10 less whatever maybe considered the ordinary inflation between the time ofincurrence and the time of payment. By extraordinaryinflation or deflation of currency is meant one that isuncommon and abrupt or sudden; where the inflation, forinstance, would simply be the equivalent of, or wouldmerely approximate, the normal cost of money or stand-ard rates of interest in loan obligations, the inflation canonly be considered as ordinary. The payment of legal in-terest, said the Court in Republic vs. Juan (92 SCRA 26),should be considered sufficient compensation for any in-flation that may have arisen. The parties, however, maystipulate to allow an adjustment of the obligation even incases of ordinary inflation or deflation.

Place of Payment

Payment shall be made in the place designated inthe obligation. There being no express stipulation and ifthe undertaking is to deliver a determinate thing, the


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payment shall be made wherever the thing might be atthe moment the obligation was constituted (see Warner,Barnes & Co. vs. Inza, 43 Phil. 505). In any other case,the place of payment shall be the domicile of the debtor(Gomez vs. Ng, 76 Phil. 555). If the debtor changes hisdomicile in bad faith or after he has incurred in delay, theadditional expenses shall be borne by him. These rules,however, are without prejudice to venue under proce-dural laws (see Art. 1251, Civil Code).

Special Forms of Payment

a. Application of Payments

Art. 1252. He who has various debts of the samekind in favor of one and the same creditor, may declareat the time of making the payment, to which of themthe same must be applied. Unless the parties sostipulate, or when the application of payment is madeby the party for whose benefit the term has beenconstituted, application shall not be made as to debtswhich are not yet due.

If the debtor accepts from the creditor a receipt inwhich an application of the payment is made, the formercannot complain of the same, unless there is a causefor invalidating the contract. (1172a)

Art. 1253. If the debt produces interest, paymentof the principal shall not be deemed to have been madeuntil the interests have been covered. (1173)

Art. 1254. When the payment cannot be applied inaccordance with the preceding rules, or if applicationcannot be inferred from other circumstances, the debtwhich 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 proportion-ately. (1174a)

The rules on application of payments under Articles1252 and 1253 apply only when: (a) there are several

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debts; and (b) the several debts are owing from one debtorto a single creditor.

Hence, where a P500 debt, secured by a guarantorup to P200, is payable in installments all of which havematured without being paid, the rules on application ofpayments would not apply since there is but one obliga-tion. Accordingly, a partial payment can be rejected bythe creditor; if accepted by the latter, neither is the debtorentitled nor can the guarantor claim that the part pay-ment shall be deemed to be that portion guaranteed asbeing more onerous (see Reparations Commission vs.Universal Deep-Sea Fishing and Manila Surety Co., 83SCRA 764).

The rules apply to a person owing several debts ofthe same kind to a single creditor. Thus, a payment madeby the surety or guarantor entitles the latter, not thedebtor, to have payment applied exclusively to the guar-anteed liability (see Magdalena Estate, Inc. vs. Rodri-guez, 18 SCRA 967; Socony-Vacuum Corp. vs. Miraflores,67 Phil. 304).

In cases where the provisions on application of pay-ments apply, the following rules govern:

(1) The debtor may declare at the time of makingthe payment to which of them the same must beapplied. Unless the parties so stipulate, or whenthe application of payment is made by the partyfor whose benefit the term has been constituted,application shall not be made as to debts whichare not yet due (see Art. 2252, Civil Code). If thedebt produces interest, payment of the princi-pal shall not be deemed to have been made un-til the interest has been covered (Art. 1253, CivilCode).

(2) If the debtor accepts from the creditor a receiptin which an application of the payment is made,the former cannot complain of the same, unless


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there is a cause for invalidating the contract(see Art. 1252, Civil Code).

(3) When the payment cannot be applied in accord-ance with the preceding rules, or if the applica-tion cannot be inferred from other circum-stances, the debt which is most onerous to thedebtor, among those due, shall be deemed tohave been satisfied. If the debts due are of thesame nature and burden, the payment shall beapplied to all of them proportionally (Art. 1254,Civil Code), an exception from the rule of integ-rity of payments.

The first choice in the application of payment lieswith the debtor (U.P. Recreation Club, Inc. vs. Alto Surety& Insurance Co., 104 Phil. 534); once made, the applica-tion is final (Bachrach Garage and Taxicab Co. vs.Galingco, 39 Phil. 912). The debtor, however, may onlymake his application to debts that have become due, un-less he has the benefit of the period, and in interest-bear-ing debts, the debtor’s payment must first be applied tothe interest and then only to the principal (see Guanzonvs. Llantada, 94 Phil. 234). No choice having been madeat the moment of payment, the creditor may state in thereceipt of the debt to which the payment is to be appliedwhich becomes operative if the debtor accepts it withoutobjections (see Sanz vs. Lavin Brothers, 6 Phil. 299). Ifneither the debtor nor the creditor has made the applica-tion, the payment shall be by operation of law, i.e., thepayment shall apply to the debt most onerous to the debtor.A secured debt is more onerous than an unsecured obli-gation (Ligget & Myers Tobacco Corp. vs. Associated In-surance & Surety Co., 109 Phil. 1093), and a sole debt ismore onerous than a solidary indebtedness (Common-wealth vs. Far Eastern Surety & Ins. Co., 83 Phil. 305).

b. Payment by Cession

Art. 1255. The debtor may cede or assign his prop-erty to his creditors in payment of his debts. This ces-

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sion, unless there is stipulation to the contrary, shallonly release the debtor from responsibility for the netproceeds of the thing assigned. The agreements which,on the effect of the cession, are made between thedebtor and his creditors shall be governed by speciallaws. (1175a)

The debtor may cede or assign his property to hiscreditors in payment of his debts. This cession, unlessthere is a stipulation to the contrary, shall only releasethe debtor from responsibility for the net proceeds of thething assigned. The agreements, which on the effect ofthe cession are made between the debtor and his credi-tors, shall be governed by special laws, e.g., laws on insol-vency (see Art. 1255, Civil Code; Act No. 1956, as amended;see Ignacio vs. Martinez, 33 Phil. 576). There can be nopayment by cession under Article 1255 where there isonly one creditor; the article contemplates the existenceof two or more creditors and involves the assignment ofall the debtor’s property (DBP vs. Court of Appeals, 284SCAD 14).

c. Tender of Payment and Consignation

Art. 1256. If the creditor to whom tender of pay-ment has been made refuses without just cause toaccept it, the debtor shall be released from responsi-bility by the consignation of the thing or sum due.

Consignation alone shall produce the same effectin the following cases:

(1) When the creditor is absent or unknown, ordoes not appear at the place of payment;

(2) When he is incapacitated to receive the pay-ment at the time it is due;

(3) When, without just cause, he refuses to givea receipt;

(4) When two or more persons claim the sameright to collect;


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(5) When the title of the obligation has been lost.(1176a)

Art. 1257. In order that the consignation of thething due may release the obligor, it must first be an-nounced to the persons interested in the fulfillment ofthe obligation.

The consignation shall be ineffectual if it is notmade strictly in consonance with the provisions whichregulate payment. (1177)

Art. 1258. Consignation shall be made by deposit-ing the things due at the disposal of judicial authority,before whom the tender of payment shall be proved, ina proper case, and the announcement of the consigna-tion in other cases.

The consignation having been made, the inter-ested parties shall also be notified thereof. (1178)

Art. 1259. The expenses of consignation, whenproperly made, shall be charged against the creditor.(1179)

Art. 1260. Once the consignation has been dulymade, the debtor may ask the judge to order the can-cellation of the obligation.

Before the creditor has accepted the consigna-tion, or before a judicial declaration that the consigna-tion has been properly made, the debtor may withdrawthe thing or the sum deposited, allowing the obligationto remain in force. (1180)

Art. 1261. If, the consignation having been made,the creditor should authorize the debtor to withdrawthe same, he shall lose every preference which he mayhave over the thing. The co-debtors, guarantors andsureties shall be released. (1181a)

If the creditor to whom tender of payment has beenmade refuses without just cause to accept it, the debtorshall be released from responsibility by the judicial con-signation of the thing or sum due (see Art. 1256, CivilCode).

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In order that tender of payment and consignationmay be valid and effective against a creditor, the follow-ing requisites should concur:

(1) The debt sought to be paid must be due;

(2) There must be a valid and unconditional tenderof payment; consignation alone or tender of pay-ment may be dispensed with in the followingcases:

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

(b) When he is incapacitated to receive thepayment at the time it is due;

(c) When, without just causes, he refuses togive a receipt;

(d) When two or more persons claim the sameright to collect; and

(e) When the title of the obligation has beenlost (Art. 1256, Civil Code; Rural Bank ofParañaque vs. Court of Appeals, 104 SCRA151).

A check, whether a manager’s check or ordinarycheck, is not legal tender, and an offer of a check inpayment of a debt is not a valid tender of payment andmay be refused receipt by the creditor. Thus, in one case,where a buyer had offered a certified personal check forthe payment of the last installment of the purchase priceof land, said check being neither legal tender nor thecurrency stipulated in the contract, there was, the Courtruled, no valid tender of payment, and it would be errorto conclude that there was tender payment by a buyersimply because said buyer had sufficient available fundson or before the grace period for paying the purchaseprice expired. Tender of payment involves a positive andunconditional act by the obligor of offering legal tendercurrency as payment to the obligee for the former’s obli-


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gation and demanding that the latter accept the same(Roman Catholic vs. Court of Appeals, G.R. No. 72110, 16November 1990). However, an offer in writing to pay aspecific sum of money, if rejected on some other grounds,is equivalent to the actual production and tender of themoney (see Sec. 24, Rule 123, Rules of Court; see alsoMcLaughlin vs. Court of Appeals, 144 SCRA 693);

(3) The consignation of the thing due must first beannounced to the persons interested in thefulfillment of the obligation;

(4) Consignation shall be made by depositing thethings due at the disposal of judicial authority(Ercillo vs. Court of Appeals, 192 SCRA 163),before whom the tender of payment shall beproved, in a proper case, and the announcementof the consignation in other cases; and

(5) The consignation having been made, the inter-ested parties shall also be notified thereof (Art.1258, Civil Code; see Valdellon vs. Tengco, 141SCRA 321; Soco vs. Millante, 123 SCRA 160;Ponce de Leon vs. Syjuco, 90 Phil. 311; Philip-pine National Bank vs. Relativo, 92 Phil. 203).

Once the consignation has been duly made, the debtormay ask the judge to order the cancellation of the obliga-tion. Before the creditor has accepted the consignation,or before a judicial declaration that the consignation hasbeen properly made, the debtor may withdraw the thingor the sum deposited, allowing the obligation to remainin force (Art. 1260, Civil Code). If, the consignation hav-ing been made, the creditor should authorize the debtorto withdraw the same, he shall lose every preferencewhich he may have over the thing. The co-debtors, guar-antors and sureties shall be released (Art. 1261, CivilCode).

A tender of payment, without valid consignation,does not discharge the obligation (Capalungan vs.Medrano, 108 Phil. 22), and the debtor continues to be

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liable for interest payments due thereon (Llamas vs.Abaya, 60 Phil. 502). Mora accipiendi does not excuseconsignation (Manuel vs. Court of Appeals, 199 SCRA603). In one case, the Supreme Court excused the pay-ment of interest despite what is considered a defectiveconsignation (due to a tender of payment in checks butwhere the creditor’s rejection of the offer was based on anentirely different reason) on the grounds of equity andjustice (Gregorio Araneta, Inc. vs. Tuason de Paterno, 91Phil. 786, reiterated in Francisco vs. Gorgonio, 115 SCRA345).

The rules on tender of payment and consignationhave been held inapplicable to options or rights of re-demption which are not in the nature of debts (seeImmaculata vs. Navarro, 160 SCRA 197; Quirino vs.Palanca, 29 SCRA 1; Asturias Sugar Central vs. PureCane Molasses Co., 60 Phil. 255).

Section 2 — Loss of the Thing Due

Art. 1262. An obligation which consists in the de-livery of a determinate thing shall be extinguished if itshould be lost or destroyed without the fault of thedebtor, and before he has incurred in delay.

When by law or stipulation, the obligor is liableeven for fortuitous events, the loss of the thing doesnot extinguish the obligation, and he shall be respon-sible for damages. The same rule applies when thenature of the obligation requires the assumption ofrisk. (1182a)

Art. 1263. In an obligation to deliver a genericthing, the loss or destruction of anything of the samekind does not extinguish the obligation. (n)

Art. 1264. The courts shall determine whether, un-der the circumstances, the partial loss of the object ofthe obligation is so important as to extinguish the obli-gation. (n)

Art. 1265. Whenever the thing is lost in the posses-sion of the debtor, it shall be presumed that the loss


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was due to his fault, unless there is proof to the con-trary, and without prejudice to the provisions of Article1165. This presumption does not apply in case of earth-quake, flood, storm or other natural calamity. (1183a)

Art. 1266. The debtor in obligations to do shallalso be released when the prestation becomes legallyor physically impossible without the fault of the obli-gor. (1184a)

Art. 1267. When the service has become so diffi-cult as to be manifestly beyond the contemplation ofthe parties, the obligor may also be released therefrom,in whole or in part. (n)

Art. 1268. When the debt of a thing certain anddeterminate proceeds from a criminal offense, thedebtor shall not be exempted from the payment of itsprice, whatever may be the cause for the loss, unlessthe thing having been offered by him to the personwho should receive it, the latter refused without justifi-cation to accept it. (1185)

Art. 1269. The obligation having been extinguishedby the loss of the thing, the creditor shall have all therights of action which the debtor may have againstthird person by reason of the loss. (1186)

A thing is lost “when it perishes, or goes out of com-merce, or disappears in such a way that its existence isunknown or (even if known) it cannot be recovered” (seeArt. 1189, Civil Code). In obligations to do, the equivalentterm of loss is “impossibility.”

Broadly in law, the risk of loss lies with the ownerunder the res perit domino rule; in the law on obligationsand contracts, however, the generally applicable princi-ple is the res perit creditori that places upon the creditorthe burden of loss (see Reyes vs. Caltex, 47 O.G. 1293;Villaruel vs. Manila Motors, 104 Phil. 926; see also Arts.1255 and 1262, Civil Code).

In effect, therefore, the debtor is relieved from hisobligation, leaving to the creditor all the rights of action

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which the debtor may have against third persons by rea-son of the loss (see Art. 1269, Civil Code). In reciprocalobligations, the debtor whose obligation has thus beenextinguished by the loss of the thing can still require theother party to comply with his own undertaking to theformer, except as otherwise expressly provided by law,such as in the sale of goods (Art. 1504, Civil Code), leaseof things (Art. 1655, Civil Code), and contract for a pieceof work (Art. 1717, Civil Code), where res perit dominoappears to be the rule.

In the following cases, however, the debtor is notdischarged from liability nor entitled, in a reciprocalobligation, to claim from the other party the latter’sperformance of his undertaking:

(1) When the loss occurs after the debtor hasincurred in delay or the loss is not without hisfault (see Art. 1262, Civil Code). Whenever thething is lost in the possession of the debtor, itshall be presumed that the loss was due to hisfault, unless there is proof to the contrary(without prejudice to the provisions of Art. 1165,supra.), but this presumption does not apply incase of loss occurring during the occasion of anearthquake, flood, storm or other naturalcalamity (see Art. 1265, Civil Code).

(2) When despite the loss of the thing because ofa fortuitous event (loss without the debtor’sfault) —

(a) The law places the burden of loss on thedebtor such as in obligations to delivergeneric things under the maxim genusnunquam perit (Art. 1263, Civil Code),which would include money (see CentralBank of the Philippines vs. Court of Ap-peals, 139 SCRA 46, where the debtor’s in-solvency was held not to discharge a con-tractual obligation but as a breach thereof)


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and similar obligations (see Ramirez vs.Court of Appeals, 98 Phil. 225; Republic vs.Grijaldo, 15 SCRA 681; De Leon vs. Soriano,87 Phil. 551); when the debt proceeds froma criminal offense, unless the thing havingbeen offered to the person who should re-ceive it, the latter refuses without justifi-cation to accept it (Art. 1268, Civil Code);and when the obligor promises the samething to two or more persons having differ-ent interests (Art. 1165, Civil Code); or

(b) The debtor has agreed by stipulation to as-sume the risk of loss (see Lawyers’ Coop-erative Publishing Co. vs. Tabora, 13 SCRA762).

(3) When the nature of obligation requires the as-sumption of risk on the part of the debtor suchas that of an insurer in a contract of insurance.

In Co vs. Court of Appeals (95 SCAD 34, 291 SCRA111), the Supreme Court has said that carnapping per secould not be considered a fortuitous event. A fortuitousevent should be understood as being an act of God or actdone solely by third parties and that neither the claimantnor the person alleged to be negligent has had any par-ticipation therein. Under Article 1174 and Article 1262 ofthe Civil Code, liability would still attach even if the losswere due to a fortuitous event if the nature of the obliga-tion requires the assumption of risk. Carnapping, ob-served the Court, is a normal business risk for thoseengaged in the repair of motor vehicles, and for just asthe owner is exposed to that risk so also is the repair shopto which the car has been entrusted.

Partial Loss; Theory of Imprevisibility

Loss or impossibility must be of a nature that wouldrender the obligation incapable from being complied within a normal manner (see PNCC vs. NLRC, 193 SCRA

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401; General Enterprises, Inc. vs. Lianga Bay LoggingCo., 11 SCRA 733; Labayen vs. Talisay-Silay, 52 Phil.440). In a partial loss of the object of the obligation, thecourts may determine whether, under given circum-stances, such loss is so important as to extinguish theobligation (Art. 1264, Civil Code).

In obligations to do, the debtor shall be releasedwhen the prestation becomes legally or physically impos-sible without his fault (Art. 1266, Civil Code). When theservice has become so difficult as to be manifestly beyondthe contemplation of the parties, the obligor may also bereleased therefrom, in whole or in part (Art. 1267, CivilCode). Neither partial loss of the thing in an obligation todeliver nor extreme difficulty in an obligation to do (alsoreferred to as the Theory of Imprevisibility or Frustrationof Enterprise in Contracts) authorizes the courts to re-make or revise a contract; if at all, these circumstancesmay only serve to release the debtor from his obligationin whole or in part (see Occena vs. Jabson, 73 SCRA 637;in respect to lease of agricultural lands, see Art. 1680,Civil Code).

In contracts, where the impossibility of things andservices occur prior to perfection, no obligation is deemedconstituted (see Art. 1348, Civil Code) and the loss pre-vents the contract from acquiring an obligatory force (seeArt. 1409, Civil Code).

Section 3 — Condonation or Remissionof the Debt

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

One and the other kind shall be subject to therules which govern inofficious donations. Expresscondonation shall, furthermore, comply with the formsof donation. (1187)


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Art. 1271. The delivery of a private document evi-dencing a credit, made voluntarily by the creditor tothe debtor, implies the renunciation of the action whichthe former had against the latter.

If in order to nullify this waiver it should be claimedto be inofficious, the debtor and his heirs may upholdit by proving that the delivery of the document wasmade in virtue of payment of the debt. (1188)

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

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

Art. 1274. It is presumed that the accessoryobligation of pledge has been remitted when the thingpledged, after its delivery to the creditor, is found inthe possession of the debtor, or of a third person whoowns the thing. (1191a)

Condonation is the forgiveness of a debt or the waiverof its enforcement (see Babez vs. Young, 92 Phil. 1067);the remission is essentially gratuitous and requires theacceptance by the obligor. It may be made expressly orimpliedly. Express condonation shall comply with theforms of donation (Art. 1270, Civil Code). The delivery ofa private document evidencing a credit, voluntarily madeby the creditor to the debtor, implies the renunciation ofthe action which the former had against the latter (seeArt. 1271, Civil Code). Whenever the private document inwhich the debt appears is found in the possession of thedebtor, it shall be presumed that the creditor delivered itvoluntarily, unless the contrary is proved (Art. 1272, CivilCode). Conversely, the possession of the instrument ofcredit by the creditor is prima facie proof of non-payment(Torbio vs. Foz, 34 Phil. 913). These presumptions maycertainly be overcome by evidence (see Lopez Liso vs.Tambunting, 33 Phil. 226; Prising vs. Springer, 13 Phil.

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223). An express condonation, upon the other hand, doesnot give rise to a mere presumption; precisely, the lawrequires it to comply with the forms of donation in orderto set it free from further dispute or doubt.

The renunciation of the principal debt shall extin-guish the accessory obligations; but the waiver of thelatter shall leave the former in force (Art. 1273, CivilCode). It is presumed that the accessory obligation ofpledge has been remitted when the thing pledged, afterits delivery to the creditor, is found in the possession ofthe debtor, or of a third person who owns the thing (Art.1274, Civil Code).

Condonation is subject to the rules which governinofficious donations (see Art. 1270, Civil Code). If inorder to nullify this waiver it should be claimed to beinofficious, the debtor and his heirs may uphold it byproving that the delivery of the document was made invirtue of payment of the debt (see Art. 1271, Civil Code).

Section 4 — Confusion or Merger of Rights

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

Art. 1276. Merger which takes place in the personof the principal debtor or creditor benefits the guaran-tors. Confusion which takes place in the person of anyof the latter does not extinguish the obligation. (1193)

Art. 1277. Confusion does not extinguish a jointobligation except as regards the share correspondingto the creditor or debtor in whom the two charactersconcur. (1194)

The obligation is extinguished from the time thecharacters of creditor and debtor are merged in the sameperson (Art. 1275, Civil Code; see Yek Tong vs. Yusingco,64 Phil. 1062). Merger as one of the means of extinguish-ing an obligation has the following elements: (1) the


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merger of the characters of the creditor and debtor mustbe in the same person; (2) it must take place in the personof either the principal creditor or the principal debtor;and (3) it must be complete and definite (Valmonte vs.Court of Appeals, 103 SCAD 509, 303 SCRA 278).

Merger which takes place in the person of the princi-pal debtor or creditor benefits the guarantors. Confusionwhich takes place in the person of any of the latter doesnot extinguish the obligation (Art. 1276, Civil Code).Confusion does not extinguish a joint obligation exceptas regards the share corresponding to the creditor ordebtor in whom the two characters concur (Art. 1277,Civil Code).

Section 5 — Compensation

Art. 1278. Compensation shall take place whentwo persons, in their own right, are creditors and debt-ors of each other. (1195)

Art. 1279. In order that compensation may beproper, it is necessary:

(1) That each one of the obligors be bound prin-cipally, and that he be at the same time a principalcreditor of the other;

(2) That both debts consist in a sum of money,or if the things due are consumable, they be of thesame kind, and also of the same quality if the latterhas 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 reten-tion or controversy, commenced by third persons andcommunicated in due time to the debtor. (1196)

Art. 1280. Notwithstanding the provisions of thepreceding article, the guarantor may set up compen-sation as regards what the creditor may owe the prin-cipal debtor. (1197)

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Art. 1281. Compensation may be total or partial.When the two debts are of the same amount, there is atotal compensation. (n)

Art. 1282. The parties may agree upon the com-pensation of debts which are not yet due. (n)

Art. 1283. If one of the parties to a suit over anobligation has a claim for damages against the other,the former may set it off by proving his right to saiddamages and the amount thereof. (n)

Art. 1284. When one or both debts are rescissibleor voidable, they may be compensated against eachother before they are judicially rescinded or avoided.(n)

Art. 1285. The debtor who has consented to theassignment of rights made by a creditor in favor of athird person, cannot set up against the assignee thecompensation which would pertain to him against theassignor, unless the assignor was notified by the debtorat the time he gave his consent, that he reserved hisright to the compensation.

If the creditor communicated the cession to himbut the debtor did not consent thereto, the latter mayset up the compensation of debts previous to the ces-sion, but not of subsequent ones.

If the assignment is made without the knowledgeof the debtor, he may set up the compensation of allcredits prior to the same and also later ones until hehad knowledge of the assignment. (1198a)

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

Art. 1287. Compensation shall not be proper whenone of the debts arises from a depositum or from theobligations of a depositary or of a bailee in commoda-tum.

Neither can compensation be set up against acreditor who has a claim for support due by gratuitous


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title, without prejudice to the provisions of paragraph2 of Article 301. (1200a)

Art. 1288. Neither shall there be compensation ifone of the debts consists in civil liability arising from apenal offense. (n)

Art. 1289. If a person should have against himseveral debts which are susceptible of compensation,the rules on the application of payments shall apply tothe order of the compensation. (1201)

Art. 1290. When all the requisites mentioned inarticle 1279 are present, compensation takes effect byoperation of law, and extinguishes both debts to theconcurrent amount, even though the creditors and debt-ors are not aware of the compensation. (1202a)

Compensation takes place when two persons, in theirown right, are creditors and debtors of each other (Art.1278, Civil Code; see Ong vs. Court of Appeals, 177 SCRA402; Sycip vs. Court of Appeals, 134 SCRA 317; De Borjavs. Gella, 8 SCRA 602). Compensation may be total (whenthe two debts are of the same amount) or partial (whenthe two debts vary in amounts, in which case compen-sation shall only be to the extent of the concurrentamount). Compensation may also be legal (by operationof law), conventional (by agreement), or judicial (by judg-ment).

Legal Compensation

In order that compensation may be proper, it is nec-essary:

(1) That each one of the obligors be bound prin-cipally, and that he be at the same time a prin-cipal creditor of the other;

(2) That both debts consist in a sum of money, or ifthe things due are consumable, that they be ofthe same kind and also of the same quality ifthe latter has been stated;

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(3) That the two debts be due;

(4) That they be liquidated and demandable; thus,compensation cannot take place if one’s claimagainst the other is still the subject of litigation(see Solinap vs. del Rosario, 123 SCRA 640);

(5) That over neither of them there be any reten-tion or controversy, commenced by third per-sons and communicated in due time to the debtor(Art. 1279, Civil Code; Solinap vs. Judge delRosario, 123 SCRA 640; Sycip vs. Court of Ap-peals, 134 SCRA 317). These provisions not-withstanding, the guarantor may set up com-pensation as regards what the creditor may owethe principal debtor (see Art. 1280, Civil Code;see Basilio vs. Natividad, 80 Phil. 52).

When all requisites for legal compensation occur,compensation takes effect by operation of law (MindanaoPortland Cement vs. Court of Appeals, 120 SCRA 930)and extinguishes both debts to the concurrent amount,even though the creditors and debtors are not aware ofthe compensation and even though the debts may be pay-able at different places, but there shall be an indemnityfor expenses of exchange or transportation to the place ofpayment (Art. 1290, in relation to Art. 1286, Civil Code).

If a person should have against him several debtswhich are susceptible of compensation, the rules on theapplication of payments shall apply to the order of thecompensation (Art. 1289, Civil Code).

When one or both debts are rescissible or voidable,they may be compensated against each other before theyare judicially rescinded or avoided (Art. 1284, Civil Code).

The debtor who has consented to the assignment ofrights made by a creditor in favor of a third person can-not set up against the assignee the compensation whichwould pertain to him against the assignor, unless theassignor was notified by the debtor, at the time he gave


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his consent, that he reserved his right to the compensa-tion. If the creditor communicated the cession to him butthe debtor did not consent thereto, the latter may set upthe compensation of debts previous to the cession, but notof subsequent ones. If the assignment is made withoutthe knowledge of the debtor, he may set up the compensa-tion of all credits prior to the same and also later onesuntil he had knowledge of the assignment (Art. 1285,Civil Code).

Compensation shall not be proper when one of thedebts: (a) arises from a depositum or from the obligationof a depositary; (b) arises from the obligation of a baileein commodatum; (c) is a claim for support due by gratui-tous title, except those in arrears (see Art. 301, CivilCode); and (d) consists in civil liability arising from apenal clause (Arts. 1287 and 1288, Civil Code).

In Republic vs. Mambulao Lumber Co. (6 SCRA 622),the Supreme Court has enunciated the rule that taxesare not subject to set-off or legal compensation. In thesubsequent case of Domingo vs. Garlito (8 SCRA 443),the tribunal has reversed itself by holding that where thetaxes and the taxpayer’s claim are fully liquidated, dueand demandable, legal compensation (Art. 1279, CivilCode) can take place by operation of law, and both debtsare extinguished to the concurrent amount. The decisionin the Mambulao Lumber case, supra, which has adoptedthe prevailing rule in common law, appears to be thebetter view for, among other things, the following rea-sons: (1) taxes are of a distinct kind, essence and nature,and these impositions cannot be so classed in merely thesame category as ordinary obligations; (2) the applicablelaws and principles governing each are peculiar, not nec-essarily common, to each; and (3) public policy is bettersubserved if the integrity and independence of taxes bemaintained. Where, however, the two claims are pleadedand proved before the same court which has jurisdictionover both said claims, conventional wisdom would dictatethe practicability of set-off. The Mambulao Lumber case

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has been subsequently restored in Francia vs. Intermedi-ate Appellate Court (162 SCRA 753).

Conventional Compensation

Conventional compensation is the mutual set-off ofobligations by the will or agreement of the parties. Theparties may agree upon the compensation of debts whichare not yet due (see Art. 1282, Civil Code).

Judicial Compensation

If one of the parties to a suit over an obligation has aclaim for damages against the other, the former may setit off by proving his right to said damages and the amountthereof (Art. 1283, Civil Code). The set-off must be pleadedby the claimant and adjudged by the court (Yap vs. Chua,14 Phil. 602).

Section 6 — Novation

Art. 1291. Obligations may be modified by:

(1) changing their object or principal conditions;

(2) substituting the person of the debtor;

(3) subrogating a third person in the rights ofthe creditor. (1203)

Art. 1292. In order that an obligation may be ex-tinguished by another which substitutes the same, it isimperative that it be so declared in unequivocal terms,or that the old and the new obligations be on everypoint incompatible with each other. (1204)

Art. 1293. Novation which consists in substitutinga new debtor in the place of the original one, may bemade even without the knowledge or against the willof the latter, but not without the consent of the credi-tor. Payment by the new debtor gives him the rightsmentioned in Articles 1236 and 1237. (1205a)

Art. 1294. If the substitution is without the knowl-edge or against the will of the debtor, the new debtor’s


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insolvency or non-fulfillment of the obligation shall notgive rise to any liability on the part of the original debtor.(n)

Art. 1295. The insolvency of the new debtor, whohas been proposed by the original debtor and acceptedby the creditor, shall not revive the action of the latteragainst the original obligor, except when said insol-vency was already existing and of public knowledge,or known to the debtor, when he delegated his debt.(1206a)

Art. 1296. When the principal obligation is extin-guished in consequence of a novation, accessory obli-gations may subsist only insofar as they may benefitthird persons who did not give their consent. (1207)

Art. 1297. If the new obligation is void, the origi-nal one shall subsist, unless the parties intended thatthe former relation should be extinguished in any event.(n)

Art. 1298. The novation is void if the original obli-gation was void, except when annulment may beclaimed only by the debtor, or when ratification vali-dates acts which are voidable. (1208a)

Art. 1299. If the original obligation was subject toa suspensive or resolutory condition, the new obliga-tion shall be under the same condition, unless it isotherwise stipulated. (n)

Art. 1300. Subrogation of a third person in therights of the creditor is either legal or conventional.The former is not presumed, except in cases expresslymentioned in this Code; the latter must be clearly es-tablished in order that it may take effect. (1209a)

Art. 1301. Conventional subrogation of a third per-son requires the consent of the original parties and ofthe third person. (n)

Art. 1302. It is presumed that there is a legal sub-rogation:

(1) When a creditor pays another creditor whois preferred, even without the debtor’s knowledge;

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(2) When a third person, not interested in theobligation, pays with the express or tacit approval ofthe debtor;

(3) When, even without the knowledge of thedebtor, a person interested in the fulfillment of the ob-ligation pays, without prejudice to the effects of confu-sion as to the latter’s share. (1210a)

Art. 1303. Subrogation transfers to the person sub-rogated the credits with all the rights thereto apper-taining, either against the debtor or against third per-sons, be they guarantors or possessors of mortgages,subject to stipulation in a conventional subrogation.(1212a)

Art. 1304. A creditor, to whom partial payment hasbeen made, may exercise his right for the remainder,and he shall be preferred to the person who has beensubrogated in his place in virtue of the partial paymentof the same credit. (1213)

Novation, in its broad concept, may either beextinctive or modificatory. Obligations may be altered bychanging their object or principal conditions, substitut-ing the person of the debtor, or subrogating a third per-son in the rights of the creditor (Art. 1291, Civil Code;Lopez vs. Court of Appeals, 114 SCRA 671); or by makingany change in any of the elements of an obligation. It isextinctive when the old obligation is extinguished by thecreation of a new one that takes the place of the former;or modificatory when the old obligation subsists, asamended, to the extent it remains compatible with thenovatory agreement. No novation of a contract occurswhen the new agreement entered into between the par-ties is intended “to give life” to the old one (Huibonhoa vs.Court of Appeals, 117 SCAD 281, 320 SCRA 625).

a. Extinctive Novation

An extinctive novation results either by changingthe object or principal conditions either by changing theobject or principal conditions (objective or real), or by


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substituting the person of the debtor or subrogating athird person in the rights of the creditor (subjective orpersonal). Under this mode, novation would have dualfunctions — one to extinguish an existing obligation, theother to substitute a new one in its place — requiring aconflux of four essential requisites: (1) a previous validobligation; (2) an agreement of all parties concerned to anew contract; (3) the extinguishment of the old obliga-tion; and (4) the birth of a valid new obligation. Theanimus novandi, whether totally or partially, must ap-pear by express agreement of the parties, or by their actsthat are too clear and unequivocal to be mistaken.

The extinguishment of the old obligation by the newone is a necessary element of novation which may beeffected either expressly or impliedly. The term “expressly’’means that the contracting parties incontrovertiblydisclose that their object in executing the new contract isto extinguish the old one. Upon the other hand, no specificform is required for an implied novation, and all that isprescribed by law would be an incompatibility betweenthe two contracts. While there is really no hard and fastrule to determine what might constitute to be a sufficientchange that can bring about novation, the touchstone forcontrariety, however, would be an irreconcilable incom-patibility between the old and the new obligations. Thereare two ways which could indicate, in fine, the presenceof novation and thereby produce the effect of extinguish-ing an obligation by another which substitutes the same.The first is when novation has been explicitly stated anddeclared in unequivocal terms. The second is when theold and the new obligations are incompatible on everypoint. The test of incompatibility is whether or not thetwo obligations can stand together, each one having itsindependent existence. If they cannot, they are incom-patible and the latter obligation novates the first.Corollarily, changes that bread incompatibility must beessential in nature and not merely accidental. The in-compatibility must take place in any of the essential ele-

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ments of the obligation, such as its object, cause or princi-pal conditions thereof; otherwise, the change would bemerely modificatory in nature and insufficient to extin-guish the original obligation (Leonida C. Quinto vs. Peo-ple of the Philippines, G.R. No. 126712, 14 April 1999,305 SCRA 708).

Extinctive novation requires: first, a previous validobligation; second, the agreement of all the parties to thenew contract; third, the extinguishments of the old obli-gation; and fourth, the validity of the new one (Tiu vs.Habana, 45 Phil. 707). Novation is never presumed; inorder that an obligation may be extinguished by anotherwhich substitutes the same, it is imperative that it be(express) so declared in unequivocal terms, or (implied)that the old and the new obligations be on every pointincompatible with each other. It does not necessarily mean,however, that the new agreement is complete in itself;certain terms and conditions may be carried, expressly orimpliedly, over to the new obligation (see Art. 1292, CivilCode; Ligutan vs. Court of Appeals, G.R. No. 138677, 12February 2002; Goni vs. Court of Appeals, 144 SCRA 222;Osmena vs. Court of Appeals, 120 SCRA 395; Lopez vs.Court of Appeals, 114 SCRA 671; Sandico vs. Piguing, 42SCRA 322; Joe’s Radio vs. Alto Electronics, 104 Phil. 333;Guerrero vs. Court of Appeals, 29 SCRA 791; Pacific Millsvs. Court of Appeals, 206 SCRA 317).

When not expressed, incompatibility is required soas to ensure that the parties did really intend such nova-tion despite their failure to express it in categorical terms.The incompatibility, to be sure, should take place in anyof the essential elements of the obligation, viz.:

(1) The juridical relation or tie, such as from a merecommodatum to lease of things, or from nego-tiorum gestio to agency, or from a mortgage toantichresis (see Jagunap vs. Mirasol [CA], 48O.G. 3911), or from a sale to one of loan (Soncuyavs. Azarraga, 65 Phil. 635);


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(2) The object or principal conditions, such as achange of the nature of the prestation; or

(3) The subjects, such as the substitution of a debtor(Azarraga vs. Rodriguez, 9 Phil. 637) or the sub-rogation of the creditor.

Extinctive novation does not necessarily imply thatthe new agreement should be complete by itself; certainterms and conditions, even some of the essential elementsof the old obligations, expressly or by implication, may becarried over to the new obligation. What may, instead, besignificant is that the old obligation is extinguished so asto affect the accessory undertakings thereto (see Art. 1296,infra.). A novation may, however, be conditional the non-fulfillment of which condition may render it legally inef-fective (see Integrated Construction Services vs. Relova,146 SCRA 360).

The rule on consensuality of contracts requires theconsent of all parties to the new agreement but not neces-sarily of the parties to the old obligation since thatconsensuality does not apply to the extinguishmentsthereof. Neither does the consensuality rule apply to le-gal subrogation which arises by operation of law ratherthan by contract. In conventional subrogation, however,the law expressly requires the consent of the originalparties and of the third person (Art. 1301, Civil Code).

Substitution of Debtors

Novation, which consists in substituting a new debtorin the place of the original one, may be made even with-out the knowledge or against the will of the latter, but notwithout the consent of the creditor. It is necessary thatthe old debtor be released from the old obligation; other-wise, the third person merely becomes a joint or solidaryco-debtor as the circumstances warrant (see MercantileInsurance vs. Court of Appeals, 196 SCRA 197; LaCampana Food Products, Inc. vs. PCIB, 142 SCRA 394).Where there is a unilateral substitution of the obligor,

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the aggrieved creditor is not bound to deal with the sub-stitute (Boysaw vs. Interphil Promotions, Inc., 148 SCRA635; see also Servicewide Specialists, Inc. vs. Intermedi-ate Appellate Court, 174 SCRA 80; GSIS vs. Court ofAppeals, 169 SCRA 244). Payment by the new debtorgives him the rights mentioned in Article 1236 and Arti-cle 1237 (supra.; Art. 1293, Civil Code; see Lopez vs. Courtof Appeals, 114 SCRA 671; Rodriguez vs. Reyes, 37 SCRA196). If the substitution is without the knowledge oragainst the will of the debtor (expromission), the newdebtor’s insolvency or non-fulfillment of the obligationshall not give rise to any liability on the part of the origi-nal debtor (Art. 1294, Civil Code). The insolvency of thenew debtor, who has been proposed by the original debtor(delegacion) and accepted by the creditor, shall not revivethe action of the latter against the original obligor, exceptwhen said insolvency was already existing and of publicknowledge, or known to the debtor, when he delegatedhis debt (Art. 1295, Civil Code).

Subrogation

Subrogation of a third person in the rights of thecreditor is either legal or conventional. The former is notpresumed, except in cases expressly mentioned in theCode; the latter must be clearly established in order thatit may take effect (Art. 1300, Civil Code). Subrogationtransfers to the person subrogated the credit with all therights thereto appertaining, either against the debtor oragainst third persons, be they guarantors or possessorsof mortgages, subject to stipulation in a conventional sub-rogation (Art. 1303, Civil Code).

Conventional subrogation of a third person, unlikein a simple assignment of credit (see Arts. 1624-1628,Civil Code), requires the consent of the original partiesand of the third person.

It is presumed that there is legal subrogation: (a)when a creditor pays another creditor who is preferred,


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even without the debtor’s knowledge; (b) when a thirdperson, not interested in the obligation, pays with ex-press or tacit approval of the debtor; or (c) when evenwithout the knowledge of the debtor, a person interestedin the fulfillment of the obligation pays, without preju-dice to the effects of confusion as to the latter’s share(Art. 1302, Civil Code).

A creditor, to whom partial payment has been made,may exercise his right for the remainder, and he shall bepreferred to the person who has been subrogated in hisplace in virtue of the partial payment of the same credit(Art. 1304, Civil Code).

Effects

When the principal obligation is extinguished in con-sequence of a novation, accessory obligations may subsistonly insofar as they may benefit third persons who didnot give their consent (Art. 1296, Civil Code).

If the new obligation is void, the original one shallsubsist, unless the parties intended that the former rela-tion should be extinguished in any event (Art. 1297, CivilCode; see Ong vs. Court of Appeals, 124 SCRA 578). Thenovation is void if the original obligation was void, exceptwhen annulment may be claimed only by the debtor orwhen ratification validates acts which are voidable (Art.1298, Civil Code).

If the original obligation is subject to a suspensive orresolutory condition, the new obligation shall be underthe same condition, unless it is otherwise stipulated (Art.1299, Civil Code).

b. Modificatory Novations

A change in the incidental elements of, or an addi-tion of such elements to, an obligation, unless otherwiseexpressed by the parties, will not result in its extinguish-ment (Young vs. Court of Appeals, 196 SCRA 795). Altera-

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tions of the terms and conditions of the obligation wouldgenerally result only in modificatory novation (Tiu vs.Habana, 45 Phil. 707) unless such terms and conditionsare considered to be the essence (and thereby become anessential part of the object) of the obligation itself (seeYoung vs. Court of Appeals, 196 SCRA 795). Thus, a changeon the rate of interest (BPI vs. Abaladejo, 53 Phil. 14), onthe compounding of such interest (see Garcia vs. Court ofAppeals, G.R. No. 80201, 20 November 1990), on the man-ner or method of payment (Ramos vs. Gibbon, 67 Phil.371; Zapanta vs. De Rotaeche, 21 Phil. 154), or on theplace of delivery (North Negros Sugar vs. Compania Gen-eral de Tobacco, 100 Phil. 1103), will merely be modifica-tory and will not affect accessory undertakings (Garciavs. Court of Appeals, G.R. No. 80201, 20 November 1990).

An increase or reduction does not change the natureof the object of the obligation to pay a sum of money andshould merely be modificatory. Accordingly, a guarantorwould still be liable, albeit never beyond his original un-dertaking. In Macondray & Co., Inc. vs. Ruiz (66 Phil.562), however, the change has been held to be extinctive;although in Millar vs. Court of Appeals (38 SCRA 642),the Court has said that a mere reduction of the amountdue would only result in a modificatory novation. A mereextension of time to pay, said the Court in Inchausti &Co. vs. Yulo (34 Phil. 978), is modificatory but a reductionof that period results in incompatibility (KabankalanSugar Co. vs. Pacheco, 55 Phil. 555). Ultimately, in theabsence of an express statement made by the parties, thequestion would largely rest on the appreciation of the courton the circumstances of each particular case, the inten-tion of the parties on the matter being always crucial. Itseems that, as a rule of thumb, changes that are substan-tially more onerous to the debtor than before would betreated as being of the essence of the obligation, therebyresulting in incompatibility and extinctive novation.


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TITLE II. CONTRACTS

Chapter 1

General Provisions

Art. 1305. A contract is a meeting of minds be-tween two persons whereby one binds himself, withrespect to the other, to give something or to rendersome service. (1254a)

Art. 1306. The contracting parties may establishsuch stipulations, clauses, terms and conditions asthey may deem convenient, provided they are notcontrary to law, morals, good customs, public order,or public policy. (1255a)

Art. 1307. Innominate contracts shall be regulatedby the stipulations of the parties, by the provisions ofTitles I and II of this Book, by the rules governing themost analogous nominate contracts, and by thecustoms of the place. (n)

Art. 1308. The contracts must bind both contract-ing parties; its validity or compliance cannot be left tothe will of one of them. (1256a)

Art. 1309. The determination of the performancemay be left to a third person, whose decision shall notbe binding until it has been made known to bothcontracting parties. (n)

Art. 1310. The determination shall not be obligatoryif it is evidently inequitable. In such case, the courtsshall decide what is equitable under the circumstances.(n)

Art. 1311. Contracts take effect only between theparties, their assigns and heirs, except in case wherethe rights and obligations arising from the contract are

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not transmissible by their nature, or by stipulation orby provision of law. The heir is not liable beyond thevalue of the property he received from the decedent.

If a contract should contain some stipulation infavor of a third person, he may demand its fulfillmentprovided he communicated his acceptance to theobligor before its revocation. A mere incidental benefitor interest of a person is not sufficient. The contractingparties must have clearly and deliberately conferred afavor upon a third person. (1257a)

Art. 1312. In contracts creating real rights, thirdpersons who come into possession of the object ofthe contract are bound thereby, subject to theprovisions of the Mortgage Law and the Land Regis-tration laws. (n)

Art. 1313. Creditors are protected in cases ofcontracts intended to defraud them. (n)

Art. 1314. Any third person who induces anotherto violate his contract shall be liable for damages tothe other contracting party.

Art. 1315. Contracts are perfected by mereconsent, and from that moment the parties are boundnot only to the fulfillment of what has been expresslystipulated but also to all the consequences which,according to their nature, may be in keeping with goodfaith, usage and law. (1258)

Art. 1316. Real contracts, such as deposit, pledgeand commodatum, are not perfected until the deliveryof the object of the obligation. (n)

Art. 1317. No one may contract in the name ofanother without being authorized by the latter, or unlesshe has by law or right to represent him.

A contract entered into in the name of another byone who has no authority or legal representation, orwho has acted beyond his powers, shall beunenforceable, 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)

Arts. 1312-1317 OBLIGATIONS AND CONTRACTSTitle II. Contracts

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Concept

A contract is a meeting of minds between two per-sons whereby one binds himself, with respect to the other,to give something or to render some service (Art. 1305,Civil Code; see Lao Sok vs. Sabaysabay, 138 SCRA 134).

Contracts may either be nominate (the Special Con-tracts regulated by Book IV of the Civil Code), such asthose which the law designates by name (e.g., sales), orinnominate (contractual relations recognized by law withno special designation) which are broadly grouped intodo ut des (I give and you give), do ut facias (I give andyou do), facio ut des (I do and you give), facio ut facias (Ido and you do) primarily based on unjust enrichment(Corpus vs. Court of Appeals, 98 SCRA 424). Innominatecontracts are regulated by the stipulations of the parties,by the provisions of Titles I and II of Book IV of the Code,by the rules governing the most analogous contracts, andby the customs of the place (Art. 1307, Civil Code), in thatorder.

Principles or Tenets of Contracts

1. Autonomy of Contracts

The contracting parties may establish such stipu-lations, clauses, terms and conditions as they may deemdesirable or convenient, provided they are not contrary tolaw, morals, good customs, public order, or public policy(Art. 1306, Civil Code; Castro vs. Court of Appeals, 99SCRA 722). A contract is the law between the partiesand, absent any showing that its provisions are wholly orin part contrary to law, morals, good customs, public orderor public policy, it shall be enforced to the letter by thecourts (Metropolitan Bank & Trust Co. vs. Wong, G.R. No.120859, 26 June 2001, 150 SCAD 178; Salvatiera vs.Court of Appeals, 73 SCAD 586, 261 SCRA 45). Courtscannot make for the parties better or equitable agreementsthan they themselves have been satisfied to make, orrewrite contracts because they operate harshly or unjustly

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to one of the parties, or alter them for the benefit of oneparty and to the detriment of the other, or by construction,relieve one of the parties from terms which he voluntarilyconsented to or impose on him those which he did not(Angel Bautista vs. Court of Appeals, G.R. No. 123655, 19January 2000, 118 SCAD 327). The fact that thecontractual stipulations may thus turn out to befinancially disadvantageous will not relieve parties theretoof their obligations; contracts bind the parties not only towhat has been expressly stipulated, but also to allnecessary consequences thereof which, according to theirnature, may be in keeping with good faith, usage and law(Torres vs. Court of Appeals, 117 SCAD 94, 320 SCRA428). A contract may happen to be a foolish or unwiseinvestment, but the law will not relieve a party from itseffects once the contract has been executed with all therequired formalities and with full awareness of his actions(Heirs of Joaquin Teves vs. Court of Appeals, 114 SCAD181, 316 SCRA 632).

In Banco Filipino Savings and Mortgage Bank vs.Hon. Navarro and Valle (152 SCRA 346, reiterated inInsular Bank of Asia and America vs. Salazar, 159 SCRA133; Macasaet vs. Commission on Audit, G.R. No. 83748,12 May 1989) the validity of “escalation” or “escalator”clauses in contracts has been upheld, the Court saying —

“Some contracts contain what is known as an‘escalator clause’ which is defined as one of whichthe contract fixes a base price but contain a provisionthat in the event of specified cost increases, the selleror contractor may raise the price up to a fixedpercentage of the base. Attacks on such a clausehave usually been based on the claim that, becauseof the open price provision, the contracts, was toodefinite to be enforceable and did not evidence anactual meeting of the minds of the parties, or thatthe arrangement left the price to be determinedarbitrarily by one party so that contract lackedmutuality. In most instances, however, these attacks


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have been unsuccessful. (17 Am. Jur. 2d, pp. 786-787)

“The Court further finds as a matter of law thatthe cost of living index adjustment, or escalatorclause, is not substantively unconscionable.”

Escalation clauses are not basically wrong or legallyobjectionable as long as they are not solely potestativebut based on reasonable and valid standards (see PNBvs. Intermediate Appellate Court, 183 SCRA 133; PNB vs.Court of Appeals, 196 SCRA 536).

The freedom of contract has been said to be both aconstitutional and statutory right (Gabriel vs. Monte dePiedad, 71 Phil. 497), and an essence of our contractualsystem (Republic vs. PLDT, 26 SCRA 629; see also Peoplevs. Pomar, 46 Phil. 440). The right, however, is not withoutlimitations; hence, contracts or stipulations may not con-travene the law, morals, good customs, public order orpublic policy (Art. 1206, Civil Code; see Lita Enterprises,Inc. vs. Intermediate Appellate Court, 129 SCRA 79;Baluyot vs. Venegas, 22 SCRA 412). The law, meant inthis context, refers to mandatory or prohibitory laws (nor-mally expressed in the Law on Obligations and Contracts,such as by the phrase “any stipulation to the contraryshall be void” or words of similar import) and not to thoseprovisions which are merely intended to be suppletory tothe agreement of the parties. Morals and good customs,being both based on a norm of conduct or standard offairness and justice, practically overlap each other exceptthat the good customs are more localized than the other(see Report of the Code Commission; De los Reyes vs.Alojado, 16 Phil. 499) and, therefore, must be proved (seeArt. 12, in relation to Art. 11, Civil Code). Public orderrelates to the public weal, peace, safety and health of thecommunity (Report of the Code Commission) which ispermanent and essential in any institution (Ollendorf vs.Abrahamson, 38 Phil. 585). Public policy is determinedby the circumstances of time, place and events; it gener-

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ally connotes the public good and welfare, the interest ofsociety, and the security of individuals and the preserva-tion of their rights (see Gabriel vs. Monte de Piedad, 71Phil. 497). In order to be against public policy, “actualinjury need not be shown; it is enough if the potentiali-ties for harm are present” (Sy Suan vs. Regala, L-9506,30 June 1959).

By way of illustration, the following agreements havebeen held to contravene the above limitations: a sale ofland covered by a homestead patent within the 5-yearprohibitory period, as being contrary to law (Castro vs.Opiano, 90 Phil. 491; see also Gacayan vs. Leano, 121SCRA 260); a promise of marriage where carnal relationis the consideration of the promise, as being contrary tomorals (Batarra vs. Marcos, 7 Phil. 156); an employmentcontract providing that within five years from its termi-nation, the employee shall not enter into any new em-ployment except by the written permission of the em-ployer, as being an unreasonable restraint and contraryto public policy (Ferrazzini vs. Gsell, 34 Phil. 957); and awaiver to transfer to another school in a scholarship grant,as being contrary to public order and public policy (Quivs. Arellano University, 2 SCRA 205).

Police power has been held to subordinate the non-impairment clause of the Constitution (Ortigas & Co.,Limited Partnership vs. Feati Bank and Trust Co., 94SCRA 533), which yields to the interest of public health,safety and morals and, in general, to public regulationsintended for the general welfare of the community (Anglo-Fil Trading Corp. vs. Lazaro, 124 SCRA 495).

Restrictive covenants on land ownership have beensustained. In the case of Fajardo, Jr. vs. Freedom ToBuild, Inc., G.R. No. 134692, 01 August 2000, the Su-preme Court has held:

“Restrictive covenants are not, strictly speak-ing, synonymous with easements. While it may becorrect to state that restrictive covenants on the use


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of land or the location or character of buildings orother structures thereon may broadly be said to cre-ate easements or rights, it can also be contendedthat such covenants, being limitations on the man-ner in which one may use his own property, do notresult in true easements, but a case of servitudes(burden), sometimes characterized to be negativeeasements or reciprocal negative easements. Nega-tive easement is the most common easement createdby covenant or agreement whose effect is to precludethe owner of the land from doing an act, which, if noeasement existed, he would be entitled to do.

“Courts which generally view restrictive cov-enants with disfavor for being a restriction on theuse of one’s property, have, nevertheless, sustainedthem where the covenants are reasonable, not con-trary to public policy, or to law, and not in restraintof trade. Subject to these limitations, courts enforcerestrictions to the same extent that will lend judicialsanction to any other valid contractual relationship.In general, frontline restrictions on constructionshave been held to be valid stipulations.

The provisions in a restrictive covenant prescribingthe type of the building to be erected are crafted notsolely for the purpose of creating easements, generally oflight and view, nor as a restriction as to the type of con-struction, but may also be aimed as a check on the subse-quent uses of the building conformably with what thedeveloper originally might have intended the stipulationsto be. x x x

There appears to be no cogent reasons for not up-holding restrictive covenants aimed to promote aesthet-ics, health, and privacy or to prevent overcrowding.

x x x

“This Court is not unaware of its ruling in AyalaCorporation vs. Ray Burton Development Corpora-

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tion, which has merely adjudged the payment of dam-ages in lieu of demolition. In the aforementionedcase, however, the elaborate mathematical formulafor the determination of compensatory damageswhich takes into account the current constructioncost index during the immediately preceding 5 yearsbased on the weighted average of wholesale priceand wage indices of the National Census and Statis-tics Office and the Bureau of Labor Statistics is ex-plicitly provided for in the Deed of Restrictions en-tered into by the parties. This unique and peculiarcircumstance, among other strong justificationstherein mentioned, is not extant in the case at bar.’’

In Alcuaz vs. PSBA (161 SCRA 7), the SupremeCourt has held that a student once admitted by the schoolwould be considered enrolled for one semester; thus, af-ter the close of the first semester, the school would nolonger have any existing contract either with the teach-ers or with the intervening teachers. The Court, in thesubsequent Non vs. Dames (185 SCRA 523), has refusedto apply the “termination of contract” theory that wouldconsider the contract between the school and the studentas expiring after each semester for collegiate courses,holding that the said contract is not to be considered asan ordinary contract but as one being imbued with publicinterest. Impositions by a school of sanctions on studentsrequire procedural due process, among them being theright to a hearing and of representation by counsel. Aca-demic deficiencies can be proper grounds but not thestudent’s exercise of his constitutional rights of free speechand assembly (see also Capitol Medical Center vs. Courtof Appeals, 178 SCRA 493). The ruling in Non vs. Dames,however, should not be given a retroactive effect to casesthat have arisen before its promulgation on May 20, 1990.A contrary view would result in oppression to the schoolsrelying on the decision in Alcuaz case promulgated onlyon May 2, 1988 (Unciano Paramedical College, Inc. vs.Court of Appeals, 221 SCRA 285).


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The decision in Isabelo, Jr. vs. Perpetual Help Col-lege of Rizal, Inc., G.R. No. 103142, 08 November 1993, isnoteworthy. There —

“The petitioner claims that the real reason whyPHCR has voided his enrollment as a senior gradu-ating student had been because of his active partici-pation in opposing PHCR’s application for tuitionfee increase with the DECS.

“The private respondent, on the other hand, in-vokes “academic freedom’’ in dropping the petitionerfrom its roll of students. It argues that the petitionerhas only been allowed to enroll “conditionally’’ dur-ing the first semester of school year 1991-92 pendingthe completion of his remedial classes in CMT, inwhich he has failed.’’

The Supreme Court said:

“The rule in this jurisdiction since Garcia vs.Loyola School of Theology, reiterated in Tangonanvs. Paño, has been to uphold the rule that admissionto an institution of higher learning is discretionaryupon the school and that such an admission is a mereprivilege, rather than a right, on the part of the stu-dent. In Ateneo de Manila University vs. Capulongthis Court cited with approval the formulation madeby Justice Felix Frankfurter of the essential freedomssubsumed in the term “academic freedom’’ encom-passing not only “the freedom to determine . . . onacademic grounds who may teach, what may betaught (and) how it shall be taught,’’ but likewise “whomay be admitted to study.’’ We have thus sanctionedits valid invocation by a school in rejecting studentswho are academically delinquent, or a laywomanseeking admission to a seminary, or students violat-ing “School Rules on Discipline.’’

“Like any other right, however, academic free-dom has never been meant to be an unabridged

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license. It is a privilege that assumes a correlativeduty to exercise it responsibly. An equally tellingprecept is a long recognized mandate, so well ex-pressed in Article 19 of the Civil Code, that every“person must, in the exercise of his rights and in theperformance of his duties, act with justice, give eve-ryone his due, and observe honesty and good faith.’’

“Another observation. In Non vs. Dames II, wehave already abandoned our earlier ruling in Alcuazvs. PSBA (that enrollment of a student is a semes-ter-to-semester contract, and that the school maynot be compelled to renew the contract) by recogniz-ing instead the right of a student to be enrolled forthe entire period required in order to complete hiscourse. We have also stressed that the contractbetween the school and the student, imbued, as it is,with public interest, is not an ordinary contract.’’

2. Consensuality of Contracts

It is indispensable in any contract that the partiesthereto give their consent (Arts. 1305, 1306 and 1315,Civil Code). Thus, although the landowner has an optionunder Article 448 of the Code to compel the builder orplanter to buy the land and the sower to pay the rent, anaction for specific performance is not available since suchaction would presuppose a contract of sale or lease, as thecase may be, which, without mutual consent, cannot ex-ist (see discussions on Art. 448, supra.).

No one may contract in the name of another withoutbeing authorized by the latter, or unless he has by law aright to represent him. A contract entered into the nameof another by one who has no authority or legal repre-sentation, or who has acted beyond his powers, shall beunenforceable, unless it is ratified, expressly or impliedly,before it is revoked by the other contracting party (Art.1317, in relation to Art. 1403 and Art. 1898, Civil Code),meanwhile rendering it, in effect, a continuing offer.


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3. Mutuality of Contracts

The contract must bind both contracting parties; itsvalidity or compliance cannot be left to the will of one ofthem (Art. 1308, Civil Code). A contract containing a con-dition whose efficacy or fulfillment is dependent solely onthe uncontrolled will of one party is void (Garcia vs. RitaLegarda, 21 SCRA 555; PNB vs. Court of Appeals, 196SCRA 536).

The determination, however, of the performance un-der the contract may be left to a third person whosedecision shall not be binding until it has been made knownto both contracting parties (see Art. 1309, Civil Code),but this determination shall not be obligatory if it isevidently inequitable. In this latter case, the courts shalldecide what is equitable under the circumstances (seeArt. 1310, Civil Code).

It has been held that a lease which provides that thelessee can continue in the premises so long as the rentalsare paid is violative of mutuality (Encarnacion vs.Baldomar, 77 Phil. 470; Lao Lim vs. Court of Appeals,191 SCRA 150). It may be preferable, however, to holdsuch contract as instead providing for a period and ashaving been contemplated by the parties or as being leftto the will of the debtor, under Article 1197 of the Code,and which would permit the courts to fix the period of thecontract if the parties are unable or unwilling to fix itthemselves. The termination of the contract does notnecessarily require mutuality, and it can even be validlyleft to one party (see Taylor vs. Uy Tieng Piao, 43 Phil.873) by agreement or under a resolutory facultativecondition. In the Baldomar case (supra.), the SupremeCourt, in effect, had given to the lessor, and withheldfrom the lessee, the decision to terminate the lease.Furthermore, by considering the lease to be violative ofmutuality, the contract itself must inescapably be deemedto have suffered from a fatal infirmity which the Courtdid not seem to have conceded.

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4. Obligatoriness of Contracts

The contract, once perfected, has the force of lawbetween the parties, with which they are bound to com-ply in good faith, and neither one may, without the con-sent of the other, renege therefrom (see Art. 1159, CivilCode; LTB vs. Manubat, 58 SCRA 650; Phoenix Assn. Co.,Ltd. vs. United States Lines, 22 SCRA 674; National Mar-keting Corp. vs. Atlas Development Corp., 21 SCRA 359).The autonomy of contracts allows the parties to establishsuch stipulations, clauses, terms and conditions as theymay deem appropriate provided only that they are notcontrary to law, morals, good customs, public order orpublic policy. The standard norm in the performance oftheir respective covenants in the contract, as well as inthe exercise of their rights thereunder, is expressed inthe cardinal principle that the parties in that juridicalrelation must act with justice, honesty and good faith(Bricktown Development Corp. [its new corporate nameMultinational Realty Development Corporation] andMariano Z. Veralde vs. Amor Tierra Development Corp.and the Court of Appeals, G.R. No. 112182, 12 December1994, 239 SCRA 126).

5. Relativity of Contracts

Contracts take effect only between the parties, theirassigns and heirs, except in cases where the rights andobligations arising from the contract are not transmissi-ble by their nature, or by stipulation or by provision oflaw. An heir, however, is not liable beyond the value ofthe property he received from the decedent (see Barandavs. Baranda, 150 SCRA 59; Art. 1311, Civil Code).

In consonance with the axiom res inter alios actaaliis neque nocet prodest, a contract can only obligate theparties who had entered into it, or their successors whoassumed their personalities or juridical positions, andthat, concomitantly, a contract can neither favor nor preju-dice third persons. As a consequence of the rule that a


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contract takes effect only between the contracting par-ties and that third persons cannot be obligated thereun-der, a person who is not a party to a contract has no legalstanding to challenge its validity or to prosecute an ac-tion for its rescission, except only to the extent that thecontract may be prejudicial to him. Verily, in some ways,third persons may be affected in varying degrees. Incontracts creating real rights, third persons who comeinto possession of the object of the contract may be boundthereby under the provisions of mortgage laws and landregistration laws (Art. 1312, Civil Code). Creditors areprotected in cases of contracts intended to defraud them(Art. 1313, Civil Code). Accion directa is allowed by lawin certain cases (see Art. 1729, Civil Code). Any thirdperson who induces another to violate his contract can bemade liable for damages to the other contracting party(Art. 1314, Civil Code; National Union of Bank Employ-ees vs. Lazaro, 157 SCRA 123). Exceptionally, contractsmay confer benefits to a third person or what are other-wise known as stipulation pour autrui.

Stipulation Pour Autrui

If a contract should contain a stipulation in favor ofa third person, he may demand its fulfillment, providedhe has communicated his acceptance to the obligor beforeits revocation. A mere incidental benefit or interest of aperson is not sufficient. It is essential that the contractingparties have clearly and deliberately conferred a favorupon the third person (Art. 1311, Civil Code). In fine, inorder that the third person benefited by a stipulationpour autrui may demand its fulfillment, the followingrequisites must be shown:

(1) There is a clear and deliberate conferment ofbenefit upon a third person, that is not condi-tioned or compensated for by any kind of obliga-tion, and for whom neither of the contractingparties bears legal representation or author-ization;

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(2) The stipulation is communicated to the thirdperson intended to be benefited by the parties;

(3) The third person accepts the benefit and com-municates such acceptance to the obligor beforeits revocation (see Young vs. Court of Appeals,G.R. No. 79518, 13 January 1989). The accept-ance may either be express or implied; such asby the enjoyment of benefits of the contract withthe knowledge of the obligor (Florentino vs.Encarnacion, L-27696, 30 September 1977). Thestipulation must merely be an incidental, notthe main element of purpose, of the contract;otherwise, the contract itself would eitheramount to a donation or place the beneficiaryas a real party thereto and would accordinglybe governed elsewhere as such.

Once the requisites of the stipulation pour autruihave concurred, the same is enforceable (see Coquia vs.Fieldman’s Insurance, Co., 26 SCRA 178), and no longercan it be revoked. The stipulation may be revoked beforeits acceptance; but to be effective, both contracting par-ties should exercise the revocation. A revocation by onlyone party would be violative of the obligatoriness andmutuality of contracts (see Kauffman vs. National Bank,41 Phil. 182). It has been held that where an agent is notthe beneficiary of a stipulation pour autrui, the fact thathe did not obtain his commission or recoup his advancesbecause of the non-performance of the contract does notentitle him to file an action against the buyer (Uy vs.Court of Appeals, 112 SCAD 63, 314 SCRA 69).

Chapter 2

Essential Requisites of Contracts

General Provisions

Art. 1318. There is no contract unless the follow-ing requisites concur:

(1) Consent of the contracting parties;

Art. 1318 OBLIGATIONS AND CONTRACTSTitle II. Contracts

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

(3) Cause of the obligation which is established.(1261)

Stages and Elements of Contracts

The three stages of a contract include its negotiationor preparation, its birth or perfection, and its fulfillmentor consummation. Negotiation covers the period from thetime the contracting parties indicate interest in the con-tract to the time the contract is concluded (perfected).The perfection of the contract takes place upon the con-currence of its essential elements. Contracts which areconsensual as to perfection are established upon the meet-ing of the minds (concurrence of offer and of acceptance)on the object and the cause of the contract. Real con-tracts require, in addition, the delivery of the object ofthe contract; solemn contracts require certain formalitiesto be observed in order to make said agreements valid,the prescribed form becoming an essential elementthereof. The stage of consummation begins when theparties perform their respective commitments under thecontract culminating in the death or extinguishment ofthe contract.

Negotiation

Negotiation is formally initiated by an offer. An im-perfect promise (policitation) is merely an offer. Publicadvertisements or solicitations and the like are generallyconstrued as mere invitations to make offers or propos-als. These circumstances, unless and until a contract isperfected, are not considered as binding commitments.Thus, at any time prior to the perfection of the contract,either negotiating party may stop the negotiation. Theoffer, at this stage, may be withdrawn; the withdrawal iseffective immediately after its manifestation, such as byits mailing and not necessarily when the offeree learns of

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the withdrawal (Laudico vs. Arias, 43 Phil. 270). Wherea period is given to the offeree within which to accept theoffer, the following rules can be said to govern:

(1) If the period is not itself founded upon or sup-ported by a consideration, the offeror is stillfree and has the right to withdraw the offer(before its acceptance) by communicating suchwithdrawal to the offeree (see Art. 1324, CivilCode; see also Atkins, Kroll & Co. vs. Cua, 102Phil. 948, wherein it has been held that thisrule is applicable to a unilateral promise to sellunder Art. 1479, modifying the previous deci-sion in South Western Sugar vs. Atlantic Gulf,97 Phil. 249), that is, before the offeror’s comingto know of the acceptance (see Art. 1319, CivilCode; Rural Bank of Parañaque vs. Court ofAppeals, 135 SCRA 408; Sanchez vs. Rigos, 45SCRA 368). The right to withdraw, however,must not be exercised whimsically or arbitrar-ily; otherwise, it could give rise to a damageclaim under Article 19 of the Code which or-dains that “every person must, in the exerciseof his rights and in the performance of his du-ties, act with justice, give everyone his due, andobserve honesty and good faith.” An action forspecific performance would be voidable.

(2) If the period has a separate consideration, acontract of “option” is deemed perfected, and itwould be a breach of that contract to withdrawthe offer during the agreed period. The option,however, is to be distinguished from the maincontract which is yet to be concluded. If, in fact,the optioner withdraws the offer before its ac-ceptance by the optionee, the latter may not suefor specific performance, but merely for dam-ages, since the main contract has failed frombeing perfected. The optioner-offeror rendershimself liable for the breach of option. In these


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cases, care should be taken of the real nature ofthe consideration given, for if, in fact, it is in-tended as part consideration for the main con-tract with a right of withdrawal on the part ofthe optionee, the main contract could be deemedperfected; a similar instance would be an “ear-nest money” in contract of sale that may evi-dence its perfection (Art. 1482, Civil Code).

(3) If the contract is perfected, i.e., the offer is ac-cepted before the offer is withdrawn, neitherparty is permitted to renege therefrom.

Perfection

A consensual contract is perfected (birth of contract)at the moment there is a meeting of minds upon theobject and the cause thereof, i.e., when its essential ele-ments concur. Its essential elements include: (1) the con-sent of the contracting parties; (2) object certain which isthe subject matter of the contract; and (3) cause of theobligation which is established (Art. 1318, Civil Code; seeRamon Magsaysay Award Foundation vs. Court of Ap-peals, 134 SCRA 136; National Grains Authority vs. In-termediate Appellate Court, 171 SCRA 131; Salonga vs.Farrales, 105 SCRA 359). In real and solemn contract,delivery and due observance of prescribed formalities,respectively, are additional essential elements to perfectthe contract (see Royal Lines, Inc. vs. Court of Appeals,143 SCRA 608). In contracts by correspondence, the Codeof Commerce expresses the “manifestation theory” (Art.54), perfecting the contract at the moment when accept-ance is declared or made by the offeree. This rule may beconsidered as having been superseded by the “cognitiontheory” adopted by Article 1319 of the Civil Code thatconsiders the acceptance to effectively bind the offeroronly “from the time it came to his knowledge.” The viewhas been expressed, however, that Article 54 of the Codeof Commerce would still apply to commercial contractspremised upon the rule that implied repeals are not

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favored and that, accordingly, not having been expresslyrepealed, the Code of Commerce is still the governing lawin commercial transaction, at least in those contractsthat are still specifically governed by the latter Code,such as bottomry and respondentia.

1. Consent

Art. 1319. Consent is manifested by the meetingof the offer and the acceptance upon the thing and thecause which are to constitute the contract. The offermust be certain and the acceptance absolute. A quali-fied acceptance constitutes a counter-offer.

Acceptance made by letter or telegram does notbind the offerer except from the time it came to hisknowledge. The contract, in such a case, is presumedto have been entered into in the place where the offerwas made. (1262a)

Art. 1320. An acceptance may be express or im-plied. (n)

Art. 1321. The person making the offer may fix thetime, place, and manner of acceptance, all of whichmust be complied with. (n)

Art. 1322. An offer made through an agent is ac-cepted from the time acceptance is communicated tohim. (n)

Art. 1323. An offer becomes ineffective upon thedeath, civil interdiction, insanity, or insolvency of ei-ther party before acceptance is conveyed. (n)

Art. 1324. When the offerer has allowed the of-feree a certain period to accept, the offer may be with-drawn at any time before acceptance by communicat-ing such withdrawal, except when the option is foundedupon a consideration, as something paid or promised.(n)

Art. 1325. Unless it appears otherwise, businessadvertisements of things for sale are not definite of-fers, but mere invitations to make an offer. (n)


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Art. 1326. Advertisements for bidders are simplyinvitations to make proposals, and the advertiser isnot bound to accept the highest or lowest bidder, un-less the contrary appears. (n)

Art. 1327. The following cannot give consent to acontract:

(1) Unemancipated minors;

(2) Insane or demented persons, and deaf-muteswho do not know how to write. (1263a)

Art. 1328. Contracts entered into during a lucid in-terval are valid. Contracts agreed to in a state of drunk-enness or during a hypnotic spell are voidable. (n)

Art. 1329. The incapacity declared in Article 1327is subject to the modifications determined by law, andis understood to be without prejudice to special dis-qualification established in the laws. (1264)

Art. 1330. A contract where consent is giventhrough mistake, violence, intimidation, undue influ-ence, or fraud is voidable. (1265a)

Art. 1331. In order that mistake may invalidate con-sent, it should refer to the substance of the thing whichis the object of the contract, or to those conditionswhich have principally moved one or both parties toenter into the contract.

Mistake as to the identity or qualifications of oneof the parties will vitiate consent only when such iden-tity or qualifications have been the principal cause ofthe contract.

A simple mistake of account shall give rise to itscorrection. (1266a)

Art. 1332. When one of the parties is unable toread, or if the contract is in a language not understoodby him, and mistake or fraud is alleged, the personenforcing the contract must show that the terms thereofhave been fully explained to the former. (n)

Art. 1333. There is no mistake if the party allegingit knew the doubt, contingency or risk affecting theobject of the contract. (n)

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Art. 1334. Mutual error as to the legal effect of anagreement when the real purpose of the parties is frus-trated, may vitiate consent. (n)

Art. 1335. There is violence when in order to wrestconsent, serious or irresistible force is employed.

There is intimidation when one of the contractingparties is compelled by a reasonable and well-groundedfear of an imminent and grave evil upon his person orproperty, 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 compe-tent authority, if the claim is just or legal, does notvitiate consent. (1267a)

Art. 1336. Violence or intimidation shall annul theobligation, although it may have been employed by athird person who did not take part in the contract. (1268)

Art. 1337. There is undue influence when a per-son takes improper advantage of his power over thewill of another, depriving the latter of a reasonable free-dom of choice. The following circumstances shall beconsidered: the confidential, family, spiritual and otherrelations between the parties, or the fact that the per-son alleged to have been unduly influenced was suf-fering from mental weakness, or was ignorant or infinancial distress. (n)

Art. 1338. There is fraud when, through insidiouswords or machinations of one of the contracting par-ties, 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 isa duty to reveal them, as when the parties are boundby confidential relations, constitutes fraud. (n)

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


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Art. 1341. A mere expression of an opinion doesnot signify fraud, unless made by an expert and theother party has relied on the former’s special know-ledge. (n)

Art. 1342. Misrepresentation by a third person doesnot vitiate consent, unless such misrepresentation hascreated substantial mistake and the same is mutual.(n)

Art. 1343. Misrepresentation made in good faith isnot fraudulent but may constitute error. (n)

Art. 1344. In order that fraud may make a contractvoidable, it should be serious and should not havebeen employed by both contracting parties.

Incidental fraud only obliges the person employ-ing it to pay damages. (1270)

Art. 1345. Simulation of a contract may be abso-lute or relative. The former takes place when the par-ties do not intend to be bound at all; the latter, whenthe parties conceal their true agreement. (n)

Art. 1346. An absolutely simulated or fictitiouscontract is void. A relative simulation, when it doesnot prejudice a third person and is not intended forany purpose contrary to law, morals, good customs,public order or public policy binds the parties to theirreal agreement. (n)

Consent is manifested by the meeting of the offerand the acceptance upon the thing and the cause whichare to constitute the contract. (see Art. 1319, Civil Code;Yuviengco vs. Dacuycuy, 104 SCRA 668). A contract beingbasically consensual in nature, it can only be perfectedupon a concurrence of the offer and the acceptance. Theoffer must be certain and the acceptance must be abso-lute, unconditional and without variance of any sort fromthe proposal. A qualified acceptance constitutes a coun-ter-offer. Such a qualified acceptance cannot be the equiva-lent of consent, and it will, in fact, have the effect of arejection or an annulment of the original offer (Cesar P.Uy, Beatriz F. Uy and Anita Papa vs. Hon. Victorino P.

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Evangelista, Presiding Judge, Regional Trial Court,Quezon City, Branch 223, et al., G.R. No. 140365, 11 July2001, 361 SCRA 95).

Verily, consent could be given not only by the partyhimself but by anyone duly authorized and acting for andin his behalf. A contract entered into in the name of an-other by one who ostensibly might have but who, in real-ity, had no authority or legal representation, or who, hav-ing such authority, acted beyond his powers, would beunenforceable, however, it is susceptible to ratificationbut that ratification should be made before its revocationby the other contracting party (Regal Films, Inc. vs.Gabriel Concepcion, G.R. No. 139532, 09 August 2001,362 SCRA 504).

The Offer

The offer must be certain (Art. 1319, Civil Code; seeRosentock vs. Burk, 46 Phil. 217). It may fix the time,place, and manner of acceptance, all of which must becomplied with (Art. 1321, Civil Code; Matias vs. Court ofAppeals, 141 SCRA 217; Leoquinco vs. Postal Savings, 47Phil. 772). It may be made personally or through anagent (Art. 1322, Civil Code). Unless it appears other-wise, business advertisements of things for sale are notdefinite offers, but mere invitations to make an offer (Art.1325, Civil Code). Advertisements for bidders are simplyinvitations to make proposals, and the advertiser is notbound to accept the highest or lowest bidder, unless thecontrary appears (Art. 1326, Civil Code; Leoquinco vs.Postal Savings Bank, 47 Phil. 772).

When the offerer has allowed the offeree a certainperiod to accept, the offer may be withdrawn at any timebefore acceptance by communicating such withdrawal,except when the option is founded upon a consideration,as something paid or promised (Art. 1324, Civil Code; seediscussion on Negotiation, supra.).

An offer becomes ineffective upon the death, civilinterdiction, insanity, or insolvency of either party before


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acceptance is conveyed (Art. 1323, Civil Code), i.e., nocontract is deemed perfected if those circumstances shouldarise before the offeror learns of the acceptance. In con-tracts by correspondence, the withdrawal of an offer iseffective upon its manifestation or when it is sent so longas the offeror has not yet learned of the acceptance by theofferee.

The Acceptance

The acceptance must be absolute (Art. 1319, CivilCode; Yuviengco vs. Dacuycuy, 104 SCRA 668; Valenciavs. RFC, 103 Phil. 444), and may be express or implied(Art. 1320, Civil Code). A qualified acceptance consti-tutes a counter-offer (Art. 1319, Civil Code; Batungan vs.Cojuangco, 78 Phil. 481) and has the effect of rejectingthe offer (see Logan vs. Phil. Acetylene, 32 Phil. 177). Anacceptance made by letter or telegram does not bind theofferor except from the time it came to his knowledge.The contract, in such a case, is presumed to have beenentered into the place where the offer is made (Art. 1319,Civil Code; Japan Overseas Commercial Co. vs. Baquer &Co., 3 C.A. Reports 961). If the offer fixes the time, placeand manner of acceptance, all such conditions must becomplied with (Art. 1321; Montinola vs. Victorias MillingCo., 54 Phil. 782). An offer made through an agent isaccepted from the time acceptance is communicated andmade known to him (Art. 1322, Civil Code).

The Parties

The contracting parties must have juridical capacityand capacity to act (see discussion on Law on Persons,supra.) and, in proper cases, authority and must not beotherwise disqualified (see Arts. 1327-1329).

Effects of Want of Capacity or Authority andDisqualification

In general, incapacity of a party would result in avoidable contract (Art. 1390, Civil Code); where both par-

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ties are incapacitated to give consent, the contract be-comes unenforceable (Art. 1403, Civil Code). Where theissue is one of authority such as in a contract entered intoby an agent, want of authority renders the contract unen-forceable (Art. 1403, Civil Code; Frias vs. Esquivel, 67SCRA 487), except where the party with whom the agentacts is aware of such lack of authority in which case it isconsidered void unless the principal ratifies the act en-tered into by the agent without or in excess of his author-ity (Art. 1898, Civil Code; National Power Corp. vs. Na-tional Merchandising Corp., 120 SCRA 628). A convey-ance of conjugal real property by the wife, who is not theadministratrix, without the husband’s consent, is void(see Arts. 96 and 124, Family Code), but until revoked, itshall be considered a continuing offer.

A contract entered into by one who by law is disqua-lified, being prohibitory in nature, is void (Art. 5, CivilCode; Rubias vs. Batiller, 51 SCRA 120; examples of dis-qualification are contained in Arts. 133, 1490 and 1491,Civil Code; see also the effect of a void contract underArts. 1409 to 1419, infra.).

Vices of Consent

Consent must be free and voluntary. A contract whereconsent is given through mistake, violence, intimidation,undue influence, or fraud is merely voidable (see Art.1330, Civil Code; Pangadil vs. Court of First Instance,116 SCRA 347; Rio Grande Rubber Est. Co. vs. Board ofLiquidator, 104 SCRA 863) and may, therefore, be rati-fied (see Art. 1390, Civil Code). Violence, intimidationand undue influence affect volition, while mistake andfraud, as well as incapacity, affect cognition.

Mistake

In order that mistake may invalidate consent, itshould refer to the substance of the thing which is theobject of the contract, or to those conditions which haveprincipally moved one or both parties to enter into the


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contract. Mistake as to the identity or qualifications ofone of the parties will vitiate consent only when suchidentity or disqualification has been the principal causeof the contract. A simple mistake of account shall giverise to its correction (Art. 1331, Civil Code; Dumasug vs.Modelo, 34 Phil. 252). Mutual error as to the legal effectof an agreement normally would not render the contractvoidable (Luna vs. Linatoc, 74 Phil. 15) but when the realpurpose of the parties is frustrated, it may be held tovitiate consent (see Art. 1334, Civil Code).

There is no mistake if the parties alleging it knewthe doubt, contingency or risk affecting the object of thecontract (Art. 1333, Civil Code).

When one of the parties is unable to read, or if thecontract is in a language not understood by him, andmistake or fraud is alleged, the person enforcing the con-tract must show that the terms thereof have been fullyexplained to the former (Art. 1332, Civil Code; see Bunyivs. Reyes, 39 SCRA 504; Tang vs. Court of Appeals, 90SCRA 236). Article 1332 of the Civil Code is intended forthe protection of a party to a contract who might be at adisadvantage due to his illiteracy, ignorance, mental weak-ness or other handicap and contemplates a situationwherein a contract has been entered into, but the consentof one of the parties is vitiated by mistake or fraud com-mitted by the other contracting party (Hemides vs. Courtof Appeals, 316 SCRA 347).

Violence and Intimidation

There is violence when in order to wrest consent,serious or irresistible force is employed. There is intimi-dation when one of the contracting parties is compelledby a reasonable and well-grounded fear of an imminentand grave evil upon his person or upon the person orproperty of his spouse, descendants or ascendants, togive his consent. In determining the degree of the intimi-dation, the age, sex and condition of the person shall beborne in mind. A threat to enforce one’s claim through

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competent authority, if the claim is just or legal, does notvitiate consent (Art. 1335, Civil Code; see Vales vs. Villa,35 Phil. 769; Papa vs. Montenegro, 54 Phil. 231). Vio-lence or intimidation shall annul the obligation, althoughit may have been employed by a third person who did nottake part in the contract (Art. 1336, Civil Code).

Undue Influence

There is undue influence when a person takes im-proper 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 con-fidential, family, spiritual, and other relations betweenthe parties, or the fact that the person alleged to haveunduly influenced is suffering from mental weakness oris ignorant or in financial distress (Art. 1337, Civil Code;Martinez vs. Hongkong and Shanghai Banking Corp., 15Phil. 252).

For undue influence to justify the cancellation of aninstrument, three elements must be present: first, a per-son who can be influenced; second, the fact that improperinfluence is exerted; and third, submission to the over-whelming effect of such unlawful conduct. A confidentialor fiduciary relationship may include any relationshipbetween persons, allowing one to dominate the other withthe opportunity to use that superiority to the other’s dis-advantage. Included are those of attorney and client,physician and patient, nurse and invalid, parent and child,guardian and ward, member of a church or sect and spir-itual adviser, a person and his confidential adviser, orwhenever a confidential relationship exists as being afact. Undue influence is not to be inferred alone from age,sickness, or debility of body if sufficient intelligence re-mains (Loyola vs. Court of Appeals, 326 SCRA 285).

Fraud

There is fraud (deceit or dolo) when, through insidi-ous words or machinations of one of the contracting par-


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ties, the other is induced to enter into a contract which,without them, he would not have agreed to (Art. 1338,Civil Code). Failure to disclose facts, when there is aduty to reveal them, as when the parties are bound byconfidential relations, constitutes fraud (Art. 1339, CivilCode; Strong vs. Repide, 41 Phil. 947). In order thatfraud may make a contract voidable, it should be serious(dolo causante) and should not have been employed byboth contracting parties (see Valdez vs. Sibal, 46 Phil.930). Incidental fraud (dolo incidente) only obliges theperson employing it to pay damages (Art. 1344, CivilCode; see Woodhouse vs. Halili, 93 Phil. 526).

The usual exaggerations in trade are not in them-selves fraudulent when the other party has had an oppor-tunity to know the facts (Art. 1340, Civil Code; Song-covs. Sellmer, 37 Phil. 254). A mere expression of an opin-ion does not signify fraud, unless made by an expert andthe other party has relied on the former’s special knowl-edge (Art. 1341, Civil Code). Misrepresentation (unlikeviolence or intimidation) by a third person does not viti-ate consent, unless such misrepresentation has createdsubstantial mistake and the same is mutual (Art. 1342,Civil Code; Co vs. Court of Appeals, 193 SCRA 198; RuralBank of Caloocan vs. Court of Appeals, 104 SCRA 151;Hill vs. Veloso, 31 Phil. 160). Misrepresentation made ingood faith is not fraudulent but may constitute error (Art.1343, Civil Code; see Asian vs. Jalandoni, 45 Phil. 296).

Simulation of Contracts

Simulation of contracts may be absolute or relative.The former takes place when the parties do not intend tobe bound at all; the latter, when the parties conceal theirtrue agreement (Art. 1345, Civil Code). An absolutelysimulated or fictitious contract is void. A relative simula-tion, when it does not prejudice a third person and is notintended for any purpose contrary to law, morals, goodcustoms, public order or public policy, binds the parties totheir real agreement (Art. 1346; see also Arts. 1359-1369

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and 1409, Civil Code, infra.; Gardner vs. Court of Ap-peals, 131 SCRA 585; Lagang vs. Court of Appeals, 131SCRA 361).

2. Object of Contracts

Art. 1347. All things which are not outside thecommerce of men, including future things, may be theobject of a contract. All rights which are not intrans-missible may also be the object of contracts.

No contracts may be entered into upon future in-heritance except in cases expressly authorized by law.

All services which are not contrary to law, morals,good customs, public order, or public policy may like-wise be the object of a contract. (1271a)

Art. 1348. Impossible things or services cannotbe the object of contracts. (1272)

Art. 1349. The object of every contract must bedeterminate as to its kind. The fact that the quantity isnot determinate shall not be an obstacle to the exist-ence of the contract, provided it is possible to deter-mine the same, without the need of a new contractbetween the parties. (1273)

All things which are not outside the commerce ofman, including future things, all rights which are notintransmissible and all services which are not contraryto law, morals, good customs, public order or public policymay be the object of a contract (see Arts. 1347, 1178 and1461, Civil Code). The object of every contract must bedeterminate as to its kind. The fact that the quantity isnot determinate shall not be an obstacle to the existenceof the contract, provided it is possible to determine thesame, without the need of a new contract between theparties (Art. 1349, Civil Code; see Yu Tek & Co. vs. Gon-zalez, 29 Phil. 384).

The following may not be the object of contract:

(1) Things which are outside the commerce of man(Art. 1347, Civil Code), such as communal prop-


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erty for public use (Mun. of Cavite vs. Rojas, 30Phil. 602);

(2) Intransmissible rights (Art. 1347, Civil Code),such as purely personal and political rights(Saura vs. Sandico, L-13403, 23 March 1960);

(3) Future inheritance except in cases expresslyprovided by law (Art. 1347, Civil Code; see alsoArt. 1080, Civil Code; Chavez vs. IntermediateAppellate Court, G.R. No. 68282, 8 November1990, where a partition inter vivos in the formof deeds of sale was not deemed to be a contractwith respect to future inheritance; Tordilla vs.Tordilla, 60 Phil. 162);

(4) Impossible things and services (Art. 1348, CivilCode); and

(5) Services which are contrary to law, morals, goodcustoms, public order or public policy (Art. 1347,Civil Code).

3. Cause of Contracts

Art. 1350. In onerous contracts the cause isunderstood to be, for each contracting party, theprestation or promise of a thing or service by the other;in remuneratory ones, the service or benefit which isremunerated; and in contracts of pure beneficence, themere liberality of the benefactor. (1274)

Art. 1351. The particular motives of the parties inentering into a contract are different from the causethereof. (n)

Art. 1352. Contracts without cause, or with unlaw-ful cause, produce no effect whatsoever. The cause isunlawful if it is contrary to law, morals, good customs,public order or public policy. (1275a)

Art. 1353. The statement of a false cause in con-tracts shall render them void, if it should not be provedthat they were founded upon another cause which istrue and lawful. (1276)

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Art. 1354. Although the cause is not stated in thecontract, it is presumed that it exists and is lawful,unless the debtor proves the contrary. (1277)

Art. 1355. Except in cases specified by law, le-sion or inadequacy of cause shall not invalidate a con-tract, unless there has been fraud, mistake or undueinfluence. (n)

In onerous contracts, the cause is understood to be,for each contracting party, the prestation or promise of athing or service by the other; in remuneratory ones, theservice or benefit which is remunerated; and in contractsof pure beneficence, the mere liberality of the benefactor(Art. 1350, Civil Code; Rodriguez vs. Rodriguez, 20 SCRA908). To illustrate, if a contract mainly would require “A”to deliver his horse to “B,” and “B” to deliver his cow to“A,” the horse and the cow would be the objects of thecontract; the cause, however, is viewed from each party’sproximate reason for concluding the contract which maynot thus be common to both parties — hence, the cause asto “A” would be the delivery of the cow and as to “B” thedelivery of the horse (see General Enterprises, Inc. vs.Lianga Bay Logging Co., 11 SCRA 733). The parties mayhave their own reasons, personal to each of them, whythey desire the exchange — properly termed their mo-tives. In contracts where money is used as the medium ofexchange, such as in sales or leases, the law considersmoney as the cause or consideration thereof, and it makesthe object and the cause as being viewed from the stand-point of the contract itself and thus common to both par-ties.

Contracts without cause, or with unlawful cause,produce no effect whatsoever. The cause is unlawful if itis contrary to law, morals, good customs, public order orpublic policy (Art. 1352, Civil Code). The absence orillegality of the cause renders the contract not merelyvoidable but void (see Batarra vs. Marcos, 7 Phil. 156).The particular motives of the parties in entering into acontract are different from the cause thereof (Art. 1351,


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Civil Code; see Basic Books, Inc. vs. Lopez, 16 SCRA 291;Gonzalez vs. Trinidad, 67 Phil. 682). Motive is that whichinduces a party, personal to him, into concluding a con-tract specifically over which the other party has no legalconcern nor has made any direct covenant. True, at times,the line that separates the motive and the cause of con-tracts may be so thin as to make them interlink.

In Liguez vs. Lopez (102 Phil. 577), a married mandonated a conjugal parcel of land to a 16-year old girl sothat he might live maritally with her. The latter’s par-ents would not allow her to live with him without thedonation. The Supreme Court ruled the donation to betainted by an immoral cause and, therefore, void and ofno effect (see discussion on Donations). The Court said:

“x x x It is argued that under Article 1274 of theCivil Code of 1889 (which was the governing law in1943 when the donation was executed), in contractsof pure beneficence the consideration is the liberal-ity of the donor, and that liberality per se can neverbe illegal, since it is neither against the law normorals or public policy. The flaw in this argumentlies in ignoring that under Article 1274, liberality ofthe donor is deemed causa only in those contractsthat are pure beneficence; that is to say, contractsdesigned solely and exclusively to procure the wel-fare of the beneficiary, without any intent of produc-ing any satisfaction for the donor; contracts, in otherwords, in which the idea of self-interest is totallyabsent on the part of the transferor. For this veryreason, the same Article 1274 provides that inremuneratory contracts, the consideration is the serv-ice or benefit for which the remuneration is given;causa is not liberality in these cases because thecontract or conveyance is not made out of pure be-neficence, but “solvendi animo.”

The existence and legality of the cause of the con-tract are presumed, although the same may not be therein

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137

stated, unless the debtor proves the contrary (Art. 1354,Civil Code; Ong vs. Ong, 139 SCRA 133).

In one case, the Supreme Court has said that indeeds of conveyance adhering to the Anglo-Saxon practice,it is not unusual to state that the consideration given isP1.00 although the actual consideration may be more. Aone-peso consideration on a sale may be suspicious; butthis alone does not justify one to infer that the buyers arenot buyers in good faith and for value. Neither does suchinference warrant one to conclude that the sale is void abinitio. Bad faith and inadequacy of monetary considerationdo not render a conveyance inexistent. The assignor’sliberality could also be sufficient cause for a valid con-tract (Ong vs. Ong, supra.; see Art. 1350, Civil Code).

Except in cases specified by law, lesion or inadequacyof cause shall not invalidate a contract, unless there hasbeen fraud, mistake or undue influence (Art. 1355, CivilCode; see Rosal vs. Gan, 55 Phil. 527). A natural obliga-tion may be a sufficient cause (Villaruel vs. Estrada, 71Phil. 14) but not a mere or purely moral obligation (Fishervs. Robb, 69 Phil. 101). Statement of a false cause incontracts shall render them void (see Mapalo vs. Mapalo,17 SCRA 114), unless it be proved that they are foundedupon another true and lawful cause (Art. 1353, Civil Code).

Chapter 3

Form of Contracts

Art. 1356. Contracts shall be obligatory, in what-ever form they may have been entered into, provided allthe essential requisites for their validity are present.However, when the law requires that a contract be insome form in order that it may be valid or enforceable,or that a contract be proved in a certain way, that re-quirement is absolute and indispensable. In such cases,the right of the parties stated in the following articlecannot be exercised. (1278a)

Art. 1357. If the law requires a document or otherspecial form, as in the acts and contracts enumerated


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in the following article, the contracting parties may com-pel each other to observe that form, once the contracthas been perfected. This right may be exercised simul-taneously with the action upon the contract. (1279a)

Art. 1358. The following must appear in a publicdocument:

(1) Acts and contracts which have for their ob-ject the creation, transmission, modification orextinguishment of real rights over immovable property;sales of real property or of an interest therein are gov-erned by Articles 1403, No. 2, and 1405;

(2) The cession, repudiation or renunciation ofhereditary rights or of those of the conjugal partner-ship of gains;

(3) The power to administer property, or anyother power which has for its object an act appearingor which should appear in a public document, or shouldprejudice a third person;

(4) The cession of actions or rights proceedingfrom an act appearing in a public document.

All other contracts where the amount involvedexceeds Five hundred pesos must appear in writing,even a private one. But sales of goods, chattels orthings in action are governed by Articles 1403, No. 2and 1405. (1280a)

Generally, contracts are obligatory in whatever formthey may have been entered into, provided all the essen-tial requisites for their validity are present. When, how-ever, the law requires that a contract be in some form inorder that it may be valid or enforceable, or that a con-tract be proved in a certain way, that requirement isabsolute and indispensable (see Art. 1356, Civil Code).Thus, Section 127 of the Land Registration Act (Act 496,now Sec. 112 of P.D. No. 1524), requiring deeds of convey-ance to be acknowledged, does not allow the registrationof a private document of sale (Gellardo vs. IntermediateAppellate Court, 155 SCRA 248).

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139

A certain form may be prescribed by law for any ofthe following purposes: for validity, for enforceability orfor greater efficacy of the contract. When the solemnityrequirement is for validity, its non-observance rendersthe contract void and of no effect. The non-compliance ofa form prescribed for enforceability will not permit thecontract, upon the objection of a party and although oth-erwise valid, to be proved or enforced by action. Formali-ties intended for greater efficacy or convenience or tobind third persons, if not done, would not adversely affectthe binding effect, validity or enforceability of the con-tract between the contracting parties themselves (Dauden-Hernaez vs. De Los Angeles, 27 SCRA 1276); in this case,the parties may compel each other to observe the form,once the contract has been perfected, and this right maybe exercised simultaneously with an action upon the con-tract (see Art. 1357, Civil Code).

Illustrative cases —

(1) In the following cases, the prescribed formalities bylaw are for the validity of the contract or agreement:

In writing

(a) Donations of personal property where its valueexceeds P5,000 (Art. 748, Civil Code);

(b) Stipulations reducing the common carrier’s ex-traordinary diligence and limiting its liability(Arts. 1744-1750, Civil Code);

(c) Agent’s authority in the sale of land or any in-terest therein (Art. 1874, Civil Code);

(d) Stipulations to pay interest on loans (Art. 1956,Civil Code); and

(e) Antichresis (Art. 2134, Civil Code).

In a Public Document

(a) Donations of real property (Art. 749, Civil Code);and


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(b) Partnerships where real property is contributed(Arts. 1771 and 1773, Civil Code).

Transfer of Certificate of Registration

Sales of large cattle (Art. 1581, Civil Code; Sec.22, Act No. 1147).

Substantial Compliance with Form Prescribed byLaw

Chattel morgages (Art. 2140, Civil Code; ActNo. 1508).

(2) In the following cases, the contract must be in writ-ing in order that it may be enforceable:

(a) An agreement that by its terms is not to be per-formed within a year from the making thereof;

(b) A special promise to answer for the debt, de-fault, or miscarriage of another;

(c) An agreement made in consideration of mar-riage, other than a mutual promise to marry;

(d) An agreement for the sale of goods, chattels orthings in action, at a price not less than fivehundred pesos, unless the buyer accepts andreceives part of such goods and chattels, or theevidences, or some of them, of such things inaction, or pays at the time some part of the pur-chase money; but when a sale is made by auc-tion and entry is made by the auctioneer in hissales book, at the time of the sale, of the amountand kind of property sold, terms of sale, price,name of the purchasers and person on whoseaccount the sale is made, it is a sufficient memo-randum;

(e) An agreement for the leasing for a longer periodthan one year, or for the sale of real property orof an interest therein; and

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141

(f) A representation as to the credit of a third per-son (see Art. 1403, Civil Code).

In the foregoing transactions, the agreement shallbe unenforceable by action, unless the same or some noteor memorandum thereof be in writing and subscribed bythe party charged, or by his agent; evidence, therefore, ofthe agreement cannot be received without the writing ora secondary evidence of its contents (Art. 1403, Civil Code).

The term “statute of frauds” is descriptive of stat-utes which require certain classes of contracts to be inwriting. The purpose of the statute is to prevent fraudand perjury in the enforcement of obligations dependingfor their evidence on the unassisted memory of witnessesby requiring certain enumerated contracts and transac-tions to be evidenced by a writing signed by the party tobe charged (Rosencor Development Corporation vs. PaternoInquing, 145 SCAD 484, 354 SCRA 119). The Statute ofFrauds cannot apply to transactions not therein enume-rated (ibid.).

When a verbal contract has already been either fullyconsummated or partially executed, its enforceability willnot be barred by the Statute of Frauds, and oral evidencemay thus be admitted to prove the agreement (Cordialvs. Miranda, 140 SCAD 271, 348 SCRA 158). Verily, theapplication of the Statute of Frauds presupposes the ex-istence of a perfected contract (Villanueva vs. Court ofAppeals, 78 SCAD 484, 267 SCRA 89).

Not all agreements “affecting land” must be put intowriting to attain enforceability. Setting up of bounda-ries, the oral partition of real property, or an agreementcreating a right of way are not covered by the provisionsof the statute of fraud (Rosencor Development Corpora-tion vs. Paterno Inquing, supra.).

(3) In the following cases, the requisite form is merelyfor greater efficacy or convenience and the failure tocomply therewith does not affect the validity andbinding effect of the act between the parties (Philip-


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pine National Railways vs. Intermediate AppellateCourt, G.R. No. 66715, 18 September 1990).

In a Public Document

(a) Acts and contracts which have for their objectthe creation, transmission, modification orextinguishments of real rights over immovableproperty; sales of real property or of an interesttherein are governed by Articles 1403, No. 2and 1405;

(b) The cession, repudiation or renunciation of he-reditary rights or of those of the conjugal prop-erty of gains;

(c) The power to administer property, or any otherpower which has for its object an act appearingor which should appear in a public document,or should prejudice a third person; and

(d) The cession of actions or rights proceedings froman act appearing in a public document (Art. 1358,Civil Code; Manotok Realty vs. Court of Appeals,L-35367, 9 August 1987).

Article 1358 does not require the accomplishment ofan act or contract in a public document in order to vali-date the act or contract, but only for its greater efficacy,convenience of the parties, and to bind third persons.The private conveyance of a real property is thereforevalid, and the vendee has the right to compel the vendoror his heirs to execute the necessary document to prop-erly convey the property (Cenido vs. Apacionado, 115SCAD 798, 318 SCRA 688).

In Writing

All contracts where the amount involved exceedsfive hundred pesos except in sales of goods, chattels orthings in action which are governed by the Statute ofFrauds (Arts. 1403, No. 2, and 1405, supra., in relation toArt. 1358, Civil Code).

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Registration

All acts or transactions affecting real property (seeArts. 708-709; Art. 2125, Civil Code; Act No. 496).

The fact alone that the two deeds are registered fiveyears after the date of their execution would not adverselyaffect their validity nor would such circumstance alonebe indicative of fraud. The registration of the documentsis a ministerial act and merely creates a constructivenotice of the contents against all third persons. Amongthe parties, the instrument would remain completely validand binding (Rebecca Viado Non vs. Court of Appeals, 121SCAD 166, 325 SCRA 652).

Chapter 4

Reformation of Instruments (n)

Art. 1359. When, there having been a meeting ofthe minds of the parties to a contract, their true inten-tion is not expressed in the instrument purporting toembody the agreement, by reason of mistake, fraud,inequitable conduct or accident, one of the parties mayask for the reformation of the instrument to the endthat such true intention may be expressed.

If mistake, fraud, inequitable conduct, or accidenthas prevented a meeting of the minds of the parties,the proper remedy is not reformation of the instrumentbut annulment of the contract.

Art. 1360. The principles of the general law onthe reformation of instruments are hereby adopted in-sofar as they are not in conflict with the provisions ofthis Code.

Art. 1361. When a mutual mistake of the partiescauses the failure of the instrument to disclose theirreal agreement, said instrument may be reformed.

Art. 1362. If one party was mistaken and the otheracted fraudulently or inequitably in such a way that theinstrument does not show their true intention, theformer may ask for the reformation of the instrument.


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Art. 1363. When one party was mistaken and theother knew or believed that the instrument did not statetheir real agreement, but concealed that fact from theformer, the instrument may be reformed.

Art. 1364. When through the ignorance, lack ofskill, negligence or bad faith on the part of the persondrafting the instrument or of the clerk or typist, theinstrument does not express the true intention of theparties, the courts may order that the instrument bereformed.

Art. 1365. If two parties agree upon the mortgageor pledge of real or personal property, but the instru-ment states that the property is sold absolutely or witha right of repurchase, reformation of the instrument isproper.

Art. 1366. There shall be no reformation in thefollowing cases:

(1) Simple donations inter vivos wherein no con-dition is imposed;

(2) Wills;

(3) When the real agreement is void.

Art. 1367. When one of the parties has brought anaction to enforce the instrument, he cannot subse-quently ask for its reformation.

Art. 1368. Reformation may be ordered at the in-stance of either party or his successors in interest, ifthe mistake was mutual; otherwise, upon petition ofthe injured party, or his heirs and assigns.

Art. 1369. The procedure for the reformation ofinstruments shall be governed by rules of court to bepromulgated by the Supreme Court.

The purpose of reformation is to set aright and clearup whatever may have been an error, imperfection orambiguity in the instrument and to make it truly reflec-tive of the real intention of the parties but not to remakethe contract or to create a new one (see Cosio vs. Palileo,

Arts. 1359-1369

145

14 SCRA 170; City of Cabanatuan vs. Lazaro, 39 SCRA653; Jardenil vs. Salas, 73 Phil. 626). The right of refor-mation is necessarily an invasion or limitation of theparol evidence rule since, when a writing is reformed, theresult would be that an oral agreement is by court degreemade legally effective. Consequently, the courts, as theagencies so authorized by law to exercise the power toreform an instrument, must necessarily exercise thatpower sparingly, with great caution and zealous care.The remedy, being an extraordinary one, must be subjectto such limitations as may be provided by law. A suit forreformation of an instrument must be brought within theperiod prescribed by law, otherwise, it will be barred bylapse of time (Rosello-Bentir vs. Leanda, 125 SCAD 322,330 SCRA 591).

Reformation would, for instance, be proper in thefollowing cases:

(a) When a mutual mistake of the parties causesthe failure of the instrument to disclose theirreal agreement (see Art. 1361, Civil Code);

(b) If one party is mistaken and the other has actedfraudulently or inequitably in such a way thatthe instrument does not show their true inten-tion (see Art. 1362, Civil Code);

(c) When one party is mistaken and the other knewor believed that the instrument did not statetheir real agreement, but concealed that factfrom the former (see Art. 1362, Civil Code);

(d) When through the ignorance, lack of skill, neg-ligence or bad faith on the part of the persondrafting the instrument or of the clerk or typist,the instrument does not express the true inten-tion of the parties (see Art. 1364, Civil Code);

(e) If two parties agree upon the mortgage or pledgeof real or personal property, but the instrumentstates that the property is sold absolutely or


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with a right of repurchase (see Arts. 1365, 1602,Civil Code); or

(f) When there is relative simulation that does notprejudice a third person and is not unlawful(Art. 1346, Civil Code).

Reformation may be ordered at the instance of eitherparty or his successors in interest if the mistake is mu-tual; otherwise, upon petition of the injured party or hisheirs and assigns (Art. 1368, Civil Code).

Reformation may not be asked in: (a) simple dona-tions inter vivos wherein no condition is imposed; (b) willsand testaments; (c) when the real agreement is void (Art.1366, Civil Code); or (d) when one of the parties hasbrought an action to enforce the instrument and subse-quently seeks its reformation (Art. 1367, Civil Code).

The principles of the general law on interpretationof instruments are applicable in the reformation of in-struments to the extent that they are not in conflict withthe provisions of the Code (see Art. 1360, Civil Code).The procedure for the reformation are governed by theRules of Court (see Art. 1369, Civil Code).

Under the Rules of Court, an action for reformationof an instrument is instituted as a special civil action fordeclaratory relief, the purpose of which is to secure anauthoritative statement of the rights and obligations ofthe parties for their guidance in the enforcement thereofor compliance therewith; hence, it must be instituted be-fore the breach of the obligation (Rosello-Bentir vs. Leanda,supra.).

Chapter 5

Interpretation of Contracts

Art. 1370. If the terms of a contract are clear andleave no doubt upon the intention of the contractingparties, the literal meaning of its stipulations shall con-trol.

Art. 1370

147

If the words appear to be contrary to the evidentintention of the parties, the latter shall prevail over theformer. (1281)

Art. 1371. In order to judge the intention of thecontracting parties, their contemporaneous and sub-sequent acts shall be principally considered. (1282)

Art. 1372. However general the terms of a contractmay be, they shall not be understood to comprehendthings that are distinct and cases that are different fromthose upon which the parties intended to agree. (1283)

Art. 1373. If some stipulation of any contractshould admit of several meanings, it shall be under-stood as bearing that import which is most adequateto render it effectual. (1284)

Art. 1374. The various stipulations of a contractshall be interpreted together, attributing to the doubt-ful ones that sense which may result from all of themtaken jointly. (1285)

Art. 1375. Words which may have differentsignifications shall be understood in that which is mostin keeping with the nature and object of the contract.(1286)

Art. 1376. The usage or custom of the place shallbe borne in mind in the interpretation of the ambigui-ties of a contract, and shall fill the omission of stipula-tions which are ordinarily established. (1287)

Art. 1377. The interpretation of obscure words orstipulations in a contract shall not favor the party whocaused the obscurity. (1288)

Art. 1378. When it is absolutely impossible to set-tle doubts by the rules established in the precedingarticles, and the doubts refer to incidental circum-stances of a gratuitous contract, the least transmis-sion of rights and interests shall prevail. If the contractis onerous, the doubt shall be settled in favor of thegreatest reciprocity of interests.

If the doubts are cast upon the principal object ofthe contract in such a way that it cannot be known


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what may have been the intention or will of the parties,the contract shall be null and void. (1289)

Art. 1379. The principles of interpretation statedin Rule 123 of the Rules of Court shall likewise beobserved in the construction of contracts. (n)

The intention of the parties is primordial (Kasilagvs. Rodriguez, 69 Phil. 217). If the terms of a contract areclear and leave no doubt upon the intention of the con-tracting parties, the literal meaning of its stipulationshall control (GSIS vs. Court of Appeals, 145 SCRA 311;Visayan Surety & Ins. Co., vs. Tabares, 67 Phil. 743). Ifthe words appear to be contrary to the evident intentionof the parties, the latter shall prevail over the former(Art. 1370, Civil Code; Sy vs. Court of Appeals, 131 SCRA116). Resort to extrinsic aids and other extraneous sourcesare not necessary in order to ascertain the intent of theparties when there is no ambiguity in the terms of theagreement (Baylon vs. Court of Appeals, 312 SCRA 502).

In case of doubt, the following rules shall govern:

(a) In order to judge the intention of the contract-ing parties, their contemporaneous and subse-quent acts shall be principally considered (Art.1371, Civil Code; GSIS vs. Court of Appeals,supra.; Serrano vs. Court of Appeals, L-46357, 9October 1985; Nielsen & Co. vs. Lepanto Con-solidated Mining Co., 18 SCRA 1040).

(b) The terms of a contract, however general, shallnot be understood to comprehend things thatare distinct and cases that are different fromthose upon which the parties intended to agree(Art. 1372, Civil Code; Buiser vs. Cabrera, 81Phil. 669).

(c) If some stipulation of any contract should ad-mit of several meanings, it shall be understoodas bearing that import which is most adequateto render it effectual (Art. 1373, Civil Code; Luna

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149

vs. Linatoc, 74 Phil. 15). Termed as the “princi-ple of effectiveness,” the rule is to the effect thatwhen two interpretations of a contract are pos-sible, that which will render the contract opera-tive, rather than that which will make it mean-ingless, will be preferred (PNB vs. Utility As-surance, G.R. No. 39215, 1 September 1989).

(d) The various stipulations of a contract shall beinterpreted together, attributing to the doubt-ful ones that sense which may result from all ofthem taken jointly (Art. 1374, Civil Code;NAPOCOR vs. Court of Appeals, G.R. No. 43706,14 November 1986; People’s Trust & Trust Co.vs. Odom, 64 Phil. 126).

(e) Words which may have different significationsshall be understood in that which is most inkeeping with the nature and object of the con-tract (Art. 1375, Civil Code; Cerman & Co. vs.Donaldson, Sim & Co., 1 Phil. 63).

(f) The usage or custom of the place shall be bornein mind in the interpretation of the ambiguitiesof a contract and shall fill the omission of stipu-lations which are ordinarily established (Art.1376, Civil Code; Andreas vs. Bank of P.I., 47Phil. 795).

(g) The interpretation of obscure words or stipu-lations in a contract shall not favor the partywho caused the obscurity (Art. 1377, Civil Code;Equitable Bank vs. Intermediate AppellateCourt, G.R. No. 74451, 25 May 1988; BayviewHotel vs. Ker & Co., 116 SCRA 327).

(h) A contract of adhesion is construed and inter-preted against the party who drafted it (Ange-les vs. Casalanz, supra.).

When it is absolutely impossible to settle doubts bythe rules established above —


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(1) If the doubts refer to incidental circumstances,the doubt in the case of a gratuitous contractshall be resolved in favor of the least trans-mission of rights and interest, and in onerouscontracts, the doubt shall be settled in favor ofthe greatest reciprocity of interests.

(2) If the doubts are cast upon the principal objectof the contract in such a way that it cannot beknown what may have been the intention orwill of the parties, the contract shall be null andvoid (see Art. 1378, Civil Code; see Labasan vs.Lacuesta, 86 SCRA 16).

The principles of interpretation and constructionunder the Rules of Court shall likewise be observed inthe interpretation and construction of contracts (see Art.1379, Civil Code; Rule 123, Rules of Court).

Defective Contracts

Civil law, in its usual sophistication, classifies defec-tive contracts into: first, the rescissible contracts (Arts.1381-1382, Civil Code), which are the least infirm; sec-ond, the voidable contracts (Art. 1390, Civil Code); third,the unenforceable contracts (Art. 1403, Civil Code); andfinally, the void contracts (Art. 1409, Civil Code).

Chapter 6

Rescissible Contracts

Art. 1380. Contracts validly agreed upon may berescinded in the cases established by law. (1290)

Art. 1381. The following contracts are rescis-sible:

(1) Those which are entered into by guardianswhenever the wards whom they represent suffer lesionby more than one-fourth of the value of the thingswhich are the object thereof;

Arts. 1380-1381

151Arts. 1382-1386 OBLIGATIONS AND CONTRACTSTitle II. Contracts

(2) Those agreed upon in representation of ab-sentees, if the latter suffer the lesion stated in the pre-ceding number;

(3) Those undertaken in fraud of creditors whenthe latter cannot in any other manner collect the claimsdue them;

(4) Those which refer to things under litigationif they have been entered into by the defendants with-out the knowledge and approval of the litigants or ofcompetent judicial authority;

(5) All other contracts specially declared by lawto be subject to rescission. (1291a)

Art. 1382. Payments made in a state of insolvencyfor obligations to whose fulfillment the debtor couldnot be compelled at the time they were effected, arealso rescissible. (1292)

Art. 1383. The action for rescission is subsidiary;it cannot be instituted except when the party sufferingdamage has no other legal means to obtain reparationfor the same. (1294)

Art. 1384. Rescission shall be only to the extentnecessary to cover the damages caused. (n)

Art. 1385. Rescission creates the obligation to re-turn the things which were the object of the contract,together with their fruits, and the price with its inter-ests; consequently, it can be carried out only when hewho demands rescission can return whatever he maybe obliged to restore.

Neither shall rescission take place when the thingswhich are the object of the contract are legally in thepossession of third persons who did not act in badfaith.

In this case, indemnity for damages may be de-manded from the person causing the loss. (1295)

Art. 1386. Rescission referred to in Nos. 1 and 2of Article 1381 shall not take place with respect to con-tracts approved by the courts. (1296a)

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Art. 1387. All contracts by virtue of which thedebtor alienates property by gratuitous title are pre-sumed to have been entered into in fraud of creditors,when the donor did not reserve sufficient property topay all debts contracted before the donation.

Alienations by onerous title are also presumedfraudulent when made by persons against whom somejudgment has been rendered in any instance or somewrit of attachment has been issued. The decision orattachment need not refer to the property alienated,and need not have been obtained by the party seekingthe rescission.

In addition to these presumptions, the design todefraud creditors may be proved in any other mannerrecognized by the law of evidence. (1297a)

Art. 1388. Whoever acquires in bad faith the thingsalienated in fraud of creditors, shall indemnify the lat-ter for damages suffered by them on account of thealienation, whenever, due to any cause, it should beimpossible for him to return them.

If there are two or more alienations, the first ac-quirer shall be liable first, and so on successively.(1298a)

Art. 1389. The action to claim rescission must becommenced within four years.

For persons under guardianship and for absen-tees, the period of four years shall not begin until thetermination of the former’s incapacity, or until the domi-cile of the latter is known. (1299)

In terms of their efficaciousness, rescissible contractsare regarded, among the four, as being the closest toperfectly executed contracts. A rescissible contract con-tains all the requisites of a valid contract and are consid-ered legally binding, but by reason of injury or damage toeither of the contracting parties or to third persons, suchas creditors, it is susceptible to rescission at the instanceof the party who may be prejudiced thereby. A rescissiblecontract is valid, binding and effective until it is rescinded.

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The proper way by which it can be assailed is by an actionfor rescission based on any of the causes specified by law(Borja vs. Addison, 44 Phil. 895).

Rescissible contracts are validly agreed upon but, byreason of lesion or economic prejudice, may be rescindedin the cases established by law (see Art. 1380, Civil Code;Cf. Ibanez vs. Hongkong & Shanghai Bank, 22 Phil. 572).The following contracts are rescissible:

(1) Those which are entered into by guardianswhenever the wards whom they represent suf-fer lesion by more than one-fourth of the valueof the things which are the object thereof;

(2) Those agreed upon in representation of absen-tees, if the latter suffer lesion by more thanone-fourth of the value of the things which arethe object thereof;

(3) Those undertaken in fraud of creditor when thelatter cannot in any other manner collect theclaims due them;

(4) Those which refer to things under litigation ifthey have been entered into by the defendantwithout the knowledge and approval of the liti-gants or of competent judicial authority;

(5) All other contracts specially declared by law tobe subject to rescission (Art. 1381; see also Arts.1177 and 1098, Civil Code).

Payments made in a state of insolvency for obliga-tions to whose fulfillment the debtor could not be com-pelled at the time they were effected are likewise rescis-sible (Art. 1382, Civil Code; Asia Banking vs. Nable, 51Phil. 763). Under the Insolvency Law, transfers declaredto be fraudulent are not merely rescissible but void (De laPaz vs. Garcia, 18 SCRA 779; Act 1956). Rescission re-ferred to in Nos. 1 and 2, Article 1381 (supra.), however,shall not take place with respect to contracts approved bythe court (see Art. 1386, Civil Code).


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Rescission creates the obligation to return the thingswhich have been the object of the contract, together withtheir fruits and the price with its interest; consequently,it can be carried out only when he who demands rescis-sion can return whatever he may be obliged to restore.Neither shall rescission take place when the things whichare the object of the contract are legally in the possessionof third persons who did not act in bad faith. In this case,indemnity for damages may be demanded from the per-son causing the loss (Art. 1385, Civil Code; see Cordoverovs. Villaruz, 46 Phil. 473).

In respect to the third type of rescissible contracts,all contracts by virtue of which the debtor alienates prop-erty by gratuitous title are presumed to have been en-tered into in fraud of creditors when the donor did notreserve sufficient property to pay all debts contractedbefore the donation. Alienations by onerous title are alsopresumed fraudulent when made by persons againstwhom some judgment has been rendered in any instanceor some writ of attachment has been issued. The decisionor attachment need not refer to the property alienatedand need not have been obtained by the party seeking therescission. In addition to these presumptions, the designto defraud creditors may be proved in any other mannerrecognized by the law of evidence (Art. 1387, Civil Code;see Provincial Sheriff vs. Court of Appeals, 22 SCRA 798;Gatchalian vs. Manalo, 68 Phil. 708; Oria vs. Mcmicking,21 Phil. 243).

Accion pauliana requires that: (1) the party askingfor rescission has a credit prior to the alienation, althoughdemandable later; (2) the debtor has made a subsequentcontract conveying a patrimonial benefit to a third per-son; (3) the creditor has no other legal remedy to satisfyhis claim; (4) the act being impugned is fraudulent; and(5) the third person who received the property conveyed,if it is by onerous title, has been an accomplice in thefraud (Siguan vs. Lim, 318 SCRA 725). An action torescind must be of last resort, availed of only after all the

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legal remedies have been exhausted and proven futile(Khe Hong Cheng vs. Court of Appeals, 355 SCRA 701).Article 1381 of the Civil Code would allow the rescissionof contract in fraud of creditors only when the latter can-not in any manner collect the claims due them (Adorablevs. Court of Appeals, 319 SCRA 200). Thus, an action forrescission cannot be instituted when the party sufferingdamage has other legal means to obtain reparation forthe same (Art. 1383, Civil Code; Goquiolay vs. Sycip, 108Phil. 947). The rescission sought shall be only to theextent necessary to cover the damages sustained (Article1384, Civil Code). Consequently, only the creditor whobrought the action for rescission can benefit therefrom;those who are strangers to the action cannot benefit fromits effects (see Siguan vs. Lim, supra.).

Rescission under Article 1191 termed “resolution” bythe old Civil Code, unlike rescission under Article 1383,is a principal action based on a breach of a party. Rescis-sion under Article 1383, upon the other hand, is a sub-sidiary action limited to cases of lesion thereunder speci-fied (Ong vs. Court of Appeals, 310 SCRA 1). Elabo-rating on the distinctions between the rescission of re-scissible contracts and resolution set forth in Article 1191,Justice J.B.L. Reyes, in his concurring opinion in UFC vs.Court of Appeals (33 SCRA 1) said:

“x x x The rescission on account of breach ofstipulation is not predicated on injury to economicinterests of the party plaintiff but on the breach offaith by the defendant, that violates the reciprocitybetween the parties. It is not a subsidiary action,and Article 1191 may be scanned without disclosinganywhere that the action for rescission thereundersubordinated to anything other than the culpablebreach of his obligation by the defendant. This re-scission is a principal action retaliatory in character,it being unjust that a party be held bound to fulfillhis promises when the other violates his. As ex-pressed in the old Latin aphorism: ‘Non servanti


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ifdem, non est fides servanda.’ Hence, the repara-tion of damages for the breach is purely secondary.”

Under Article 1389 of the Civil Code, the action toclaim rescission must be commenced within four years.It is the legal possibility of bringing the action whichdetermines the starting point for the computation of thefour-year prescriptive period provided for in Article 1389of the Civil Code (see Khe Hong Cheng vs. Court of Ap-peals, supra.). However, the period of four years shall notbegin until the termination of the incapacity of the per-son under guardianship, or until the domicile of the ab-sentee is known (Art. 1389, Civil Code).

Re Right of First Refusal

A right of first refusal is not a perfected contract.Neither does it qualify as an option under the secondparagraph of Article 1479, which itself must be supportedby a consideration separate and distinct from the priceitself, nor an offer which Article 1319 of the Code re-quires to be definitive and certain both as to object andcause of the contemplated agreement. Even while theobject in a “right of first refusal’’ might be determinate,the exercise of the right, nevertheless, would still be de-pendent not only on the grantor’s eventual intention toenter into a binding juridical relation but also on terms,including the price, that obviously are yet to be fixed. Itwould be absurd to suggest that a right of first refusalcan be the proper subject of an action for specific per-formance but, of course, neither would it be correct to saythat a breach of such right would be totally inconsequen-tial. A grantor who unjustly discards his own affirmationviolates the basic dogma in human relations so well ex-pressed as in Article 19 of the Civil Code to the effect thatevery person is expected to act with justice, give anotheris due and observe honesty and good faith. When ignored,the legal feasibility of an action for damages not an ac-tion for rescission under Article 1381 of the Code which is

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subsidiary and merely to obtain reparation is a matternow long settled.

Unfortunately, it would seem, Article 1381 (para-graph 3) of the Civil Code has been invoked to be thestatutory authority for the rescission of the contract ofsale between Carmelo & Bauermann, Inc., and Equato-rial Realty Development, Inc., in the case of EquatorialRealty Development, Inc. vs. Mayfair Theater, Inc. (G.R.No. 106063, 21 November 1996). The action for rescissionunder that provision of the law, unlike in the resolutionof reciprocal obligations under Article 1191 of the Code, ismerely subsidiary and relates to the specific instancewhen a debtor, in an attempt to defraud his creditor,enters into a contract with another that deprives thecreditor to recover his just claim and leaves him with noother legal means, than by rescission, to obtain repara-tion. Thus, the rescission is only to the extent necessaryto cover the damages caused (Article 1384, Civil Code)and, consistent with its subsidiary nature, would requirethe debtor to be an indispensable party in the action (seeGigante vs. Republic Savings Bank, 135 Phil. 359).

The concept of a right of first refusal as a simplejuridical relation, and so governed (basically) by the CivilCode’s title on “Human Relations,’’ is not altered by thefact alone that it might be among the stipulated items ina separate document or even in another contract. A“breach’’ of the right of first refusal can only give rise toan action for damages primarily under Article 19 of theCivil Code, as well as its related provisions, but not to anaction for specific performance set out under Book IV ofthe Code on “Obligations and Contracts.’’ That right,standing by itself, is far distant from being the obligationreferred to in Article 1159 of the Code which would havethe force of law sufficient to compel compliance per seor to establish a creditor-debtor or obligee-obligorrelation between the parties. If, as it is rightly so, a rightof first refusal cannot even be properly classed as an offeror as an option, certainly, and with much greater reason,


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it cannot be the equivalent of, nor be given the same legaleffect as, a duly perfected contract. It is not possible tocross out, such as what has been said in Ang Yu Asuncionvs. Court of Appeals (238 SCRA 602), the indispensableelement of consensuality in the perfection of contracts. Itis basic that without mutual consent on the object and onthe cause, a contract cannot exist (Art. 1305, Civil Code);corollary to it, no one can be forced, least of all perhaps bya court, into a contract against his will or compelled toperform thereunder.

Chapter 7

Voidable Contracts

Art. 1390. The following contracts are voidable orannullable, even though there may have been no dam-age to the contracting parties:

(1) Those where one of the parties is incapableof giving consent to a contract;

(2) Those where the consent is vitiated by mis-take, violence, intimidation, undue influence, or fraud;

These contracts are binding, unless they are an-nulled by a proper action in court. They are suscep-tible of ratification. (n)

Art. 1391. The action for annulment shall bebrought within four years.

This period shall begin:

In cases of intimidation, violence or undue influ-ence, from the time the defect of the consent ceases.

In case of mistake or fraud, from the time of thediscovery of the same.

And when the action refers to contracts enteredinto by minors or other incapacitated persons, fromthe time the guardianship ceases. (1301a)

Art. 1392. Ratification extinguishes the action toannul a voidable contract. (1309a)

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Art. 1393. Ratification may be effected expresslyor tacitly. It is understood that there is a tacit ratifica-tion if, with knowledge of the reason which renders thecontract voidable and such reason having ceased, theperson who has a right to invoke it should execute anact which necessarily implies an intention to waive hisright. (1311a)

Art. 1394. Ratification may be effected by theguardian of the incapacitated person. (n)

Art. 1395. Ratification does not require the con-formity of the contracting party who has no right tobring the action for annulment. (1312)

Art. 1396. Ratification cleanses the contract fromall its defects from the moment it was constituted. (1313)

Art. 1397. The action for the annulment of con-tracts may be instituted by all who are thereby obligedprincipally or subsidiarily. However, persons who arecapable cannot allege the incapacity of those withwhom they contracted; nor can those who exerted in-timidation, violence, or undue influence, or employedfraud, or caused mistake base their action upon theseflaws of the contract. (1302a)

Art. 1398. An obligation having been annulled, thecontracting parties shall restore to each other the thingswhich have been the subject matter of the contract,with their fruits, and the price with its interest, exceptin cases provided by law.

In obligations to render service, the value thereofshall be the basis for damages. (1303a)

Art. 1399. When the defect of the contract con-sists in the incapacity of one of the parties, the inca-pacitated person is not obliged to make any restitutionexcept insofar as he has been benefited by the thingor price received by him. (1304)

Art. 1400. Whenever the person obliged by thedecree of annulment to return the thing can not do sobecause it has been lost through his fault, he shallreturn the fruits received and the value of the thing at


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the time of the loss, with interest from the same date.(1307a)

Art. 1401. The action for annulment of contractsshall be extinguished when the thing which is the ob-ject thereof is lost through the fraud or fault of theperson who has a right to institute the proceedings.

If the right of action is based upon the incapacityof any one of the contracting parties, the loss of thething shall not be an obstacle to the success of theaction, unless said loss took place through the fraudor fault of the plaintiff. (1314a)

Art. 1402. As long as one of the contracting par-ties does not restore what in virtue of the decree ofannulment he is bound to return, the other cannot becompelled to comply with what is incumbent upon him.(1308)

The following contracts are voidable or annullable,even though there may have been no damage to the con-tracting parties:

(1) Those where one of the parties is incapable ofgiving consent to a contract; and

(2) Those where the consent is vitiated by mistake,violence, intimidation, undue influence or fraud.

These contracts are binding, unless they are annulledin a proper action in court. Deceit by a third person with-out connivance with a party does not render the contractvoidable unless it results in mutual error (Art. 1342, CivilCode; Co vs. Court of Appeals, 193 SCRA 198). Voidablecontracts are susceptible of ratification (see Arts. 1390and 1327, Civil Code, supra.; Gonzales vs. Lopez, 160SCRA 346; Vda. de Buncio vs. Estate of De Leon, 156SCRA 352; Tumalad vs. Vicencio, 41 SCRA 143).

The action for annulment shall be brought withinfour years which shall begin, in cases of intimidation,violence or undue influence, from the time the defect ofthe consent ceases, and in case of mistake or fraud, from

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the time of the discovery of the same. When the actionrefers to contracts entered into by minors or other inca-pacitated persons, the period starts from the time theguardianship ceases (Art. 1391, Civil Code; see Reyes vs.Ferrer, 156 SCRA 314; Bael vs. Intermediate AppellateCourt, 169 SCRA 617; Armentia vs. Patriarca, 18 SCRA1253; Braganza vs. De Villar Abrille, 105 Phil. 456). Thediscovery of fraud or mistake is deemed to have takenplace from the execution of the contract or its registra-tion if there is an allegation that it did not express thetrue intention of the parties. (Bael vs. Intermediate Ap-pellate Court, supra.).

Ratification extinguishes the action to annul a void-able contract (Art. 1392, Civil Code). Ratification may beeffected either expressly or tacitly. It is understood thatthere is a tacit ratification if, with knowledge of the rea-son which renders the contract voidable and such reasonhaving ceased, the person who has a right to invoke itshould execute an act which necessarily implies an inten-tion to waive his right (Art. 1393, Civil Code). Impliedratification may take the form of accepting and retainingthe benefits of a contract (Julian Francisco vs. PastorHerrera, G.R. No. 139982, 21 November 2002). Ratifica-tion may be effected by the guardian of the incapacitatedperson (Art. 1394, Civil Code). Ratification does not re-quire the conformity of the contracting party who has noright to bring the action for annulment (Art. 1395, CivilCode). Ratification cleanses the contract from all its de-fects from the moment it is constituted (Art. 1396, CivilCode; see Tang vs. Gonzales, 52 Phil. 180).

The action for the annulment of contracts may beinstituted by all who are thereby obliged principally orsubsidiarily, or although not being parties, may be preju-diced by such contracts. Persons, however, who are capa-ble cannot allege the incapacity of those with whom theyare contracted; nor can those who exerted intimidation,violence, or undue influence, or employed fraud, or causedmistake base their action upon these flaws of the con-


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tract (see Art. 1397, Civil Code; see Singson vs. IsabelaSawmill, 88 SCRA 623; City Council of Cebu City vs.Cuizon, 47 SCRA 325; De Santos vs. City of Manila, 45SCRA 409; Wolfson vs. Estate of Martinez, 20 Phil. 340).

Effects of Annulment

An obligation having been annulled, the contractingparties shall restore to each other the things which havebeen the subject matter of the contract, with their fruitsand the price with its interest, except in cases providedby law. In obligations to render service, the value thereofshall be the basis for damages (Art. 1398, Civil Code;Cadwallader & Co. vs. Smith Bell & Co., 7 Phil. 461).When the defect of the contract consists in the incapacityof one of the parties, the incapacitated persons is notobliged to make any restitution except insofar as he hasbeen benefited by the thing or price received by him (Art.1399, Civil Code; Braganza vs. De Villa Abrille, 105 Phil.456).

Effect of Loss of Thing

The rules may be stated thusly —

(1) If the thing is lost after the decree of annulment

(a) If the thing is lost because of the fault of theobligor (who may either be the plaintiff or thedefendant bound by the judgment to make res-titution), he shall return the fruits received andthe value of the thing at the time of the loss,with interest from the same date (Art. 1400,Civil Code).

(b) If the thing is lost due to fortuitous event —

(i) If the vice of consent is attributable to theobligor, the latter is liable as in (1) above;

(ii) If the vice of consent is not attributable tothe obligor, the general rule of res peritcreditori applies; where, however, the obli-

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gation annulled is analogous to, is theequivalent of, or approximates a sale ofgoods, lease of things or contract for a pieceof work, the res perit domino rule shouldapply. (Thus, in Dumasag vs. Modelo [34Phil. 252], where the defendant wasrequired to return the carabao sold afterannulment of the sale, the loss of thecarabao because of fortuitous event did notexcuse the defendant [as its owner at thetime of lost] from paying its value to theplaintiff).

(2) Where the thing is lost before the action to annul isbrought —

(a) If the thing is lost due to the fault of the partyentitled to bring the action, the right to bringsuch action is extinguished (Art. 1401, CivilCode).

(b) If the thing is lost because of fortuitous event,should the a contrario rule apply? It is believedthat the res perit domino rule should insteadapply since at this point in time no obligation toreturn has as yet arisen; accordingly, if at thetime of loss the party who has the right to bringthe action was the owner thereof, the actionshould likewise fail. Article 1402 of the CivilCode appears to sanction this rule indirectly byproviding that if in virtue of a decree (once given)one fails to restore what he is bound to return,the other is not compelled to comply with whatis incumbent upon him.

Chapter 8

Unenforceable Contracts (n)

Art. 1403. The following contracts are unenforce-able, unless they are ratified:


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(1) Those entered into in the name of anotherperson by one who has been given no authority orlegal representation, or who has acted beyond his pow-ers;

(2) Those that do not comply with the Statute ofFrauds as set forth in this number. In the following casesan agreement hereafter made shall be unenforceable byaction, unless the same, or some note or memorandumthereof, be in writing, and subscribed by the partycharged, or by his agent; evidence, therefore, of theagreement cannot be received without the writing, or asecondary evidence of its contents:

(a) An agreement that by its terms is not tobe performed within a year from the makingthereof;

(b) A special promise to answer for the debt,default, or miscarriage of another;

(c) An agreement made in consideration ofmarriage, other than a mutual promise to marry;

(d) An agreement for the sale of goods,chattels or things in action, at a price not lessthan Five hundred pesos, unless the buyer ac-cept and receive part of such goods and chattels,or the evidences, or some of them, of such thingsin action, or pay at the time some part of thepurchase money; but when a sale is made by auc-tion and entry is made by the auctioneer in hissales book, at the time of the sale, of the amountand kind of property sold, terms of sale, price,names of the purchasers and person on whoseaccount the sale is made, it is a sufficient memo-randum;

(e) An agreement for the leasing for a longerperiod than one year, or for the sale of real prop-erty or of an interest therein;

(f) A representation as to the credit of athird person.

(3) Those where both parties are incapable ofgiving consent to a contract.

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Art. 1404. Unauthorized contracts are governedby Article 1317 and the principles of agency in Title Xof this Book.

Art. 1405. Contracts infringing the Statute ofFrauds, referred to in No. 2, of Article 1403, are ratifiedby the failure to object to the presentation of oral evi-dence to prove the same, or by the acceptance of ben-efits under them.

Art. 1406. When a contract is enforceable underthe Statute of Frauds, and a public document is neces-sary for its registration in the Registry of Deeds, theparties may avail themselves of the right under Article1357.

Art. 1407. In a contract where both parties areincapable of giving consent, express or implied ratifi-cation by the parent, or guardian, as the case may be,of one of the contracting parties shall give the contractthe same effect as if only one of them were incapa-citated.

If ratification is made by the parents or guardians,as the case may be, of both contracting parties, thecontract shall be validated from the inception.

Art. 1408. Unenforceable contracts cannot be as-sailed by third persons.

Unenforceable contracts are those that cannot beenforced by court action, upon the timely objection of aparty. The following contracts are unenforceable, unlessthey are ratified:

(1) Those entered into in the name of another per-son by one who has not been given authority orlegal representation, or who has acted beyondhis powers (Frias vs. Esquivel, 66 SCRA 29),except that, if the other party is aware of theagent’s want of authority, the contract is ren-dered void (see Art. 1898, Civil Code, infra.;National Power Corp. vs. National Merchandis-ing Corp., 117 SCRA 789);


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(2) Those that do not comply with the Statute ofFrauds which requires certain agreements orsome kind of note or memorandum thereof tobe in writing, and subscribed by the other partycharged, or by his agent; otherwise, the sameshall be unenforceable and evidence of theagreement cannot be received without thewriting, or a secondary evidence of its contents.These are —

(a) An agreement that by its terms is not to beperformed within a year from the makingthereof (see Arroyo vs. Azur, 76 Phil. 493);

(b) A special promise to answer for the debt,default, or miscarriage of another (seeColbert vs. Bachrach, 12 Phil. 83 [but not adirect or primary liability]);

(c) An agreement made in consideration ofmarriage, other than a mutual promise tomarry (see Atienza vs. Castillo, 72 Phil.589);

(d) An agreement for the sale of goods, chat-tels or things in action, at a price not lessthan five hundred pesos, unless the buyeraccepts and receives part of such goods andchattels, or the evidences, or some of them,of such things in action, or pays at the timesome part of the purchase money; but whena sale is made by auction and entry is madeby auctioneer in his sales book, at the timeof sale, price, names of the purchasers andperson on whose account the sale is made,it is a sufficient memorandum;

(e) An agreement for the leasing for a longerperiod than one year, or for the sale of realproperty or of an interest therein (Santosvs. Ganayo, 116 SCRA 431; Ipapo vs. In-termediate Appellate Court, G.R. No. 72740,

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27 January 1987; Montilla vs. Court of Ap-peals, 161 SCRA 167; see also Art. 1443 onexpress trust) but not all dealings involvingreal property are covered (Cruz vs. Tuason& Co., 76 Phil. 543), such as an agreementsettling a boundary dispute (Hernandez vs.Court of Appeals, 160 SCRA 821) or a par-tition of co-owned property (Espina vs.Ayala, 196 SCRA 312);

(f) A representation as to the credit of a thirdperson (see Surety Co. vs. Teodoro, 101 Phil.684);

(3) Those where both parties are incapable of giv-ing consent to a contract (see Art. 1403, CivilCode).

Unauthorized contracts are additionally governedby Article 1317 and the principles of agency in Title X ofBook IV of the Code (see Art. 1404, Civil Code).

Contracts infringing the Statute of Frauds referredto in No. 2 of Article 1403 (supra.) are ratified by thefailure to object to the presentation of oral evidence toprove the same (see Conlu vs. Araneta, 15 Phil. 587,requiring the objection to be made at the first opportu-nity; and Abenica vs. Gonda, 34 Phil. 739, wherein it washeld that cross-examination on the contract was deemeda waiver of the defense of the Statute of Frauds), or bythe acceptance of benefits thereunder (Art. 1405, CivilCode). The Statute of Frauds is applicable only to execu-tory contracts, not to those that are totally or partiallyperformed (Victoriano vs. Court of Appeals, 194 SCRA 19;Clarin vs. Ralona, 127 SCRA 512; Facturan vs. Sabanal,81 Phil. 512; Diana vs. Macalibo, 75 Phil. 71; Carbonellvs. Poncio, L-11231, 12 May 1958; Inigo vs. Estate ofManolo, 21 SCRA 246). The full compliance by one partyto the contract renders said contract enforceable (see PNBvs. Phil. Vegetable Oil Co., 49 Phil. 857; Shoetime vs. LaTondeña, 68 Phil. 24). The same rule applies when par-


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tial compliance is made by such party (Valenzuela vs.Court of Appeals, 181 SCRA 524). When a contract isenforceable under the Statute of Frauds, and a publicdocument is necessary for its registration in the Registryof Deeds, the parties may avail themselves of the rightunder Article 1357 (Art. 1406, Civil Code), i.e., to compeleach other to observe the requisite form to permit suchregistration.

In a contract where both parties are incapable ofgiving consent, express or implied ratification by the par-ent or guardian, as the case may be, of one of the con-tracting parties shall give the contract the same effect asif only one of them were incapacitated. The contract shallbe deemed validated from its inception if the ratificationis made by the parents or guardians, as the case may be,of both contracting parties (Art. 1407, Civil Code). Unen-forceable contracts cannot be assailed by third persons(Art. 1408, Civil Code). One case has held a consum-mated verbal sale to be valid between the parties butwhen a third person disputes the ownership of the buyer,the latter could be precluded, said the Court, from offer-ing proof, unless the writing is shown (Claudel vs. Courtof Appeals, 199 SCRA 113).

Chapter 9

Void or Inexistent Contracts

Art. 1409. The following contracts are inexistentand void from the beginning:

(1) Those whose cause, object or purpose is con-trary to law, morals, good customs, public order orpublic policy;

(2) Those which are absolutely simulated or fic-titious;

(3) Those whose cause or object did not exist atthe time of the transaction;

(4) Those whose object is outside the commerceof men;

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(5) Those which contemplate an impossible serv-ice;

(6) Those where the intention of the parties rela-tive to the principal object of the contract cannot beascertained;

(7) Those expressly prohibited or declared voidby law.

These contracts cannot be ratified. Neither canthe right to set up the defense of illegality be waived.

Art. 1410. The action or defense for the declara-tion of the inexistence of a contract does not prescribe.

Art. 1411. When the nullity proceeds from the ille-gality of the cause or object of the contract, and theact constitutes a criminal offense, both parties beingin pari delicto, they shall have no action against eachother, and both shall be prosecuted. Moreover, the pro-visions of the Penal Code relative to the disposal ofeffects or instruments of a crime shall be applicable tothe things or the price of the contract.

This rule shall be applicable when only one of theparties is guilty; but the innocent one may claim whathe has given, and shall not be bound to comply withhis promise. (1305)

Art. 1412. If the act in which the unlawful or for-bidden cause consists does not constitute a criminaloffense, the following rules shall be observed:

(1) When the fault is on the part of both con-tracting parties, neither may recover what he has givenby virtue of the contract, or demand the performanceof the other’s undertaking;

(2) When only one of the contracting parties isat fault, he cannot recover what he has given by rea-son of the contract, or ask for the fulfillment of whathas been promised him. The other, who is not at fault,may demand the return of what he has given withoutany obligation to comply with his promise. (1306)

Art. 1413. Interest paid in excess of the interestallowed by the usury laws may be recovered by the


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debtor, with interest thereon from the date of the pay-ment.

Art. 1414. When money is paid or property deli-vered for an illegal purpose, the contract may be repudi-ated by one of the parties before the purpose has beenaccomplished, or before any damage has been causedto a third person. In such case, the courts may, if thepublic interest will thus be subserved, allow the partyrepudiating the contract to recover the money or prop-erty.

Art. 1415. Where one of the parties to an illegal con-tract is incapable of giving consent, the courts may, ifthe interest of justice so demands, allow recovery ofmoney or property delivered by the incapacitated per-son.

Art. 1416. When the agreement is not illegal perse but is merely prohibited, and the prohibition by thelaw is designed for the protection of the plaintiff, hemay, if public policy is thereby enhanced, recover whathe has paid or delivered.

Art. 1417. When the price of any article or com-modity is determined by statute, or by authority of law,any person paying any amount in excess of the maxi-mum price allowed may recover such excess.

Art. 1418. When the law fixes, or authorizes thefixing of the maximum number of hours of labor, and acontract is entered into whereby a laborer undertakesto work longer than the maximum thus fixed, he maydemand additional compensation for service renderedbeyond the time limit.

Art. 1419. When the law sets, or authorizes thesetting of a minimum wage for laborers, and a contractis agreed upon by which a laborer accepts a lowerwage, he shall be entitled to recover the deficiency.

Art. 1420. In case of a divisible contract, if theillegal terms can be separated from the legal ones, thelatter may be enforced.

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Art. 1421. The defense of illegality of contracts isnot available to third persons whose interests are notdirectly affected.

Art. 1422. A contract which is the direct result ofa previous illegal contract, is also void and inexistent.

Article 1409 of the Civil Code of the Philippines hasgrouped together contracts which have theretofore beenjurisprudentially considered void ab initio under the oldcode. The nullity of these contracts is rather definitive innature and cannot thereby be cured by ratification. Thereare, however, other judicial relations which are specifi-cally declared to be void by law under separate provisionsof the code like the sale of a piece of land or any interesttherein made through an agent whose authority is notreduced in writing or when the agent exceeds the scope ofhis authority. In these special instances, it would beimportant and prudent to take a minute longer to look atthe law for, at times, the rationale for their being canjustify a divergence from the standard rules governingvoid contracts in general. Thus, although by statute andjurisprudence denominated void, Article 1874 sales, are,in fact, susceptible to ratification. This intent of the lawcan be gleaned from some provisions of the code.

The susceptibility to ratification could prompt one tosay that the contract should, in essence, be deemed merelyunenforceable. That, too, may not be totally accurate foroutside that feature, other principles of a void contractcould, nevertheless, be apt and relevant. To exemplify,the rule in evidence to the effect that the unenforceablecharacter of a contract is lost by a failure to object at thefirst opportunity to the presentation of oral evidence toprove the questioned transaction would not necessarilybe applicable to contracts specially declared void underArticle 1874 of the Code which sanctions ratificationonly if done by an act of affirmation by the principal(Claudio De Los Reyes and Lydia De Los Reyes vs. Court


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of Appeals and Aluyong Gabriel, G.R. No. 129103, 03September 1999, 313 SCRA 632, Concurring Opinion).

Void contracts cannot be ratified (Manotok Realtyvs. Court of Appeals, 149 SCRA 372). Neither can theright to set up the defense of illegality be waived (Art.1409, Civil Code; see Martin vs. Adil, 130 SCRA 406;Arsenal vs. Court of Appeals, 143 SCRA 40; see also dis-cussions on Autonomy and Elements of Contracts, su-pra.; also Arts. 5, 17, 1306, 1345-1358, Civil Code, su-pra.). A contract which is the direct result of a previousillegal contract is itself null and void (Art. 1422, CivilCode; E. Razon, Inc. vs. Philippine Ports Authority, 151SCRA 233). The action or defense for the declaration ofthe inexistence of a contract does not prescribe (Art. 1410,Civil Code; see Cabral vs. Court of Appeals, 130 SCRA498; Trigal vs. Tobias, 25 SCRA 1154). Mere lapse of timecannot give efficacy to a void contract (Vda. de Catindigvs. Heirs of Roque, 74 SCRA 83). A promise to convey ahomestead after the 5-year prohibitory period is itselfvoid and neither prescription or laches nor implied trustcan be invoked (see Homena vs. Casa, 157 SCRA 188).The inexistence or absolute nullity of a contract cannotbe invoked by a person whose interests are not directlyaffected thereby (Chavez vs. PCGG, 307 SCRA 394).

Effects

When the nullity proceeds from the illegality of thecause or object of the contract and the act constitutes acriminal offense, both parties being in pari delicto, theyshall have no action against each other, and both shall beprosecuted. Furthermore, the provisions of the Penal Coderelative to the disposal of effects or instruments of acrime shall be applicable to the things or the price of thecontract. This rule shall be applicable when only one ofthe parties is guilty; but the innocent one may claimwhat he has given and shall not be bound to comply withhis promise (Art. 1411, Civil Code; Iribar vs. Millat, 5Phil. 362).

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If the act in which the unlawful or forbidden causeconsists does not constitute a criminal offense, the follow-ing rules are observed:

(1) When the fault is on the part of both contract-ing parties, neither may recover what he hadgiven by virtue of the contract, or demand theperformance of the other’s undertaking; and

(2) When only one of the contracting parties is atfault, he cannot recover what he has given byreason of the contract, or ask for the fulfillmentof what has been promised him. The other, whois not at fault, may demand the return of whathe has given without any obligation to complywith his promise (Art. 1312, Civil Code; seeYuchengco vs. Velayo, 115 SCRA 307; see alsoUmali vs. Court of Appeals, 189 SCRA 529;Bough vs. Contiveros, 40 Phil. 209).

When the agreement is not illegal per se but is merelyprohibited and the prohibition by the law is designed forthe protection of the plaintiff, he may, if public policy isthereby enhanced, recover what he has paid or delivered(Art. 1416, Civil Code; see Guiang vs. Kintanar, 106 SCRA49). Thus, recovery has been allowed in the sale of landacquired under the Public Land Act within the prohib-ited period (see Ras vs. Sua, 25 SCRA 153). In the sale ofland to aliens, the seller’s right of recovery (Phil. Bank-ing Corp. vs. Lui, 21 SCRA 52), however, is lost if mean-while the land is conveyed to a qualified national (Yap vs.Rico, 121 SCRA 244) or if the buyer himself becomes anaturalized citizen (Republic vs. Intermediate AppellateCourt, 175 SCRA 398; De Castro vs. Tan, 129 SCRA 85).

Interest paid in excess of the interest allowed by theusury laws may be recovered by the debtor, with interestthereon from the date of the payment (Art. 1413, CivilCode; see discussion on Contracts of Loan, infra.; seeAngel Warehousing Co. vs. Chelda Ent., 23 SCRA 119,allowing recovery of the whole interest; see also Briones


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vs. Camnayo, 41 SCRA 404). Central Bank Circular No.905, issued conformably with Presidential Decree No.116, as amended, has done away with the interest ceil-ings prescribed by the Usury Law (Act No. 2655, asamended).

Summary on the Civil Effects of a Void Contract

1. Neither party may seek to enforce a void con-tract, irrespective of the reason that makes itvoid (Bough vs. Contiveros, 40 Phil. 209). Fromthis rule, there is no exception and neither pre-scription or laches nor the doctrine of impliedtrust may be invoked that would lend the courtitself to its enforcement which the parties maynot do (see Homena vs. Casa, 157 SCRA 188).

2. Neither party may seek the aid of the law or thecourts, and both parties shall be deemed in paridelicto. Hence, the expressions ex dolo malonon eritor getio or in pari delicto potior est con-ditio dependentis. From this rule there are ex-ceptions so as to permit the return of that whichmay have been given under a void contract, suchas by —

(a) The innocent party (Arts. 1411-1412, CivilCode);

(b) The debtor who pays usurious interest (Art.1413 Civil Code);

(c) The party repudiating the void contractbefore the illegal purpose is accomplishedor before damage is caused to a third per-son and if public interest is subserved byallowing recovery (Art. 1414, Civil Code);

(d) The incapacitated party if the interest ofjustice so demands (Art. 1515, Civil Code);

(e) The party for whose protection the prohibi-tion by law is intended if the agreement is

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Void

Lack of essen-tial elements orillegality

Imprescriptible

Cannot be rati-fied

Not binding

Parties andthird personswhose interestsare directlyaffected

As to

1. Causes

2. Prescription

3. Ratification

4. Bindingefficacy

5. Assailability

Rescissible

Lesion/fraudagainst creditors

Prescriptible

Need notbe ratified

Binding unlessrescinded

Parties or thirdpersons who aredefrauded

Voidable

Vice of Consent

Prescriptible

Can be ratified

Binding untilannulled

Parties or thirdpersons who areprejudiced

Unenforceable

Failure of form,want of author-ity, or incapacityof both parties

Imprescriptible

Can be ratified

Not enforceableunless totally orpartially per-formed or theobjection iswaived

Parties only

not illegal per se but merely prohibited andif public policy would be enhanced bypermitting recovery (Art. 1416, Civil Code);and

(f) The party for whose benefit the law hasbeen intended such as in price ceiling laws(Art. 1417, Civil Code) and labor laws (Arts.1418-1419, Civil Code).

Resumé on Distinctive Features of Defective Contracts


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TITLE III. NATURAL OBLIGATIONS

Art. 1423. Obligations are civil or natural. Civilobligations give a right of action to compel theirperformance. Natural obligations, not being based onpositive law but on equity and natural law, do not granta right of action to enforce their performance, but aftervoluntary fulfillment by the obligor, they authorize theretention of what has been delivered or rendered byreason thereof. Some natural obligations are set forth inthe following articles.

Art. 1424. When a right to sue upon a civilobligation has lapsed by extinctive prescription, theobligor who voluntarily performs the contract cannotrecover what he has delivered or the value of the servicehe has rendered.

Art. 1425. When without the knowledge or againstthe will of the debtor, a third person pays a debt whichthe obligor is not legally bound to pay because theaction thereon has prescribed, but the debtor latervoluntarily reimburses the third person, the obligorcannot recover what he has paid.

Art. 1426. When a minor between eighteen andtwenty-one years of age who has entered into a contractwithout the consent of the parent or guardian, after theannulment of the contract voluntarily returns the wholething or price received, notwithstanding the fact thathe has not been benefited thereby, there is no right todemand the thing or price thus returned.

Art. 1427. When a minor between eighteen andtwenty-one years of age, who has entered into acontract without the consent of the parent or guardian,voluntarily pays a sum of money or delivers a fungiblething in fulfillment of the obligation, there shall be no

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right to recover the same from the obligee who hasspent or consumed it in good faith. (1160a)

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

Art. 1429. When a testate or intestate heirvoluntarily pays a debt of the decedent exceeding thevalue of the property which he received by will or bythe law of intestacy from the estate of the deceased,the payment is valid and cannot be rescinded by thepayer.

Art. 1430. When a will is declared void because ithas not been executed in accordance with theformalities required by law, but one of the intestateheirs, after the settlement of the debts of the deceased,pays a legacy in compliance with a clause in thedefective will, the payment is effective and irrevocable.

Obligations are civil or natural. Civil obligations givea right of action to compel their performance. Naturalobligations, not being based on positive law but on equityand natural law, do not warrant a right of action to enforcetheir performance but, after voluntary fulfillment by theobligor, they authorize the retention of what has beendelivered or rendered by reason thereof (see Art. 1423,Civil Code; Ansay vs. NDC, 107 Phil. 997). Moral obliga-tions, unlike natural obligations, have no legalconsequence. Natural obligations may be distinguishedfrom moral obligations in that the former must haveinitially been or be founded upon civil obligations that,for some reasons, cannot be enforced or are no longerenforceable by court action.

The codal provisions are merely illustrative, i.e., notexclusive, of natural obligations.

When a right to sue upon a civil obligation has lapsedby extinctive prescription, the obligor who voluntarilyperforms the contract cannot recover what he has

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delivered or the value of the service he has rendered (Art.1424, Civil Code). In Development Bank of the Philippines(DBP) vs. Adil (161 SCRA 307), a second promissory notethat was executed covering a sum in a previous promissorynote which had theretofore prescribed was held to beenforceable. The new note, the Court said, amounted torenunciation and waiver of the right of prescription ofaction, adding that the consideration of the new pro-missory note was the obligation under the old promissorynote, and the statute of limitation merely barred theremedy but did not discharge the debt.

When without the knowledge or against the will ofthe debtor, a third person pays a debt which the obligor isnot legally bound to pay because the action thereon hasprescribed, but the debtor later voluntarily reimbursesthe third person, the obligor cannot recover what he haspaid (Art. 1425, Civil Code). When such payment by athird person is with the knowledge or consent of the debtor,the former may demand, unless he intended it to be adonation, from the debtor what he has paid but he cannotcompel the creditor to subrogate him in his rights (seeArts. 1236, 1237 and 1238, Civil Code).

Republic Act No. 6809, lowering the age of majorityto 18 years from twenty-one, renders obsolete the provi-sions of Article 1426 and Article 1427 of the Civil Code. Aperson, at least eighteen years of age, is now qualified forall acts of civil life except as may be specifically so providedotherwise.

When, after an action to enforce a civil obligationhas failed, the defendant voluntarily performs theobligation, he cannot demand the return of what he hasdelivered or the payment of the value of the service hehas rendered (Art. 1428, Civil Code). But payment madeafter the defendant has been judicially ordered to retainthe debt shall not be valid (Art. 1243, Civil Code).

An heir is not obligated to pay a debt owing from thedeceased, but when the heir voluntarily pays a debt of

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the decedent exceeding the value of the property whichhe received by will or by the law of intestacy from theestate of the deceased, the payment is valid and cannotbe rescinded by the payer (Art. 1429, Civil Code).

When a will is declared void because it has not beenexecuted in accordance with the formalities required bylaw, but one of the intestate heirs, after the settlement ofthe debts of the deceased, pays a legacy in compliancewith a clause in the defective will, the payment is effectiveand irrevocable (Art. 1430, Civil Code). The term “legacy”must be understood in a generic sense as also includingany testamentary disposition in favor of an heir, legateeor devisee.

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TITLE IV. ESTOPPEL (n)

Art. 1431. Through estoppel an admission or repre-sentation is rendered conclusive upon the personmaking it, and cannot be denied or disproved as againstthe person relying thereon.

Art. 1432. The principles of estoppel are herebyadopted insofar as they are not in conflict with theprovisions of this Code, the Code of Commerce, theRules of Court and special laws.

Art. 1433. Estoppel may be in pais or by deed.

Art. 1434. When a person who is not the owner ofa thing sells or alienates and delivers it, and later theseller or grantor acquires title thereto, such title passesby operation of law to the buyer or grantee.

Art. 1435. If a person in representation of anothersells or alienates a thing, the former cannot subse-quently set up his own title as against the buyer orgrantee.

Art. 1436. A lessee or a bailee is estopped fromasserting title to the thing leased or received, as againstthe lessor or bailor.

Art. 1437. When in a contract between third per-sons concerning immovable property, one of them ismisled by a person with respect to the ownership orreal right over the real estate, the latter is precludedfrom asserting his legal title or interest therein, providedall these requisites are present:

(1) There must be fraudulent representation orwrongful concealment of facts known to the partyestopped;

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181

(2) The party precluded must intend that theother should act upon the facts as misrepresented;

(3) The party misled must have been unaware ofthe true facts; and

(4) The party defrauded must have acted inaccordance with the misrepresentation.

Art. 1438. One who has allowed another to assumeapparent ownership of personal property for the purposeof making any transfer of it, cannot, if he received thesum for which a pledge has been constituted, set up hisown title to defeat the pledge of the property, made bythe other to a pledgee who received the same in goodfaith and for value.

Art. 1439. Estoppel is effective only as betweenthe parties thereto or their successors in interest.

Through estoppel an admission or representation isrendered conclusive upon the person making it and cannotbe denied or disproved against the person relying thereon(Art. 1431, Civil Code; Laurel V vs. Civil Service Com-mission, 203 SCRA 195; Servicewide Specialists vs.Intermediate Appellate Court, 174 SCRA 80). Estoppel,however, cannot give validity to an act that is prohibitedby law or against public policy (Development Bank of thePhilippines vs. Court of Appeals, 90 SCAD 12, 284 SCRA14). The principles of estoppel have been adopted by theCivil Code insofar as they are not in conflict with itsprovisions, the Code of Commerce, the Rules of Courtand special laws (see Art. 1432, Civil Code; Cf. Lazo vs.Republic Surety & Ins. Co., 31 SCRA 329).

Article 1433 of the Code classifies estoppel intoestoppel in pais or by deed. It may also be promissory incharacter (Philippine National Bank vs. IntermediateAppellate Court, 189 SCRA 680). Estoppel is in pais whenthe admission or representation arises from the conductof the party in estoppel such as by his act or declaration,omission or silence. Since estoppel is based on equity andjustice, it is essential that before a person can be barred

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from asserting a fact contrary to his admission or repre-sentation, it must be shown that such admission or rep-resentation has been intended and would unjustlycause harm to those who are misled if the principle werenot applied against him. Generally, it has been said thatthe following elements must be shown so as to put aparty in estoppel by his conduct:

(1) Insofar as the party in estoppel is concerned, itshould appear that —

(a) His conduct amounts to a false representationor concealment of material facts or at least iscalculated to convey the impression that thefacts are otherwise than, and inconsistent with,those which the party subsequently attempts toassert;

(b) There is an intent or at least expectation thathis conduct shall be acted upon by, or at leastinfluence, the other party; and

(c) He has knowledge, actual or constructive, of thereal facts.

(2) Insofar as the party invoking estoppel is con-cerned, it must be shown that —

(a) He has lack of knowledge and of the means ofknowledge of the truth as to the material facts;

(b) He has relied in good faith upon the conduct orstatements of the party to be estopped; and

(c) His reliance thereon is of such character as tochange his position or status to his injury,detriment or prejudice (Kalalo vs. Luz, 34 SCRA347).

Estoppel by laches and estoppel by silence may beconsidered as forms of estoppel in pais. Estoppel by laches,in a general sense, is the failure or neglect for anunreasonable or unexplained length of time to do thatwhich, by exercising due diligence, could or should have

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183

been done earlier warranting a presumption that he hasabandoned his right or has declined to assert it (Madejavs. Patcho, 132 SCRA 540). Mere lapse of time cannotgive efficacy to a void contract (Catindig vs. Roque, 74SCRA 83), but estoppel may bar a party who makes nocategorical objection to (Northern Cement vs. IntermediateAppellate Court, 158 SCRA 408), or who fails to promptlyrepudiate, an invalid contract (Cadano vs. Cadano, 49SCRA 33; De Castro vs. Tan, 129 SCRA 85). The law aidsthe vigilant, not those who slumber on their rights ––vigilantibus sed non dormientibus jura subveniunt. Thedoctrine of “laches” is a creation of equity applied only tobring about equitable results, and it is largely addressedto the sound discretion of the court (Central Azucareradel Danao vs. Court of Appeals, 137 SCRA 295).

The elements of laches are —

(1) conduct of the defendant which gives rise to acause of action for which the plaintiff can seek a remedy;

(2) delay in asserting the right, complainant beingaware of defendant’s conduct and having the opportunityto institute a suit;

(3) lack of knowledge on the part of defendant thatcomplainant would assert the right on which he bases hissuit; and

(4) injury or prejudice to defendant in the eventrelief is accorded to the complainant, or the suit is notbarred (Chacon Enterprise vs. Court of Appeals, 124 SCRA784; Cimafranca vs. Intermediate Appellate Court, 147SCRA 611; Alba vs. Santander, 160 SCRA 8; Bailon-Casilao vs. Court of Appeals, 160 SCRA 738).

The equitable principle of laches has been distin-guished from prescription, viz.:

(1) Prescription is concerned with the fact of delay;laches relates to the effects of delay.

(2) Prescription is statutory; laches is a creation ofequity; and


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(3) Prescription is a matter of time; laches is a mat-ter of injustice (see Heirs of Lacamen vs. Heirs of Laruan,65 SCRA 605).

Estoppel by silence or inaction assumes that theremust be an obligation or duty, not merely a right andopportunity, to speak (see 19 Am. Jur. 663). Mere innocentsilence will not create estoppel. There must also be someelement of turpitude or negligence connected with thesilence by which another is misled to his injury based onmoral and natural justice; its applicability to anyparticular case to a large extent depends upon the specialcircumstances of the case (Beronilla vs. GSIS, 36 SCRA44, citing Mirasol vs. Mun. of Tabaco, 43 Phil. 610; seealso Santiago Syjuco, Inc. vs. Castro, 175 SCRA 171).

Estoppel by deed refers to admissions or represen-tations in an instrument or deed. Thus, a privy to acontract would be precluded from asserting against theother party any right in derogation of the deed or fromdenying the truth of any material fact found therein (see31 C.J.S. 195; Banco de Oro vs. Equitable Bank, 157SCRA 188).

The code enumerates instances of estoppel, albeitnon-exclusive in nature; hence —

(a) When a person who is not the owner of a thingsells or alienates and delivers it, and later the seller orgrantor acquires title thereto, such title passes byoperation of law to the buyer or grantee (Art. 1434, CivilCode). If the thing sold is yet undelivered when titlepasses to the seller, the latter shall be bound to deliver itto the buyer.

(b) If a person in representation of another sells oralienates a thing, the former cannot subsequently set uphis own title as against the buyer or grantee (Art. 1435,Civil Code). A sale by a non-owner can be perfected, andit obligates the seller to acquire title to the thing anddeliver it to the buyer.

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185

(c) A lessee or a bailee is estopped from assertingtitle to the thing leased or received, as against the lessoror bailor (Art. 1436, Civil Code). The possession of thething by the lessee or bailee, not being adverse to thelessor or bailor, may not ripen into ownership byacquisitive prescription.

(d) When in a contract between third personsconcerning immovable property, one of them is misled bya person with respect to the ownership or real right overthe real estate, the latter is precluded from asserting hislegal title or interest therein, provided all these requisitesare present:

(1) There must be fraudulent representationor wrongful concealment of facts known to the partyestopped;

(2) The party precluded must intend that theother should so act upon the facts as misrepresented;

(3) The party misled must have been unawareof the true facts; and

(4) The party defrauded must have acted inaccordance with the misrepresentation (Art. 1437,Civil Code).

(e) One who has allowed another to assume appa-rent ownership of personal property for the purpose ofmaking any transfer of it, cannot, if he received the sumfor which a pledge has been constituted, set up his owntitle to defeat the pledge of the property, made by theother to a pledgee who received the same in good faithand for value (Art. 1438, Civil Code).

Persons Bound by Estoppel

Estoppel is effective only as between the partiesthereto or their successors in interest (Art. 1439, CivilCode). In Mapa vs. Guanzon (77 SCRA 837), it has beenruled that while no title in derogation to that of a regis-tered owner may be acquired by prescription or adverse


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possession, this legal guarantee may in appropriate casesyield to the right of third persons under the equitableprinciple of laches (see also Caragay-Layno vs. Court ofAppeals, 133 SCRA 718). Neglect or omissions of publicofficers as to their duties will not work as estoppel againstthe State, and the government is never estopped by themistakes or errors of its agent (Manila Lodge vs. Court ofAppeals, 73 SCRA 116; Auyong Hian vs. Court of TaxAppeals, 59 SCRA 110; Bachrach Motors vs. Unson, 50Phil. 981). Certain affirmative acts of public officials may,however, give rise to estoppel (see Bachrach Motors vs.Unson, 50 Phil. 981; Pineda vs. CFI, 52 Phil. 803; Boadavs. Posadas, 58 Phil. 184). The Central Bank may beguilty of promissory estoppel (Central Bank vs. Court ofAppeals, 106 SCRA 143; see also Central Bank vs. Inter-mediate Appellate Court, 179 SCRA 752). In Republic vs.Alagad (169 SCRA 455), the Republic assailed the deci-sion insofar as it had sustained the lower court in dis-missing the petition for failure of the Republic to appearfor pre-trial. In holding that the Court of Appeals wasguilty of grave abuse of discretion, the Supreme Courtsaid:

“It is well-established that the State cannot bebound by, or estopped from, the mistakes or negligentacts of its officials or agents, much more, non-suitedas result thereof.

“This is so because:

“x x x [T]he state as a person in law is the judicialentity, which is the source of any asserted right toownership in land under the basic doctrine embodiedin the 1935 Constitution as well as the presentcharter. It is charged moreover with the conservationof such patrimony. There is need therefore of the mostrigorous scrutiny before private claims to portionsthereof are judicially accorded recognition, especiallyso where the matter is sought to be raised up anewafter almost fifty years. Such primordial considera-

Arts. 1431-1439

187

tion, not the apparent carelessness, much less theacquiescence of public officials, is the controlling norm. . .

“The cases of Ramos vs. Central Bank of thePhilippines and Nilo vs. Romero, cited by the Courtof Appeals in support of its decision, are notapplicable. In Ramos, we applied estoppel uponfinding of bad faith on the part of the State (theCentral Bank) in deliberately reneging on itspromises. In Nilo, we denied efforts to impugn thejurisdiction of the court on the ground that thedefendant had been ‘erroneously’ represented in thecomplaint by the City Attorney when it should havebeen the City Mayor, on the holding that the CityAttorney, in any event, could have ably defended theCity (Davao City). In both cases, it is seen that theacts that gave rise to estoppel were voluntary andintentional in character, in which cases, it could notbe said that the Government had been prejudiced bysome negligent act or omission.”

On the matter of court jurisdiction, the ruling inPeople vs. Casiano (111 Phil. 72; see also People vs. Munar,53 SCRA 278; Nieva vs. Manila Banking Corp., 124 SCRA453) is instructive.

“The operation of the principle of estoppel onthe question of jurisdiction seemingly depends uponwhether the lower court actually had jurisdiction ornot. If it had no jurisdiction, but the case was triedand decided upon the theory that it had jurisdiction,the parties are not barred, on appeal, from assailingsuch jurisdiction, for the same ‘must exist as a matterof law, and may not be conferred by consent of theparties or by estoppel (5 C.J.S. 861-863). However, ifthe lower court had jurisdiction, and the case washeard and decided upon a given theory, such, forinstance, as that the court had no jurisdiction, theparty who induced it to adopt such theory will not be


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permitted, on appeal, to assume an inconsistent po-sition — that the lower court had jurisdiction. Here,the principle of estoppel applies. The rule thatjurisdiction is conferred by law, and does not dependupon the will of the parties, has no bearing thereon.”

When a court which lacks jurisdiction over a casebut subsequently acquires it by an invocation of anaffirmative defense by the defendant, the latter is barredby estoppel against a claim of lack of jurisdiction. A partymay not reject that jurisdiction with respect to the part ofthe decision unfavorable to him and accept it as regardsthe portion that favors him (Balais vs. Balais, 159 SCRA47). Also, a person, who is not an original party to anaction but who fully participates, voluntarily appearedand seen the proceedings before the appellate court,cannot be permitted to run about and repudiate later thesaid appellate court’s jurisdiction (Limpin, Jr. vs.Intermediate Appellate Court, 147 SCRA 516).

On estoppel by judgment, the case of Peñalosa vs.Tuason (22 Phil. 303; see also Manila Electric Co. vs.Court of Appeals, 114 SCRA 173) can be well in point:

“The two main rules based on the doctrine of resjudicata or estoppel by judgment as known to Anglo-American jurisprudence are as follows:

(a) That judgment rendered by a court ofcompetent jurisdiction on the merits is a bar to anyfuture suit between the same parties or their priviesupon the same cause of action, so long as it remainsunreversed;

(b) A point which was actually and directly inissue in a former suit, and was there judicially passedupon and determined by a domestic court of compe-tent jurisdiction, cannot be again drawn in questionin any future action between the same parties ortheir privies, even when the causes of action in thetwo suits are wholly different.

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189

The difference between the effect of a judgmentas a bar or estoppel against the prosecution of asecond action upon the same claim or demand, andits effect as an estoppel in another action betweenthe same parties upon a different claim or cause ofaction, is that in the former case the judgment, ifrendered upon the merits, constitutes an absolutebar to a subsequent action, and is a finality as to theclaim or demand in controversy, concluding partiesand those in privity with them, not only as to everymatter which was offered and received to sustain ordefeat the claim or demand, but as to any otheradmissible matter which might have been offeredfor that purpose. While in the latter case thejudgment in the prior action operates as an estoppelonly as to those matters in issue or points contro-verted upon the determination of which the findingor judgment was rendered.”

The first which renders the judgment conclusive be-tween the parties on the matters directly adjudged iswhat we might term as res judicata, and the second whichprecludes the parties from raising any question that mighthave been put in issue by them is commonly referred to asestoppel by judgment.


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TITLE V. TRUSTS

Chapter 1

General Provisions

Art. 1440. A person who establishes a trust iscalled the trustor; one in whom confidence is reposedas regards property for the benefit of another personis known as the trustee; and the person for whosebenefit the trust has been created is referred to as thebeneficiary.

Art. 1441. Trusts are either express or implied.Express trusts are created by the intention of the trustoror of the parties. Implied trusts come into being byoperation of law.

Art. 1442. The principles of the general law oftrusts, insofar as they are not in conflict with this Code,the Code of Commerce, the Rules of Court and speciallaws are hereby adopted.

A trust is a juridical relationship that exists betweenone person having the equitable title or beneficial enjoy-ment of property, real or personal, and another havingthe legal title thereto (see Deluao vs. Casteel, 29 SCRA368). The person who establishes the trust is the trustor(or grantor); one in whom confidence is reposed as re-gards property for the benefit of another person is knownas the trustee (fiduciary), and the person for whose benefitthe trust has been created is referred to as the beneficiary(cestui que trust). The Code has adopted the principles ofthe general law of trusts, insofar as they are not in conflictwith its provisions, the Code of Commerce, the Rules ofCourt and special laws (see Arts. 1440 and 1442, CivilCode).

Arts. 1440-1442

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191

Trust is either express or implied. Express trustsare created by the intention of the trustor or of the par-ties. Implied trusts come into being by implication of law(Art. 1441, Civil Code). Implied trusts, in turn, may ei-ther be: (a) resulting trusts which are presumed to havebeen contemplated by the parties, the intention as towhich is to be found in the nature of their transaction butnot expressed in the deed itself (see 89 C.J.S. 275), suchas those contained in Articles 1448 to 1455 of the Code,and (b) constructive trusts which are created, not by anyword evincing a direct intention to create a trust, but byoperation of law based on equity in order to satisfy thedemands of justice, such as Article 1456 (infra.) of theCode (Eschay vs. Court of Appeals, 61 SCRA 369; Ramosvs. Ramos, 61 SCRA 284; Magallon vs. Montejo, 146 SCRA282; Salao vs. Salao, 70 SCRA 65). One basic distinctionbetween an implied trust and an express trust is thatwhile the former may be established by parol evidence,the latter cannot. Even then, in order to establish animplied trust in real property by parol evidence, the proofshould be as fully convincing as if the acts giving rise tothe trust obligation are proven by an authentic docu-ment. An implied trust, in fine, cannot be establishedupon vague and inconclusive proof (Heirs of Lorenzo Yap,namely Sally Sun Yap, Margaret Yap-Uy and Manuel Yapvs. The Honorable Court of Appeals, Ramon Yap andBenjamin Yap, G.R. No. 133047, 17 August 1999, 312SCRA 603).

Neither laches nor prescription is a bar to enforce anexpress trust (see Government vs. Abadilla, 46 Phil. 642;Fabian vs. Fabian, 22 SCRA 231). In Valdez vs. Olorga(51 SCRA 71), the Supreme Court has ruled:

“From the standpoint of acquisitive prescrip-tion, or prescription of ownership, this court has heldnumerous decisions involving fiduciary relations suchas those occupied by a trustee with respect to thecestui que trust that, as a general rule, the former’spossession is not adverse and therefore cannot ripen

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into a title by prescription. Adverse possession insuch case requires the concurrence of the followingcircumstances: (a) that the trustee has performedunequivocal acts of repudiation amounting to ousterof the cestui que trust; (b) that such positive acts ofrepudiation have been made known to the cestui quetrust; and (c) that the evidence thereon should beclear and conclusive.”

Either laches or prescription, however, may consti-tute a bar to enforce an implied trust (see Fabian vs.Fabian, 22 SCRA 231; Sinaon vs. Soroñgon, 136 SCRA407). Thus, an action to recover an immovable under aconstructive trust prescribes in 10 years (Gicano vs.Gegato, 157 SCRA 140; De Portugal vs. Intermediate Ap-pellate Court, 159 SCRA 178) counted from the date theTransfer Certificate of Title is issued in the name of therepudiating possessor (Villagonzalo vs. Intermediate Ap-pellate Court, 167 SCRA 535; Bergado vs. Court of Ap-peals, 173 SCRA 497).

Chapter 2

Express Trusts

Art. 1443. No express trusts concerning an im-movable or any interest therein may be proved by parolevidence.

Art. 1444. No particular words are required for thecreation of an express trust, it being sufficient that atrust is clearly intended.

Art. 1445. No trust shall fail because the trusteeappointed declines the designation, unless the con-trary should appear in the instrument constituting thetrust.

Art. 1446. Acceptance by the beneficiary is neces-sary. Nevertheless, if the trust imposes no onerouscondition upon the beneficiary, his acceptance shallbe presumed, if there is no proof to the contrary.

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Express trusts are those which are created by thedirect and positive acts of the parties, by some writing ordeed, or by will, or by words evincing an intention toestablish a trust. No particular words are required forthe creation of an express trust, it being sufficient that atrust is clearly intended (Art. 1444, Civil Code). No ex-press trusts concerning an immovable or any interesttherein may be proved by parole evidence (Art. 1443,Civil Code; Ferrer-Lopez vs. Court of Appeals, 150 SCRA393; Asuncion vs. Pineda, 175 SCRA 719; Cuaycong vs.Cuaycong, 21 SCRA 1193).

No trust shall fail because the trustee appointed de-clines the designation, unless the contrary should appearin the instrument constituting the trust (Art. 1445, CivilCode). Acceptance by the beneficiary is necessary. Never-theless, if the trust imposes no onerous condition uponthe beneficiary, his acceptance shall be presumed unlessthere is proof to the contrary (Art. 1446, Civil Code). Thisacceptance by the beneficiary is not subject to the law ondonation (see Cristobal vs. Gomez, 50 Phil. 810).

Chapter 3

Implied Trusts

Art. 1447. The enumeration of the following casesof implied trust does not exclude others establishedby the general law of trust, but the limitation laid downin Article 1442 shall be applicable.

Art. 1448. There is an implied trust when propertyis sold, and the legal estate is granted to one party butthe price is paid by another for the purpose of havingthe beneficial interest of the property. The former isthe trustee, while the latter is the beneficiary. However,if the person to whom the title is conveyed is a child,legitimate or illegitimate, of the one paying the price ofthe sale, no trust is implied by law, it being disputablypresumed that there is a gift in favor of the child.


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Art. 1449. There is also an implied trust when adonation is made to a person but it appears that al-though the legal estate is transmitted to the donee, henevertheless is either to have no beneficial interest oronly a part thereof.

Art. 1450. If the price of a sale of property is loanedor paid by one person for the benefit of another andthe conveyance is made to the lender or payor to se-cure the payment of the debt, a trust arises by opera-tion of law in favor of the person to whom the moneyis loaned or for whom it is paid. The latter may redeemthe property and compel a conveyance thereof to him.

Art. 1451. When land passes by succession toany person and he causes the legal title to be put inthe name of another, a trust is established by impli-cation of law for the benefit of the true owner.

Art. 1452. If two or more persons agree to pur-chase property and by common consent the legal titleis taken in the name of one of them for the benefit ofall, a trust is created by force of law in favor of theothers in proportion to the interest of each.

Art. 1453. When property is conveyed to a personin reliance upon his declared intention to hold it for, ortransfer it to another or the grantor, there is an impliedtrust in favor of the person whose benefit is contem-plated.

Art. 1454. If an absolute conveyance of propertyis made in order to secure the performance of an obli-gation of the grantor toward the grantee, a trust byvirtue of law is established. If the fulfillment of theobligation is offered by the grantor when it becomesdue, he may demand the reconveyance of the propertyto him.

Art. 1455. When any trustee, guardian or otherperson holding a fiduciary relationship uses trust fundsfor the purchase of property and causes the convey-ance to be made to him or to a third person, a trust isestablished by operation of law in favor of the personto whom the funds belong.

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Art. 1456. If property is acquired through mistakeor fraud, the person obtaining it is, by force of law,considered a trustee of an implied trust for the benefitof the person from whom the property comes.

Art. 1457. An implied trust may be proved by oralevidence.

Implied trusts are those which, without being ex-press, are deducible from the nature of the transaction asmatters of intent or, independently of the particular in-tention of the parties, as being super-induced on the trans-action by operation of law basically by reason of equity.These species of implied trust are ordinarily subdividedinto resulting and constructive trusts. A resulting trust isone that arises by implication of law and presumed al-ways to have been contemplated by the parties, the in-tention as to which can be found in the nature of theirtransaction although not expressed in a deed or instru-ment of conveyance. Resulting trusts are based on theequitable doctrine that it is the more valuable considera-tion than the legal title that determines the equitableinterest in property. Upon the other hand, a constructivetrust is a trust not created by any word or phrase, eitherexpressly or impliedly, evincing a direct intention to cre-ate a trust, but one that arises in order to satisfy thedemands of justice. It does not come about by agreementor intention but in main by operation of law construedagainst one who, by fraud, duress or abuse of confidence,obtains or holds the legal right to property which heought not, in equity and good conscience, to hold.

Although, ordinarily, a certificate of title becomesincontrovertible one year after it is issued pursuant to apublic grant, the rule does not apply when such issuanceis null and void. An action to declare the nullity of thatvoid title does not prescribe; in fact, it is susceptible todirect, as well as to collateral, attack. The ten-year pre-scriptive period is applicable to an action for reconvey-ance if it is based on an implied or constructive trustpredicated on Article 1456 of the Civil Code.


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The enumeration of the cases of implied trust by thelaw does not exclude possible other instances establishedby the principles of the general law of trusts (see Art.1442, in relation to Art. 1447, Civil Code).

(a) An implied trust is created when property issold and the legal estate is granted to one party but theprice is paid by another for the purpose of having thebeneficial interest of the property. The former is the trus-tee, while the latter is the beneficiary. If the person towhom the title has been conveyed is a child, legitimate orillegitimate, of the one paying the price of the sale, notrust is implied by law, it being disputably presumed thatthere is a gift in favor of the child (Art. 1448, Civil Code).

(b) An implied trust arises when a donation is madeto a person but it appears that, although the legal estateis transmitted to the donee, he is nevertheless either tohave no beneficial interest or to only have a part thereof(Art. 1449, Civil Code). The remaining part, in the lattercase, is covered by the implied trust.

(c) If the price of a sale of property is loaned or paidby one person for the benefit of another and the convey-ance is made to the lender or payor to secure the paymentof the debt, a trust arises by operation of law in favor ofthe person to whom the money is loaned or for whom it ispaid, allowing the latter to redeem the property and com-pel a conveyance thereof to him (Art. 1450, Civil Code).

(d) When land passes by succession to any personand he causes the legal title to be put in the name ofanother, a trust is established by implication of law forthe benefit of the trust owner (Art. 1451, Civil Code).

(e) If two or more persons agree to purchase prop-erty and by common consent the legal title is taken in thename of one of them for the benefit of all, a trust iscreated by force of law in favor of the others in proportionto the interest of each (Art. 1452, Civil Code). If the agree-ment is explicit on the trust relationship, the trust maybe considered express rather than implied.

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(f) When property is conveyed to a person in reli-ance upon his declared intention to hold it for, or transferit to another or to the grantor, there is an implied trust infavor of the person whose benefit is contemplated (Art.1453, Civil Code; Valera vs. Inserto, 149 SCRA 533).

(g) If an absolute conveyance of property is madein order to secure the performance of an obligation of thegrantor toward the grantee, a trust by virtue of law isestablished. If the fulfillment of the obligation is offeredby the grantor when it becomes due, he may demand thereconveyance of the property to him (Art. 1454, Civil Code).Related to this illustrative implied trust are the provi-sions of the Civil Code on a contract presumed to be anequitable mortgage under Article 1602 of the Civil Code.

(h) When any trustee, guardian or other personholding a fiduciary relationship uses trust funds for thepurchase of property and causes the conveyance to bemade to him or to a third person, a trust is established byoperation of law in favor of the person to whom the fundsbelong (Art. 1455, Civil Code; Valera vs. Inserto, 149 SCRA533).

(i) If property is acquired through mistake or fraud,the person obtaining it is, by force of law, considered atrustee of an implied trust for the benefit of the personfrom whom the property comes (Art. 1456, Civil Code;Adille vs. Court of Appeals, 157 SCRA 455; Caro vs. Courtof Appeals, 180 SCRA 401; Tale vs. Court of Appeals, 208SCRA 266).

When a property is transferred to the paramour,which property has been acquired by the husband duringhis marriage, a constructive trust is deemed to have beencreated by operation of law under the provisions of Arti-cle 1456 of the Civil Code (Belcodero vs. Court of Appeals,45 SCAD 400, 227 SCRA 303). An action for reconvey-ance of a parcel of land based on an implied or construc-tive trust prescribes in ten years, the point of referencebeing the date of registration of the deed or the date of


198 CIVIL LAW

the issuance of the certificate of title over the property.This rule finds applicability only when the plaintiff isnot in possession of the property, since if a personclaiming to be the owner thereof is in actual possession ofthe property, the right to seek reconveyance, whichin effect seeks to quiet title to the property, does notprescribe (Heirs of Olviga vs. Court of Appeals, 45 SCAD427, 227 SCRA 234).

An implied trust, unlike an express trust involvingreal property or an interest therein, may be proved byoral evidence (Art. 1457, in relation to Article 1443, CivilCode).

Arts. 1447-1457

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SPECIAL CONTRACTS

TITLE VI. SALES

Chapter 1

Nature and Form of the Contract

Art. 1458. By the contract of sale one of thecontracting parties obligates himself to transfer theownership of and to deliver a determinate thing, andthe other to pay therefor a price certain in money or itsequivalent.

A contract of sale may be absolute or conditional.(1445a)

Art. 1459. The thing must be licit and the vendormust have a right to transfer the ownership thereof atthe time it is delivered. (n)

Art. 1460. A thing is determinate when it is parti-cularly designated or physically segregated from allothers of the same class.

The requisite that a thing be determinate is satis-fied if at the time the contract is entered into, the thingis capable of being made determinate without the ne-cessity of a new or further agreement between the par-ties. (n)

Art. 1461. Things having a potential existence maybe the object of the contract of sale.

The efficacy of the sale of a mere hope or expect-ancy is deemed subject to the condition that the thingwill come into existence.

The sale of a vain hope or expectancy is void. (n)

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200 CIVIL LAW

Art. 1462. The goods which form the subject of acontract of sale may be either existing goods, ownedor possessed by the seller, or goods to be manu-factured, raised, or acquired by the seller after the per-fection of the contract of sale, in this Title called “fu-ture goods.”

There may be a contract of sale of goods, whoseacquisition by the seller depends upon a contingencywhich may or may not happen. (n)

Art. 1463. The sole owner of a thing may sell anundivided interest therein. (n)

Art. 1464. In the case of fungible goods, theremay be a sale of an undivided share of a specific mass,though the seller purports to sell and the buyer to buya definite number, weight or measure of the goods inthe mass, and though the number, weight or measureof the goods in the mass is undetermined. By such asale the buyer becomes owner in common of such ashare of the mass as the number, weight or measurebought bears to the number, weight or measure of themass. If the mass contains less than the number, weightor measure bought, the buyer becomes the owner ofthe whole mass and the seller is bound to make goodthe deficiency from goods of the same kind and qual-ity, unless a contrary intent appears. (n)

Art. 1465. Things subject to a resolutory condi-tion may be the object of the contract of sale. (n)

Art. 1466. In construing a contract containing pro-visions characteristic of both the contract of sale andof the contract of agency to sell, the essential clausesof the whole instrument shall be considered. (n)

Art. 1467. A contract for the delivery at a certainprice of an article which the vendor in the ordinarycourse of his business manufactures or procures forthe general market, whether the same is on hand at thetime or not, is a contract of sale, but if the goods areto be manufactured specially for the customer and uponhis special order, and not for the general market, it is acontract for a piece of work. (n)

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201

Art. 1468. If the consideration of the contract con-sists partly in money, and partly in another thing, thetransaction shall be characterized by the manifest in-tention of the parties. If such intention does not clearlyappear, it shall be considered a barter if the value ofthe thing given as a part of the consideration exceedsthe amount of the money or its equivalent; otherwise,it is a sale. (1446a)

Art. 1469. In order that the price may be consid-ered certain, it shall be sufficient that it be so withreference to another thing certain, or that the determi-nation thereof be left to the judgment of a specifiedperson or persons.

Should such person or persons be unable or un-willing to fix it, the contract shall be inefficacious, un-less the parties subsequently agree upon the price.

If the third person or persons acted in bad faith orby mistake, the courts may fix the price.

Where such third person or persons are preventedfrom fixing the price or terms by fault of the seller orthe buyer, the party not in fault may have such rem-edies against the party in fault as are allowed the selleror the buyer, as the case may be. (1447a)

Art. 1470. Gross inadequacy of price does not af-fect a contract of sale, except as it may indicate adefect in the consent, or that the parties really intendeda donation or some other act or contract. (n)

Art. 1471. If the price is simulated, the sale isvoid, but the act may be shown to have been in realitya donation, or some other act or contract. (n)

Art. 1472. The price of securities, grain, liquids,and other things shall also be considered certain, whenthe price fixed is that which the thing sold would haveon a definite day, or in a particular exchange or mar-ket, or when an amount is fixed above or below theprice 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 leftto the discretion of one of the contracting parties. How-

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202 CIVIL LAW

ever, if the price fixed by one of the parties is acceptedby the other, the sale is perfected. (1449a)

Art. 1474. Where the price cannot be determinedin accordance with the preceding articles, or in anyother manner, the contract is inefficacious. However, ifthe thing or any part thereof has been delivered to andappropriated by the buyer, he must pay a reasonableprice therefor. What is a reasonable price is a questionof fact dependent on the circumstances of eachparticular case. (n)

Art. 1475. The contract of sale is perfected at themoment there is a meeting of minds upon the thingwhich is the object of the contract and upon the price.

From that moment, the parties may reciprocallydemand performance, subject to the provisions of thelaw governing the form of contracts. (1450a)

Art. 1476. In the case of a sale by auction:

(1) Where goods are put up for sale by auctionin lots, each lot is the subject of a separate contract ofsale.

(2) A sale by auction is perfected when the auc-tioneer announces its perfection by the fall of the ham-mer, or in other customary manner. Until such an-nouncement is made, any bidder may retract his bid;and the auctioneer may withdraw the goods from thesale unless the auction has been announced to be with-out reserve.

(3) A right to bid may be reserved expressly byor on behalf of the seller, unless otherwise providedby law or by stipulation.

(4) Where notice has not been given that a saleby auction is subject to a right to bid on behalf of theseller, it shall not be lawful for the seller to bid himselfor to employ or induce any person to bid at such saleon his behalf or for the auctioneer, to employ or in-duce any person to bid at such sale on behalf of theseller or knowingly to take any bid from the seller orany person employed by him. Any sale contraveningthis rule may be treated as fraudulent by the buyer. (n)

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203

Art. 1477. The ownership of the thing sold shallbe transferred to the vendee upon the actual or con-structive delivery thereof. (n)

Art. 1478. The parties may stipulate that owner-ship in the thing shall not pass to the purchaser untilhe has fully paid the price. (n)

Art. 1479. A promise to buy and sell a determinatething for a price certain is reciprocally demandable.

An accepted unilateral promise to buy or to sell adeterminate thing for a price certain is binding uponthe promissor if the promise is supported by aconsideration distinct from the price. (1451a)

Art. 1480. Any injury to or benefit from the thingsold, after the contract has been perfected, from themoment of the perfection of the contract to the time ofdelivery, shall be governed by Articles 1163 to 1165,and 1262.

This rule shall apply to the sale of fungible things,made independently and for a single price, or withoutconsideration of their weight, number, or measure.

Should fungible things be sold for a price fixedaccording to weight, number, or measure, the risk shallnot be imputed to the vendee until they have beenweighed, counted, or measured, and delivered, unlessthe latter has incurred in delay. (1452a)

Art. 1481. In the contract of sale of goods by de-scription or by sample, the contract may be rescindedif the bulk of the goods delivered do not correspondwith the description or the sample, and if the contractbe by sample as well as by description, it is notsufficient that the bulk of goods correspond with thesample if they do not also correspond with the de-scription.

The buyer shall have a reasonable opportunity ofcomparing the bulk with the description or the sample.(n)

Art. 1482. Whenever earnest money is given in acontract of sale, it shall be considered as part of the


204 CIVIL LAW

price and as proof of the perfection of the contract.(1454a)

Art. 1483. Subject to the provisions of the Statuteof Frauds and of any other applicable statute, a con-tract of sale may be made in writing, or by word ofmouth, or partly in writing and partly by word of mouth,or may be inferred from the conduct of the parties. (n)

Art. 1484. In a contract of sale of personal prop-erty the price of which is payable in installments, thevendor may exercise any of the following remedies:

(1) Exact fulfillment of the obligation, should thevendee fail to pay;

(2) Cancel the sale, should the vendee’s failureto pay cover two or more installments;

(3) Foreclose the chattel mortgage on the thingsold, if one has been constituted, should the vendee’sfailure to pay cover two or more installments. In thiscase, he shall have no further action against thepurchaser to recover any unpaid balance of the price.Any agreement to the contrary shall be void. (1454-A-a)

Art. 1485. The preceding article shall be appliedto contracts purporting to be leases of personal prop-erty with option to buy, when the lessor has deprivedthe lessee of the possession or enjoyment of the thing.(1454-A-a)

Art. 1486. In the cases referred to in the two pre-ceding articles, a stipulation that the installments orrents paid shall not be returned to the vendee or les-see shall be valid insofar as the same may not beunconscionable under the circumstances. (n)

Art. 1487. The expenses for the execution and reg-istration of the sale shall be borne by the vendor, un-less there is a stipulation to the contrary. (1455a)

Art. 1488. The expropriation of property for publicuse is governed by special laws. (1456)

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Chapter 2

Capacity to Buy or Sell

Art. 1489. All persons who are authorized in thisCode to obligate themselves, may enter into a contractof sale, saving the modifications contained in the fol-lowing articles.

Where necessaries are sold and delivered to aminor or other person without capacity to act, he mustpay a reasonable price therefor. Necessaries are thosereferred to in Article 290. (1457a)

Art. 1490. The husband and the wife cannot sellproperty to each other, except:

(1) When a separation of property was agreedupon in the marriage settlements; or

(2) When there has been a judicial separation ofproperty under Article 191. (1458a)

Art. 1491. The following persons cannot acquireby purchase, even at a public or judicial auction, eitherin person or through the mediation of another:

(1) The guardian, the property of the person orpersons who may be under his guardianship;

(2) Agents, the property whose administrationor sale may have been intrusted to them, unless theconsent of the principal has been given;

(3) Executors and administrators, the propertyof the estate under administration;

(4) Public officers and employees, the propertyof the State or of any subdivision thereof, or of anygovernment-owned or -controlled corporation, orinstitution, the administration of which has beenintrusted to them; this provision shall apply to judgesand government experts who, in any manner whatso-ever, take part in the sale;

(5) Justices, judges, prosecuting attorneys,clerks of superior and inferior courts, and other offic-ers and employees connected with the administration


206 CIVIL LAW

of justice, the property and rights in litigation or leviedupon an execution before the court within whose juris-diction or territory they exercise their respective func-tions; this prohibition includes the act of acquiring byassignment and shall apply to lawyers, with respect tothe property and rights which may be the object of anylitigation in which they may take part by virtue of theirprofession.

(6) Any others specially disqualified by law.(1459a)

Art. 1492. The prohibitions in the two precedingarticles are applicable to sales in legal redemption, com-promises and renunciations. (n)

1. Concept

A sale is a contract whereby a person, called theseller, obligates himself to deliver and to transfer owner-ship of a thing or right to another, called the buyer, for aprice certain. A contract of sale may be absolute or condi-tional (Art. 1458, Civil Code). Where the sale is condi-tional, such as in “Contracts to Sell” when ownership isretained until the fulfillment of a positive suspensivecondition, e.g., full payment of the purchase price, thebreach of the condition will prevent the obligation to con-vey title from acquiring an obligatory force (Roque vs.Lapuz, 96 SCRA 741; Agustin vs. Court of Appeals, 186SCRA 375; see also Spouses Gimenez vs. Court of Ap-peals, 195 SCRA 205). Where the condition is imposedupon the perfection of the contract itself, the failure of thecondition would prevent such perfection (Romero vs. Courtof Appeals, G.R. No. 107207, 03 November 1995, 250 SCRA223; People’s Homesite & Housing Corp. vs. Court of Ap-peals, 133 SCRA 777). If the condition is imposed on theobligation of a party which is not fulfilled, the other partymay either refuse to proceed or waive said condition (Art.1545, Civil Code; Delta Motor vs. Genuino, 170 SCRA 29;see discussions, infra., on “right of first refusal” stipula-tions on lease agreements and contracts in general).

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In Dignos vs. Court of Appeals (158 SCRA 375), itwas held that a sale, although denominated as a “Deed ofConditional Sale,” is absolute where the contract is de-void of any proviso that the title is reserved or the right tounilaterally rescind is stipulated, e.g., until or unless theprice is paid. Ownership will then be transferred to thebuyer upon actual or constructive delivery (i.e., by a pub-lic document) of the property sold. The sale being abso-lute is governed by the provisions of Article 1592 of theCivil Code, allowing rescission the exercise of which wouldrequire, said the Court, a public document conformablywith Article 1358 of the Civil Code. Observe, however,that Article 1358 of the Civil Code requires a public in-strument merely for greater efficacy; Article 1592 speci-fies a notarial rescission instead.

In Delpher Trades Corporation vs. Intermediate Ap-pellate Court (157 SCRA 349), a lease contract providedthat should the lessor decide to sell the property leased,the lessee would have the priority to buy the same. Thelessor later exchanged the property for no par value sharesin a corporation (Sec. 135, now Sec. 134, National Inter-nal Revenue Code), a business conduit of the lessor whichwas part of the family’s “estate planning” for tax avoid-ance purposes. The Supreme Court held the exchange asnot amounting to a sale since there was no real transferof ownership or interest to a third party but that the fami-ly’s ownership was merely changed from one form to an-other.

The stipulation that the “payment of the full consid-eration based on a survey shall be due and payable in five(5) years from the execution of a formal deed of sale” isnot a condition which affects the efficacy of the contractof sale. It merely provides the manner by which the fullconsideration is to be computed and the time within whichthe same is to be paid (Heirs of Juan San Andres vs.Rodriguez, 127 SCAD 178, 332 SCRA 769).

Transfer of rights may either be by assignment or bynegotiation, such as when the evidence of credit is a nego-


208 CIVIL LAW

tiable document (see discussions, infra., on Documents ofTitle and Assignment of Credits).

Distinguished from a Piece of Work Contract

A contract for the delivery at a certain price of anarticle which the vendor in the ordinary course of hisbusiness manufactures or procures for the general mar-ket, whether the same is on hand at the time or not, is acontract of sale, but if the goods are to be manufacturedspecially for the customer and upon his special order, andnot for the general market, it is a contract for a piece ofwork (Art. 1467, Civil Code). The mere fact alone thatcertain articles are made upon previous orders of custom-ers will not argue against the imposition of the sales taxif such articles are ordinarily manufactured by the tax-payer for sale to the public (Celestino Co. vs. Collector, 99Phil. 841). The distinction between a contract of sale andone for work, labor and materials is tested, said the Su-preme Court in Commissioner vs. Engineering Equip-ment and Supply Company (64 SCRA 590), by the in-quiry whether the thing transferred is one not in exist-ence and which never would have existed but for theorder of the party desiring to acquire it, or a thing whichwould have existed and had been the subject of sale ofsome other person even if the order had not been given. Ifthe article ordered by the purchaser is exactly such asthe manufacturer makes and keeps on hand for sale toanyone, and no change or modification of it is made at theother’s request, it is a contract of sale even though it maybe entirely made after, and in consequence of, the latter’sorder of it.

Distinguished from Barter

If the consideration of the contract consists partly inmoney, and partly in another thing, the transaction shallbe characterized by the manifest intention of the parties.If such intention does not clearly appear, it shall be con-sidered a barter if the value of the thing given as a part of

Arts. 1458-1492

209

the consideration exceeds the amount of the money or itsequivalent; otherwise, it is a sale (Art. 1468, Civil Code).

Expropriation

The expropriation of property for public use is gov-erned by special laws (Art. 1488, Civil Code).

2. Elements (Perfection)

a. Consent

The contract of sale is perfected at the moment thereis a meeting of minds upon the thing which is the objectof the contract and upon the price (delivery of the thingsold is not required to perfect the contract). From thatmoment, the parties may reciprocally demand perform-ance, subject to the provisions of the law governing theform of contracts (Art. 1475, Civil Code; see Clarin vs.Rulona, 127 SCRA 512). Non-payment of the purchaseprice constitutes a very good reason to rescind a sale, forit violates the very essence of the contract of sale (CentralBank of the Philippines vs. Bichara, 123 SCAD 697, 328SCRA 807). Where the parties have yet to agree on howand when the down payment and the installment pay-ments are to be paid, the sale cannot as yet be deemed tobe a perfected contract (see Velasco vs. Court of Appeals,51 SCRA 439).

In Maharlika Publishing Corporation vs. Tagle (142SCRA 553), it was shown that in 1963, the GSIS enteredinto a conditional contract to sell a parcel of land to peti-tioner Maharlika Publishing Corporation. One of the con-ditions of the contract was that said petitioner shouldpay the GSIS in monthly installments and that failure topay any installment within 90 days from the due datewould render the contract automatically cancelled. Thepetitioner failed to pay several installments. After warn-ing the petitioner, GSIS cancelled the contract and pub-lished an invitation to bid the property on 12 February1971. On 11 February 1971, the petitioner, represented


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by its president, Adolfo Calica, addressed to the GSIS aletter-proposal for the payment of the arrearages. Calicadiscussed the proposal with GSIS Vice Chairman LeoniloOcampo, who sent a note to GSIS General Manager Ro-man Cruz, Jr., which read: “It sounds fair and reasonablesubject to your wise judgment, as usual.” The letter-pro-posal and Ocampo’s note were taken to Cruz who wroteon the face of Ocampo’s note a note to one Mr. Ibañezwhich read: “Hold bidding. Discuss with me.” The letter-proposal together with two checks amounting to P11,000were submitted to the office of Cruz and were received byhis secretary. Nevertheless, the public bidding was heldand Calica participated but his bid was rejected as im-perfect. In the court proceedings that followed, the ques-tion was whether petitioner had repurchased the prop-erty. The Supreme Court ruled:

“In Article 1475 of the Civil Code, we find thatthe contract of sale is perfected at the moment thereis a meeting of minds upon the thing which is theobject of the contract and upon the price. From thatmoment, the parties may reciprocally demand per-formance, subject to the law governing the form ofcontracts. x x x

“We note that the petitioners are not completestrangers entering into a contract with respondentGSIS for the first time. There was an earlier con-tract to sell the same properties to the petitioners.That contract was perfected and there had been par-tial compliance with its terms. The transaction nowunder question in this case merely referred to thecuring of certain defects which led to the cancella-tion of the earlier contract by GSIS. Under the pecu-liar circumstances of this case, therefore, the accept-ance of the petitioners’ letter-proposal by Mr. Ro-man Cruz, Jr., the person with authority to do so,and his order to his subordinates to stop the biddingso that they could first discuss the matter with him,

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created an agreement of binding nature with thepetitioners.”

In the case of a sale by auction:

(1) Where goods are put up for sale by auction inlots, each lot is the subject of a separate contract of sale.

(2) A sale by auction is perfected when the auction-eer announces its perfection by the fall of the hammer, orin other customary manner. Until such announcement ismade, any bidder may retract his bids; and the auction-eer may withdraw the goods from the sale unless theauction has been announced to be without reserve.

(3) A right to bid may be reserved expressly by oron behalf of the seller, unless otherwise provided by lawor by stipulation.

(4) Where notice has not been given that a sale byauction is subject to a right to bid on behalf of the seller,it shall not be lawful for the seller to bid himself or toemploy or induce any person to bid at such sale on hisbehalf or for the auctioneer, to employ or induce anyperson to bid at such sale on behalf of the seller or know-ingly to take any bid from the seller or any person em-ployed by him. Any sale contravening this rule may betreated as fraudulent by the buyer (Art. 1476, Civil Code).

A promise to buy and sell a determinate thing for aprice certain is reciprocally demandable (Art. 1479, CivilCode). An accepted unilateral promise which specifiesthe thing to be sold and the price to be paid, when cou-pled with a valuable consideration apart from the price,is what may be so properly termed as the perfected con-tract of option. This contract is legally binding and con-forms with the 2nd paragraph of Article 1479 of the CivilCode (Ang Yu Asuncion vs. Court of Appeals, 238 SCRA602; Co vs. Court of Appeals, 312 SCRA 528). Withoutsuch consideration, the option is not binding (Natino vs.Intermediate Appellate Court, 197 SCRA 332). An optioncontract is separate and distinct from that which the


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parties may enter into upon the consummation of theoption (Laforteza vs. Machuca, 127 SCAD 798, 333 SCRA643; Co vs. Court of Appeals, 57 SCAD 163, SCAD 312SCRA 528). An option, as used in the law of sales, is acontinuing offer or contract by which the owner stipu-lates with another that the latter shall have the right tobuy the property at a fixed price within a time certain, orunder, or in compliance with, certain terms and condi-tions, or which gives to the owner of the property theright to sell or demand a sale. It is also sometimes calledan “unaccepted offer.” An option is not of itself a pur-chase, but merely secures the privilege to buy. It is not asale of property but a sale of the right to purchase. It issimply a contract by which the owner of property agreeswith another person that he shall have the right to buyhis property at a fixed price within a certain time. Hedoes not sell his land, nor does he agree to sell it; but hedoes sell something, i.e., the right or privilege to buy atthe election or option of the other party. Its distinguish-ing characteristic is that it imposes no binding obligationon the person holding the option, aside from the consid-eration for the offer. Until acceptance, it is not, prop-erly speaking, a contract, and does not vest, transfer, oragree to transfer, any title to, or any interest or right inthe subject matter, but is merely a contract by which theowner of the property gives the optionee the right orprivilege of accepting the offer and buying the propertyon certain terms.

To elucidate. An unconditional mutual promise to buyand sell, as long as the object is made determinate andthe price is fixed, can be obligatory on the parties, andcompliance therewith may accordingly be exacted. Anaccepted unilateral promise which specifies the thing tobe sold and the price to be paid, when coupled with avaluable consideration distinct and separate from the price,is what may properly be termed a perfected contract ofoption. This contract is legally binding, Observe, however,that the option is not the contract of sale itself. The

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optionee has the right, but not the obligation, to buy. Oncethe option is exercised timely, i.e., the offer is acceptedbefore a breach of the option, a bilateral promise to selland to buy ensues and both parties are then reciprocallybound to comply with their respective undertakings.

A negotiation is formally initiated by an offer. Animperfect promise (policitacion) is merely an offer. Publicadvertisements or solicitations and the like are ordinar-ily construed as mere invitations to make offers or onlyas proposals. These relations, until a contract is perfected,are not considered binding commitments. Thus, at anytime prior to the perfection of the contract, either negoti-ating party may stop the negotiation. The offer, at thisstage, may be withdrawn; the withdrawal is effectiveimmediately after its manifestation, such as by its mail-ing and not necessarily when the offeree learns of thewithdrawal. Where a period is given to the offeree withinwhich to accept the offer, the following rules generally govern:

(1) If the period is not itself founded upon or sup-ported by a consideration, the offeror is still free and has theright to withdraw the offer before its acceptance, or, if anacceptance has been made, before the offeror’s coming toknow of such fact, by communicating that withdrawal to theofferee. The right to withdraw, however, must not be exercisedwhimsically or arbitrarily; otherwise, it could give rise to adamage claim under Article 19 of the Civil Code whichordains that “every person must, in the exercise of his rightsand in the performance of his duties, act with justice, giveeveryone his due, and observe honesty and good faith.’’

(2) If the period has a separate consideration, acontract of “option’’ is deemed perfected, and it would be abreach of that contract to withdraw the offer during theagreed period. The option, however, is an independentcontract by itself, and it is to be distinguished from theprojected main agreement (subject matter of the option)which is obviously yet to be concluded. If, in fact, theoptioner-offerer withdraws the offer before its acceptance


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(exercise of the option) by the optionee-offeree, the lattermay not sue for specific performance on the proposedcontract (“object’’ of the option) since it has failed to reachits own stage of perfection. The optioner-offeror, however,renders himself liable for damages for breach of the op-tion. In these cases, care should be taken of the realnature of the consideration given, for if, in fact, it hasbeen intended to be part of the consideration for the maincontract with a right of withdrawal on the part of theoptionee, the main contract could be deemed perfected; asimilar instance would an “earnest money’’ in a contractof sale that can evidence its perfection (Ang Yu Asuncionvs. Court of Appeals and Buen Realty Development Corp.,G.R. No. 109125, 02 December 1994, 238 SCRA 602).

In Atkins Kroll vs. Co. vs. Cua (102 Phil. 948; reiter-ated in Sanchez vs. Rigos, 45 SCRA 368; and Rural Bankof Parañaque, Inc. vs. Remolado, 135 SCRA 409), theSupreme Court has said that there is no distinction be-tween Article 1324 on an offer and Article 1479 on a mereunilateral promise to sell (modifying the ruling in South-ern Sugar and Molasses Co. vs. Atlantic Gulf & Pacific,97 Phil. 249; see discussion on Art. 1324, supra.). Thecontract of sale is perfected upon acceptance of the optionto buy, although it is not accompanied by an actual pay-ment of the price (Nietes vs. Court of Appeals, 46 SCRA654). A mutual promise to buy and sell, however, is recip-rocally demandable (Mas vs. Lanuza, 5 Phil. 457).

Whenever earnest money is given in a contract ofsale, it is considered as part of the price and as proof ofthe perfection of the contract (Art. 1482, Civil Code; Salas-Rodriguez vs. Leuterio, 47 Phil. 818). Earnest money issomething of value to show the buyer being really inearnest and is given to bind the bargain (Topacio vs.Court of Appeals, 211 SCRA 291). An earnest money mustbe distinguished from an option money, thusly: (a) ear-nest money is part of the purchase price, while optionmoney is the money given as distinct consideration for an

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option contract; (b) earnest money is given only wherethere is already a sale, while option money applies to asale not yet perfected; and (c) the buyer is bound to paythe balance whenever earnest money is given, while whenthe would be buyer gives option money, he is not requiredto buy but may even forfeit it depending on the terms ofthe option (Limson vs. Court of Appeals, G.R. No. 135929,20 April 2001).

Right of First Refusal

In the law on sales, the so-called “right of first re-fusal’’ is relatively an innovative juridical relation. Need-less to point out, it cannot be deemed a perfected contractof sale under Article 1458 of the Civil Code. Neither canthe right of first refusal, understood in its normal con-cept, per se be brought within the purview of an optionunder the second paragraph of Article 1479 or possibly ofan offer under Article 1319 of the same Code. An optionor an offer would require, among other things, a clearcertainty on both the object and the cause or considera-tion of the envisioned contract. In a right of first refusal,while the object might be made determinate, the exerciseof the right, however, would be dependent not only on thegrantor’s eventual intention to enter into a binding ju-ridical relation with another but also on terms, includingthe price, that obviously are yet to be later firmed up.Prior thereto, it can at best be so described as merelybelonging to a class of preparatory juridical relationsgoverned not by contracts (since the essential elementsto establish the vinculum juris would still be indefiniteand inconclusive) but by, among other laws of generalapplication, the pertinent scattered provisions of the CivilCode on human conduct. (But see Equatorial vs. Carmelo,G.R. No. 106063, 21 November 1996).

Even on the premise that such right of first refusalhas been decreed under a final judgment, its breach can-not justify correspondingly an issuance of a writ of execu-tion under a judgment that merely recognizes its exist-


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ence, nor would it sanction an action for specific perform-ance without thereby negating the indispensable elementof consensuality in the perfection of contracts. It is not tosay, however, that the right of first refusal would be in-consequential for, such as already intimated above, anunjustified disregard thereof, given, for instance, the cir-cumstances expressed in Article 19 of the Civil Code, canwarrant a recovery for damages (Ang Yu Asuncion vs.Court of Appeals and Buen Realty Development Corp.,G.R. No. 109125, 02 December 1994, 238 SCRA 602).

Capacity to Buy or Sell

Generally, all persons who are capable of acting withcivil effects or authorized to obligate themselves may en-ter into a contract of sale; where, however, necessariesare sold and delivered to a minor (unemancipated) orother person without capacity to act, he must pay a rea-sonable price therefor. Necessaries are those referred toin Article 290 of the Civil Code (now Art. 194, FamilyCode) such as items indispensable for sustenance, dwell-ing, clothing and medical attendance (see Art. 1489, CivilCode). In other cases, a contract of sale entered into by aminor or an incapacitated person would be voidable (seeArt. 1390, Civil Code).

Disqualifications

The husband and the wife cannot sell property toeach other, except: (1) when a separation of property wasagreed upon in the marriage settlements; or (2) whenthere has been a judicial separation of property betweenthe spouses (Art. 1490, Civil Code).

The following persons cannot acquire by purchase,even at a public or judicial auction, either in person orthrough the mediation of another —

(1) The guardian, the property of the person or per-sons who may be under his guardianship;

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(2) Agents, the property whose administration orsale may have been entrusted to them, unless the con-sent of the principal has been given:

(3) Executors and administrators, the property ofthe estate under administration;

(4) Public officers and employees, the property ofthe State or of any subdivision thereof, or of any govern-ment-owned or -controlled corporation, or institution, theadministration of which has been entrusted to them; thisprovision shall apply to judges and government expertswho, in any manner whatsoever, take part in the sale;

(5) Justices, judges, prosecuting attorneys, clerksof superior and inferior courts, and other officers andemployees connected with the administration of justice,the property and rights in litigation or levied upon onexecution before the court within whose jurisdiction orterritory they exercise their respective functions; this pro-hibition includes the act of acquiring by assignment andshall apply to lawyers, with respect to the property andright which may be the object of any litigation in whichthey may take part by virtue of their profession.

(6) Any others specially disqualified by law (Art.1491, Civil Code).

The foregoing prohibitions (under Arts. 1490-1491)are applicable to sales in legal redemption, compromisesand renunciations (see Art. 1492, Civil Code). But thedisqualification of an agent does not include the specialpower to foreclose real estate mortgages (Fiestan vs. Courtof Appeals, 185 SCRA 751).

A contract of sale entered into by persons who aredisqualified under the provisions of Article 1490 and Ar-ticle 1491 is void (Uy Sui Pin vs. Cantollas, 70 Phil. 55;Maharlika Publishing Corporation vs. Tagle, 142 SCRA553; Rubias vs. Batiller, 51 SCRA 120).

In general, the law considers as voidable an act orcontract of an incapacitated person (Art. 1390, Civil Code)


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or one (act or contract) requiring an approval thereof byanother which is not given (Bautista vs. Montilla, L-6569,3 April 1956; see Art. 173, Art. 399, Civil Code) and asvoid that of a person suffering from disqualification (Art.5 and Art. 1409, Civil Code). Where a person insteadsuffers from want of authority, the resulting act or con-tract becomes generally unenforceable (Art. 1403, CivilCode). At times, however, the law expresses a differentrule; thus, a will and testament executed by an incapaci-tated person renders the will void (Art. 801, in relation toArt. 839, Civil Code); and a sale of a piece of land by agentwhose authority is not in writing (Art. 1874, Civil Code),or a contract entered into by an agent in excess of author-ity with another who is aware of the limits of the powersgranted by the principal in the absence of ratification, isconsidered void (Art. 1998, Civil Code).

There have been deviations, too, not by strict posi-tive law but by judicial decisions. For instance, in Felipevs. Aldon (120 SCRA 628), the sale of a conjugal parcel ofland sold by the wife, who was not the administratrix ofthe conjugal partnership, was held to be voidable (Art.124, Family Code, now expresses such sale to be void). InYuchengco vs. Velayo (115 SCRA 307), Presidential De-cree No. 189 and Presidential Decree No. 289, authoriz-ing rules and regulations to be promulgated by the Min-istry of Tourism and to give them the force and effect oflaw, were held to prohibit the transfer of shares of stockof the corporation engaged in tourism without the ap-proval of the Tourism Ministry. A conveyance withoutsuch approval, the Court ruled, resulted in a void con-tract and entitled the buyers in good faith to recover theprice paid therefor. Justice Aquino, concurring, consid-ered the contract merely rescissible under Article 1547 ofthe Civil Code, thus permitting the purchaser to recoverthe price paid under Article 1594. Perhaps, the rule bythe majority of the Justices in the Yuchengco case can bejustified in that the prerequisite approval is governmen-tal, the absence of which renders the contract contrary to

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law and, therefore, void under the provisions of Article1409.

Under Article 1491 of the Civil Code, a sale betweena lawyer and his client involving property and rights inlitigation is expressly prohibited. In a settlement of estateproceedings, the property is still considered underlitigation after the project of partition is approved butbefore the estate is declared closed and terminated(Fornilda vs. Br. 164, RTC IVth Judicial Region, Pasig,166 SCRA 281). In Director of Lands vs. Ababa (88 SCRA513), the Supreme Court sanctioned a contingent feearrangement, whereby the lawyer was to get a share ofthe property under litigation, on the ground that thetransfer of the thing (under said arrangement) wouldtake effect only after the finality of a favorable judgment(see also Fabillo vs. Intermediate Appellate Court, 195SCRA 28). But if, as the Supreme Court held in Rubiasvs. Batiller (51 SCRA 120), a violation of Article 1491renders the contract void, then convalidation would beimproper since a contract is adjudged either as valid oras void not on circumstances subsequent but on thosecontemporary with the contract itself. It would have, ofcourse, been preferable had the Court simply ruled inAbada that since the contract was one of lease of service,the disqualification under Article 1491 did not apply.

b. Object — Present and Future (vendor need notbe the owner at perfection but only upon delivery)

The thing must be licit and the vendor must have aright to transfer the ownership thereof at the time it isdelivered (Art. 1459, Civil Code); he need not be its owner,however, when the contract is perfected (Martin vs. Reyes,91 Phil. 666). The thing must also be determinate; it isdeterminate when it is particularly designated or physi-cally segregated from all others of the same class, or if atthe time the contract is entered into, the thing is capableof being made determinate without the necessity of a newor further agreement between the parties (see Art. 1460,


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Civil Code; Melliza vs. City of Iloilo, 23 SCRA 477). A saleof up to a certain quantity of palay produced is valid(National Grains Authority vs. Intermediate AppellateCourt, 171 SCRA 131).

Emptio Rei Speratae

Things having a potential existence may be the objectof the contract of sale (Art. 1461, Civil Code; Pichel vs.Alonzo, 111 SCRA 341; Sibal vs. Valdez, 50 Phil. 512).The goods which form the subject of a contract of salemay either be existing goods, owned or possessed by theseller, or goods to be manufactured, raised, or acquiredby the seller after the perfection of the contract of sale(called “future goods”). There may be a contract of sale ofgoods, whose acquisition by the seller depends upon acontingency which may or may not happen (Art. 1462,Civil Code; Martin vs. Reyes, 91 Phil. 666). Things sub-ject to a resolutory condition may meanwhile be the ob-ject of the contract of sale (Art. 1465, Civil Code; Rodriguezvs. Francisco, 2 SCRA 649).

Emptio Spei

The efficacy of the sale of a mere hope or expectancyis deemed subject to the condition that the thing willcome into existence. The sale of a vain hope or expectancyis void (Art. 1461, Civil Code). The term “vain” does notconnote impossibility but if the hope or expectancy doesoccur, its character as being vain might well be assailed.

Sale of Interest

A co-owner of a thing may sell his undivided interesttherein (Art. 439, Civil Code), but not a definite partthereof (Clarin vs. Rulona, 127 SCRA 512). A sole ownermay also sell an undivided interest in the thing, render-ing the buyer a co-owner with the seller (Art. 1463, CivilCode). In the case of fungible goods, there may be a saleof an undivided share of a specific mass, though the sellerpurports to sell and the buyer to buy a definite number,

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weight or measure of the goods in the mass, and thoughthe number, weight or measure of the goods in the massis undetermined. By such a sale the buyer becomes ownerin common of such a share of the mass as the number,weight or measure bought bears to the number, weight ormeasure of the mass. If the mass contains less than thenumber, weight or measure bought, the buyer becomesthe owner of the whole mass and the seller is bound tomake good the deficiency from goods of the same kindand quality, unless a contrary intent appears (Art. 1464,Civil Code).

Sale of Animals

The sale of animals suffering from contagiousdiseases or that are unfit for the use or service stated inthe contract is void (see Art. 1575, Civil Code); otherwise,the contract is treated just like any sale of goods subjectto the provisions of Act No. 1147 on the sale of largecattle.

Sale of Credit

When a credit or incorporeal right is transferred,the contract is commonly referred to as an “assignment”(Art. 1624, Civil Code) or as “negotiation” in the case ofcredits or rights which are evidenced by negotiable docu-ments or instruments (see infra.).

c. Cause — Money or its Equivalent

The price must be certain in money or its equivalent(see Art. 1458, Civil Code; Republic vs. Phil. ResourcesDev. Corp., 102 Phil. 960). In order that the price may beconsidered certain, it shall be sufficient that it be so withreference to another thing certain, or that the deter-mination thereof be left to the judgment of a specifiedperson or persons. Should such person or persons beunable or unwilling to fix it, the contract shall be ineffi-cacious, unless the parties subsequently agree upon theprice. If the third person or persons acted in bad faith or


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by mistake, the courts may fix the price. Where such thirdpersons are prevented from fixing the price or terms byfault of the seller or the buyer, the party not in fault mayhave such remedies against the party in fault as areallowed the seller or the buyer, as the case may be (Art.1469, Civil Code). The fixing of the price can never be leftto the discretion of one of the contracting parties. If, how-ever, the price fixed by one of the parties is accepted bythe other, the sale is perfected (Art. 1473, Civil Code).The price of securities, grain, liquids, and other thingsshall also be considered certain when the price fixed isthat which the thing sold would have on a definite day, orin a particular exchange or market, or when an amountis fixed above or below the price on such day, or in suchexchange or market, provided said amount be certain(Art. 1472, Civil Code). Where the price cannot be deter-mined in any other manner, the contract is rendered inef-ficacious. If, however, the thing or any part thereof hasbeen delivered to and appropriated by the buyer, he mustpay a reasonable price therefor. What could be a reason-able price is a question of fact dependent on the circum-stances of each particular case (Art. 1474, Civil Code).

Gross inadequacy of price does not affect a contractof sale, except as it may indicate a defect in the consent oras it may mean that the parties may have really intendeda donation or some other act or contract (Art. 1470, CivilCode; see Goquiolay vs. Sycip, 108 Phil. 947). If the pricewere simulated, the sale is void (Borromeo vs. Borromeo,98 Phil. 432; Jocson vs. Court of Appeals, 170 SCRA 333;de Portugal vs. Intermediate Appellate Court, 159 SCRA179; Ladanga vs. Court of Appeals, 131 SCRA 361), butagain the act may be shown to have been in reality a do-nation, or some other act or contract (Art. 1471, CivilCode). The Supreme Court, in Ladanga vs. Court of Ap-peals (131 SCRA 361), ruled that a contract of sale is voidand without effect “where the price, which appears thereinas paid, has in fact never been paid by the purchaser tothe vendor” (citing the previous cases of Catindig vs. Heirsof Roque, 74 SCRA 83 and Mapalo vs. Mapalo, 123 Phil.

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979). Such a sale, the Supreme Court said, is “inexistentand cannot be considered consummated” (citing Borromeovs. Borromeo, 96 Phil. 431). Although the law would con-sider the sale perfected from the moment the parties agreeon the thing to be sold and the price to be paid therefor(see Art. 1458 in relation to Art. 1319, Civil Code), it is atperfection, not consummation, when a contract is to beadjudged as being either valid or void. The circumstanceof consummation, however, is a strong factor to considerin determining whether there is absolute simulation thatcan, indeed, render an agreement void (see also Art. 1409,par. 2, Civil Code; Cf. Gardner vs. Court of Appeals, 131SCRA 585; De Portugal vs. Intermediate Appellate Court,159 SCRA 179). A sale of property for “P1.00 and othervaluable consideration” (a common law documentationpractice) would be legally feasible as a sale contract solong as it can withstand a possibility that, in reality, adifferent contract is intended by the parties or that, infact, the same is merely a simulated arrangement. In onecase, a sale for P1.00, plus an unspecified and unquantifiedservices, of a valuable piece of real estate was held to befictitious and void (Bagnas vs. Court of Appeals, 176 SCRA159).

Form of Contract

Subject to the provisions of the Statute of Fraudsand of any other applicable statute, a contract of salemay be made in writing or verbally, or partly in writingand partly by word of mouth, or may be inferred from theconduct of the parties (Art. 1483, Civil Code). In the saleof large cattle, a transfer of the Certificate of Registra-tion is required (Sec. 22, Act No. 1147). The sale of goodsworth not less than P500, as well as a sale of real prop-erty, is covered by the Statute of Frauds and must thusbe in writing to be enforceable (see Art. 1403, Civil Code).

The expenses for the execution and registration ofthe sale shall be borne by the vendor, unless there is astipulation to the contrary (Art. 1487, Civil Code).


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Chapter 3

Effects of the Contract When the Thing SoldHas Been Lost

Art. 1493. If at the time the contract of sale isperfected, the thing which is the object of the contracthas been entirely lost, the contract shall be withoutany effect.

But if the thing should have been lost in part only,the vendee may choose between withdrawing fromthe contract and demanding the remaining part, pay-ing its price in proportion to the total sum agreed upon.(1460a)

Art. 1494. Where the parties purport a sale of spe-cific goods, and the goods without the knowledge of theseller have perished in part or have wholly or in a mate-rial part so deteriorated in quality as to be substantiallychanged in character, the buyer may at his option treatthe sale:

(1) As avoided; or

(2) As valid in all of the existing goods or in somuch thereof as have not deteriorated, and as bindingthe buyer to pay the agreed price for the goods in whichthe ownership will pass, if the sale was divisible. (n)

Chapter 4

Obligations of the Vendor

Section 1 — General Provisions

Art. 1495. The vendor is bound to transfer theownership of and deliver, as well as warrant the thingwhich is the object of the sale. (1461a)

Art. 1496. The ownership of the thing sold is ac-quired by the vendee from the moment it is deliveredto him in any of the ways specified in Articles 1497 to1501, or in any other manner signifying an agreementthat the possession is transferred from the vendor tothe vendee. (n)

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Section 2 — Delivery of the Thing Sold

Art. 1497. The thing sold shall be understood asdelivered, when it is placed in the control and posses-sion of the vendee. (1462a)

Art. 1498. When the sale is made through a publicinstrument, the execution thereof shall be equivalentto the delivery of the thing which is the object of thecontract, if from the deed the contrary does not appearor cannot clearly be inferred.

With regard to movable property, its delivery mayalso be made by the delivery of the keys of the placeor depository where it is stored or kept. (1463a)

Art. 1499. The delivery of movable property maylikewise be made by the mere consent or agreement ofthe contracting parties, if the thing sold cannot be trans-ferred to the possession of the vendee at the time ofthe sale, or if the latter already had it in his possessionfor any other reason. (1463a)

Art. 1500. There may also be tradition constitutumpossessorium. (n)

Art. 1501. With respect to incorporeal property,the provisions of the first paragraph of Article 1498shall govern. In any other case wherein said provi-sions are not applicable, the placing of the titles ofownership in the possession of the vendee or the useby the vendee of his rights, with the vendor’s consent,shall be understood as a delivery. (1464)

Art. 1502. When goods are delivered to the buyer“on sale or return” to give the buyer an option to re-turn the goods instead of paying the price, the owner-ship passes to the buyer on delivery, but he may revestthe ownership in the seller by returning or tenderingthe goods within the time fixed in the contract, or, if notime has been fixed, within a reasonable time. (n)

When goods are delivered to the buyer on ap-proval or on trial or on satisfaction, or other similarterms, the ownership therein passes to the buyer:

(1) When he signifies his approval or acceptance


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to the seller or does any other act adopting the trans-action;

(2) If he does not signify his approval or accept-ance to the seller, but retains the goods without givingnotice of rejection, then if a time has been fixed for thereturn of the goods, on the expiration of such time,and, if no time has been fixed, on the expiration of areasonable time. What is a reasonable time is a ques-tion of fact. (n)

Art. 1503. Where there is a contract of sale ofspecific goods, the seller may, by the terms of thecontract, reserve the right of possession or ownershipin the goods until certain conditions have been ful-filled. The right of possession or ownership may bethus reserved notwithstanding the delivery of the goodsto the buyer or to a carrier or other bailee for the pur-pose of transmission to the buyer.

Where goods are shipped, and by the bill of ladingthe goods are deliverable to the seller or his agent, or tothe order of the seller or of his agent, the seller therebyreserves the ownership in the goods. But, if except forthe form of the bill of lading, the ownership would havepassed to the buyer on shipment of the goods, the sell-er’s property in the goods shall be deemed to be onlyfor the purpose of securing performance by the buyerof his obligations under the contract.

Where goods are shipped, and by the bill of lad-ing the goods are deliverable to order of the buyer orof his agent, but possession of the bill of lading isretained by the seller or his agent, the seller therebyreserves a right to the possession of the goods asagainst the buyer.

Where the seller of goods draws on the buyer forthe price and transmits the bill of exchange and bill oflading together to the buyer to secure acceptance orpayment of the bill of exchange, the buyer is bound toreturn the bill of lading if he does not honor the bill ofexchange, and if he wrongfully retains the bill of ladinghe acquires no added right thereby. If, however, the billof lading provides that the goods are deliverable to the

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buyer or to the order of the buyer, or is indorsed inblank, or to the buyer by the consignee named therein,one who purchases in good faith, for value, the bill oflading, or goods from the buyer will obtain the owner-ship in the goods, although the bill of exchange hasnot been honored, provided that such purchaser hasreceived delivery of the bill of lading indorsed by theconsignee named therein, or of the goods, without no-tice of the facts making the transfer wrongful. (n)

Art. 1504. Unless otherwise agreed, the goods re-main at the seller’s risk until the ownership therein istransferred to the buyer, but when the ownership thereinis transferred to the buyer the goods are at the buyer’srisk whether actual delivery has been made or not,except that:

(1) Where delivery of the goods has been madeto the buyer or to a bailee for the buyer, in pursuanceof the contract and the ownership in the goods hasbeen retained by the seller merely to secure perform-ance by the buyer of his obligations under the con-tract, the goods are at the buyer’s risk from the time ofsuch delivery;

(2) Where actual delivery has been delayedthrough the fault of either the buyer or seller the goodsare at the risk of the party in fault. (n)

Art. 1505. Subject to the provisions of this Title,where goods are sold by a person who is not the ownerthereof, and who does not sell them under authority orwith the consent of the owner, the buyer acquires nobetter title to the goods than the seller had, unless theowner of the goods is by its conduct precluded fromdenying the seller’s authority to sell.

Nothing in this Title, however, shall affect:

(1) The provisions of any factors’ acts, recordinglaws, or any other provision of law enabling the appar-ent owner of goods to dispose of them as if he were thetrue owner thereof;

(2) The validity of any contract of sale understatutory power of sale or under the order of a court ofcompetent jurisdiction;


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(3) Purchases made in a merchant’s store, or infairs, or markets, in accordance with the Code of Com-merce and special laws. (n)

Art. 1506. Where the seller of goods has a void-able title thereto, but his title has not been avoided atthe time of the sale, the buyer acquires a good title tothe goods, provided he buys them in good faith, forvalue, and without notice of the seller’s defect of title.(n)

Obligations of Seller, In General —

The vendor is bound to transfer the ownership ofand deliver, as well as warrant, the thing which is theobject of the sale (Art. 1495, Civil Code).

Delivery

The vendor is bound to deliver the thing sold and itsaccessions and accessories in the condition in which theywere upon the perfection of the contract. All fruits shallpertain to the vendee from the day on which the contractwas perfected (Art. 1537, Civil Code).

The ownership of the thing sold is acquired by thevendee upon the actual or constructive delivery thereof(see Art. 1477, Civil Code) or from the moment it isdelivered to him in any of the ways specified in Articles1497 to 1501 of the Code (infra.), or in any other mannersignifying an agreement that the possession is trans-ferred from the vendor to the vendee (see Art. 1496, CivilCode; Sapto vs. Fabiana, 103 Phil. 683) even when theprice is yet unpaid (Ledesma vs. Court of Appeals, 213SCRA 195). The rule notwithstanding, the parties maystipulate that ownership shall not pass to the purchaseruntil he has fully paid the price (see Art. 1478, CivilCode; Edca Publishing vs. Santos, 184 SCRA 614; Beanvs. Cadwallader, 10 Phil. 606), or the seller may reservethe right of possession or ownership in the goods untilcertain conditions are fulfilled (see Art. 1503, Civil Code).Delivery may be actual, constructive (which may be sym-

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bolic, by tradicio longa manu, by tradicio brevi manu, orby constitutum possessorium), quasi-tradition and by op-eration of law (see discussions on Tradition as a Mode ofAcquiring Ownership, supra.).

Illustrative Acts Constituting Delivery

The thing sold shall be understood as delivered whenit is placed in the control and possession of the vendee(Art. 1497, Civil Code; La Fuerza, Inc. vs. Court of Ap-peals, 23 SCRA 1217; Chrysler Philippines Corp. vs. Courtof Appeals, 133 SCRA 567; Alliance Tobacco Corporation,Inc. vs. Philippine Virginia Tobacco Administration, 179SCRA 336).

When the sale is made through a public instrument,the execution thereof shall be equivalent to the deliveryof the thing which is the object of the contract if from thedeed the contrary does not appear or cannot clearly beinferred (Viacrusis vs. Court of Appeals, 44 SCRA 176).With regard to movable property, its delivery may also bemade by the delivery of the keys of the place or depositorywhere it is stored or kept (Art. 1498, Civil Code).

The delivery of movable property may likewise bemade by the mere consent or agreement of the contractingparties if the thing sold cannot be transferred to the pos-session of the vendee at the time of the sale, or if thelatter already had it in his possession for any other rea-son (Art. 1499, Civil Code; Board of Liquidators vs. Floro,110 Phil. 482).

There may also be tradition constitutum possessorium(Art. 1500, Civil Code) such as when the seller continuesto be in possession as the lessee of the buyer (Amigo vs.Teves, 96 Phil. 252).

With respect to incorporeal property, the sale madethrough a public instrument is equivalent to delivery ifthe contrary does not appear or cannot be clearly inferred(see also Art. 1625, Civil Code). In any other case, the


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placing of the titles of ownership in the possession of thevendee or the use by the vendee of his rights, with thevendor’s consent, shall be understood as a delivery (Art.1501, in relation to Art. 1498, Civil Code).

Delivery on “Sale or Return” or on “Trial on Satisfaction”

When goods are delivered to the buyer “on sale orreturn” to give the buyer an option to return the goodsinstead of paying the price, the ownership passes to thebuyer on delivery, but he may revest the ownership in theseller by returning or tendering the goods within thetime fixed in the contract, or, if no time has been fixed,within a reasonable time.

When goods are delivered to the buyer “on approvalor trial or on satisfaction,” or other similar terms, theownership therein passes to the buyer:

(1) When he signifies his approval or acceptance tothe seller or does any other act adopting the transaction;

(2) If he does not signify his approval or acceptanceto the seller, but retains the goods without giving noticeof rejection, then if a time has been fixed for the return ofthe goods, on the expiration of such time, and, if no timehas been fixed, on the expiration of a reasonable time.What is a reasonable time is a question of fact (Art. 1502,Civil Code).

Transfers of Goods Covered by Documents of Title

Art. 1507. A document of title in which it is statedthat the goods referred to therein will be delivered tothe bearer, or to the order of any person named insuch document is a negotiable document of title. (n)

Art. 1508. A negotiable document of title may benegotiated by delivery:

(1) Where by the terms of the document the car-rier, warehouseman or other bailee issuing the sameundertakes to deliver the goods to the bearer; or

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(2) Where by the terms of the document the car-rier, warehouseman or other bailee issuing the sameundertakes to deliver the goods to the order of a speci-fied person, and such person or a subsequent indorseeof the document has indorsed it in blank or to thebearer.

Where by the terms of a negotiable document oftitle the goods are deliverable to bearer or where anegotiable document of title has been indorsed in blankor to bearer, any holder may indorse the same to him-self or to any specified person, and in such case thedocument shall thereafter be negotiated only by theindorsement of such indorsee.

Art. 1509. A negotiable document of title may benegotiated by the indorsement of the person to whoseorder the goods are by the terms of the documentdeliverable. Such indorsement may be in blank, tobearer or to a specified person. If indorsed to a speci-fied person, it may be again negotiated by the indorse-ment of such person in blank, to bearer or to anotherspecified person. Subsequent negotiations may bemade in like manner. (n)

Art. 1510. If a document of title which contains anundertaking by a carrier, warehouseman or other baileeto deliver the goods to bearer, to a specified person ororder of a specified person or which contains words oflike import, has placed upon it the words “not negoti-able,” “non-negotiable” or the like, such document maynevertheless be negotiated by the holder and is a nego-tiable document of title within the meaning of this Title.But nothing in this Title contained shall be construed aslimiting or defining the effect upon the obligations ofthe carrier, warehouseman, or other bailee issuing adocument of title or placing thereon the words “notnegotiable,” “non-negotiable,” or the like. (n)

Art. 1511. A document of title which is not in suchform that it can be negotiated by delivery may be trans-ferred by the holder by delivery to a purchaser or donee.A non-negotiable document cannot be negotiated andthe indorsement of such a document gives the trans-feree no additional right. (n)


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Art. 1512. A negotiable document of title may benegotiated:

(1) By the owner thereof; or

(2) By any person to whom the possession orcustody of the document has been entrusted by theowner, if, by the terms of the document the bailee issu-ing the document undertakes to deliver the goods tothe order of the person to whom the possession orcustody of the document has been entrusted, or if atthe time of such entrusting the document is in suchform that it may be negotiated by delivery. (n)

Art. 1513. A person to whom a negotiable docu-ment of title has been duly negotiated acquires thereby:

(1) Such title to the goods as the person negoti-ating the document to him had or had ability to conveyto a purchaser in good faith for value and also suchtitle to the goods as the person to whose order thegoods were to be delivered by the terms of the docu-ment had or had ability to convey to a purchaser ingood faith for value; and

(2) The direct obligation of the bailee issuingthe document to hold possession of the goods for himaccording to the terms of the document as fully as ifsuch bailee had contracted directly with him. (n)

Art. 1514. A person to whom a document of titlehas been transferred, but not negotiated, acquiresthereby, as against the transferor, the title to the goods,subject to the terms of any agreement with thetransferor.

If the document is non-negotiable, such personalso acquires the right to notify the bailee who issuedthe document of the transfer thereof, and thereby toacquire the direct obligation of such bailee to holdpossession of the goods for him according to the termsof the document.

Prior to the notification to such bailee by thetransferor or transferee of a non-negotiable documentof title, the title of the transferee to the goods and theright to acquire the obligation of such bailee may be

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defeated by the levy of an attachment of executionupon the goods by a creditor of the transferor, or by anotification to such bailee by the transferor or a sub-sequent purchaser from the transferor of a subsequentsale of the goods by the transferor. (n)

Art. 1515. Where a negotiable document of title istransferred for value by delivery, and the indorsementof the transferor is essential for negotiation, the trans-feree acquires a right against the transferor to compelhim to indorse the document unless a contrary inten-tion appears. The negotiation shall take effect as of thetime when the indorsement is actually made. (n)

Art. 1516. A person who for value negotiates ortransfers a document of title by indorsement or deliv-ery, including one who assigns for value a claim se-cured by a document of title unless a contrary inten-tion appears, warrants:

(1) That the document is genuine;

(2) That he has a legal right to negotiate or trans-fer it;

(3) That he has knowledge of no fact whichwould impair the validity or worth of the document;and

(4) That he has a right to transfer the title to thegoods and that the goods are merchantable or fit for aparticular purpose, whenever such warranties wouldhave been implied if the contract of the parties hadbeen to transfer without a document of title the goodsrepresented thereby. (n)

Art. 1517. The indorsement of a document of titleshall not make the indorser liable for any failure onthe part of the bailee who issued the document or pre-vious indorsers thereof to fulfill their respective obli-gations. (n)

Art. 1518. The validity of the negotiation of a ne-gotiable document of title is not impaired by the factthat the negotiation was a breach of duty on the part ofthe person making the negotiation, or by the fact thatthe owner of the document was deprived of the pos-


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session of the same by loss, theft, fraud, accident,mistake, duress, or conversion, if the person to whomthe document was negotiated or a person to whom thedocument was subsequently negotiated paid valuetherefore in good faith without notice of the breach ofduty, or loss, theft, fraud, accident, mistake, duress orconversion. (n)

Art. 1519. If goods are delivered to a bailee by theowner or by a person whose act in conveying the titleto them to a purchaser in good faith for value wouldbind the owner and a negotiable document of title isissued for them they cannot thereafter, while in pos-session of such bailee, be attached by garnishment orotherwise or be levied under an execution unless thedocument be first surrendered to the bailee or its ne-gotiation enjoined. The bailee shall in no case be com-pelled to deliver up the actual possession of the goodsuntil the document is surrendered to him or impoundedby the court. (n)

Art. 1520. A creditor whose debtor is the owner ofa negotiable document of title shall be entitled to suchaid from courts of appropriate jurisdiction by injunc-tion and otherwise in attaching such document or insatisfying the claim by means thereof as is allowed atlaw or in equity in regard to property which cannotreadily be attached or levied upon by ordinary legalprocess. (n)

The term “document of title to goods” includes anybill of lading, dock warrant, “quedan,” or warehouse re-ceipt or order for the delivery of goods, or any other docu-ment used in the ordinary course of business in the saleor transfer of goods, as proof of the possession or controlof the goods or authorizing or purporting to authorize thepossessor of the document to transfer or receive, eitherby indorsement or by delivery, goods represented by suchdocument (see Art. 1636, Civil Code).

The document may either be negotiable or non-nego-tiable. A document of title in which it is stated that thegoods referred to therein will be delivered to the bearer

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of, or to the order of any person named in, such document isa negotiable document of title (Art. 1507, Civil Code; Romanvs. Asia Banking Corp., 46 Phil. 705). The Code also provides:

“Art. 1510. If a document of title which containsan undertaking by a carrier, warehouseman or otherbailee to deliver the goods to bearer, to a specifiedperson or order (or to the order) of a specified personor which contains words of like import, has placedupon it the words ‘not negotiable,’ ‘non-negotiable’ orthe like, such document may nevertheless be negoti-ated by the holder and is a negotiable document oftitle within the meaning of this title. But nothing inthis Title contained shall be construed as limiting ordefining the effect upon the obligations of the car-rier, warehouseman, or other bailee issuing a docu-ment of title or placing thereon the words ‘not nego-tiable,’ ‘non-negotiable,’ or the like” (Words in paren-thesis added).

A non-negotiable document of title is one in which itis expressed that the goods covered thereby are to bedelivered to a specified person named therein.

Manner of Transfer

A negotiable document of title is transferred by ne-gotiation (delivery or indorsement, as the case may be;see infra.) or by assignment; a non-negotiable documentmay only be transferred by assignment. In either case,i.e., negotiation or assignment, the transferee does notacquire title more than what the transferor had or hadability to convey.

Negotiation

A negotiable document of title may be negotiated bydelivery:

(1) Where by the terms of the document the carrier,warehouseman or other bailee issuing the same under-takes to deliver the goods to the bearer; or


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(2) Where by the terms of the document the carrier,warehouseman or other bailee issuing the same under-takes to deliver the goods to the order of a specified per-son and such person or a subsequent indorsee of thedocument has indorsed it in blank or to the bearer.

Where by the terms of a negotiable document of titlethe goods are deliverable to bearer or where a negotiabledocument of title has been indorsed in blank or to bearer,any holder may indorse the same to himself or to anyspecified person, and in such case the document shallthereafter be negotiated only by the indorsement of suchindorsee (Art. 1508, Civil Code).

A negotiable document of title may be negotiated bythe indorsement of the person to whose order the goodsare by the terms of the document deliverable. Such in-dorsement may be in blank, to bearer or to a specifiedperson. If indorsed to a specified person, it may be againnegotiated by the indorsement of such person in blank, tobearer or to another specified person. Subsequent nego-tiations may be made in like manner (Art. 1509, CivilCode).

Where a negotiable document of title is transferredfor value by delivery, and the indorsement of the transferoris essential for negotiation, the transferee acquires a rightagainst the transferor to compel him to indorse the docu-ment unless a contrary intention appears. The negotia-tion shall take effect as of the time when the indorsementis actually made (Art. 1515, Civil Code).

A negotiable document of title may be negotiated: (1)by the owner thereof; or (2) by any person to whom thepossession or custody of the document has been entrustedby the owner if, by the terms of the document, the baileeissuing the document undertakes to deliver the goods tothe order of the person to whom the possession or custodyof the document has been entrusted, or if at the time ofsuch entrusting the document is in such form that it maybe negotiated by delivery (Art. 1512, Civil Code).

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Effects of Negotiation

A person to whom a negotiable document of title hasbeen duly negotiated acquires thereby: (1) such title tothe goods as the person negotiating the document to himhad or had ability to convey to a purchaser in good faithfor value and also such title to the goods as the person towhose order the goods were to be delivered by the termsof the document had or had ability to convey to a pur-chaser in good faith for value; and (2) the direct obliga-tion of the bailee issuing the document to hold possessionof the goods for him according to the terms of the docu-ment as fully as if such bailee had contracted directlywith him (Art. 1513, Civil Code).

The validity of the negotiation of a negotiable docu-ment of title is not impaired by the fact that the negotia-tion was a breach of duty on the part of the person mak-ing the negotiation or by the fact that the owner of thedocument was deprived of the possession of the same byloss, theft, fraud, accident, mistake, duress, or conversion,if the person to whom the document was negotiated or aperson to whom the document was subsequentlynegotiated paid value therefor in good faith without no-tice of the breach of duty or loss, theft, fraud, accident,mistake, duress or conversion (Art. 1518, Civil Code; seeNational Bank vs. Producers Warehouse Assn., 42 Phil.608).

If goods are delivered to a bailee by the owner or by aperson whose act in conveying the title to them to a pur-chaser in good faith for value would bind the owner and anegotiable document of title is issued for them, they can-not thereafter, while in possession of such bailee, be at-tached by garnishment or otherwise or be levied underan execution unless the document be first surrendered tothe bailee or its negotiation enjoined. The bailee shall inno case be compelled to deliver up the actual possessionof the goods until the document is surrendered to him orimpounded by the court (Art. 1519, Civil Code).


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A creditor whose debtor is the owner of a negotiabledocument of title shall be entitled to such aid from courtsof appropriate jurisdiction by injunction and otherwise inattaching such document or in satisfying the claim bymeans thereof as is allowed at law or in equity in regardto property which cannot readily be attached or leviedupon by ordinary legal process (Art. 1520, Civil Code).

Assignment and its Effects

A document of title, which is not in such form that itcan be negotiated by delivery, may be transferred by theholder by delivery to a purchaser or donee. A non-negoti-able document cannot be negotiated and the indorsementof such a document gives the transferee no additionalright (Art. 1511, Civil Code).

A person to whom a document of title (whether nego-tiable or non-negotiable) has been transferred, but notnegotiated, acquires thereby, as against the transferorthe title to the goods, subject to the terms of any agree-ment with the transferor. If the document is non-negoti-able, such person also acquires the right to notify thebailee who issued the document of the transfer thereof,and thereby to acquire the direct obligation of such baileeto hold possession of the goods for him according to theterms of the document. Prior to the notification to suchbailee by the transferor or transferee of a non-negotiabledocument of title, the title of the transferee to the goodsand the right to acquire the obligation of such bailee maybe defeated by the levy of an attachment of executionupon the goods by a creditor of the transferor, or by anotification to such bailee by the transferor or a subse-quent purchaser from the transferor of a subsequent saleof the goods by the transferor (Art. 1514, Civil Code).

Liability of Transferor

A person who for value negotiates or transfers a docu-ment of title by indorsement or delivery, including one

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who assigns for value a claim secured by a document oftitle, unless a contrary intention appears, warrants:

(1) That the document is genuine;

(2) That he has a legal right to negotiate or trans-fer it;

(3) That he has knowledge of no fact which wouldimpair the validity or worth of the document; and

(4) That he has a right to transfer the title to thegoods and that the goods are merchantable or fit for aparticular purpose, whenever such warranties would havebeen implied if the contract of the parties had been totransfer without a document of title the goods representedthereby (Art. 1516, Civil Code).

The indorsement of a document of title shall notmake the indorser liable for any failure on the part of thebailee who issued the document or previous indorsersthereof to fulfill their respective obligations (Art. 1517,Civil Code).

Double Sales

“Art. 1544. If the same thing should have beensold to different vendees, the ownership shall betransferred to the person who may have first takenpossession thereof in good faith, if it should be mov-able property.

“Should it be immovable property, the owner-ship shall belong to the person acquiring it who ingood faith first recorded it in the Registry of Prop-erty.

“Should there be no inscription, the ownershipshall pertain to the person who in good faith wasfirst in the possession; and, in the absence thereof,to the person who presents the oldest title, providedthere is good faith.”


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The above provisions of the Civil Code apply, by ex-press provision of the law, to double donations (Art. 744,Civil Code). In agency, when the agent and the principalcontract with regard to the same thing, the law favorsthat of the prior date but in case of double sales, Article1544 is made to apply (see Art. 1916, Civil Code). It mayalso be well to note that under Article 1165 (see also Art.1917 in Agency) of the Code, if an obligor has promised todeliver the same thing to two or more persons who do nothave the same interest, he shall be responsible for anyfortuitous event until he has effected the delivery.

In sales, Article 1544, providing for the rules to re-solve the conflicting rights of two or more buyers, is ap-propriate since the law does not prohibit but, in fact,sanctions the perfection of a sale by a non-owner, suchas the sale of future things or a short sale, for it is only atthe consummation stage of the sale, i.e., delivery of thething sold, that ownership would be deemed transmittedto the buyer. In the meanwhile, a subsequent sale toanother of the same thing by the same seller can still be alegal possibility. This rule on double sales finds hardlyany relevance in an ordinary donation where the lawrequires the donor to have ownership of the thing or thereal right he donates at the time of its perfection (seeArticle 750, Civil Code) since a donation constitutes amode, not just a title, in an acquisition and transmissionof ownership.

A conditional sale or contract to sell could only havethe effect of preventing the obligation to convey title fromacquiring an obligatory force if the condition is yet unful-filled (see Roque vs. Lapuz, 96 SCRA 741). In a contractof sale, title, too, is not conveyed until, of course, whenand after delivery is made. Clearly, Article 1544 also cov-ers sales where ownership is not yet transmitted to thebuyer; indeed, it equates some of its rules of preference,such as priority in possession or registration, to coverprecisely the transfer of ownership (see Alterado vs.

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Jimenez [CA], 57 O.G. 9213; see also Land Authority vs.De Leon, 120 SCRA 128).

The rule on double sales has been held to apply wherethe same property was sold to different buyers, first byits owner and later by the heirs, the latter being deemedthe juridical continuation of the personality of the decedent(Nuguid vs. Court of Appeals, 171 SCRA 213).

(1) In the double sales of movables, the vendee whoin good faith takes possession has the better right to itsownership (Tomassi vs. Villa-Abrille, 104 Phil. 310); oth-erwise, the preference, all things being equal, should begiven to the first buyer (prius tempore, potior jure).

(2) In the double sales of immovables, ownership istransferred (in the order hereunder stated) to —

(a) the first registrant in good faith;

(b) the first in possession in good faith; and

(c) the buyer who presents the oldest titlein good faith.

The governing principle is prius tempore, potior jure(first in time, stronger in right). Knowledge by the firstbuyer of the second sale cannot defeat the first buyer’srights except when the second buyer first registers ingood faith the second sale (Olivares vs. Gonzales, 159SCRA 33). Conversely, knowledge gained by the secondbuyer of the first sale defeats his rights even if he is firstto register, since such knowledge taints his registrationwith bad faith (see also Astorga vs. Court of Appeals, 133SCRA 748). In Cruz vs. Cabaña (129 SCRA 656), it washeld that it is essential, to merit the protection of Article1544, second paragraph, that the second realty buyermust act in good faith in registering his deed of sale(citing Carbonell vs. Court of Appeals, 69 SCRA 99;Abarquez vs. Court of Appeals, 213 SCRA 414). The knowl-edge gained by the second buyer of the first sale defeatshis rights even if he is first to register the second sale,since such knowledge taints his prior registration with


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bad faith. Thus, before the second buyer can obtain prior-ity over the first, he must show that he has acted in goodfaith throughout — from the time of acquisition untiltitle is transferred to him by registration or failing regis-tration, by delivery of possession (Uraca vs. Court of Ap-peals, 278 SCRA 702, cited in Angel Bautista vs. Court ofAppeals, 118 SCAD 327, 322 SCRA 365). In cases of dou-ble sales of immovables, what finds relevance andmateriality is not whether or not the second buyer is abuyer in good faith but whether or not said second buyerregisters such second sale in good faith, that is, withoutknowledge of any defect in the title of the property sold(Bayoca vs. Nogales, 133 SCAD 564, 340 SCRA 154).Article 1544 does not apply where the first registrantsdid not act in good faith, such as where they had notice ofthe prior sale of the land to another (Tan vs. Court ofAppeals, G.R. No. 135038, 16 November 2001).

The registration contemplated under Article 1544has been held to refer to registration under Act 496 LandRegistration Act (now PD 1529) which considers the actof registration as the operative act that binds the land(see Mediante vs. Rosabal, 1 O.G. [12] 900; Garcia vs.Rosabal, 73 Phil. 694). On lands covered by the TorrensSystem, the purchaser acquires such rights and interestas they appear in the certificate of title, unaffected byany prior lien or encumbrance not noted therein. Thepurchaser is not required to explore farther than whatthe Torrens title, upon its face, indicates. The only excep-tion is where the purchaser has actual knowledge of aflaw or defect in the title of the seller or of such liens orencumbrances which, as to him, is equivalent to registra-tion (see Sec. 39, Act 496; Bornales vs. Intermediate Ap-pellate Court, 166 SCRA 519; Hernandez vs. Sales, 69Phil. 744; Tajonera vs. Court of Appeals, 103 SCRA 467).

Registration of the second buyer under Act 3344,providing for the registration of all instruments on landneither covered by the Spanish Mortgage Law nor theTorrens System (Act 496), cannot improve his standing

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since Act 3344 itself expresses that registration thereun-der would not prejudice prior rights in good faith (seeCarumba vs. Court of Appeals, 31 SCRA 558). Registra-tion, however, by the first buyer under Act 3344 can havethe effect of constructive notice to the second buyer thatcan defeat his right as such buyer in good faith (see Arts.708-709, Civil Code; see also Revilla vs. Galindez, 107Phil. 480; Taguba vs. Peralta, 132 SCRA 700). Article1544 has been held to be inapplicable to execution salesof unregistered land, since the purchaser merely stepsinto the shoes of the debtor and acquires the latter’sinterest as of the time the property is sold (Carumba vs.Court of Appeals, 31 SCRA 558; see also Fabian vs. Smith,Bell & Co., 8 Phil. 496) or when there is only one sale(Remalante vs. Tibe, 158 SCRA 138).

In case the first rule, in respect of immovables underArticle 1544, is inapplicable, the ownership goes to thefirst in possession, by actual or constructive delivery tohim, in good faith (see Sanchez vs. Ramos, 40 Phil. 614).The execution of a public instrument evidencing the salehas been held to transfer the possession of the propertysold to the buyer (Navera vs. Court of Appeals, 184 SCRA584). In default thereof, the preference belongs to thebuyer who presents the oldest title in good faith whowould generally be the first buyer since the character ofhis title is determined as of the time of the sale and notbecause of events subsequent thereto.

In Caram vs. Laureta (103 SCRA 7), the Court hasratiocinated that in order to give full effect to Article1544, the status of the two contracts must be declared sothat one contract must be declared void to cut off rightswhich may arise from said contract; otherwise, Article1544 would be rendered meaningless. The provision, how-ever, appears to be self-operating, and it can vest owner-ship without going into the validity or nullity of the othersale. If, as the Supreme Court has ruled, the other salebecomes void, how then could the remedies against thebreach of implied warranty against eviction under Arti-


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cle 1553 to Article 1556 become operative. Then, too, acontract of sale can be an executory contract and theconveyance of title can be made, as in fact it usually doesoccur, after such perfection. The seller, it may be noted,need not be the owner at the time of the perfection of thecontract of sale, and the law dictates the passing of titleonly upon delivery. If, in a double sale, the seller laterreacquires ownership, he must be obligated, as he is obli-gated, to convey title to the other buyer (see Art. 1434,Civil Code).

Place and Time of Delivery

Art. 1521. Whether it is for the buyer to take pos-session of the goods or for the seller to send them tothe buyer is a question depending in each case on thecontract, express or implied, between the parties. Apartfrom any such contract, express or implied, or usageof trade to the contrary, the place of delivery is theseller’s place of business if he has one, and if not hisresidence; but in case of a contract of sale of specificgoods, which to the knowledge of the parties when thecontract or the sale was made were in some otherplace, then that place is the place of delivery.

Where by a contract of sale the seller is bound tosend the goods to the buyer, but no time for sendingthem is fixed, the seller is bound to send them within areasonable time.

Where the goods at the time of sale are in thepossession of a third person, the seller has not ful-filled his obligation to deliver to the buyer unless anduntil such third person acknowledges to the buyer thathe holds the goods on the buyer’s behalf.

Demand or tender of delivery may be treated asineffectual unless made at a reasonable hour. What isa reasonable hour is a question of fact.

Unless otherwise agreed, the expenses of and in-cidental to putting the goods into a deliverable statemust be borne by the seller. (n)

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Art. 1522. Where the seller delivers to the buyer aquantity of goods less than he contracted to sell, thebuyer may reject them, but if the buyer accepts orretains the goods so delivered, knowing that the selleris not going to perform the contract in full, he mustpay for them at the contract rate. If, however, the buyerhas used or disposed of the goods delivered before heknows that the seller is not going to perform his con-tract in full, the buyer shall not be liable for more thanthe fair value to him of the goods so received.

Where the seller delivers to the buyer a quantity ofgoods larger than he contracted to sell, the buyer mayaccept the goods included in the contract and reject therest. If the buyer accepts the whole of the goods so de-livered he must pay for them at the contract rate.

Where the seller delivers to the buyer the goodshe contracted to sell mixed with goods of a differentdescription not included in the contract, the buyer mayaccept the goods which are in accordance with thecontract and reject the rest.

In the preceding two paragraphs, if the subjectmatter is indivisible, the buyer may reject the whole ofthe goods.

The provisions of this article are subject to anyusage of trade, special agreement, or course of deal-ing between the parties. (n)

Art. 1523. Where, in pursuance of a contract ofsale, the seller is authorized or required to send thegoods to the buyer, delivery of the goods to a carrier,whether named by the buyer or not, for the purpose oftransmission to the buyer is deemed to be a deliveryof the goods to the buyer, except in the cases pro-vided for in Article 1503, first, second and third para-graphs, or unless a contrary intent appears.

Unless otherwise authorized by the buyer, theseller must make such contract with the carrier on be-half of the buyer as may be reasonable, having regardto the nature of the goods and the other circumstancesof the case. If the seller omit so to do, and the goods


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are lost or damaged in course of transit, the buyer maydecline to treat the delivery to the carrier as a deliveryto himself, or may hold the seller responsible in dam-ages.

Unless otherwise agreed, where goods are sentby the seller to the buyer under circumstances in whichthe seller knows or ought to know that it is usual toinsure, the seller must give such notice to the buyer asmay enable him to insure them during their transit,and, if the seller fails to do so, the goods shall bedeemed to be at his risk during such transit. (n)

Art. 1524. The vendor shall not be bound to de-liver the thing sold, if the vendee has not paid him theprice, or if no period for the payment has been fixed inthe contract. (1466)

Art. 1525. The seller of goods is deemed to be anunpaid seller within the meaning of this Title:

(1) When the whole of the price has not beenpaid or tendered;

(2) When a bill of exchange or other negotiableinstrument has been received as conditional payment,and the condition on which it was received has beenbroken by reason of the dishonor of the instrument,the insolvency of the buyer, or otherwise.

In Articles 1525 to 1535 the term “seller” includesan agent of the seller to whom the bill of lading hasbeen indorsed, or a consignor or agent who has him-self paid, or is directly responsible for the price, or anyother 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 mayhave passed to the buyer, the unpaid seller of goods,as such, has:

(1) A lien on the goods or right to retain themfor the price while he is in possession of them;

(2) In case of the insolvency of the buyer, a rightof stopping the goods in transitu after he has partedwith the possession of them;

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(3) A right of resale as limited by this Title;

(4) A right to rescind the sale as likewise limitedby this Title.

Where the ownership in the goods has not passedto the buyer, the unpaid seller has, in addition to hisother remedies, a right of withholding delivery similar toand coextensive with his rights of lien and stoppage intransitu where the ownership has passed to the buyer.(n)

Art. 1527. Subject to the provisions of this Title,the unpaid seller of goods who is in possession of themis entitled to retain possession of them until payment ortender of the price in the following cases, namely:

(1) Where the goods have been sold without anystipulation 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 notwith-standing that he is in possession of the goods as agentor bailee for the buyer. (n)

Art. 1528. Where an unpaid seller has made partdelivery of the goods, he may exercise his right of lienon the remainder, unless such part delivery has beenmade under such circumstances as to show an intentto waive the lien or right of retention. (n)

Art. 1529. The unpaid seller of goods loses hislien thereon:

(1) When he delivers the goods to a carrier orother bailee for the purpose of transmission to thebuyer without reserving the ownership in the goods orthe right to the possession thereof;

(2) When the buyer or his agent lawfully obtainspossession 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 ob-


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tained judgment or decree for the price of the goods.(n)

Art. 1530. Subject to the provisions of this Title,when the buyer of goods is or becomes insolvent, theunpaid seller who has parted with the possession ofthe goods has the right of stopping them in transitu,that is to say, he may resume possession of the goodsat any time while they are in transit, and he will thenbecome entitled to the same rights in regard to thegoods as he would have had if he had never partedwith the possession. (n)

Art. 1531. Goods are in transit within the meaningof the preceding article:

(1) From the time when they are delivered to acarrier by land, water, or air, or other bailee for thepurpose of transmission to the buyer, until the buyer,or his agent in that behalf, takes delivery of them fromsuch carrier or other bailee;

(2) If the goods are rejected by the buyer, and thecarrier 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 meaningof the preceding article:

(1) If the buyer, or his agent in that behalf, ob-tains delivery of the goods before their arrival at theappointed destination;

(2) If, after the arrival of the goods at the ap-pointed destination, the carrier or other bailee acknowl-edges to the buyer or his agent that he holds the goodson his behalf and continues in possession of them asbailee for the buyer or his agent; and it is immaterialthat further destination for the goods may have beenindicated by the buyer;

(3) If the carrier or other bailee wrongfullyrefuses to deliver the goods to the buyer or his agentin that behalf.

If the goods are delivered to a ship, freight train,truck, or airplane chartered by the buyer, it is a ques-

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tion depending on the circumstances of the particularcase, whether they are in the possession of the carrieras such or as agent of the buyer.

If part delivery of the goods has been made to thebuyer, or his agent in that behalf, the remainder of thegoods may be stopped in transitu, unless such partdelivery has been under such circumstances as to showan agreement with the buyer to give up possession ofthe whole of the goods. (n)

Art. 1532. The unpaid seller may exercise his rightof stoppage in transitu either by obtaining actual pos-session of the goods or by giving notice of his claim tothe carrier or other bailee in whose possession the goodsare. Such notice may be given either to the person inactual possession of the goods or to his principal. Inthe latter case the notice, to be effectual, must be givenat such time and under such circumstances that theprincipal, by the exercise of reasonable diligence, mayprevent a delivery to the buyer.

When notice of stoppage in transitu is given bythe seller to the carrier, or other bailee in possessionof the goods, he must redeliver the goods to, or ac-cording to the directions of, the seller. The expensesof such delivery must be borne by the seller. If, how-ever, a negotiable document of title representing thegoods has been issued by the carrier or other bailee,he shall not be obliged to deliver or justified in deliver-ing the goods to the seller unless such document isfirst surrendered for cancellation. (n)

Art. 1533. Where the goods are of perishable na-ture, or where the seller expressly reserves the right ofresale in case the buyer should make default, or wherethe buyer has been in default in the payment of theprice for an unreasonable time, an unpaid seller hav-ing a right of lien or having stopped the goods in tran-situ may resell the goods. He shall not thereafter beliable to the original buyer upon the contract of sale orfor any profit made by such resale, but may recoverfrom the buyer damages for any loss occasioned bythe breach of the contract of sale.


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Where a resale is made, as authorized in this arti-cle, the buyer acquires a good title as against the origi-nal buyer.

It is not essential to the validity of a resale thatnotice of an intention to resell the goods be given bythe seller to the original buyer. But where the right toresell is not based on the perishable nature of the goodsor upon an express provision of the contract of sale,the giving or failure to give such notice shall be rel-evant in any issue involving the question whether thebuyer had been in default for an unreasonable timebefore the resale was made.

It is not essential to the validity of a resale thatnotice of the time and place of such resale should begiven by the seller to the original buyer.

The seller is bound to exercise reasonable careand judgment in making a resale, and subject to thisrequirement may make a resale either by public or pri-vate sale. He cannot, however, directly or indirectlybuy the goods. (n)

Art. 1534. An unpaid seller having the right of lienor having stopped the goods in transitu, may rescindthe transfer of title and resume the ownership in thegoods, where he expressly reserved the right to do soin case the buyer should make default, or where thebuyer has been in default in the payment of the pricefor an unreasonable time. The seller shall not thereaf-ter be liable to the buyer upon the contract of sale, butmay recover from the buyer damages for any loss oc-casioned by the breach of the contract.

The transfer of title shall not be held to have beenrescinded by an unpaid seller until he has manifestedby notice to the buyer or by some other overt act anintention to rescind. It is not necessary that such overtact should be communicated to the buyer, but the giv-ing or failure to give notice to the buyer of the inten-tion to rescind shall be relevant in any issue involvingthe question whether the buyer had been in default foran unreasonable time before the right of rescissionwas asserted. (n)

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Art. 1535. Subject to the provisions of this Title,the unpaid seller’s right of lien or stoppage in transituis not affected by any sale, or other disposition of thegoods which the buyer may have made, unless theseller has assented thereto.

If, however, a negotiable document of title hasbeen issued for goods, no seller’s lien or right of stop-page in transitu shall defeat the right of any purchaserfor value in good faith to whom such document hasbeen negotiated, whether such negotiation be prior orsubsequent to the notification to the carrier, or otherbailee who issued such document, of the seller’s claimto a lien or right of stoppage in transitu. (n)

Art. 1536. The vendor is not bound to deliver thething sold in case the vendee should lose the right tomake use of the term as provided in Article 1198. (1467a)

Art. 1537. The vendor is bound to deliver the thingsold and its accessions and accessories in the condi-tion in which they were upon the perfection of the con-tract.

All the fruits shall pertain to the vendee from theday on which the contract was perfected. (1468a)

Art. 1538. In case of loss, deterioration or improve-ment of the thing before its delivery, the rules in Arti-cle 1189 shall be observed, the vendor being consid-ered the debtor. (n)

Art. 1539. The obligation to deliver the thing soldincludes that of placing in the control of the vendee allthat is mentioned in the contract, in conformity withthe following rules:

If the sale of real estate should be made with astatement of its area, at the rate of a certain price for aunit of measure or number, the vendor shall be obligedto 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 choosebetween a proportional reduction of the price and therescission of the contract, provided that, in the latter


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case, the lack in the area be not less than one-tenth ofthat stated.

The same shall be done, even when the area isthe same, if any part of the immovable is not of thequality specified in the contract.

The rescission, in this case, shall only take placeat the will of the vendee, when the inferior value of thething sold exceeds one-tenth of the price agreed upon.

Nevertheless, if the vendee would not have boughtthe immovable had he known of its smaller area orinferior quality, he may rescind the sale. (1469a)

Art. 1540. If, in the case of the preceding article,there is a greater area or number in the immovablethan that stated in the contract, the vendee may acceptthe area included in the contract and reject the rest. Ifhe accepts the whole area, he must pay for the sameat the contract rate. (1470a)

Art. 1541. The provisions of the two precedingarticles shall apply to judicial sales. (n)

Art. 1542. In the sale of real estate, made for alump sum and not at the rate of a certain sum for aunit of measure or number, there shall be no increaseor decrease of the price, although there be a greater orless area or number than that stated in the contract.

The same rule shall be applied when two or moreimmovables are sold for a single price; but if, besidesmentioning the boundaries, which is indispensable inevery conveyance of real estate, its area or numbershould be designated in the contract, the vendor shallbe bound to deliver all that is included within saidboundaries, even when it exceeds the area or numberspecified in the contract; and, should he not be able todo so, he shall suffer a reduction in the price, in pro-portion to what is lacking in the area or number, un-less the contract is rescinded because the vendee doesnot accede to the failure to deliver what has been stipu-lated. (1471)

Art. 1543. The actions arising from Articles 1539

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and 1542 shall prescribe in six months, counted fromthe day of delivery. (1472a)

Art. 1544. If the same thing should have been soldto different vendees, the ownership shall be transferredto the person who may have first taken possessionthereof in good faith, if it should be movable property.

Should it be immovable property, the ownershipshall belong to the person acquiring it who in goodfaith first recorded it in the Registry of Property.

Should there be no inscription, the ownership shallpertain to the person who in good faith was first in thepossession; and, in the absence thereof, to the personwho presents the oldest title, provided there is goodfaith. (1473)

Whether it is for the buyer to take possession of thegoods or for the seller to send them to the buyer is aquestion depending in each case on the contract, expressor implied, between the parties. Apart from any suchcontract, express or implied, or usage of trade to thecontrary, the place of delivery is the seller’s place of busi-ness if he has one, and if not, his residence; but in case ofa contract of sale of specific goods, which to the knowl-edge of the parties when the contract or the sale wasmade were in some other place, then that place is theplace of delivery. Where the goods at the time of sale arein the possession of a third person, the seller has notfulfilled his obligation to deliver to the buyer unless anduntil such third person acknowledges to the buyer thathe holds the goods on the buyer’s behalf.

Demand or tender of delivery may be treated as inef-fectual unless made at a reasonable hour. What is a rea-sonable hour is a question of fact. Where by a contract ofsale the seller is bound to send the goods to the buyer, butno time for sending them is fixed, the seller is bound tosend them within a reasonable time. Unless otherwiseagreed, the expenses of and incidental to putting thegoods into a deliverable state must be borne by the seller


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(Art. 1521, Civil Code). The vendor shall not be bound todeliver the thing sold if the vendee has not paid him theprice, or if no period for the payment has been fixed in thecontract (Art. 1524, Civil Code; Florendo vs. Fox, 20 Phil.388).

Delivery to Carrier

Where, in pursuance of a contract of sale, the selleris authorized or required to send the goods to the buyer,delivery of the goods to a carrier, whether named by thebuyer or not, for the purpose of transmission to the buyeris deemed to be a delivery of the goods to the buyer,except in the cases provided for in Article 1503, first,second and third paragraphs (infra.) or unless a contraryintent appears. Unless otherwise authorized by the buyer,the seller must make such contract with the carrier onbehalf of the buyer as may be reasonable, having regardto the nature of the goods and the other circumstances ofthe case. If the seller omits to do so and the goods are lostor damaged in course of transit, the buyer may decline totreat the delivery to the carrier as a delivery to himself,or may hold the seller responsible in damages. Unlessotherwise agreed, where goods are sent by the seller tothe buyer under circumstances in which the seller knowsor ought to know that it is usual to insure, the seller mustgive such notice to the buyer as may enable him to insurethem during their transit, and if the seller fails to do so,the goods shall be deemed to be at his risk during suchtransit (Art. 1523, Civil Code). In Behn, Meyer & Co. vs.Yengco (38 Phil. 602), the Supreme Court defined com-monly used terms in the delivery of goods to the carrier,thus:

“The letters ‘c.i.f.’ found in British contractsstand for costs, insurance, and freight. They signifythat the price fixed covers not only the cost of thegoods, but the expense of freight and insurance to bepaid by the seller (Ireland vs. Livingston, L.R., 5H.L., 395). Our instant contract, in addition to the

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letters ‘c.i.f.,’ has the word following, ‘Manila.’ Undersuch a contract, an Australian case is authority forthe proposition that no inference is permissible thata seller was bound to deliver at the point of destina-tion (Bowden vs. Little, 4 Comm. [Australia], 1364).With all due deference to the decision of the HighCourt of Australia, we believe that the word ‘Manila’in conjunction with the letters ‘c.i.f.’ must mean thatthe contract price, covering costs, insurance andfreight, signifies that delivery was to be made atManila. x x x

“In mercantile contracts of American origin, theletters ‘F.O.B.’ standing for the words ‘Free on Board,’are frequently used. The meaning is that the sellershall bear all expenses until the goods are deliveredwhere they are to be ‘F.O.B.’ According as to whetherthe goods are to be delivered ‘F.O.B.’ at the point ofshipment or at the point of destination determinesthe time when property passes. x x x

“Both of the terms ‘C.I.F.’ and ‘F.O.B.’ merelymake rules of presumption which yield to proof ofcontrary intention. As Benjamin, in his work onSales, well says: The question, at last, is one of in-tent, to be ascertained by a consideration of all thecircumstances. (Benjamin on Sales, par. 329). Forinstance, in a case of Philippine origin, appealed tothe United States Supreme Court, it was held thatthe sale was complete on shipment, though the con-tract was for goods ‘F.O.B. Manila,’ the place of des-tination, the other terms of the contract showing theintention to transfer the property (United States vs.R.P. Andrews & Co. [1907], 207 U.S. 229). x x x

“A specification in a contract relative to the pay-ment of freight can be taken to indicate the inten-tion of the parties in regard to the place of delivery.If the buyer is to pay the freight, it is reasonable tosuppose that he does so because the goods become


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his at the point of shipment. On the other hand, ifthe seller is to pay the freight, the inference is equallystrong that the duty of the seller is to have the goodstransported to their ultimate destination and thattitle to property does not pass until the goods havereached their destination (see Williston on Sales, pp.406-408).”

Absent any fault on the part of the seller, the latteris not liable for mis-delivery by the carrier (Smith Bell &Co. vs. Gutierrez, 8 SCRA 408).

Where there is a contract of sale of specific goods,the seller may, by the terms of the contract, reserve theright of possession or ownership in the goods until cer-tain conditions have been fulfilled. The right of posses-sion or ownership may be thus reserved notwithstandingthe delivery of the goods to the buyer or to a carrier orother bailee for the purpose of transmission to the buyer(see Art. 1503, Civil Code).

Where goods are shipped and, by the bill of lading,the goods are deliverable to the seller or his agent or tothe order of the seller or of his agent, the seller therebyreserves the ownership in the goods. But, if except for theform of the bill of lading, the ownership would have passedto the buyer on shipment of the goods, the seller’s prop-erty in the goods shall be deemed to be only for the pur-pose of securing performance by the buyer of his obliga-tions under the contract.

Where goods are shipped, and by the bill of ladingthe goods are deliverable to the order of the buyer or ofhis agent, but possession of the bill of lading is retainedby the seller or his agent, the seller thereby reserves aright to the possession of the goods as against the buyer.

Where the seller of goods draws on the buyer for theprice and transmits the bill of exchange and bill of ladingtogether to the buyer to secure acceptance or payment ofthe bill of exchange, the buyer is bound to return the bill

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of lading if he does not honor the bill of exchange, and ifhe wrongfully retains the bill of lading he acquires noadded right thereby. If, however, the bill of lading pro-vides that the goods are deliverable to the buyer or to theorder of the buyer, or is indorsed in blank or to the buyerby the consignee named therein, one who purchases ingood faith for value, the bill of lading, or goods from thebuyer will obtain the ownership in the goods, althoughthe bill of exchange has not been honored, provided thatsuch purchaser has received delivery of the bill of ladingindorsed by the consignee named therein, or of the goods,without notice of the facts making the transfer wrongful(Art. 1503, Civil Code).

Risk of Loss

Different rules govern the effects of the loss of theobject of sale, viz.:

(1) If the thing (personal or real) is lost before thesale could be perfected, the lack of object as an essentialelement of the contract would prevent the sale from be-ing perfected (see Art. 1318, in relation to Art. 1409, CivilCode). If it is lost in part, the parties may decide onwhether to proceed with their contract or not on the re-mainder; if the loss is unknown to them and they proceedwith the contract, their mistake can vitiate consent.

(2) If the thing is lost at the time the sale is per-fected, Article 1493, Civil Code, shall govern, viz.:

“Art. 1493. If at the time the contract of sale isperfected, the thing which is the object of the con-tract has been entirely lost, the contract shall bewithout any effect.

“But if the thing should have been lost in partonly, the vendee may choose between withdrawingfrom the contract and demanding the remaining part,paying its price in proportion to the total sum agreedupon.”


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(3) If the thing is lost after the sale is perfected butbefore it is delivered to the buyer, three provisions of theCode on Sales, providing for different rules, are expressed,viz.:

“Art. 1480. Any injury to or benefit from thething sold, after the contract has been perfected,from the moment of the perfection to the time ofdelivery, shall be governed by Articles 1163 to 1165and 1262.

“This rule shall apply to the sale of fungiblethings, made independently and for a single price, orwithout consideration of their weight, number, ormeasure.

“Should fungible things be sold for a price fixedaccording to weight, number, or measure, the riskshall not be imputed to the vendee until they havebeen weighed, counted, or measured and delivered,unless the latter has incurred in delay.”

“Art. 1504. Unless otherwise agreed, the goodsremain at the seller’s risk until the ownership thereinis transferred to the buyer, but when the ownershiptherein is transferred to the buyer the goods are atthe buyer’s risk whether actual delivery has beenmade or not, except that:

“(1) Where delivery of the goods has beenmade to the buyer or to a bailee for the buyer, inpursuance of the contract and the ownership in thegoods has been retained by the seller merely to se-cure performance by the buyer of his obligations un-der the contract, the goods are at the buyer’s riskfrom the time of such delivery;

“(2) Where actual delivery has been delayedthrough the fault of either the buyer or seller thegoods are at the risk of the party in fault.”

“Art. 1538. In case of loss, deterioration or im-provement of the thing before its delivery, the rules

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in Article 1189 shall be observed, the vendor beingconsidered the debtor.”

Undoubtedly, if the loss is due to the fault of oneparty or when he is in default, such loss shall be for hisaccount. If the loss is due to a fortuitous event, Articles1480 and 1538 express the general rule in the Law onObligations and Contracts “res perit creditori” that placesthe burden of loss on the creditor (in this case the buyer)to whom the obligation to deliver is due (see Art. 1262,Civil Code, in prestations to give and Art. 1255, inprestation to do; see also Villaruel vs. Manila Motors, 104Phil. 926; Reyes vs. Caltex, 47 O.G. 1293). The seller,whose obligation is extinguished by a fortuitous event,may thus retain the price, if paid, or demand payment, ifstill owing. In the sale of goods (corporeal movable), how-ever, Article 1504, adopting the “res perit domino” rule byway of exception, controls (see Norkis Distributors, Inc.vs. Court of Appeals, 193 SCRA 700; Chrysler PhilippinesCorp. vs. Court of Appeals, 133 SCRA 567) such thatuntil delivery is effected the risk of loss lies with theseller (being still the owner). The third paragraph of Arti-cle 1480 regarding the sale of fungibles conforms withArticle 1504 and applies the res perit domino rule thatwould put the burden of loss on the seller until after suchfungibles are delivered to the vendee.

In case of partial loss or deterioration in quality ofspecific goods sold, the following provision governs:

“Art. 1494. Where the parties purport a sale ofspecific goods, and the goods without the knowledgeof the seller have perished in part or have wholly orin a material part so deteriorated in quality as to besubstantially changed in character, the buyer mayat his option treat the sale:

“(1) As avoided; or

“(2) As valid in all of the existing goods or inso much thereof as have not deteriorated, and as


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binding the buyer to pay the agreed price for thegoods in which the ownership will pass, if the salewas divisible.”

The term “goods” referred to in the foregoing rules“includes all chattels or personal property” (but not thingsin action or money of legal tender in the Philippines), aswell as “growing fruits or crops.” The term “specific goods”embraces “goods identified and agreed upon at the time acontract of sale is made” (see Art. 1636, Civil Code).

(4) If the thing is lost after its delivery, the buyer,subject to contrary stipulations (e.g., delivery on “trial orsatisfaction”) as well as express and implied warranties,bears the risk of loss (see Art. 1504, Civil Code; see alsodiscussion on Risk of Loss in Loss as a mode of extin-guishing obligations, supra.).

Delivery of Articles with Incorrect Quality

In the contract of sale of goods by description or bysample, the contract may be rescinded if the bulk of thegoods delivered does not correspond with the descriptionor the sample, and if the contract be by sample as well asby description, it is not sufficient that the bulk of goodscorresponds with the sample if it does not also corre-spond with the description. The buyer shall have a rea-sonable opportunity of comparing the bulk with the de-scription or the sample (Art. 1481, Civil Code).

Delivery of Incorrect Quantity

Where the seller delivers to the buyer a quantity ofgoods less than what he contracted to sell, the buyer mayreject them, but if the buyer accepts or retains the goodsso delivered, knowing that the seller is not going to per-form the contract in full, he must pay for them at thecontract rate. If, however, the buyer has used or disposedof the goods delivered before he knows that the seller isnot going to perform his contract in full, the buyer shall

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not be liable for more than the fair value to him of thegoods so received.

Where the seller delivers to the buyer a quantity ofgoods larger than what he contracted to sell, the buyermay accept the goods included in the contract and rejectthe rest. The buyer must pay at the contract rate if heaccepts the whole of the goods so delivered.

Where the seller delivers to the buyer the goods hecontracted to sell mixed with goods of a different descrip-tion not included in the contract, the buyer may acceptthe goods which are in accordance with the contract andreject the rest.

In the preceding two paragraphs, if the subject mat-ter is indivisible, the buyer may reject the whole of thegoods. These rules are subject to any usage of trade, spe-cial agreement, or course of dealing between the parties(Art. 1522, Civil Code).

The obligation to deliver the thing sold includes thatof placing in the control of the vendee all that is men-tioned in the contract. In the case of real estate —

(a) If the sale should be made with a statement ofits area, at the rate of a certain price for a unit of meas-ure or number, the vendor shall be obliged to deliver tothe vendee, if the latter should demand it, all that mayhave been stated in the contract; but should this be notpossible, the vendee may choose between a proportionalreduction of the price and the rescission of the contract,provided that, in the latter case, the lack in the area benot less than one-tenth of that sale. The same shall bedone, even when the area is the same, if any part of theimmovable is not of the quality specified in the contract.The rescission, in this case, shall only take place at thewill of the vendee, when the inferior value of the thingsold exceeds one-tenth of the price agreed upon. If, never-theless, the vendee would not have bought the immov-able had he known of its smaller area or inferior quality,


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he may rescind the sale (see Art. 1539, Civil Code). Incase, however, there is a greater area or number in theimmovable than that stated in the contract, the vendeemay accept the area included in the contract and rejectthe rest. If he accepts the whole area, he must pay for thesame at the contract rate (see Art. 1540, Civil Code).These provisions are applicable to judicial sales (see Art.1541, Civil Code).

(b) In the sale of real estate, made for a lump sumand not at the rate of a certain sum for a unit of measureor number, there shall be no increase or decrease of theprice, although there be a greater or lesser area or numberthan that stated in the contract. The same rule shall beapplied when two or more immovables are sold for asingle price; but if, besides mentioning the boundarieswhich 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 includedwithin said boundaries, even when it exceeds the area ornumber specified in the contract; and, should he not beable to do so, he shall suffer a reduction in the price, inproportion to what is lacking in the area or number, un-less the contract is rescinded because the vendee does notaccede to the failure to deliver what has been stipulated(Art. 1542, Civil Code).

In a sale pursuant to Article 1542 of the Civil Code,the vendor’s obligation is to deliver everything within theboundaries, for it is the entirety thereof that distinguishesthe determinate object. A vendee of land, when sold ingross or when its area is described by “more or less,” doesnot, however, take all risk of quantity in the land. “Moreor less” or words of similar import covers only a reason-able excess or deficiency (Veronica Robles vs. DominadorArbasa, G.R. No. 130707, 31 July 2001, 152 SCAD 115).

The actions arising from Articles 1539 and 1542 pre-scribe in six months, counted from the day of delivery(see Art. 1543, Civil Code).

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Sale by Non-Owner of Goods

Where goods are sold by a person who is not theowner thereof, and who does not sell them under author-ity or with the consent of the owner, the buyer acquiresno better title to the goods than what the seller had(thus, the maxim “caveat emptor” or “buyer beware”),unless the owner of the goods is by his conduct precludedfrom denying the seller’s authority to sell. The rule, how-ever, does not affect:

(1) The provisions of any factors’ act, recording laws,or any other provision of law enabling the apparent ownerof goods to dispose of them as if he were the true ownerthereof;

(2) The validity of any contract of sale under statu-tory power of sale or under the order of a court of compe-tent jurisdiction;

(3) Purchases made in a merchant’s store, or infairs, or markets, in accordance with the Code of Com-merce and special laws (see Art. 1505, Civil Code; seeHidalgo vs. La Tondeña, 16 SCRA 619; GutierrezHermanos vs. Orense, 28 Phil. 571; Mallorca vs. DeOcampo, 32 SCRA 48; Luna vs. Valle, 48 SCRA 361; ChuaHai vs. Kapunan, 104 Phil. 110). Where the seller ofgoods has a voidable title thereto, but his title has notbeen avoided at the time of the sale, the buyer acquires agood title to the goods, provided he buys them in goodfaith, for value, and without notice of the seller’s defect oftitle (Art. 1506, Civil Code; see Aznar vs. Yapdiangco, 13SCRA 486; Chua Hai vs. Kapunan, supra.).

It may not be amiss to correlate some rules on thesale of property by a non-owner, thus —

a. Where goods are sold by one who is neither theowner nor the representative of the owner, thebuyer acquires no title to the goods, subject,however, to the provisions of Article 1505 (su-pra.) and of Article 559 in case the goods (mov-


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able property) are placed in the possession ofthe buyer who had acted in good faith (see dis-cussions on Art. 559, supra.).

b. When said person, who is not the owner of thing(movable or immovable) sold, sells and deliversit, and he later acquires title thereto, such titlepasses by operation of law to the buyer pursu-ant to Article 1434 of the Civil Code.

c. When a person contracts the sale in a repre-sentative capacity but he acts without or in ex-cess of authority, the sale is unenforceable un-der the general provisions of Article 1403 of theCode but if the other party is aware of the agent’slack or excess of authority, unless ratified bythe principal, the contract is considered void byArticle 1898. In case the sale involves a piece ofland, or any interest therein, the authority ofthe agent must be in writing; otherwise, thesale is void under Article 1874 of the Civil Code.

Conditions and Warranties

Art. 1545. Where the obligation of either party to acontract of sale is subject to any condition which isnot performed, such party may refuse to proceed withthe contract or he may waive performance of the con-dition. If the other party has promised that the condi-tion should happen or be performed, such first men-tioned party may also treat the nonperformance of thecondition as a breach of warranty.

Where the ownership in the thing has not passed,the buyer may treat the fulfillment by the seller of hisobligation to deliver the same as described and as war-ranted expressly or by implication in the contract ofsale as a condition of the obligation of the buyer toperform his promise to accept and pay for the thing. (n)

Art. 1546. Any affirmation of fact or any promiseby the seller relating to the thing is an express war-ranty if the natural tendency of such affirmation or

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promise is to induce the buyer to purchase the same,and if the buyer purchases the thing relying thereon.No affirmation of the value of the thing, nor any state-ment purporting to be a statement of the seller’s opin-ion only, shall be construed as a warranty, unless theseller made such affirmation or statement as an expertand it was relied upon by the buyer. (n)

Art. 1547. In a contract of sale, unless a contraryintention appears, there is:

(1) An implied warranty on the part of the sellerthat he has a right to sell the thing at the time whenthe ownership is to pass, and that the buyer shall fromthat time have and enjoy the legal and peaceful pos-session of the thing;

(2) An implied warranty that the thing shall befree from any hidden faults or defects, or any chargeor encumbrance not declared or known to the buyer.

This article shall not, however, be held to renderliable a sheriff, auctioneer, mortgagee, pledgee, or otherperson professing to sell by virtue of authority in factor law, for the sale of a thing in which a third personhas a legal or equitable interest. (n)

Subsection 1 — Warranty in Case of Eviction

Art. 1548. Eviction shall take place whenever by afinal judgment based on a right prior to the sale or anact imputable to the vendor, the vendee is deprived ofthe whole or of a part of the thing purchased.

The vendor shall answer for the eviction eventhough nothing has been said in the contract on thesubject.

The contracting parties, however, may increase,diminish, or suppress this legal obligation of the ven-dor. (1475a)

Art. 1549. The vendee need not appeal from thedecision in order that the vendor may become liablefor eviction. (n)


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Art. 1550. When adverse possession had beencommenced before the sale but the prescriptive periodis completed after the transfer, the vendor shall not beliable for eviction. (n)

Art. 1551. If the property is sold for nonpaymentof taxes due and not made known to the vendee beforethe sale, the vendor is liable for eviction. (n)

Art. 1552. The judgment debtor is also responsi-ble for eviction in judicial sales, unless it is otherwisedecreed in the judgment. (n)

Art. 1553. Any stipulation exempting the vendorfrom the obligation to answer for eviction shall be void,if he acted in bad faith. (1476)

Art. 1554. If the vendee has renounced the rightto warranty in case of eviction, and eviction shouldtake place, the vendor shall only pay the value whichthe thing sold had at the time of the eviction. Shouldthe vendee have made the waiver with knowledge ofthe risks of eviction and assumed its consequences,the vendor shall not be liable. (1477)

Art. 1555. When the warranty has been agreedupon or nothing has been stipulated on this point, incase eviction occurs, the vendee shall have the rightto demand of the vendor:

(1) The return of the value which the thing soldhad at the time of the eviction, be it greater or lessthan the price of the sale;

(2) The income or fruits, if he has been orderedto deliver them to the party who won the suit againsthim;

(3) The costs of the suit which caused theeviction, and, in a proper case, those of the suit broughtagainst the vendor for the warranty;

(4) The expenses of the contract, if the vendeehas paid them;

(5) The damages and interests, and ornamentalexpenses, if the sale was made in bad faith. (1478)

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Art. 1556. Should the vendee lose, by reason ofthe eviction, a part of the thing sold of such impor-tance, in relation to the whole, that he would not havebought it without said part, he may demand the rescis-sion of the contract; but with the obligation to returnthe thing without other encumbrances than those whichit had when he acquired it.

He may exercise this right of action, instead ofenforcing the vendor’s liability for eviction.

The same rule shall be observed when two or morethings have been jointly sold for a lump sum, or for aseparate price for each of them, if it should clearlyappear that the vendee would not have purchased onewithout the other. (1479a)

Art. 1557. The warranty cannot be enforced until afinal judgment has been rendered, whereby the vendeeloses the thing acquired or part thereof. (1480)

Art. 1558. The vendor shall not be obliged to makegood the proper warranty, unless he is summoned inthe suit for eviction at the instance of the vendee. (1481a)

Art. 1559. The defendant vendee shall ask, withinthe time fixed in the Rules of Court for answering thecomplaint, that the vendor be made a co-defendant.(1482)

Art. 1560. If the immovable sold should be en-cumbered with any non-apparent burden or servitude,not mentioned in the agreement, of such a nature thatit must presume that the vendee would not have ac-quired it had he been aware thereof, he may ask forthe rescission of the contract, unless he should preferthe appropriate indemnity. Neither right can be exer-cised if the non-apparent burden or servitude is re-corded in the Registry of Property, unless there is anexpress warranty that the thing is free from all bur-dens and encumbrances.

Within one year, to be computed from the execu-tion of the deed, the vendee may bring the action forrescission, or sue for damages.


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One year having elapsed, he may only bring anaction for damages within an equal period, to becounted from the date on which he discovered the bur-den or servitude. (1483a)

Subsection 2 — Warranty Against Hidden Defectsof or Encumbrances Upon the Thing Sold

Art. 1561. The vendor shall be responsible for war-ranty against the hidden defects which the thing soldmay have, should they render it unfit for the use forwhich it is intended, or should they diminish its fitnessfor such use to such an extent that, had the vendeebeen aware thereof, he would not have acquired it orwould have given a lower price for it; but said vendorshall not be answerable for patent defects or thosewhich may be visible, or for those which are not vis-ible if the vendee is an expert who, by reason of histrade or profession, should have known them. (1484a)

Art. 1562. In a sale of goods, there is an impliedwarranty or condition as to the quality or fitness of thegoods, as follows:

(1) Where the buyer, expressly or by implication,makes known to the seller the particular purpose forwhich the goods are acquired, and it appears that thebuyer relies on the seller’s skill or judgment (whetherhe be the grower or manufacturer or not), there is animplied warranty that the goods shall be reasonably fitfor such purpose;

(2) Where the goods are bought by descriptionfrom 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 ofmerchantable quality. (n)

Art. 1563. In the case of contract of sale of a speci-fied article under its patent or other trade name, there isno warranty as to its fitness for any particular purpose,unless there is a stipulation to the contrary. (n)

Art. 1564. An implied warranty or condition as tothe quality or fitness for a particular purpose may beannexed by the usage of trade. (n)

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Art. 1565. In the case of a contract of sale bysample, if the seller is a dealer in goods of that kind,there is an implied warranty that the goods shall befree from any defect rendering them unmerchantablewhich would not be apparent on reasonable exami-nation of the sample. (n)

Art. 1566. The vendor is responsible to the vendeefor any hidden faults or defects in the thing sold, eventhough he was not aware thereof.

This provision shall not apply if the contrary hasbeen stipulated, and the vendor was not aware of thehidden 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 withdraw-ing from the contract and demanding a proportionatereduction of the price, with damages in either case.(1486a)

Art. 1568. If the thing sold should be lost in con-sequence of the hidden faults, and the vendor wasaware of them, he shall bear the loss, and shall beobliged to return the price and refund the expenses ofthe contract, with damages. If he was not aware ofthem, he shall only return the price and interest thereon,and reimburse the expenses of the contract which thevendee might have paid. (1487a)

Art. 1569. If the thing sold had any hidden fault atthe time of the sale, and should thereafter be lost by afortuitous event or through the fault of the vendee, thelatter 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 dam-ages to the vendee. (1488a)

Art. 1570. The preceding articles of this Subsec-tion shall be applicable to judicial sales, except thatthe judgment debtor shall not be liable for damages.(1489a)

Art. 1571. Actions arising from the provisions ofthe preceding ten articles shall be barred after sixmonths, from the delivery of the thing sold. (1490)


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Art. 1572. If two or more animals are sold together,whether for a lump sum or for a separate price foreach of them, the redhibitory defect of one shall onlygive rise to its redhibition, and not that of the others;unless it should appear that the vendee would not havepurchased the sound animal or animals without thedefective one.

The latter case shall be presumed when a team,yoke, pair, or set is bought, even if a separate pricehas been fixed for each one of the animals composingthe same. (1491)

Art. 1573. The provisions of the preceding articlewith respect to the sale of animals shall in like mannerbe applicable to the sale of other things. (1492)

Art. 1574. There is no warranty against hiddendefects of animals sold at fairs or at public auctions,or of livestock sold as condemned. (1493a)

Art. 1575. The sale of animals suffering from con-tagious diseases shall be void.

A contract of sale of animals shall also be void ifthe use or service for which they are acquired hasbeen stated in the contract, and they are found to beunfit therefor. (1494a)

Art. 1576. If the hidden defect of animals, even incase a professional inspection has been made, shouldbe of such a nature that expert knowledge is not suffi-cient to discover it, the defect shall be considered asredhibitory.

But if the veterinarian, through ignorance or badfaith should fail to discover or disclose it, he shall beliable for damages. (1495)

Art. 1577. The redhibitory action, based on thefaults or defects of animals, must be brought withinforty days from the date of their delivery to the vendee.

This action can only be exercised with respect tofaults and defects which are determined by law or bylocal customs. (1496a)

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Art. 1578. If the animal should die within threedays after its purchase, the vendor shall be liable if thedisease which caused the death existed at the time ofthe contract. (1497a)

Art. 1579. If the sale be rescinded, the animal shallbe returned in the condition in which it was sold anddelivered, the vendee being answerable for any injurydue to his negligence, and not arising from the re-dhibitory fault or defect. (1498)

Art. 1580. In the sale of animals with redhibitorydefects, the vendee shall also enjoy the right men-tioned in Article 1567; but he must make use thereofwithin the same period which has been fixed for theexercise of the redhibitory action. (1499)

Art. 1581. The form of sale of large cattle shall begoverned by special laws. (n)

A contract of sale may be subject to conditions, aswell as warranties, express or implied, otherwise, thecaveat emptor (“buyer beware”) rule may also find appli-cation (see Filinvest Credit Corporation vs. Court of Ap-peals, 178 SCRA 188).

Where the obligation of either party to a contract ofsale is subject to any condition which is not performed,such party may refuse to proceed with the contract or hemay waive performance of the condition (Delta Motor vs.Genuino, 170 SCRA 29). If the other party has promisedthat the condition should happen or be performed, suchfirst mentioned party may also treat the non-perform-ance of the condition as a breach of warranty (Delta Mo-tor vs. Genuino, 170 SCRA 29; see Art. 1545, Civil Code).

Where the ownership in the thing has not passed,the buyer may treat the fulfillment by the seller of hisobligation to deliver the same as described and as war-ranted expressly, or by implication in the contract of saleas a condition of the obligation of the buyer to perform hispromise to accept and pay for the thing (see Art. 1545,Civil Code).


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Express Warranty

Any affirmation of fact or any promise by the sellerrelating to the thing is an express warranty if the naturaltendency of such affirmation or promise is to induce thebuyer to purchase the same and the buyer purchases thething relying thereon. No affirmation of the value of thething, nor any statement purporting to be a statement ofthe seller’s opinion only, shall be construed as a warranty,unless the seller made such affirmation or statement asan expert and it was relied upon by the buyer (Art. 1546,Civil Code; see Azarraga vs. Gay, 52 Phil. 599; see alsoArt. 1599, infra., on the buyer’s remedies in breach of war-ranty).

Implied Warranties

In a contract of sale, unless a contrary intentionappears, there is:

(1) An implied warranty on the part of the sellerthat he has a right to sell the thing at the time when theownership is to pass, and that the buyer shall from thattime have and enjoy the legal and peaceful possession ofthe thing; and

(2) An implied warranty that the thing shall befree from any hidden faults or defects, or any charge orencumbrance not declared or known to the buyer.

These warranties shall not, however, be held to renderliable a sheriff, auctioneer, mortgagee, pledgee, or otherperson professing to sell by virtue of authority in fact orlaw for the sale of a thing in which a third person has alegal or equitable interest (Art. 1547, Civil Code; see Sta.Romana vs. Imperio, 15 SCRA 625; Chang vs. Santos, 13Phil. 52; Lim vs. Lang, 51 Phil. 930).

Implied Warranty Against Eviction

Eviction shall take place whenever by a final judg-ment based on a right prior to the sale or an act imput-able to the vendor, the vendee is deprived of the whole or

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of a part of the thing purchased. The vendee need notappeal from the decision in order that the vendor maybecome liable for eviction. The vendor shall not be obligedto make good the proper warranty, unless he is summonedin the suit for eviction at the instance of the vendee. Thedefendant vendee shall ask, within the time fixed in theRules of Court for answering the complaint, that the ven-dor be made a co-defendant. The warranty cannot be en-forced until a final judgment has been rendered, wherebythe vendee loses the thing acquired or a part thereof (Arts.1548-1549, 1557-1559, Civil Code; Bautista vs. Lasam,72 Phil. 605; Republic vs. Alto Surety, 103 Phil. 717). Thevendor shall answer for the eviction although the contractis silent on the subject. The contracting parties, however,may increase, diminish or suppress this legal obligationof the vendor (see Art. 1548, Civil Code).

In fine, the vendor’s liability may be enforced only ifthe following requisites concur: (a) there is a final judg-ment; (b) the purchaser is deprived of the whole or part ofthe thing sold; (c) the deprivation is by virtue of a rightprior to the sale in question; and (d) the vendor has beensummoned and made a co-defendant in the suit for evic-tion at the instance of the vendee (Escaler vs. Court ofAppeals, 138 SCRA 1).

If the property is sold for non-payment of taxes dueand not made known to the vendee before the sale, thevendor is liable for eviction (Art. 1551, Civil Code). Thejudgment debtor is also responsible for eviction in judi-cial sales, unless it is otherwise decreed in the judgment(Art. 1552, Civil Code). However, when adverse posses-sion had been commenced before the sale but the pre-scriptive period is completed after the transfer, the ven-dor shall not be liable for eviction (Art. 1550, Civil Code).

Waiver

If the vendee has renounced the right to warranty incase of eviction (consciente), and eviction should take place,


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the vendor shall only pay the value which the thing soldhad at the time of the eviction. Should the vendee havemade the waiver with knowledge of the risks of evictionand assumed its consequences (intencionada), the ven-dor shall not be liable (Art. 1554, Civil Code; PNB vs.Silo, 72 Phil. 141; Andaya vs. Manansala, 107 Phil. 1151).Any such waiver or stipulation exempting the vendorfrom the obligation to answer for eviction shall be void ifhe acted in bad faith (Art. 1553, Civil Code; Angelo vs.Pacheco, 56 Phil. 70).

Effects of Eviction

When the warranty has been agreed upon or noth-ing has been stipulated on this point, in case evictionoccurs, the vendee shall have the right to demand of thevendor:

(1) The return of the value which the thing soldhad at the time of the eviction, be it greater or less thanthe price of the sale;

(2) The income or fruits, if he has been ordered todeliver 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 againstthe vendor for the warranty;

(4) The expenses of the contract, if the vendee haspaid them;

(5) The damages and interest, and ornamental ex-penses, if the sale was made in bad faith (Art. 1555, CivilCode).

Should the vendee lose, by reason of the eviction, apart of the thing sold of such importance, in relation tothe whole, that he would not have bought it without saidpart, he may demand the rescission of the contract; butwith the obligation to return the thing without otherencumbrances than those which it had when he acquiredit. He may exercise this right of action, instead of enforc-

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ing the vendor’s liability for eviction. The same rule shallbe observed when two or more things have been jointlysold for a lump sum, or for a separate price for each ofthem, if it should clearly appear that the vendee wouldnot have purchased one without the other (Art. 1556,Civil Code).

If the immovable sold should be encumbered withany non-apparent burden or servitude, not mentioned inthe agreement, of such nature that it must be presumedthat the vendee would not have acquired it had he beenaware thereof, he may ask for the rescission of the con-tract, unless he should prefer the appropriate indemnity.Neither right can be exercised if the non-apparent bur-den or servitude is recorded in the Registry of Property,unless there is an express warranty that the thing is freefrom all burdens and encumbrances. Within one year, tobe computed from the execution of the deed, the vendeemay bring the action for rescission or sue for damages.One year having elapsed, he may only bring an action fordamages within an equal period, to be counted from thedate on which he discovered the burden or servitude (Art.1560, Civil Code).

Implied Warranty Against Hidden Defects of orEncumbrances Upon the Thing Sold

The vendor shall be responsible for warranty againstthe hidden defects which the thing sold may have, shouldthey render it unfit for the use for which it is intended orshould they diminish its fitness for the same such anextent that, had the vendee been aware thereof, he wouldnot have acquired it or would have given a lower price forit. The vendor is responsible for any such hidden faults ordefects even though he was not aware thereof. This war-ranty shall not, however, apply if the contrary has beenstipulated and the vendor was not aware of the hiddenfaults or defects in the thing sold. The said vendor shallnot also be answerable for patent defects or those whichmay be visible, or for those which are not visible but the


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vendee is an expert who, by reason of his trade or profes-sion, should have known them (see Arts. 1561 and 1566,Civil Code; Gochengco vs. Dean, 47 Phil. 687). In the caseof contract of sale of a specified article under its patent orother trade name, there is no warranty as to its fitnessfor any particular purpose, unless there is a stipulationto the contrary (Art. 1563, Civil Code).

In a sale of goods, there is an implied warranty orcondition as to the quality or fitness of the goods, asfollows:

(1) Where the buyer, expressly or by implication,makes known to the seller the particular purpose forwhich the goods are acquired, and it appears that thebuyer relies on the seller’s skill or judgment (whether hebe the grower or manufacturer or not), there is an im-plied warranty that the goods shall be reasonably fit forsuch purpose;

(2) Where the goods are bought by description froma seller who deals in goods of that description (whetherhe be the grower or manufacturer or not), there is animplied warranty that the goods shall be of merchantablequality (Art. 1562, Civil Code; McCullough vs. Aenlle &Co., 3 Phil. 285).

An implied warranty or condition as to the quality orfitness for a particular purpose may be annexed by theusage of trade (Art. 1564, Civil Code).

In the case of a contract of sale by sample, if the selleris a dealer in goods of that kind, there is an implied war-ranty that the goods shall be free from any defect render-ing them unmerchantable which would not be apparenton reasonable examination of the sample (Art. 1565, CivilCode; McCullough vs. Aenlle & Co., 3 Phil. 285).

Effects of Hidden Defects or Encumbrances

The remedy against violations of the warrantyagainst hidden defects is either to withdraw from the

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contract (redhibitory action) or to demand a proportion-ate reduction of the price (accion quanti minoris) withdamages in either case (Engineering & Machinery Corpo-ration vs. Court of Appeals, 67 SCAD 113, 252 SCRA 156;see Consolidated Plywood Industries, Inc. vs. IFC Leas-ing and Acceptance Corporation, 149 SCRA 448).

If the thing sold should be lost in consequence of thehidden faults and the vendor was aware of them, he shallbear the loss and shall be obliged to return the price andrefund the expenses of the contract, with damages. If hewas not aware of them, he shall only return the price andinterest thereon and reimburse the expenses of the con-tract which the vendee might have paid (Art. 1568, CivilCode).

If the thing sold had any hidden fault at the time ofthe sale and should thereafter be lost by a fortuitousevent or through the fault of the vendee, the latter maydemand of the vendor the price which he paid, less thevalue which the thing had when it was lost. If the vendoracted in bad faith, he shall pay damages to the vendee(Art. 1569, Civil Code).

The foregoing rules shall be applicable to judicialsales, except that the judgment debtor shall not be liablefor damages (see Art. 1570, Civil Code).

Actions arising from the above responsibilities of thevendor for hidden defects or encumbrances shall be barredafter six months from the delivery of the thing sold (seeArt. 1571, Civil Code; La Fuerza vs. Court of Appeals, 23SCRA 1217). In G.A. Machineries, Inc. vs. Yaptinchay(126 SCRA 78), Yaptinchay agreed to purchase from GAMIa brand-new diesel engine. Pursuant to the contract,GAMI delivered an engine to Yaptinchay. A few days afterdelivery, the engine malfunctioned and continued to mal-function after repeated repairs. Yaptinchay, became con-vinced that the engine delivered to him was not brand-new. Eventually he filed a suit for damages. The trialcourt ruled in his favor. The decision was affirmed by the


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Court of Appeals. GAMI went to the Supreme Court,contending that Yaptinchay’s cause of action had pres-cribed. GAMI said the respondent’s cause of action wasfor breach of warranty against hidden defects as pro-vided under Article 1561 and Article 1565 of the CivilCode, and Article 1571 provides for a six-month prescrip-tive period from the delivery of the thing sold to the filingof an action for breach of warranty against hidden de-fects. GAMI said that when respondent filed the casemore than six months had already elapsed. It contendedthat Yaptinchay’s cause of action was premised on thedelivery of a defective engine and that the allegations inthe complaint that the engine was not brand-new weremere specifications of the precise nature of the hiddendefects. The Supreme Court ruled:

“A cursory reading of the complaint shows thatthe petitioner’s arguments are not well-taken.

“The main thrust of the complaint is the con-tention that the Fordson diesel engine delivered bythe petitioner to the respondent was not brand-newcontrary to the representations of the former andthe expectations of the latter. The complaint wascouched in a manner which shows that instead ofthe brand-new Fordson diesel engine which wasbought by the respondent from the petitioner, an-other engine which was not brand-new was deliv-ered resulting in the damages sought to be recov-ered. It is evident, therefore, that the complaint wasfor a breach of contract of sale rather than a breachof warranty against hidden defects.”

There is no implied warranty as to the condition,adaptation, fitness, suitability or quality of a thing soldas and for a “secondhand article,” said the Court in Molesvs. Intermediate Appellate Court (169 SCRA 777), unless,as provided in Article 1562 of the Civil Code, when “thebuyer, expressly or by implication, makes known to theseller the particular purpose for which the goods are

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acquired, and it appears that the buyer relies on theseller’s skill on judgment” in which case “there is animplied warranty that the goods shall be reasonably fitfor such purpose.” A redhibitory defect contemplated inArticle 1561, referring to an imperfection or defect ofsuch nature as to engender a certain degree of importance,which prescribes in six months under Article 1571, refersto an implied warranty. Where the case involves an expresswarranty, such as a certification by the seller that thearticles sold are “in A-1 condition,” the general rule onrescission of contracts within four years instead applies.

In Schmid & Oberly, Inc. vs. RJL Martinez FishingCorp. (166 SCRA 493), an indentor, the Court noted, isone who, for compensation, acts as a middleman inbringing about a purchase and sale of goods between aforeign supplier and a local purchaser. Not being thevendor, an indentor cannot be held liable for the impliedwarranty for hidden defects under Article 1561 of theCivil Code. An indentor, however, is not prevented fromvoluntarily warranting the thing sold. To some extent,the indentor is an agent of both the vendor and the vendee,and he may expressly obligate himself to undertake theobligations of the principal. A mere expression of opinionhowever, e.g., the equipment is “very good,” cannot beconstrued as such express warranty.

Redhibitory Defects of Animals

If two or more animals are sold together, whether fora lump sum or for a separate price for each of them, theredhibitory defect of one shall only give rise to itsredhibition, and not that of the others; unless it shouldappear that the vendee would not have purchased thesound animal or animals without the defective one. Thelatter case shall be presumed when a team, yoke, pair, orset is bought, even if a separate price has been fixed foreach one of the animals composing the same (Art. 1572,Civil Code; this particular provision has been made tolikewise apply, under Art. 1573, to the sale of other things).


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If the hidden defect of animals, even in case a profes-sional inspection has been made, should be of such anature that expert knowledge is not sufficient to discoverit, the defect shall be considered as redhibitory. But if theveterinarian, through ignorance or bad faith should failto discover or disclose it, he shall be liable for damages(Art. 1576, Civil Code).

There is no warranty against hidden defects of ani-mals sold at fairs or at public auction, or of livestock soldas condemned (Art. 1574, Civil Code).

Redhibitory Action

The redhibitory action, based on the faults or defectsof animals, must be brought within forty days from thedate of their delivery to the vendee. This action can onlybe exercised with respect to faults and defects which aredetermined by law or by local customs (Art. 1577, CivilCode).

If the animal should die within three days after itspurchase, the vendor shall be liable if the disease whichcaused the death existed at the time of the contract (Art.1578, Civil Code). If the sale be rescinded, the animalshall be returned in the condition in which it was soldand delivered, the vendee being answerable for any in-jury due to his negligence, and not arising from the re-dhibitory fault or defect (Art. 1579, Civil Code).

In the sale of animals with redhibitory defects, thevendee may also elect between withdrawing from thecontract and demanding a proportionate reduction of theprice, with damages in either case, but he must make usethereof within the same period which has been fixed forthe exercise of the redhibitory action (Art. 1580, in rela-tion to Art. 1567, Civil Code).

The form of sale of large cattle is governed by speciallaws (Art. 1581, Civil Code; see Sec. 22, Act No. 1147,requiring a Certificate of Registration).

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Chapter 5

Obligations of the Vendee

Art. 1582. The vendee is bound to accept deliveryand to pay the price of the thing sold at the time andplace stipulated in the contract.

If the time and place should not have been stipu-lated, the payment must be made at the time and placeof the delivery of the thing sold. (1500a)

Art. 1583. Unless otherwise agreed, the buyer ofgoods is not bound to accept delivery thereof byinstallments.

Where there is a contract of sale of goods to bedelivered by stated installments, which are to beseparately paid for, and the seller makes defective de-liveries in respect of one or more installments, or thebuyer neglects or refuses without just cause to takedelivery of or pay for one or more installments, it de-pends in each case on the terms of the contract andthe circumstances of the case, whether the breach ofcontract is so material as to justify the injured party inrefusing to proceed further and suing for damages forbeach of the entire contract, or whether the breach isseverable, giving rise to a claim for compensation butnot 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 deemedto have accepted them unless and until he has had areasonable opportunity of examining them for the pur-pose of ascertaining whether they are in conformity withthe contract if there is no stipulation to the contrary.

Unless otherwise agreed, when the seller tendersdelivery of goods to the buyer, he is bound, on re-quest, to afford the buyer a reasonable opportunity ofexamining the goods for the purpose of ascertainingwhether they are in conformity with the contract.

Where goods are delivered to a carrier by theseller, in accordance with an order from or agreementwith the buyer, upon the terms that the goods shall not


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be delivered by the carrier to the buyer until he haspaid the price, whether such terms are indicated bymarking the goods with the words “collect on deliv-ery,” or otherwise, the buyer is not entitled to examinethe goods before the payment of the price, in the ab-sence of agreement or usage of trade permitting suchexamination. (n)

Art. 1585. The buyer is deemed to have acceptedthe goods when he intimates to the seller that he hasaccepted them, or when the goods have been deliv-ered to him, and he does any act in relation to themwhich is inconsistent with the ownership of the seller,or when, after the lapse of a reasonable time, he re-tains the goods without intimating to the seller that hehas rejected them. (n)

Art. 1586. In the absence of express or impliedagreement of the parties, acceptance of the goods bythe buyer shall not discharge the seller from liability indamages or other legal remedy for breach of any prom-ise or warranty in the contract of sale. But, if, afteracceptance of the goods, the buyer fails to give noticeto the seller of the breach in any promise of warrantywithin a reasonable time after the buyer knows, or oughtto know of such breach, the seller shall not be liabletherefor. (n)

Art. 1587. Unless otherwise agreed, where goodsare delivered to the buyer, and he refuses to acceptthem, having the right so to do, he is not bound toreturn them to the seller, but it is sufficient if he notifiesthe seller that he refuses to accept them. If hevoluntarily constitutes himself a depositary thereof, heshall be liable as such. (n)

Art. 1588. If there is no stipulation as specified inthe first paragraph of Article 1523, when the buyer’srefusal to accept the goods is without just cause, thetitle thereto passes to him from the moment they areplaced at his disposal. (n)

Art. 1589. The vendee shall owe interest for theperiod between the delivery of the thing and the pay-ment of the price, in the following three cases:

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(1) Should it have been so stipulated;

(2) Should the thing sold and delivered producefruits or income;

(3) Should he be in default, from the time of ju-dicial or extrajudicial demand for the payment of theprice. (1501a)

The vendee is bound to accept delivery and to paythe price of the thing sold at the time and place stipu-lated in the contract. If the time and place should nothave been stipulated, the payment must be made at thetime and place of the delivery of the thing sold (Art. 1582,Civil Code). The goods are deemed to be in a “deliverablestate” when they are in such condition that the buyerwould, under the contract, be bound to take delivery ofthem (see Art. 1636, Civil Code).

Acceptance of Delivery

The buyer may reject the seller’s delivery of a quantityof goods less than that contracted (Art. 1522, Civil Code;Chrysler Philippines Corp. vs. Court of Appeals, 133 SCRA567). Unless otherwise agreed, the buyer of goods is notbound to accept delivery thereof by installments. Wherethere is a contract of sale of goods to be delivered by statedinstallments, which are to be separately paid for, and theseller makes defective deliveries in respect of one or moreinstallments, or the buyer neglects or refuses without justcause to take delivery of or pay for one or more installments,it depends in each case on the terms of the contract and thecircumstances of the case, whether the breach of contract isso material as to justify the injured party in refusing toproceed further and suing for damages for breach of theentire contract, or whether the breach is severable, givingrise to a claim for compensation but not to a right to treatthe whole contract as broken (Art. 1583, Civil Code).

Where the goods are delivered to the buyer, whichhe has not previously examined, he is not deemed to have


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accepted them unless and until he has had a reasonableopportunity of examining them for the purpose of ascer-taining whether they are in conformity with the contract,if there is no stipulation to the contrary. Unless other-wise agreed, when the seller tenders delivery of goods tothe buyer, he is bound, on request, to afford the buyer areasonable opportunity of examining the goods for thepurpose of ascertaining whether they are in conformitywith the contract. Where goods are delivered to a carrierby the seller, in accordance with an order from or agree-ment with the buyer, upon the terms that the goods shallnot be delivered by the carrier to the buyer until he haspaid the price, whether such terms are indicated by mark-ing the goods with the words “collect on delivery,” or oth-erwise, the buyer is not entitled to examine the goodsbefore the payment of the price, in the absence of agree-ment or usage of trade permitting such examination (Art.1584, Civil Code).

The buyer is deemed to have accepted the goodswhen he intimates to the seller that he has acceptedthem, or when the goods have been delivered to him, andhe does any act in relation to them which is inconsistentwith the ownership of the seller, or when, after the lapseof a reasonable time, he retains the goods without inti-mating to the seller that he has rejected them (Art. 1585,Civil Code).

Effects of Acceptance or Rejection

In the absence of express or implied agreement ofthe parties, acceptance of the goods by the buyer shallnot discharge the seller from liability in damages or otherlegal remedy for breach of any promise or warranty inthe contract of sale. But, if, after acceptance of the goods,the buyer should fail to give notice to the seller of thebreach in any promise of warranty within a reasonabletime after the buyer knows, or ought to know of suchbreach, the seller shall not be liable therefor (Art. 1586,Civil Code; this provision did not exist under the old Civil

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Code during which regime the case of Ker & Co. vs. De LaRama, 11 Phil. 456, was decided).

Unless otherwise agreed, where goods are deliveredto the buyer, and he refuses to accept them, having theright so to do, he is not bound to return them to the seller,but it is sufficient if he notifies the seller that he refusesto accept them. If he voluntarily constitutes himself adepository thereof, he shall be liable as such (Art. 1587,Civil Code).

The title to the goods passes to the buyer from themoment they are placed at his disposal when his refusalto accept them is without just cause (see Art. 1588, CivilCode).

Payment of Price

The vendee shall owe interest for the period betweenthe delivery of the thing and the payment of the price, inthe following three cases:

(1) Should it have been so stipulated;

(2) Should the thing sold and delivered producefruits or income;

(3) Should he be in default, from the time of judi-cial or extrajudicial demand for the payment of the price(Art. 1589, Civil Code).

Should the vendee be disturbed in the possession orownership of the thing acquired, or should he have rea-sonable grounds to fear such disturbance, by a vindicatoryaction or a foreclosure of mortgage, he may suspend thepayment of the price until the vendor has caused thedisturbance or danger to cease, unless the latter givessecurity for the return of the price in a proper case, or ithas been stipulated that, notwithstanding any such con-tingency, the vendee shall be bound to make the pay-ment. A mere act of trespass shall not authorize the sus-pension of the payment of the price (Art. 1590, Civil Code;Bareng vs. Court of Appeals, 107 Phil. 641).


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Should the vendor have reasonable grounds to fearthe loss of immovable property sold and its price, he mayimmediately sue for the rescission of the sale. Shouldsuch ground not exist, the provisions of Article 1191shall be observed (Art. 1591, Civil Code).

Where there is a flaw or defect in a contract of sale,the remedy is rescission or annulment but not refusal topay the balance of the purchase price and at the sametime retaining the goods purchased by the buyer (seeEmbee Transportation Corporation vs. Camacho, 80 SCRA477).

3. Remedies in Sales

Generally, the remedies of an aggrieved party in con-tracts are judicial in nature predicated upon a basic legalprinciple that no one should be permitted to take the lawinto his own hands, although it is, too, recognized that ina reciprocal obligation a party thereto may refuse to per-form his part of the undertaking if the other does nothimself comply or is not ready to comply with what isincumbent upon him (see Art. 1169, Civil Code), in turn,premised on the maxim “exceptio non adimpleticontractus.”

The law on sales, mainly perhaps because of thehighly reciprocal nature of the contract, grants or recog-nizes rather extravagant remedies, judicial as well asextrajudicial, more than perhaps in any other agreement.

a. Extrajudicial Remedies in Sales

Art. 1590. Should the vendee be disturbed in thepossession or ownership of the thing acquired, orshould he have reasonable grounds to fear such dis-turbance, by a vindicatory action or a foreclosure ofmortgage, he may suspend the payment of the priceuntil the vendor has caused the disturbance or dangerto cease, unless the latter gives security for the returnof the price in a proper case, or it has been stipulated

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that, notwithstanding any such contingency, the vendeeshall be bound to make the payment. A mere act oftrespass shall not authorize the suspension of the pay-ment of the price. (1502a)

Art. 1591. Should the vendor have reasonablegrounds to fear the loss of immovable property soldand its price, he may immediately sue for the rescis-sion of the sale.

Should such ground not exist, the provisions ofArticle 1191 shall be observed. (1503)

Art. 1592. In the sale of immovable property, eventhough it may have been stipulated that upon failure topay the price at the time agreed upon the rescission ofthe contract shall of right take place, the vendee maypay, even after the expiration of the period, as long asno demand for rescission of the contract has beenmade upon him either judicially or by a notarial act.After the demand, the court may not grant him a newterm. (1504a)

Art. 1593. With respect to movable property, therescission of the sale shall of right take place in theinterest of the vendor, if the vendee, upon the expira-tion of the period fixed for the delivery of the thing,should not have appeared to receive it, or having ap-peared, he should not have tendered the price at thesame time, unless a longer period has been stipulatedfor its payment. (1505)

(1) Of the Buyer

(a) The buyer need not pay unless there is de-livery (see Art. 1582, Civil Code; Barretto vs.Compañia Maritima, 62 SCRA 147).

(b) The buyer may reject improper deliveries(see Arts. 1522, 1540, 1583 and 1587, Civil Code);and

(c) The buyer may, if he is disturbed in thepossession or ownership of the thing, or should hehave reasonable grounds to fear such disturbance


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(but not because of mere act of trespass), suspendpayment of the price (Art. 1590, Civil Code).

(2) Of the Seller

(a) The vendor is not bound to deliver the thingsold if the vendee has not paid the price, or if noperiod for the payment has been fixed in the con-tract, or in case the vendee loses the right to makeuse of the term (see Arts. 1524 and 1536, in relationto Art. 1198, Civil Code; Cf. Katigbak vs. Court ofAppeals, 4 SCRA 243).

(b) Additional or Special Remedies

(i) In Conditional Contracts of Sale or toSell (where seller reserves title or to retake pos-session if conditions do not occur):

In the case of movable property, the non-fulfillmentof the condition (e.g., non-payment of the price) preventsthe obligation to convey title from acquiring an obliga-tory force. To retake possession, however, judicial actionis required. Rescission is unnecessary once the period ofthe fulfillment of the condition (or non-payment of theprice) expires without such condition having occurred;where no period is stipulated, Article 1191 (resolution)may be sought, although Article 1593 could be applicable(by analogy at least) that may permit an extrajudicialrescission (by mere notice).

In the case of immovable property, substantially thesame results would follow, hence, if the buyer fails to payin accordance with the terms of the agreement, the selleris entitled to rescind. Article 1592, which permits thevendee to pay even after the expiration of the period aslong as no demand for rescission is made upon him eitherjudicially or by notarial act, does not apply to contracts tosell or deeds of conditional sale (see Alfonso vs. Court ofAppeals, 186 SCRA 400; Joseph & Sons Enterprises, Inc.vs. Court of Appeals, 143 SCRA 663). Where no time forthe fulfillment of the condition (e.g., payment of the price)

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is fixed, Article 1191 (not Article 1592 [see Roque vs.Lapuz, 96 SCRA 741; Caridad Est. vs. Sautno, 71 Phil.114]), unless the parties have agreed otherwise (seeTorralba vs. De los Angeles, 96 SCRA 69), would be appli-cable, i.e., the seller need not meanwhile deliver, and hemay choose between fulfillment or resolution. Until re-solved by the courts, the contractual obligation remainsindefinite although subject to other legal principles, suchas laches, prescription, and so forth.

(ii) In Installment Sales:

Of Personal Property

“Art. 1484. In a contract of sale of personal prop-erty the price of which is payable in installments,the vendor may exercise any of the following rem-edies:

“(1) Exact fulfillment of the obligation, shouldthe vendee fail to pay;

“(2) Cancel the sale, should the vendee’s fail-ure to pay cover two or more installments;

“(3) Foreclose the chattel mortgage on the thingsold, if one has been constituted, should the vendee’sfailure to pay cover two or more installments. In thiscase, he shall have no further action against thepurchaser to recover any unpaid balance of the price.Any agreement to the contrary shall be void.”

“Art. 1485. The preceding article shall be ap-plied to contracts purporting to be leases of personalproperty with option to buy, when the lessor hasdeprived the lessee of the possession or enjoyment ofthe thing.”

“Art. 1486. In the cases referred to in the twopreceding articles, a stipulation that the installmentsor rents paid shall not be returned to the vendee orlessee shall be valid insofar as the same may not beunconscionable under the circumstances.”


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The remedies under Article 1484 of the Civil Code,where a sale of personal property on installments is se-cured by a chattel mortgage on the thing sold, are alter-native and exclusive, not cumulative, remedies (seeServicewide Specialists, Inc. vs. Intermediate AppellateCourt, 174 SCRA 80). The rule applies to lease-purchasecontracts of personal property (see Filinvest Credit Corp.vs. Court of Appeals, 178 SCRA 188).

“The meaning of [Article 1484 of the Civil Code]has been repeatedly enunciated in a long line of cases.Thus: ‘Should the vendee or purchaser of a personalproperty default in the payment of two or more ofthe agreed installments, the vendor or seller has theoption to avail of any of these three remedies —either to exact fulfillment by the purchaser of theobligation, or to cancel the sale, or to foreclose themortgage on the purchased personal property, if onehas been constituted. These remedies have been rec-ognized as alternative, not cumulative, that the ex-ercise of one would bar the exercise of the other.’’(Nonato vs. Intermediate Appellate Court, 140 SCRA255.)

When the seller assigns his credit to another person,the latter would be bound by the same law. Accordingly,when the assignee forecloses on the mortgage, there canbe no further recovery of the deficiency, the assignee hav-ing acquired no rights better than those of the assignor(Zeyas vs. Luneta Motors, 117 SCRA 726); and when theproperty is foreclosed, the seller-mortgagee is deemed tohave renounced all other rights; hence, a foreclosure ofadditional property would be a nullity (Ridad vs. FilipinasInvestment and Finance Corp., 120 SCRA 246).

In the event the seller-mortgagee seeks, instead, theenforcement of the additional mortgages, guarantees orother security arrangements, he must then be deemed tohave lost by waiver or non-choice his lien on the chattel

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mortgage of the personal property sold by and mortgagedto him, although, similar to an action for specific per-formance, he may still levy on it on execution.

In ordinary alternative obligations, a mere choicecategorically or unequivocally made and communicatedby the person entitled to exercise it concludes the parties.He may not thereafter exercise any other option, unlessthe opted alternative proves to be ineffectual or unavail-ing due to no fault on his part. This rule, in essence, is themeaning of alternative obligations in substantive law asdistinguished from alternative remedies in procedurallaw where the choice generally becomes conclusive uponthe exercise of the remedy. Under Article 1484 of theCivil Code, it is only when there has actually been aforeclosure of the chattel mortgage that the vendee-mort-gagor is not liable for deficiency. If the case is one forspecific performance, even when this action is chosenafter the vendee has refused to surrender the mortgagedproperty to permit an extrajudicial foreclosure, that prop-erty may be levied on execution and an alias writ may beissued if the proceeds thereof are insufficient to satisfythe judgment credit (Industrial Finance Corp. vs. Ramirez,77 SCRA 152). A mere demand to surrender the objectwhich is not heeded by the mortgagor because the prop-erty is in the possession of a repair shop will not amountto a foreclosure (see Industrial Finance Corporation vs.Tobias, 78 SCRA 28).

In Filinvest vs. Philippine Acetylene Company (111SCRA 421), the Court held that a mere return of themortgaged vehicle, which had unpaid taxes, upon de-mand by the seller-mortgagee that the mortgagor-buyereither pay the unpaid price or return the vehicle,amounted to neither a foreclosure or cancellation nor adacion en pago. (To be considered as the equivalent ofdation in payment, there must, the Court ruled, be anexpress or implied but clear intention of both parties thatthe delivery was an accepted equivalent of performanceof the obligation.)


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Of Real Property Covered by Republic Act No. 6552(Realty Installment Buyer Protection Act)

Republic Act 6552 is a special law on the sale oninstallments of certain real property, the full text of whichprovides:

Section 1. This Act shall be known as the ‘Re-alty Installment Buyer Protection Act.’

Sec. 2. It is hereby declared a public policy toprotect buyers of real estate on installment pay-ments against onerous and oppressive conditions.

Sec. 3. In all transactions or contracts involv-ing the sale or financing of real estate on installmentpayments, including residential condominiumapartments but excluding industrial lots, com-mercial buildings and sales to tenants under Re-public Act Numbered Thirty-eight hundred forty-four as amended by Republic Act Numbered Sixty-three hundred eighty-nine, where the buyer haspaid at least two years of installments, the buyer isentitled to the following rights in case he defaultsin the payment of succeeding installments:

(a) To pay, without additional interest, theunpaid installments due within the total grace pe-riod earned by him, which is hereby fixed at therate of one month grace period for every one yearof installment payments made: Provided, That thisright shall be exercised by the buyer only once inevery five years of the life of the contract and itsextensions, if any.

(b) If the contract is cancelled, the seller shallrefund to the buyer the cash surrender value of thepayments on the property equivalent to fifty percent of the total payments made and, after five yearsof installments, an additional five per cent everyyear but not to exceed ninety per cent of total pay-ments made: Provided, That the actual cancellationof the contract shall take place after thirty daysfrom receipt by the buyer of the notice of cancella-tion or the demand for rescission of the contract by

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a notarial act and upon full payment of the cashsurrender value to the buyer.

Down payments, deposits or options on thecontract shall be included in the computation ofthe total number of installments made.

Sec. 4. In cases where less than two years ofinstallments were paid, the seller shall give thebuyer a grace period of not less than sixty daysfrom the date the installments became due. If thebuyer fails to pay the installments due at the expi-ration of the grace period, the seller may cancelthe contract after thirty days from receipt by thebuyer of the notice of cancellation or the demandfor rescission of the contract by a notarial act.

Sec. 5. Under Sections 3 and 4, the buyer shallhave the right to sell his rights or assign the sameto another person or to reinstate the contract byupdating the account during the grace period andbefore actual cancellation of the contract. The deedof sale or assignment shall be done by notarial act.

Sec. 6. The buyer shall have the right to pay inadvance any installment or the full unpaid balanceof the purchase price any time without interestand to have such full payment of the purchase priceannotated in the certificate of title covering theproperty.

Sec. 7. Any stipulation in any contract hereaf-ter entered into contrary to the provisions of Sec-tions 3, 4, 5 and 6 shall be null and void.

Sec. 8. If any provision of this Act is held invalidor unconstitutional, no other provision shall be af-fected thereby.

Sec. 9. This Act shall take effect upon its ap-proval.

(Note: See Presidential Decree No. 1344, ExecutiveOrder No. 648, 7 February 1981, and Executive OrderNo. 90, 17 December 1986; see also C.T. Torres Enter-prises, Inc. vs. Hibionada, 191 SCRA 268). Where the


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development work in a housing subdivision is delayed orincomplete, the buyer has the option to demand reim-bursement of installments thus far paid or wait for itscompletion; in the meantime, the seller may not rescindthe sale (Relucio vs. Brillante-Garfin, 187 SCRA 405).

While Republic Act No. 6552 recognizes the right ofthe vendor to cancel the contract upon breach and non-payment of stipulated installments by the vendee, it like-wise grants the latter the right to receive the cash sur-render value of the payments already made in case hedefaults in the payments of succeeding installments (Rillovs. Court of Appeals, 274 SCRA 461; see also CarmelitaLeaño vs. Court of Appeals, G.R. No. 129018, 15 Novem-ber 2001). In Vda. de Roxas vs. Court of Appeals (143SCRA 77), it was ruled that there would be no legal basisfor notarial cancellation where the vendor’s decision isnot so much because the vendee was not paying dueinstallments on time as the vendor’s desire to be paid anamount higher than what was being paid and acceptedregularly.

(iii) In Contracts of Sale:

Of Personal Property

Rights under Article 1593, Civil Code

“Art. 1593. With respect to movable property,the rescission of the sale shall of right take place inthe interest of the vendor, if the vendee, upon theexpiration of the period fixed for the delivery of thething, should not have appeared to receive it, or,having appeared, he should not have tendered theprice at the same time, unless a longer period hasbeen stipulated for its payment.”

Rescission “shall of right take place” if the vendee,on the date fixed for delivery of the thing, does not appearor pay, unless a longer period has been stipulated forpayment (Guevarra vs. Pascual, 12 Phil. 311). A notice of

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rescission appears to be required in other cases of breachof the contract (see Art. 1597, Civil Code, infra.). A stipu-lation reserving the right of rescission is preferable butnot required. These rules are inapplicable if the vendorhas already effected delivery (but in this case, Article1526 might still be applicable; see infra.).

Rights under Article 1526, Civil Code

“Art. 1526. Subject to the provisions of this Ti-tle, notwithstanding that the ownership in the goodsmay have passed to the buyer, the unpaid seller ofgoods, as such, has:

“(1) A lien on the goods or right to retain themfor the price while he is in possession of them;

“(2) In case of the insolvency of the buyer, aright of stopping the goods in transitu after he hasparted with the possession of them;

“(3) A right of resale as limited by this Title;

“(4) A right to rescind the sale as likewise lim-ited by this Title.

“Where the ownership in the goods has notpassed to the buyer, the unpaid seller has, in addi-tion to his other remedies, a right of withholdingdelivery similar to and co-extensive with his rightsof lien and stoppage in transitu where the owner-ship has passed to the buyer.”

The seller of goods is deemed to be an unpaid seller:

(1) When the whole of the price has not been paidor tendered;

(2) When a bill of exchange or other negotiable in-strument has been received as conditional payment, andthe condition on which it was received has been brokenby reason of the dishonor of the instrument, the insol-vency of the buyer, or otherwise. The term “seller” (for


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purposes of Arts. 1525-1535, Civil Code) includes an agentof the seller to whom the bill of lading has been indorsed,or a consignor or agent who has himself paid, or is di-rectly responsible for the price, or any other person whois in the position of a seller (Art. 1525, Civil Code).

The unpaid seller of goods who is in possession thereofis entitled to retain possession of them until payment ortender of the price in the following cases, namely:

(1) Where the goods have been sold without anystipulation as to credit;

(2) Where the goods have been sold on credit, butthe term of credit has expired;

(3) Where the buyer becomes insolvent.

The seller may exercise his right of lien notwith-standing that he is in possession of the goods as agent orbailee for the buyer (Art. 1527, Civil Code).

Where an unpaid seller has made part delivery ofthe goods, he may exercise his right of lien on the remain-der, unless such part delivery has been made under suchcircumstances as to show an intent to waive the lien orright of retention (Art. 1528, Civil Code; Katigbak vs.Court of Appeals, 4 SCRA 243).

The unpaid seller of goods loses his lien thereon: (1)when he delivers the goods to a carrier or other bailee forthe purpose of transmission to the buyer without reserv-ing the ownership in the goods or the right to the posses-sion thereof (see Cebu United Enterprises vs. Gallofin,106 Phil. 491); (2) when the buyer or his agent lawfullyobtains possession of the goods; or (3) by waiver thereof.

The unpaid seller of goods, having a lien thereon,does not lose his lien by reason only that he has obtainedjudgment or decree for the price of the goods (Art. 1529,Civil Code).

When the buyer of goods is or becomes insolvent, theunpaid seller who has parted with the possession of the

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goods has the right of stopping them in transitu, that isto say, he may resume possession of the goods at any timewhile they are in transit, and he will then become enti-tled to the same rights in regard to the goods as he wouldhave had if he had never parted with the possession (Art.1530, Civil Code). Goods are in transit:

(1) From the time when they are delivered to acarrier by land, water, or air, or other bailee for the pur-pose of transmission to the buyer, until the buyer, or hisagent in that behalf, takes delivery of them from suchcarrier or other bailee;

(2) If the goods are rejected by the buyer, and thecarrier or other bailee continues in possession of them,even if the seller has refused to receive them back.

Goods are no longer in transit:

(1) If the buyer, or his agent in that behalf, obtainsdelivery of the goods before their arrival at the appointeddestination;

(2) If, after the arrival of the goods at the appointeddestination, the carrier or other bailee acknowledges tothe buyer or his agent that he holds the goods on hisbehalf and continues in possession of them as bailee forthe buyer or his agent; and it is immaterial that furtherdestination for the goods may have been indicated by thebuyer;

(3) If the carrier or other bailee wrongfully refusesto deliver the goods to the buyer or his agent in thatbehalf. If the goods are delivered to a ship, freight train,truck, or airplane chartered by the buyer, it is a questiondepending on the circumstances of the particular case,whether they are in the possession of the carrier as suchor as agent of the buyer. If part delivery of the goods hasbeen made to the buyer, or his agent in that behalf, theremainder of the goods may be stopped in transitu, un-less such part delivery has been under such circumstancesas to show an agreement with the buyer to give up pos-session of the whole of the goods (Art. 1531, Civil Code).


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The unpaid seller may exercise his right of stoppagein transitu either by obtaining actual possession of thegoods or by giving notice of his claim to the carrier orother bailee in whose possession the goods are. Such no-tice may be given either to the person in actual posses-sion of the goods or to his principal. In the latter case thenotice, to be effectual, must be given at such time andunder such circumstances that the principal, by the exer-cise of reasonable diligence, may prevent a delivery tothe buyer. When notice of stoppage in transitu is given bythe seller to the carrier, or other bailee in possession ofthe goods, he must redeliver the goods to, or according tothe directions of, the seller. The expenses of such deliverymust be borne by the seller. If, however, a negotiabledocument of title representing the goods has been issuedby the carrier or other bailee, he shall not be obliged todeliver or justified in delivering the goods to the sellerunless such document is first surrendered for cancella-tion (Art. 1532, Civil Code).

Where the goods are of perishable nature, or wherethe seller expressly reserves the right of resale in case thebuyer should make default, or where the buyer has beenin default in the payment of the price for an unreason-able time, an unpaid seller having a right of lien or hav-ing stopped the goods in transitu may resell the goods.He shall not thereafter be liable to the original buyerupon the contract of sale or for any profit made by suchresale, but may recover from the buyer damages for anyloss occasioned by the breach of the contract of sale. Wherea resale is made, conformably with the foregoing, thebuyer acquires a good title as against the original buyer.It is not essential to the validity of a resale that notice ofthe time and place of such resale should be given by theseller to the original buyer. The seller is bound to exercisereasonable care and judgment in making a resale, andsubject to this requirement, may make a resale either bypublic or private sale. He cannot, however, directly orindirectly buy the goods (Art. 1533, Civil Code).

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An unpaid seller, having the right of lien or havingstopped the goods in transitu, may rescind the transfer oftitle and resume the ownership in the goods where heexpressly reserved the right to do so in case the buyershould make default, or where the buyer has been indefault in the payment of the price for an unreasonabletime. The seller shall not thereafter be liable to the buyerupon the contract of sale, but may recover from the buyerdamages for any loss occasioned by the breach of thecontract. The transfer of title shall not be held to havebeen rescinded by an unpaid seller until he has mani-fested by notice to the buyer or by some other overt act anintention to rescind. It is not necessary that such overtact should be communicated to the buyer, but the givingor failure to give notice to the buyer of the intention torescind shall be relevant in any issue involving the ques-tion whether the buyer had been in default for an unrea-sonable time before the right of rescission was arrested(Art. 1534, Civil Code).

The unpaid seller’s right of lien or stoppage in tran-situ is not affected by any sale, or other disposition of thegoods which the buyer may have made, unless the sellerhas assented thereto. If, however, a negotiable documentof title has been issued for goods, no seller’s lien or rightof stoppage in transitu shall defeat the right of any pur-chaser for value in good faith to whom such documenthas been negotiated, whether such negotiation be prioror subsequent to the notification to the carrier, or otherbailee who issued such document of the seller’s claim to alien or right of stoppage in transitu (Art. 1535, Civil Code;see Roman vs. Asia Banking Corp., 46 Phil. 705).

While the goods remain in his possession, the ven-dor has the preferential right to the purchase price (Unsonvs. Urquijo, etc., 51 Phil. 329) and no action is essential torescind the sale (Hanlon vs. Hausserman, 40 Phil. 796,see also Art. 1593, Civil Code). If the goods, however, arealready in the buyer’s possession, judicial action (specificperformance or resolution) can be taken. A right to re-


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scind without judicial action, however, may be reservedby the seller. In this case, notice to the buyer of rescissionwould be required; to retake possession of the goods notvoluntarily surrendered, judicial action is necessary toobtain the return of the property.

Of Real Property

“Art. 1592. In the sale of immovable property,even though it may have been stipulated that uponfailure to pay the price at the time agreed upon therescission of the contract shall of right take place,the vendee may pay, even after the expiration of theperiod, as long as a demand for rescission of the con-tract has been made upon him either judicially or bya notarial act. After the demand, the court may notgrant him a new term” (Civil Code).

This provision which permits the vendee to pay, evenafter the expiration of the period, as long as no demandfor rescission of the contract has been made upon himeither judicially or by notarial act, does not apply to acontract to sell or deed of conditional sale where the sellerreserves title until full payment of the price (Alfonso vs.Court of Appeals, 186 SCRA 400); the latter is entitled torescind without regard to Article 1592 (see Joseph & SonsEnterprises, Inc. vs. Court of Appeals, 143 SCRA 663). Inone case, the Court ruled that a contract to sell condi-tioned on the payment of the price acquires no obligatoryforce if the price is unpaid (Agustin vs. Court of Appeals,186 SCRA 373).

In the case of Palay, Inc. vs. Clave (124 SCRA 638),the Court said that judicial action for the rescission of acontract is not necessary where the contract providesthat it may be revoked or cancelled for violation of any ofits terms and conditions, but as held in previous juris-prudence, there must be at least a written notice sent tothe defaulter informing him of the rescission.

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Where the sale is absolute in nature, the applicableprovision is Article 1592 of the Code (Taguba vs. Vda. deDe Leon, 132 SCRA 722; Dignos vs. Court of Appeals, 158SCRA 375).

In contracts of sale, judicial resolution (Art. 1191,Civil Code) is necessary unless extrajudicial rescission isreserved; in the latter case, a rescission by notarial act isessential short of judicial action. To retake possession, ifthe buyer is unwilling to surrender it, judicial processesmust be sought. A stipulation, entitling one party to takepossession of the land sold if the other party violates thecontract does not ex proprio vigore confer upon the formerthe right to take possession thereof, if objected to by thelatter, without judicial intervention and determination(Zulueta vs. Mariano, 111 SCRA 206).

Unlike the resolution of the contract contemplatedin Article 1191 of the Code, the rescission prescribed un-der Article 1592 does not authorize the court to grant anew period for compliance (Bucoy vs. Paulino, 23 SCRA248). In the interest of justice and equity, however, suchas when there has been a substantial performance ingood faith, it has been held that a court may grant a newterm upon the authority of Article 1234 (supra.) of theCode (Angeles vs. Calasanz, 135 SCRA 323, citing J.M.Tuason & Co., Inc. vs. Javier, 31 SCRA 829).

Effect of Mortgage

In Suria vs. Intermediate Appellate Court (151 SCRA661), the Supreme Court held:

“By the contract of sale, the vendor obligateshimself to transfer the ownership of and to deliver adeterminate thing to the buyer, who in turn, is obli-gated to pay a price certain in money or its equiva-lent (Art. 1458, Civil Code). From the respondent’sown arguments, we note that they have fully com-plied with their part of the reciprocal obligation. Asa matter of fact, they have already parted with the


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title as evidenced by the transfer certificate of titlein the petitioner’s name as of June 27, 1875.

“The buyer, in turn, fulfilled his end of the bar-gain when he executed the deed of mortgage. Thepayments on an installment basis secured by theexecution of a mortgage took the place of a cashpayment. In other words, the relationship betweenthe parties is no longer one of buyer and seller be-cause the contract of sale has been perfected andconsummated. It is already one of a mortgagor and amortgagee. In consideration of the petitioner’s prom-ise to pay on installment basis the sum they owe therespondents, the latter have accepted the mortgageas security for the obligation.

“The situation in this case is, therefore, differ-ent from that envisioned in the cited opinion of Jus-tice J.B.L. Reyes. The petitioners’ breach of obliga-tions is not with respect to the perfected contract ofsale but in the obligations created by the mortgagecontract. The remedy of rescission is not a principalaction retaliatory in character but becomes a sub-sidiary one which by law is available only in theabsence of any other legal remedy (Art. 1384, CivilCode).

“Foreclosure here is not a remedy accorded bylaw but as earlier stated, is a specific provision foundin the contract between the parties.

“The petitioners are correct in citing this Court’sruling in Villaruel vs. Tan King (43 Phil. 251) whenwe stated:

“At the outset it must be said that since thesubject matter of the sale in question is real property,it does not come strictly within the provisions ofArticle 1124 of the Civil Code, but is rather subjectedto the stipulations agreed upon by the contractingparties and to the provisions of Article 1504 of theCivil Code.

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“The pacto commisorio or ley comisoria is noth-ing more than a condition subsequent of the contractof purchase and sale. Considered carefully, it is thevery condition subsequent that is always attached toall bilateral obligations according to Article 1124;except that when applied to real property it is subor-dinate to the stipulations made by the contractingparties and to the provisions of the article on whichwe are now commenting (Article 1504). (Manresa,Civil Code, volume 10, page 286, second edition).

“Now, in the contract of purchase and sale be-fore us, the parties stipulated that the payment ofthe balance of one thousand pesos (P1,000) was guar-anteed by the mortgage of the house that was sold.This agreement has the two-fold effect of acknowl-edging indisputably that the sale had been consum-mated, so much so that the vendee was disposing ofit by mortgaging it to the vendor, and of waiving thepacto commisorio, that is the resolution of the sale inthe event of failure to pay the one thousand pesos(P1,000) such waiver being proved by the executionof the mortgage to guarantee the payment, and inaccord therewith the vendor’s adequate remedy, incase of nonpayment, is the foreclosure of such mort-gage. (At pp. 255-256)

“x x x x x x x x x

“There is, therefore, no cause for the resolutionof the sale as prayed for by the plaintiff. His action,at all events, should have been one for the foreclos-ure of the mortgage, which is not the action broughtin this case.

“Article 1124 of the Civil Code, as we have seen,is not applicable to this case. Neither is the doctrineenunciated in the case of Ocejo, Perez & Co. vs. Inter-national Banking Corporation (37 Phil. 631), whichplaintiff alleges to be applicable, because that prin-ciple has reference to the sale of personal property.”


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Upon the breach of an obligation, the aggrieved party,as reiterated in Consolidated Plywood Industries, Inc. vs.IFC Leasing and Acceptance Corporation (149 SCRA 448),may opt for specific performance or resolution of the obli-gation under Article 1191 of the Civil Code. The remediesare not cumulative but alternative (Osorio and Tirona vs.Bennet and Prov. Board of Cavite, 41 Phil. 301; Siy vs.Court of Appeals, 138 SCRA 536). Obviously, the choice iswith the aggrieved party. Thus, where the remedy of spe-cific performance is chosen, the resolution of the obliga-tion can no longer be sought unless, of course, thefulfillment of the obligation is impossible or becomes un-lawful (see Ayson-Simon vs. Adamos, 131 SCRA 439).Thus, it is submitted, if the obligation is secured, such asby a mortgage, the foreclosure thereof would amount to,in effect, a pursuit of specific performance, and resolu-tion would no longer be available. The existence of acces-sory contracts to secure the principal obligations does notmilitate nor warrant against the alternative remedy ofresolution. It is not only when there are specific remediesprovided for in certain juridical relations, such as thosefound in Articles 1786 and 1788 in partnership, that Arti-cle 1191 would be inapplicable (see Sancho vs. Lizariaga,55 Phil. 601). The passing of title of the property sold isno ground for withholding from the seller the right ofresolution where the buyer breaches his obligation underhis contract. Neither can the execution of the mortgage tosecure the unpaid price be tantamount to the payment ofthe price nor the substitute thereof. The essence of themortgage is still to the payment compliance in the con-tract of sale.

Could the vendor demand the rescission of a con-tract for the sale of a parcel of land for a cause traceableto his own failure to have the squatters on the subjectproperty evicted within the contractually-stipulated pe-riod? The question was posed in Virgilio R. Romero vs.Hon. Court of Appeals and Enriqueta Chua Vda. DeOngsiong, G.R. No. 107207, 23 November 1995. The Su-preme Court ruled:

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“The term “condition’’ in the context of a per-fected contract of sale pertains, in reality, to the com-pliance by one party of an undertaking the fulfillmentof which would beckon, in turn, the demandability ofthe reciprocal prestation of the other party. The re-ciprocal obligations referred to would normally be,in the case of vendee, the payment of the agreedpurchase price and, in the case of the vendor, thefulfillment of certain express warranties (which, inthe case at bench is the timely eviction of the squat-ters on the property).

x x x

“From the moment the contract is perfected,the parties are bound not only to the fulfillment ofwhat has been expressly stipulated but also to allthe consequences which, according to their nature,may be in keeping with good faith, usage and law.Under the agreement, private respondent is obli-gated to evict the squatters on the property. Theejectment of the squatters is a condition the opera-tive act of which sets into motion the period of com-pliance by petitioner of his own obligation, i.e., topay the balance of the purchase price. Private re-spondent’s failure to “remove the squatters from theproperty’’ within the stipulated period gives peti-tioner the right to either refuse to proceed with theagreement or waive that condition in consonancewith Article 1545 of the Civil Code. This option clearlybelongs to petitioner and not to private respondent.

“We share the opinion of the appellate courtthat the undertaking required of private respondentdoes not constitute a “potestative condition depend-ent solely on his will’’ that might, otherwise, be voidin accordance with Article 1182 of the Civil Code buta “mixed’’ condition “dependent not on the will of thevendor alone but also of third persons like the squat-ters and government agencies and personnel con-cerned.’’ We must hasten to add, however, that where


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the so-called “potestative condition’’ is imposed noton the birth of the obligation but on its fulfillment,only the condition is avoided, leaving unaffected ob-ligation itself.

“In contracts of sale particularly, Article 1545 ofthe Civil Code, aforementioned, allows the obligee tochoose between proceeding with the agreement orwaiving the performance of the condition. It is thisprovision which is the pertinent rule in the case atbench. Here, evidently, petitioner has waived theperformance of the condition imposed on private re-spondent to free the property from squatters.

“In any case, private respondent’s action for re-scission is not warranted. She is not the injured party.The right of resolution of a party to an obligationunder Article 1191 of the Civil Code is predicated ona breach of faith by the other party that violates thereciprocity between them. It is private respondentwho has failed in her obligation under the contract.Petitioner did not breach the agreement. He hasagreed, in fact, to shoulder the expenses of the ex-ecution of the judgment in the ejectment case and tomake arrangements with the sheriff to effect suchexecution. In his letter of 23 June 1989, counsel forpetitioner has tendered payment and demandedforthwith the execution of the deed of absolute sale.Parenthetically, this offer to pay, having been madeprior to the demand for rescission, assuming for thesake of argument that such a demand is proper underArticle 1592 of the Civil Code, would likewise sufficeto defeat private respondent’s prerogative to rescindthereunder.’’

Chapter 6

Actions for Breach of Contract of Sale of Goods

Art. 1594. Actions for breach of the contract ofsale of goods shall be governed particularly by theprovisions of this Chapter, and as to matters not spe-

Art. 1594

307

cifically provided for herein, by other applicable provi-sions of this Title. (n)

Art. 1595. Where, under a contract of sale, theownership of the goods has passed to the buyer, andhe wrongfully neglects or refuses to pay for the goodsaccording to the terms of the contract of sale, the sellermay maintain an action against him for the price of thegoods.

Where, under a contract of sale, the price is pay-able on a certain day, irrespective of delivery or of trans-fer of title, and the buyer wrongfully neglects or refusesto pay such price, the seller may maintain an action forthe price although the ownership in the goods has notpassed. But it shall be a defense to such an action thatthe seller at any time before the judgment in such actionhas manifested an inability to perform the contract ofsale on his part or an intention not to perform it.

Although the ownership in the goods has notpassed, if they cannot readily be resold for a reasonableprice, and if the provisions of Article 1596, fourth para-graph, are not applicable, the seller may offer to deliverthe goods to the buyer, and, if the buyer refuses toreceive them, may notify the buyer that the goods arethereafter held by the seller as bailee for the buyer.Thereafter the seller may treat the goods as the buyer’sand may maintain an action for the price. (n)

Art. 1596. Where the buyer wrongfully neglects orrefuses to accept and pay for the goods, the sellermay maintain an action against him for damages fornon-acceptance.

The measure of damages is the estimated lossdirectly and naturally resulting in the ordinary courseof events from the buyer’s breach of contract.

Where there is an available market for the goodsin question, the measure of damages is, in the ab-sence of special circumstances showing proximatedamage of a different amount, the difference betweenthe contract price and the market or current price atthe time or times when the goods ought to have been


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accepted, or, if no time was fixed for acceptance, thenat the time of the refusal to accept.

If, while labor or expense of material amount isnecessary on the part of the seller to enable him tofulfill his obligations under the contract of sale, thebuyer repudiates the contract or notifies the seller toproceed no further therewith, the buyer shall be liableto the seller for labor performed or expenses madebefore receiving notice of the buyer’s repudiation orcountermand. The profit the seller would have made ifthe contract or the sale had been fully performed shallbe considered in awarding the damages. (n)

Art. 1597. Where the goods have not been deliv-ered to the buyer, and the buyer has repudiated thecontract of sale, or has manifested his inability to per-form his obligations thereunder, or has committed abreach thereof, the seller may totally rescind the con-tract of sale by giving notice of his election so to do tothe buyer. (n)

Art. 1598. Where the seller has broken a contractto deliver specific or ascertained goods, a court may, onthe application of the buyer, direct that the contractshall be performed specifically, without giving the sellerthe option of retaining the goods on payment of dam-ages. The judgment or decree may be unconditional, orupon such terms and conditions as to damages, paymentof the price and otherwise, as the court may deem just. (n)

Art. 1599. Where there is a breach of warranty bythe seller, the buyer may, at his election:

(1) Accept or keep the goods and set up againstthe seller, the breach of warranty by way of recoupmentin diminution or extinction of the price;

(2) Accept or keep the goods and maintain anaction against the seller for damages for the breach ofwarranty;

(3) Refuse to accept the goods, and maintain anaction against the seller for damages for the breach ofwarranty;

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309

(4) Rescind the contract of sale and refuse toreceive the goods or if the goods have already beenreceived, return them or offer to return them to theseller and recover the price or any part thereof whichhas been paid.

When the buyer has claimed and been granted aremedy in anyone of these ways, no other remedy canthereafter be granted, without prejudice to the provi-sions of the second paragraph of Article 1191.

When the goods have been delivered to the buyer,he cannot rescind the sale if he knew of the breach ofwarranty when he accepted the goods without protest,or if he fails to notify the seller within a reasonabletime of the election to rescind, or if he fails to return orto offer to return the goods to the seller in substan-tially as good condition as they were in at the time theownership was transferred to the buyer. But if deterio-ration or injury of the goods is due to the breach ofwarranty, such deterioration or injury shall not preventthe buyer from returning or offering to return the goodsto the seller and rescinding the sale.

Where the buyer is entitled to rescind the saleand elects to do so, he shall cease to be liable for theprice upon returning or offering to return the goods. Ifthe price or any part thereof has already been paid, theseller shall be liable to repay so much thereof as hasbeen paid, concurrently with the return of the goods,or immediately after an offer to return the goods inexchange for repayment of the price.

Where the buyer is entitled to rescind the saleand elects to do so, if the seller refuses to accept anoffer of the buyer to return the goods, the buyer shallthereafter be deemed to hold the goods as bailee forthe seller, but subject to a lien to secure the paymentof any portion of the price which has been paid, andwith the remedies for the enforcement of such lienallowed to an unpaid seller by Article 1526.

(5) In the case of breach of warranty of quality,such loss, in the absence of special circumstancesshowing proximate damage of a greater amount, is the

Art. 1599 OBLIGATIONS AND CONTRACTSTitle VI. Sales

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difference between the value of the goods at the timeof delivery to the buyer and the value they would havehad if they had answered to the warranty. (n)

Where, under a contract of sale, the ownership of thegoods has passed to the buyer, and he wrongfully ne-glects or refuses to pay for the goods according to theterms of the contract of sale, the seller may maintain anaction against him for the price of the goods. Where theprice is payable on a certain day, irrespective of deliveryor of transfer of title, and the buyer wrongfully neglectsor refuses to pay such price, the seller may maintain anaction for the price although the ownership in the goodshas not passed. But it shall be a defense to such an actionthat the seller at any time before the judgment in suchaction has manifested an inability to perform the con-tract of sale on his part or an intention not to perform it.Although the ownership in the goods has not passed, ifthey cannot readily be resold for a reasonable price, andif the provisions of Article 1596, fourth paragraph (in-fra.), are not applicable, the seller may offer to deliverthe goods to the buyer, and, if the buyer refuses to receivethem, may notify the buyer that the goods are thereafterheld by the seller as bailee for the buyer. Thereafter, theseller may treat the goods as the buyer’s and may main-tain an action for the price (see Art. 1595, Civil Code; seealso Matute vs. Cheong Boo, 37 Phil. 372).

“Art. 1596. Where the buyer wrongfully neglectsor refuses to accept and pay for the goods, the sellermay maintain an action against him for damages fornon-acceptance.

“The measure of damages is the estimated lossdirectly and naturally resulting in the ordinarycourse of events from the buyer’s breach of contract.

“Where there is an available market for thegoods in question, the measure of damages is, in theabsence of special circumstances showing proximate

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damage of a different amount, the difference betweenthe contract price and the market or current price atthe time or times when the goods ought to have beenaccepted, or, if no time was fixed for acceptance,then at the time of the refusal to accept.

“If, while labor or expense of material amountis necessary on the part of the seller to enable him tofulfill his obligations under the contract of sale, thebuyer repudiates the contract or notifies the seller toproceed no further therewith, the buyer shall be li-able to the seller for labor performed or expensesmade before receiving notice of the buyer’s repudia-tion or countermand. The profit the seller would havemade if the contract or the sale had been fully per-formed shall be considered in awarding the damages(Civil Code).”

In case the goods have not been delivered to thebuyer and the buyer has repudiated the contract of sale,or has manifested his ability to perform his obligationsthereunder, or has committed a breach thereof, the sellermay totally rescind the contract of sale by giving notice ofhis election so to do to the buyer (Art. 1597, Civil Code).

Where the seller has broken a contract to deliverspecific or ascertained goods, a court may, on the applica-tion of the buyer, direct that the contract shall be per-formed specifically, without giving the seller the option ofretaining the goods on payment of damages. The judg-ment or decree may be unconditional, or upon such termsand conditions as to damages, payment of the price andotherwise, as the court may deem just (Art. 1598, CivilCode).

In the event of breach of warranty by the seller, thebuyer may, at his election:

(1) Accept or keep the goods and set up against theseller, the breach of warranty by way of recoupment indiminution or extinction of the price;


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(2) Accept or keep the goods and maintain anaction against the seller for damages for the breach of war-ranty;

(3) Refuse to accept the goods, and maintain anaction against the seller for damages for the breach ofwarranty;

(4) Rescind the contract of sale and refuse to re-ceive the goods or if the goods have already been re-ceived, return them or offer to return them to the sellerand recover the price or any part thereof which has beenpaid. When the buyer has claimed and been granted aremedy in any of these ways, no other remedy can there-after be granted, without prejudice to the provisions ofthe second paragraph of Article 1191 (supra.). Where thegoods have been delivered to the buyer, he cannot rescindthe sale if he knew of the breach of warranty when heaccepted the goods without protest, or if he fails to notifythe seller within a reasonable time of the election to re-scind, or if he fails to return or to offer to return the goodsto the seller in substantially as good condition as theywere in at the time the ownership was transferred to thebuyer. But if deterioration or injury of the goods is due tothe breach of warranty, such deterioration or injury shallnot prevent the buyer from returning or offering to re-turn the goods to the seller and rescinding the sale. Wherethe buyer is entitled to rescind the sale and elects to doso, he shall cease to be liable for the price upon returningor offering to return the goods. If the price or any partthereof has already been paid, the seller shall be liable torepay so much thereof as has been paid, concurrentlywith the return of the goods, or immediately after anoffer to return the goods in exchange for repayment of theprice. Where the buyer is entitled to rescind the sale andelects to do so, if the seller refuses to accept an offer of thebuyer to return the goods, the buyer shall thereafter bedeemed to hold the goods as bailee for the seller, butsubject to a lien to secure the payment of any portion ofthe price which has been paid, and with the remedies for

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the enforcement of such lien allowed to an unpaid sellerby Article 1526.

(5) In the case of breach of warranty of quality,such loss, in the absence of special circumstances show-ing proximate damage of a greater amount, is the differ-ence between the value of the goods at the time of deliv-ery to the buyer and the value they would have had ifthey had answered to the warranty (Art. 1599, Civil Code).

Cases which are not specifically covered by the fore-going rules are governed by the other provisions of theCode on sales (see Art. 1594, Civil Code) and, in theirdefault, by the remedies applicable to obligations andcontracts in general.

Chapter 7

Extinguishment of Sale

Art. 1600. Sales are extinguished by the samecauses as all other obligations, by those stated in thepreceding articles of this Title, and by conventional orlegal redemption. (1506)

Sales are extinguished by the same causes as allother obligations, by those stated in the preceding provi-sions on Sales, and by conventional or legal redemption(see Art. 1600; see also Art. 1231, Civil Code), regardlessof whether the contract is a perfected sale or a consum-mated sale (Ocejo, Perez & Co. vs. International Bank, 37Phil. 631).

Section 1 — Conventional Redemption

Art. 1601. Conventional redemption shall takeplace when the vendor reserves the right to repurchasethe thing sold, with the obligation to comply with theprovisions of Article 1616 and other stipulations whichmay have been agreed upon. (1507)

Art. 1602. The contract shall be presumed to bean equitable mortgage, in any of the following cases:


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(1) When the price of a sale with right to repur-chase is unusually inadequate;

(2) When the vendor remains in possession aslessee or otherwise;

(3) When upon or after the expiration of the rightto repurchase another instrument extending the periodof redemption or granting a new period is executed;

(4) When the purchaser retains for himself a partof the purchase price;

(5) When the vendor binds himself to pay thetaxes on the thing sold;

(6) In any other case where it may be fairly in-ferred that the real intention of the parties is that thetransaction shall secure the payment of a debt or theperformance of any other obligation.

In any of the foregoing case, any money, fruits, orother benefit to be received by the vendee as rent orotherwise shall be considered as interest which shallbe subject to the usury laws. (n)

Art. 1603. In case of doubt, a contract purportingto be a sale with right to repurchase shall be con-strued as an equitable mortgage. (n)

Art. 1604. The provisions of Article 1602 shall alsoapply to a contract purporting to be an absolute sale.(n)

Art. 1605. In the cases referred to in Articles 1602and 1604, the apparent vendor may ask for thereformation of the instrument. (n)

Art. 1606. The right referred to in Article 1601, inthe absence of an express agreement, shall last fouryears from the date of the contract.

Should there be an agreement, the period cannotexceed ten years.

However, the vendor may still exercise the rightto repurchase within thirty days from the time finaljudgment was rendered in a civil action on the basis

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315

that the contract was a true sale with right to repur-chase. (1508a)

Art. 1607. In case of real property, the consolida-tion of ownership in the vendee by virtue of the failureof the vendor to comply with the provisions of Article1616 shall not be recorded in the Registry of Propertywithout a judicial order, after the vendor has been dulyheard. (n)

Art. 1608. The vendor may bring his action againstevery possessor whose right is derived from thevendee, even if in the second contract no mentionshould have been made of the right to repurchase,without prejudice to the provisions of the MortgageLaw and the Land Registration Law with respect tothird persons. (1510)

Art. 1609. The vendee is subrogated to the ven-dor’s rights and actions. (1511)

Art. 1610. The creditors of the vendor cannot makeuse of the right of redemption against the vendee, untilafter they have exhausted the property of the vendor.(1512)

Art. 1611. In a sale with a right to repurchase, thevendee of a part of an undivided immovable who ac-quires the whole thereof in the case of Article 498, maycompel the vendor to redeem the whole property, if thelatter wishes to make use of the right of redemption.(1513)

Art. 1612. If several persons, jointly and in thesame contract, should sell an undivided immovablewith a right of repurchase, none of them may exercisethis right for more than his respective share.

The same rule shall apply if the person who soldan immovable alone has left several heirs, in whichcase each of the latter may only redeem the part whichhe may have acquired. (1514)

Art. 1613. In the case of the preceding article, thevendee may demand of all the vendors or co-heirs thatthey come to an agreement upon the repurchase of the


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whole thing sold; and should they fail to do so, thevendee cannot be compelled to consent to a partialredemption. (1515)

Art. 1614. Each one of the co-owners of an undi-vided immovable who may have sold his share sepa-rately, may independently exercise the right of repur-chase as regards his own share, and the vendee can-not compel him to redeem the whole property. (1516)

Art. 1615. If the vendee should leave several heirs,the action for redemption cannot be brought againsteach of them except for his own share, whether thething be undivided, or it has been partitioned amongthem.

But if the inheritance has been divided, and thething sold has been awarded to one of the heirs, theaction for redemption may be instituted against himfor the whole. (1517)

Art. 1616. The vendor cannot avail himself of theright of repurchase without returning to the vendee theprice of the sale, and in addition:

(1) The expenses of the contract, and any otherlegitimate payments made by reason of the sale;

(2) The necessary and useful expenses made onthe thing sold. (1518)

Art. 1617. If at the time of the execution of thesale there should be on the land, visible or growingfruits, there shall be no reimbursement for or proratingof those existing at the time of redemption, if no in-demnity was paid by the purchaser when the sale wasexecuted.

Should there have been no fruits at the time ofthe sale, and some exist at the time of redemption,they shall be prorated between the redemptioner andthe vendee, giving the latter the part corresponding tothe time he possessed the land in the last year, countedfrom the anniversary of the date of the sale. (1519a)

Art. 1618. The vendor who recovers the thing soldshall receive it free from all charges or mortgages con-

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317

stituted by the vendee, but he shall respect the leaseswhich the latter may have executed in good faith, andin accordance with the custom of the place where theland is situated. (1520)

Conventional redemption shall take place when thevendor reserves the right to repurchase the thing sold,with the obligation to return to the vendee the purchaseprice and the expenses of the contract and other legiti-mate expenses made by reason of the sale, as well as thenecessary and useful expenses made on the thing sold,and other stipulations which may have been agreed upon(Art. 1601, in relation to Art. 1616, Civil Code). Mean-while, the vendee is subrogated to the vendor’s rightsand actions (see Art. 1609, Civil Code; Floro vs. Granada,83 Phil. 487).

The contract, however, shall be presumed to be anequitable mortgage in any of the following cases:

(1) When the price of a sale with right to repur-chase is unusually inadequate (Cabigao vs. Lim, 50 Phil.844);

(2) When the vendor remains in possession as les-see or otherwise (see Capulong vs. Court of Appeals, 130SCRA 245);

(3) When upon or after the expiration of the rightto repurchase another instrument extending the periodof redemption or granting a new period is executed (Reyesvs. De Leon, 20 SCRA 369);

(4) When the purchaser retains for himself a partof the purchase price (Escoto vs. Arcilla, 89 Phil. 199);

(5) When the vendor binds himself to pay the taxeson the thing sold (see Dalandan vs. Julio, 10 SCRA 400);and

(6) In any other case where it may be fairly in-ferred that the real intention of the parties is that thetransaction shall secure the payment of a debt or the


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performance of any other obligation (Diaz vs. Court ofAppeals, 84 SCRA 483; Buce vs. Court of Appeals, 157SCRA 330; Escudero vs. Dulay, 158 SCRA 69; Bundalianvs. Court of Appeals, 129 SCRA 645).

In any of the foregoing cases, any money, fruits, orother benefit to be received by the vendee as rent orotherwise shall be considered as interest which shall besubject to usury laws (see Art. 1602, Civil Code). In caseof doubt, a contract purporting to be a sale with right torepurchase shall be construed as an equitable mortgage(Art. 1603, Civil Code; see De la Paz vs. Garcia, 18 SCRA779).

The provisions of Article 1602 shall also apply to acontract purporting to be an absolute sale (see Art. 1604,Civil Code; Ramos vs. Court of Appeals, 180 SCRA 635).In this case, as well as in those referred to in Article1602, the apparent vendor may ask for the reformation ofthe instrument (see Art. 1605, Civil Code; Buce vs. Courtof Appeals, 157 SCRA 330).

The right to repurchase (referred to in Art. 1601), inthe absence of an express agreement, shall last for fouryears from the date of the contract (Heirs of Parco vs.Haw Pia, 45 SCRA 164; Medel vs. Francisco, 51 Phil.367; Rosales vs. Reyes, 25 Phil. 495). It was held in onecase that where the sale provided that the repurchasecannot be made within two years, the four-year period isto be counted from the time the right can be exercised(Badayos vs. Court of Appeals, 207 SCRA 209). Shouldthere be an agreement, the intent of the parties is pri-mordial (Alojado vs. Lim, 51 Phil. 339). But the periodcannot exceed ten years counted from the execution ofthe contract (Dalandan vs. Julio, 10 SCRA 400; Baluyotvs. Venegas, 22 SCRA 412); the excess shall be deemedvoid (Anchuelo vs. Intermediate Appellate Court, 147SCRA 434; see also Art. 1606, Civil Code). The vendor,however, may still exercise the right to repurchase withinthirty days from the time final judgment was rendered in

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a civil action on the basis that the contract was a truesale with right to repurchase (Art. 1606, Civil Code; Feriavs. Sava, 91 Phil. 963; Gerardino, Sr. vs. CFI [Br. III],Capiz, 80 SCRA 646). This rule allowing, in effect, thevendor who failed to repurchase the property within theperiod agreed upon to still redeem the property within 30days from final judgment in a civil action in which thetrue nature of the contract (whether it is a sale withpacto de retro or an equitable mortgage) is the main issue(see Gonzales vs. De Leon, 4 SCRA 333; Rosario vs.Rosario, 110 Phil. 394), does not apply where the transac-tion is admittedly a sale with a right of repurchase. Thependency of action tolls the terms of the right of redemp-tion where the action concerning the validity of a salewith pacto de retro is brought in good faith, said theCourt in Consolidated Bank and Trust Corporation(Solidbank) vs. Intermediate Appellate Court (150 SCRA591; reiterating Fernandez vs. Suplido, 96 Phil. 541).The rule is also applicable to statutory rights of redemp-tion and appeals (citing Philadelphia Mortgage Co. vs.Gusters, 75 N.W. 1107).

The non-payment of a balance of the purchase pricedoes not relieve the vendor-a-retro from exercising withinthe time stipulated the right to repurchase the propertyby a valid tender of payment, preferably (but not a neces-sity) followed by consignation. In fine, the fact that thepurchase price is not as yet fully paid does not suspendthe efficacy of the repurchase provisions (Catangcatangvs. Legayada, 84 SCRA 51).

Persons Entitled to Exercise Redemption

The vendor-a-retro himself normally exercises theright of redemption. He may also bring his action againstevery possessor whose right is derived from the vendeeeven if in the second contract no mention should havebeen made of the right to repurchase, without prejudiceto the provisions of the Mortgage Law and the Land Reg-


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istration laws with respect to third persons (see Art. 1908,Civil Code; Rivera vs. Court of Appeals, 176 SCRA 169;Alarcon vs. Esteva, 16 SCRA 123). The creditors of thevendor cannot make use of the right of redemption againstthe vendee until after they have exhausted the propertyof the vendor (Art. 1610, Civil Code).

Each one of the co-owners of an undivided immov-able, who may have sold his share separately, mayindependently exercise the right of repurchase as regardshis own share, and the vendee cannot compel him toredeem the whole property (Art. 1614, Civil Code). Thevendee, however, of a part of an undivided immovablewho acquires the whole thereof in the case of Article 498(supra., on Co-ownership) may compel the vendor to re-deem the whole property, if the latter wishes to make useof the right of redemption (see Art. 1611, Civil Code).

If several persons, jointly and in the same contract,should sell an undivided immovable with a right of re-purchase, none of them may exercise this right for morethan his respective share. This rule shall also apply if theperson who has sold an immovable alone has left severalheirs, in which case each of the latter may only redeemthe part which he may have acquired (see De Guzman vs.Court of Appeals, 148 SCRA 75; Art. 1612, Civil Code). Inthis latter case, the vendee may demand of all the ven-dors or co-heirs that they come to an agreement upon therepurchase of the whole thing sold; and should they failto do so, the vendee cannot be compelled to consent to apartial redemption (Art. 1613, Civil Code).

If the vendee should leave several heirs, the actionfor redemption cannot be brought against each of themexcept for his own share, whether the thing be divided, orit has been partitioned among them. But if the inherit-ance has been divided and the thing sold has been awardedto one of the heirs, the action for redemption may beinstituted against him for the whole (Art. 1615, CivilCode).

Arts. 1601-1618

321

Exercise and Effects of Redemption

“Art. 1616. The vendor cannot avail himself ofthe right of repurchase without returning to thevendee the price of the sale, and in addition:

(1) The expenses of the contract, and any otherlegitimate payments made by reason of the sale;

(2) The necessary and useful expenses madeon the thing sold.” (Civil Code; see Calagan vs. Courtof First Instance, 95 SCRA 498).

The proper exercise of the conventional right of re-demption requires a tender of payment; a mere letterexpressing that desire is not sufficient (Uy Lee vs. Courtof Appeals, 68 SCRA 196). Judicial consignation is notnecessary (see Badayos vs. Court of Appeals, 207 SCRA209; Legaspi vs. Court of Appeals, 142 SCRA 82).

The right of redemption is correctly availed of, heldthe Court in Anchuelo vs. Intermediate Appellate Court(147 SCRA 434), by returning the price of the sale; it isnot sufficient to intimate or to state to the vendee a retrothe vendor’s desire to redeem, who must thereupon offerto repay the price (citing Fructo vs. Fuentes, 15 Phil. 394and other cases). In Hulganza vs. Court of Appeals (147SCRA 77), the Court was more explicit, thus:

“The only issue raised herein, is whether or notit is necessary that the formal offer to redeem theland in question be accompanied by a bona fide ten-der of the redemption price, or the repurchase pricebe consigned in Court, within the period of redemp-tion even if the right is exercised through the filingof a judicial action. (Brief for Petitioners, p. 5; Rollo,p. 110).

“x x x

“The issue has already been laid to rest in suc-cessive decisions of the Supreme Court which ruled:


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‘The formal offer to redeem, accompaniedby a bona fide tender of the redemption price,within the period of redemption prescribed bylaw, is only essential to preserve the right of re-demption for future enforcement beyond suchperiod of redemption and within the period pre-scribed for the action by the statute of limita-tions. Where, as in the instant case, the right toredeem is exercised thru the filing of judicialaction within the period of redemption pre-scribed by the law, the formal offer to redeem,accompanied by a bona fide tender of the re-demption price, might be proper, but it is notessential. The filing of the action itself, withinthe period of redemption, is equivalent to a for-mal offer to redeem. Any other construction,particularly with reference to redemption ofhomesteads conveyed to third parties, wouldwork hardships on the poor homesteaders whocannot be expected to know the subtleties of thelaw, and would defeat the evident purpose of thePublic Land Law — to give the homesteader orpatentee every chance to preserve for himselfand his family the land that the state grantedhim as a reward for his labor in cleaning andcultivating it. (Avendaño vs. Hao Su Ton, 47 Off.Gaz., 357; Pascua vs. Talens, 45 Off. Gaz., Supp.No. 9, 413; Reveros vs. Abel, et al., 48 Off. Gaz.,5318-5319 [1952]; recently reiterated inTolentino vs. Court of Appeals, 106 SCRA 526[1981]).’

“In view of the foregoing consideration, it ap-pears evident that the bona fide tender of the redemp-tion price or its equivalent — consignation of saidprice in court is not essential or necessary in the caseat bar where the filing of the action itself is equiva-lent to a formal offer to redeem.”

If at the time of the execution of the sale there shouldbe on the land visible or growing fruits, there shall be no

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reimbursement for or prorating of those existing at thetime of redemption if no indemnity was paid by the pur-chaser when the sale was executed. Should there havebeen no fruits at the time of the sale and some exist at thetime of redemption, they shall be pro-rated between theredemptioner and the vendee, giving the latter the partcorresponding to the time he possessed the land in thelast year, counted from the anniversary of the date of thesale (Art. 1617, Civil Code). The parties, however, mayprovide for different rules (see Almeda vs. Daluro, 79SCRA 327).

The vendor who recovers the thing sold shall receiveit free from all charges or mortgages constituted by thevendee, but he shall respect the leases which the lattermay have executed in good faith, and in accordance withthe custom of the place where the land is situated (Art.1618, Civil Code).

Failure of Redemption

If the vendor fails to redeem the property within theprescribed period, the right is lost and all rights pertain-ing to the property and all those incidental thereto areirrevocably consolidated in the buyer (see Penaco vs.Ruaya, 110 SCRA 46). In the case of real property, how-ever, the consolidation of ownership in the vendee byvirtue of the failure of the vendor to comply with theprovisions of Article 1616 (see supra.) shall not be re-corded in the Registry of Property without a judicial or-der in an ordinary civil action, after the vendor has beenduly heard (see Art. 1607, Civil Code; Yturralde vs. Courtof Appeals, 43 SCRA 313). The judicial hearing refers notto the consolidation itself which vests by operation of lawbut to the registration of the consolidation (De Bayquenvs. Balaoro, 143 SCRA 412; but see Flores vs. So, 162SCRA 117 and Medida vs. Court of Appeals, 208 SCRA887 on foreclosed property).


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Section 2 — Legal Redemption

Art. 1619. Legal redemption is the right to be sub-rogated, upon the same terms and conditions stipu-lated in the contract, in the place of one who acquiresa thing by purchase or dation in payment, or by anyother transaction whereby ownership is transmitted byonerous title. (1521a)

Art. 1620. A co-owner of a thing may exercise theright of redemption in case the shares of all the otherco-owners or of any of them, are sold to a third per-son. 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 exercisethe right of redemption, they may only do so in propor-tion to the share they may respectively have in thething owned in common. (1522a)

Art. 1621. The owners of adjoining lands shall alsohave the right of redemption when a piece of rural land,the area of which does not exceed one hectare, is alien-ated, unless the grantee does not own any rural land.

This right is not applicable to adjacent lands whichare separated by brooks, drains, ravines, roads andother apparent servitudes for the benefit of other es-tates.

If two or more adjoining owners desire to exer-cise the right of redemption at the same time, the ownerof the adjoining land of smaller area shall be preferred;and should both lands have the same area, the onewho first requested the redemption. (1523a)

Art. 1622. Whenever a piece of urban land whichis so small and so situated that a major portion thereofcannot be used for any practical purpose within a rea-sonable time, having been bought merely for specula-tion, is about to be re-sold, the owner of any adjoiningland has a right of pre-emption at a reasonable price.

If the re-sale has been perfected, the owner of theadjoining land shall have a right of redemption, also ata reasonable price.

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325

When two or more owners of adjoining lands wishto exercise the right of pre-emption or redemption, theowner whose intended use of the land in question ap-pears best justified shall be preferred. (n)

Art. 1623. The right of legal pre-emption or re-demption shall not be exercised except within thirtydays from the notice in writing by the prospective ven-dor, or by the vendor, as the case may be. The deed ofsale shall not be recorded in the Registry of Property,unless accompanied by an affidavit of the vendor thathe has given written notice thereof to all possibleredemptioners.

The right of redemption of co-owners excludesthat of adjoining owners. (1524a)

Legal redemption is the right to be subrogated, uponthe same terms and conditions stipulated in the contract,in the place of one who acquires a thing by purchase ordation in payment, or by any other transaction wherebyownership is transmitted by onerous title (Art. 1619, CivilCode).

Illustrative Instances

(1) A co-owner of a thing may exercise the right ofredemption not right of pre-emption (Reyes vs. Hon. Judge,190 SCRA 171) in case the shares of all the other co-owners or of any of them are sold to a third person. If theprice of the alienation is grossly excessive, theredemptioner shall pay only a reasonable one. Shouldtwo or more co-owners desire to exercise the right ofredemption, they may only do so in proportion to theshare they may respectively have in the thing owned incommon (Art. 1620, Civil Code; see Salatandol vs. Retes,162 SCRA 568). In Villanueva vs. Florendo (139 SCRA329), the petitioners and respondent ConcepcionVillanueva were the children of the spouses MacarioVillanueva and Basilia Garcia. The spouses owned a smalllot in Aparri. In 1944, Basilia Garcia died intestate. In1964, Macario Villanueva sold to Erlinda Villangca, wife


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of Concepcion Villanueva, one-half of the lot. The lot hadnot been partitioned. Having been informed of the sale,the petitioners signified the intention to redeem the por-tion of the lot sold but the vendee refused to allow theredemption, contending that redemption would not lieagainst her. The petitioners filed a complaint for rescis-sion of sale and legal redemption. The trial court ren-dered judgment declaring the vendee the absolute ownerof the lot. The petitioners went to the Supreme Court.The Supreme Court ruled:

“A co-owner of a thing may exercise the right ofredemption in case the shares of all the other co-owners or of any of them are sold to a third person.x x x’

“It is not disputed that co-ownership exists butthe lower court disallowed redemption because itconsidered the vendee, Erlinda Villangca, a co-heir,being married to Concepcion Villanueva, and theconveyance was held valid since it was in favor ofthe conjugal partnership of the spouses in the ab-sence of any statement that it is paraphernal in char-acter. Within the meaning of Article 1620, the term‘third person’ or ‘stranger’ refers to all persons whoare not heirs in succession, and by heirs are meantonly those who are called either by will or the law tosucceed the deceased and who actually succeed. Inshort, a third person is any one who is not a co-owner. x x x

“The co-owners should therefore be allowed toexercise their right to redeem the property sold toErlinda Villangca.”

The law grants a co-owner the exercise of the right ofredemption when the shares of the other owners are soldto a “stranger’’ or “third person.’’ There is no legal redemp-tion either in case of a mere lease and the purchaser isalso a tenant (Fernandez vs. Spouses Tarun, G.R. No.143868, 14 November 2002).

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327

(2) The owners of adjoining lands shall have theright of redemption when a piece of rural land, the areaof which does not exceed one hectare, is alienated, unlessthe grantee does not own any rural land. This right is notapplicable to adjacent lands which are separated bybrooks, drains, ravines, roads and other apparentservitudes for the benefit of other estates. If two or moreadjoining owners desire to exercise the right of redemp-tion at the same time, the owner of the adjoining land ofsmaller area shall be preferred; and should both landshave the same area, the one who first requested the re-demption (Art. 1621, Civil Code).

(3) Whenever a piece of urban land which is sosmall and so situated that a major portion thereof cannotbe used for any practical purpose within a reasonabletime, having been bought merely for speculation, is aboutto be resold, the owner of any adjoining land has a rightof pre-emption at a reasonable price. If the resale hasbeen perfected, the owner of the adjoining land shall havea right of redemption, also at a reasonable price. Whentwo or more owners of adjoining lands wish to exercisethe right of pre-emption or redemption, the owner whoseintended use of the land in question appears best justi-fied shall be preferred (Art. 1622, Civil Code). This provi-sion of the Civil Code only deals with small urban landsthat have been purchased for speculation where only ad-joining lot owners can exercise the right of pre-emptionor redemption (Sen Po Ek Marketing Corporation vs.Martinez, 120 SCAD 712, 325 SCRA 210).

The right of redemption of co-owners excludes thatof adjoining owners (Art. 1623, Civil Code; Alonzo vs.Intermediate Appellate Court, 150 SCRA 259).

Period of and Exercise of Redemption

The right of legal pre-emption or redemption shallnot be exercised except within thirty days from the noticein writing by the prospective vendor, or by the vendor, asthe case may be. The deed of sale shall not be recorded in


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the Registry of Property, unless accompanied by an affi-davit of the vendor that he has given written notice thereofto all possible redemptioners (Art. 1623, Civil Code;Cabrera vs. Villanueva, 160 SCRA 672, Salatandol vs.Retes, 162 SCRA 568). Notice is indispensable, and ac-tual knowledge by the redemptioner is not legally suffi-cient (Conejero vs. Court of Appeals, 16 SCRA 775). In alater case, however, it was held that written notice to aco-owner is not necessary if the latter is actually aware,being an intermediary, of the sale (see Distrito vs. Courtof Appeals, 197 SCRA 606). In Spouses Si vs. Court ofAppeals (135 SCAD 754, 342 SCRA 653), it was held thata written notice should be treated as being a formal req-uisite to make certain that the co-owners had actual no-tice of the sale to enable them to exercise their right ofredemption within the limited period of thirty days. Butwhere the co-owners had actual notice of the sale at thetime thereof and/or afterwards, a written notice of a factalready known to them would be superfluous.

To exercise the right, tender of payment, unlike inconventional redemption, is not required; it is enoughthat an offer to redeem is made in proper form (see Toriovs. Del Rosario, 93 Phil. 800). Substantial compliancewith the requirements for legal redemption is sufficientto exercise the right to redeem the property. Thus, thefailure to include in the redemption price the registrationfee of P3.00 paid by the auction buyer is not a substantialdefect (see Rosales vs. Yoa, 120 SCRA 869).

Other instances of legal redemption include the rightof redemption in the foreclosure of mortgages (Sec. 6, Act3135), execution sales (Sec. 29, Rule 39), levy of real prop-erty for unpaid taxes (National Internal Revenue Codeand Local Government Code) and other cases under spe-cial laws. In execution sales, the exercise of the right ofredemption is not conditioned upon ownership of the prop-erty sold on execution but by virtue of a writ of executiondirected against such judgment debtor. Thus, it is thejudgment debtor who has the right to redeem the prop-

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erty and not any third-party claimant. In no case may athird party claimant be allowed to exercise right of re-demption unless he is a successor-in-interest of the judg-ment debtor or a redemptioner (creditor) (CMS StockBrokerage, Inc. vs. Court of Appeals, G.R. No. 124347, 21July 1997).

The use of a check is not improper in the exercise ofthe right of redemption by judicial action (Tolentino vs.Court of Appeals, 106 SCRA 513).

Redemption Distinguished from Option to Buy

One must take note of the distinction between theright of repurchase and an option to buy. In Villarica vs.Court of Appeals (26 SCRA 189; reiterated in Vda. deCruzo vs. Carriaga, Jr., 174 SCRA 330), the SupremeCourt made this observation:

“x x x. An option to buy is different and distinctfrom the right of repurchase which must be reservedby the vendor, by stipulation to that effect, in thecontract of sale. This is clear from the provision ofArticle 1601 of the Civil Code.

“The right of repurchase is not a right grantedthe vendor by the vendee in a subsequent instru-ment, but is a right reserved by the vendor in thesame instrument of sale as one of the stipulations ofthe contract. Once the instrument of absolute sale isexecuted, the vendor can no longer reserve the rightto repurchase, and any right thereafter granted thevendor by the vendee in a separate instrument can-not be a right of repurchase but some other right likethe option to buy in the instant case.”

Where the deed of sale and option to repurchase,although written on separate documents, are executedon the same date, the same, said the Court in one case,can be considered as a sale with a right of repurchase(Claravall vs. Court of Appeals, 190 SCRA 439; Capulongvs. Court of Appeals, 130 SCRA 248). When made after


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the sale, the right to repurchase, without independentconsideration becomes a mere promise to sell (Diamantevs. Court of Appeals, 206 SCRA 52). In a pacto de retrosale, the vendor imposes the right to repurchase as acondition of the sale; in an option to buy or in a promise tosell, it is the vendee who grants the right and subjectsthe act to the rules governing offers or options.

Chapter 8

Assignment of Credits and OtherIncorporeal Rights

Art. 1624. An assignment of credits and other in-corporeal rights shall be perfected in accordance withthe provisions of Article 1475. (n)

Art. 1625. An assignment of a credit, right or ac-tion shall produce no effect as against third persons,unless it appears in a public instrument, or the instru-ment is recorded in the Registry of Property in casethe assignment involves real property. (1526)

Art. 1626. The debtor who, before having know-ledge of the assignment, pays his creditor shall bereleased from the obligation. (1527)

Art. 1627. The assignment of a credit includes allthe accessory rights, such as a guaranty, mortgage,pledge or preference. (1528)

Art. 1628. The vendor in good faith shall be re-sponsible for the existence and legality of the credit atthe time of the sale, unless it should have been sold asdoubtful; but not for the solvency of the debtor, unlessit has been so expressly stipulated or unless the insol-vency was prior to the sale and of common knowledge.

Even in these cases he shall only be liable for theprice received and for the expenses specified in No. 1of Article 1616.

The vendor in bad faith shall always be answer-able for the payment of all expenses, and for damages.(1529)

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331

Art. 1629. In case the assignor in good faith shouldhave made himself responsible for the solvency of thedebtor, and the contracting parties should not haveagreed upon the duration of the liability, it shall last forone year only, from the time of the assignment if theperiod had already expired.

If the credit should be payable within a term orperiod which has not yet expired, the liability shallcease one year after the maturity. (1530a)

Art. 1630. One who sells an inheritance withoutenumerating the things of which it is composed, shallonly be answerable for his character as an heir. (1531)

Art. 1631. One who sells for a lump sum the wholeof certain rights, rents, or products, shall comply byanswering for the legitimacy of the whole in general; buthe shall not be obliged to warrant each of the variousparts of which it may be composed, except in the caseof eviction from the whole or the part of greater value.(1532a)

Art. 1632. Should the vendor have profited by someof the fruits or received anything from the inheritancesold, he shall pay the vendee thereof, if the contraryhas not been stipulated. (1533)

Art. 1633. The vendee shall, on his part, reimbursethe vendor for all that the latter may have paid for thedebts of and charges on the estate and satisfy thecredits he may have against the same, unless there isan agreement to the contrary. (1534)

Art. 1634. When a credit or other incorporeal rightin litigation is sold, the debtor shall have a right toextinguish it by reimbursing the assignee for the pricethe latter paid therefore, the judicial costs incurred byhim, and the interest on the price from the day onwhich the same was paid.

A credit or other incorporeal right shall be con-sidered in litigation from the time the complaint con-cerning the same is answered.

The debtor may exercise his right within thirtydays from the date the assignee demands paymentfrom him. (1535)


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Art. 1635. From the provisions of the precedingarticle shall be excepted the assignments or salesmade:

(1) To a co-heir or co-owner of the right assign-ed;

(2) To a creditor in payment of his credit;

(3) To the possessor of a tenement or piece ofland which is subject to the right in litigation assigned.(1536)

Assignment of Credit

An assignment of credit is an act of transferring,either onerously or gratuitously, the right of an assignorto an assignee who would then be capable of proceedingagainst the debtor for enforcement or satisfaction of thecredit. The transfer of rights takes place upon perfectionof the contract, and ownership of the right, including allappurtenant accessory rights, is thereupon acquired bythe assignee. The assignment binds the debtor only uponacquiring knowledge of the assignment but he is entitled,even then, to raise against the assignee the same defenseshe could set up against the assignor. Where the assign-ment is on account of pure liberality on the part of theassignor, the rules on donation would likewise be perti-nent; where valuable consideration is involved, the as-signment partakes of the nature of a contract of sale orpurchase.

Upon an assignment of a contract to sell, the as-signee is effectively subrogated in place of the assignorand in a position to enforce the contract to sell to thesame extent as the assignor could (Project Builders Inc.vs. Court of Appeals, G.R. No. 99433, 19 June 2001, 358SCRA 626).

An assignment of credit and other incorporeal rightsis perfected, as in a contract of sale, at the moment thereis a meeting of the minds upon the object and the consid-eration of the transfer (see Art. 1624, in relation to Art.

Arts. 1624-1635

333

1475, Civil Code; see also Arts. 1459, 1461 and 1462,Civil Code; C & C Commercial Corporation vs. PhilippineNational Bank, 175 SCRA 1). An assignment of a credit,right or action shall produce no effect, however, as againstthird persons (not successors-in-interest), unless it ap-pears in a public instrument, or the instrument is re-corded in the Registry of Property in case the assignmentinvolves real property (see Art. 1625, Civil Code). Thedebtor’s consent is not required (Rodriguez vs. Court ofAppeals, 207 SCRA 553), but a debtor who pays his credi-tor before having knowledge of the assignment shall bereleased from the obligation (see Art. 1626, Civil Code;Elizalde & Co. vs. Biñan Transp. Co. [CA], 56 O.G. 5886).Where the juridical relation intended to be established isone of conventional subrogation, such as when it variescertain rights and obligations of the parties, Articles 1300-1304 (supra.) of the Code govern.

Effects of Assignment

In General

The assignment of a credit includes all the accessoryrights, such as guaranty, mortgage, pledge or preference(Art. 1627, Civil Code).

The vendor in good faith shall be responsible for theexistence and legality of the credit at the time of the sale,unless it should have been sold as doubtful; but not forthe solvency of the debtor, unless it has been so expresslystipulated or unless the insolvency was prior to the saleand of common knowledge. Even in these cases he shallonly be liable for the price received and for the expensesspecified in No. 1 of Article 1616 (supra.). The vendor inbad faith shall always be answerable for the payment ofall expenses and for damages (Art. 1628, Civil Code). Incase the assignor in good faith should have made himselfresponsible for the solvency of the debtor, and the con-tracting parties should not have agreed upon the dura-tion of the liability, it shall last for one year only from the


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time of the assignment if the period had already expired.If the credit should be payable within a term or periodwhich has not yet expired, the liability shall cease oneyear after the maturity (Art. 1629, Civil Code).

A person is deemed insolvent who either has ceasedto pay his debts in the ordinary course of business orcannot pay his debts as they become due, whether insol-vency proceedings have been commenced or not (see Art.1636, Civil Code).

In Sale of Inheritance

One who sells an inheritance, without enumeratingthe things of which it is composed, shall only be answer-able for his character as an heir (Art. 1630, Civil Code).Should the vendor have profited by some of the fruits orreceived anything from the inheritance sold, he shall paythe vendee thereof if the contrary has not been stipulated(Art. 1632, Civil Code). The vendee shall, on his part,reimburse the vendor for all that the latter may havepaid for the debts of and charges on the estate and satisfythe credits he may have against the same, unless there isan agreement to the contrary (Art. 1633, Civil Code).

But a contract upon future inheritance is not al-lowed except in cases expressly authorized by law (Art.1347, Civil Code) such as one that partakes the nature ofa partition inter vivos of an estate (Art. 1180, Civil Code,Chavez vs. Intermediate Appellate Court, 191 SCRA 211).An “affidavit of conformity” seeking to validate or ratify asale of future inheritance is a useless document (Tanedovs. Court of Appeals, 67 SCAD 57, 252 SCRA 80).

One who sells for a lump sum the whole of certainrights, rents, or products shall comply by answering forthe legitimacy of the whole in general; but he shall not beobliged to warrant each of the various parts of which itmay be composed, except in the case of eviction from thewhole or the part of greater value (Art. 1631, Civil Code).

Arts. 1624-1635

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In Sale of Credit under Litigation

When a credit or other incorporeal right in litigationis sold, the debtor shall have a right to extinguish it byreimbursing the assignee for the price the latter paidtherefor, the judicial costs incurred by him, and the inter-est on the price from the day on which the same was paid.A credit or other incorporeal right shall be considered inlitigation from the time the complaint concerning thesame is answered. The debtor may exercise his rightwithin thirty days from the date the assignee demandspayment from him (Art. 1634, Civil Code; see NIDC vs.De los Angeles, 40 SCRA 487). From these provisionsshall be excepted the assignments or sales made:

(1) To a co-heir or co-owner of the right assigned;

(2) To a creditor in payment of his credit;

(3) To the possessor of a tenement or piece of landwhich is subject to the right in litigation assigned (seeArt. 1635, Civil Code).

Chapter 9

General Provisions

Art. 1636. In the preceding articles in this Titlegoverning the sale of goods, unless the context orsubject matter otherwise requires:

(1) “Document of title to goods” includes anybill of lading, dock warrant, “quedan,” or warehousereceipt or order for the delivery of goods, or any otherdocument used in the ordinary course of business inthe sale or transfer of goods, as proof of the posses-sion or control of the goods, or authorizing or purport-ing to authorize the possessor of the document to trans-fer or receive, either by indorsement or by delivery,goods represented by such document.

“Goods” includes all chattels personal but notthings in action or money of legal tender in the Philip-pines. The term includes growing fruits or crops.

Art. 1636 OBLIGATIONS AND CONTRACTSTitle VI. Sales

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“Order” relating to documents of title means anorder by indorsement on the documents.

“Quality of goods” includes their state or condi-tion.

“Specific goods” means goods identified andagreed upon at the time a contract of sale is made.

An antecedent or pre-existing claim, whether formoney or not, constitutes “value” where goods ordocuments of title are taken either in satisfactionthereof or as security therefore.

(2) A person is insolvent within the meaning ofthis Title who either has ceased to pay his debts in theordinary course of business or cannot pay his debtsas they become due, whether insolvency proceedingshave been commenced or not.

(3) Goods are in a “deliverable state” within themeaning of this Title when they are in such a state thatthe buyer would, under the contract, be bound to takedelivery of them. (n)

Art. 1637. The provisions of this Title are subjectto the rules laid down by the Mortgage Law and theLand Registration Law with regard to immovable prop-erty. (1537a)

The definition of terms in Article 1636 are helpfulguides but are subordinate to the express stipulation ofthe parties. Article 1637 must be understood to includesuch special laws as may be made explicitly applicable.

Arts. 1636-1637

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TITLE VII. BARTER OR EXCHANGE

Art. 1638. By the contract of barter or exchangeone of the parties binds himself to give one thing inconsideration of the other’s promise to give anotherthing. (1538a)

Art. 1639. If one of the contracting parties, havingreceived the thing promised him in barter, should provethat it did not belong to the person who gave it, hecannot be compelled to deliver that which he offeredin exchange, but he shall be entitled to damages.(1539a)

Art. 1640. One who loses by eviction the thingreceived in barter may recover that which he gave inexchange with a right to damages, or he can only de-mand an indemnity for damages. However, he can onlymake use of the right to recover the thing which hehas delivered while the same remains in the posses-sion of the other party, and without prejudice to therights acquired in good faith in the meantime by athird person. (1540a)

Art. 1641. As to all matters not specifically pro-vided for in this Title, barter shall be governed by theprovisions of the preceding Title relating to sales.(1541a)

One of the parties to a contract of barter or exchangebinds himself to give one thing in consideration of theother’s promise to give another thing (Art. 1638, CivilCode; see Murphy vs. Trinidad, 44 Phil. 649).

If one of the contracting parties, having received thething promised him in barter, should prove that it did notbelong to the person who gave it, he cannot be compelledto deliver that which he offered in exchange, but he shall

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be entitled to damages (Art. 1639, Civil Code; see Biagtanvs. Oller, 62 Phil. 933).

One who loses by eviction the thing received in bar-ter may recover that which he gave in exchange with aright to damages, or he may only demand an indemnityfor damages. However, he can only make use of the rightto recover the thing which he has delivered while thesame remains in the possession of the other party, andwithout prejudice to the rights acquired in good faith inthe meantime by a third person (Art. 1640, Civil Code).

As to all matters not specifically provided for above,barter shall be governed by the provisions of the Coderelating to sales (see Art. 1641, Civil Code).

Arts. 1638-1641