Obligations

General provisions
Nature and effect
In two separate documents signed by him, Juan Valentino "obligated" himself each to
Maria and to Perla, thus -'To Maria, my true love, I obligate myself to give you my one
and only horse when I feel like It." -and- 'To Perla, my true sweetheart, I obligate myself
to pay you the 500 I owe you when I feel like it." Months passed but Juan never
bothered to make good his promises. Maria and Perla came to consult you on whether
or not they could recover on the basis of the foregoing settings. What would your legal
advice be?
I would advise Maria not to bother running after Juan for the latter to make good
his promise. This is because a promise is not an actionable wrong that allows a party to
recover especially when she has not suffered damages resulting from such promise. A
promise does not create an obligation on the part of Juan because it is not something
which arises from a contract, law, quasi-contracts or quasi- delicts (Art. 1157). Under
Art. 1182, Juan's promise to Maria is void because a conditional obligation depends
upon the sole will of the obligor. As regards Perla, the document is an express
acknowledgment of a debt, and the promise to pay what he owes her when he feels like
it is equivalent to a promise to pay when his means permits him to do so, and is
deemed to be one with an indefinite period under Art. 1180. Hence the amount is
recoverable after Perla asks the court to set the period as provided by Art. 1197, par. 2.

Roland, a basketball star, was under contract for one year to play-for-play exclusively
for Lady Love, Inc. However, even before the basketball season could open, he was
offered a more attractive pay plus fringes benefits by Sweet Taste, Inc. Roland
accepted the offer and transferred to Sweet Taste. Lady Love sues Roland and Sweet
Taste for breach of contract. Defendants claim that the restriction to play for Lady Love
alone is void, hence, unenforceable, as it constitutes an undue interference with the
right of Roland to enter into contracts and the impairment of his freedom to play and
enjoy basketball. Can Roland be bound by the contract he entered into with Lady Love
or can he disregard the same? Is he liable at all? How about Sweet Taste? Is it liable to
Lady Love?
Yes, Roland is liable under the contract as far as Lady Love is concerned. He is
liable for damages under Article 1170 of the Civil Code since he contravened the tenor
of his obligation. Not being a contracting party, Sweet Taste is not bound by the contract
but it can be held liable under Art. 1314. The basis of its liability is not prescribed by
contract but is founded on quasi- delict, assuming that Sweet Taste knew of the
contract. Article 1314 of the Civil Code provides that any third person who induces
another to violate his contract shall be liable for damages to the other contracting party.

Printado is engaged in the printing business. Suplico supplies printing paper to Printado
pursuant to an order agreement under which Suplico binds himself to deliver the same
volume of paper every month for a period of 18 months, with Printado in turn agreeing
to pay within 60 days after each delivery. Suplico has been faithfully delivering under
the order agreement for 10 months but thereafter stopped doing so, because Printado
has not made any payment at all. Printado has also a standing contract with publisher
Publico for the printing of 10, 000 volumes of school textbooks. Suplico was aware of
said printing contract. After printing 1, 000 volumes, Printado also fails to perform under
its printing contract with Publico. Suplico sues Printado for the value of the unpaid
deliveries under their order agreement. At the same time Publico sues Printado for
damages for breach of contract with respect to their own printing agreement. In the suit
filed by Suplico, Printado counters that: (a) Suplico cannot demand payment for
deliveries made under their order agreement until Suplico has completed performance
under said contract; (b) Suplico should pay damages for breach of contract; and (c) with
Publico should be liable for Printado’s breach of his contract with Publico because the
order agreement between Suplico and Printado was for the benefit of Publico. Are the
contentions of Printado tenable? Explain your answers as to each contention.
No, the contentions of Printado are untenable. Printado having failed to pay for
the printing paper covered by the delivery invoices on time, Suplico has the right to
cease making further delivery. And the latter did not violate the order agreement.
Suplico cannot be held liable for damages, for breach of contract, as it was not he who
violated the order agreement, but Printado. Suplico cannot be held liable for Printado’s
breach of contract with Publico. He is not a party to the agreement entered into by and
between Printado and Publico. Theirs is not a stipulation pour atrui. Such contracts do
could not affect third persons like Suplico because of the basic civil law principle of
relativity of contracts which provides that contracts can only bind the parties who
entered into it, and it cannot favor or prejudice a third person, even if he is aware of
such contract and has acted with knowledge thereof.

A van owned by Orlando and driven by Diego, while negotiating a downhill slope of a
city road, suddenly gained speed, obviously beyond the authorized limit in the area, and
bumped a car in front of it, causing severe damage to the care and serious injuries to its
passengers. Orlando was not in the car at the time of the incident. The car owner and
the injured passengers sued Orlando and Diego for damages caused by Diego’s
negligence. In their defense, Diego claims that the downhill slope caused the van to
gain speed and that, as he stepped on the brakes to check the acceleration, the brakes
locked, causing the van to go even faster and eventually to hit the car in front of it.
Orlando and Diego contend that the sudden malfunction of the van’s brake system is a
fortuitous even and that, therefore, they are exempt from any liability. Is this contention
tenable? Explain.
No. It is well settled that mechanical defects of a motor vehicle do not constitute
fortuitous event, since the presence of such defects would have been readily detected
by diligent maintenance check. The failure to maintain the vehicle in safe running
condition constitutes negligence.

AB Corp. entered into a contract with XY Corp. whereby the former agreed to construct
the research and laboratory facilities of the latter. Under the terms of the contract, AB
Corp. agreed to complete the facility in 18 months, at the total contract price of P10
million. XY Corp. paid 50% of the total contract price, the balance to be paid upon
completion of the work. The work stated immediately, but AB Corp. later experienced
work slippage because of labor unrest in his company. AB Corp.'s employees claimed
that they are not being paid on time; hence, the work slowdown. As of the 17th month,
work was only 45% completed. AB Corp. asked for extension of time, claiming that its
labor problems is a case of fortuitous event, but this was denied by XY Corp. When it
became certain that the construction could not be finished on time, XY Corp. sent
written notice cancelling the contract, and requiring AB Corp. to immediately vacate the
premises. Can the labor unrest be considered a fortuitous event?
Labor unrest is not a fortuitous event that will excuse AB Corporation from
complying with its obligation of constructing the research and laboratory facilities of XY
Corporation. The labor unrest, which may even be attributed in large part to AB
Corporation itself, is not the direct cause of non-compliance by AB Corporation. It is
independent of its obligation. It is similar to the failure of a DBP borrower to pay her loan
just because her plantation suffered losses due to the cadang cadang disease. It does
not excuse compliance with the obligation.

Kinds
Are the following obligations valid, why, and if they are valid, when is the obligation
demandable in each case?
If the debtor promises to pay as soon as he has the means to pay.
The obligation is valid. It is an obligation subject to an indefinite period because
the debtor binds himself to pay when his means permit him to do so ( Art. 1180). When
the creditor knows that the debtor already has the means to pay, he must file an action
in court to fix the period, and when the definite period as set by the court arrives, the
obligation to pay becomes demandable (Art. 1197).

If the debtor promises to pay when he likes.

The obligation to pay when he likes is a suspensive condition the fulfillment of
which is subject to the sole will of the debtor and therefore the conditional obligation is
void (Art. 1182).

If the debtor promises to pay when he becomes a lawyer.

The obligation is valid. It is subject to a suspensive condition, i.e. the future and
uncertain event of his becoming a lawyer. The performance of this obligation does not
depend solely on the will of the debtor but also on other factors outside the debtor’s
control.

If the debtor promises to pay if his son, who is sick with cancer, does not die within one
year.
The obligation is valid. The death of the son of cancer within one year is made a
negative suspensive condition to his making the payment. The obligation is demandable
if the son does not die within one year (Art. 1185).

Pedro promised to give his grandson a car if the latter will pass the bar examinations.
When his grandson passed the said examinations, Pedro refused to give the car on the
ground that the condition was a purely potestative one. Is he correct or not?
No, he is not correct. First of all, the condition is not purely potestative, because
it does not depend on the sole will of one of the parties. Secondly, even if it were, it
would be valid because it depends on the sole will of the creditor (the donee) and not of
the debtor (the donor).

In 1997, Manuel bound himself to sell Eva a house and lot which is being rented by
another person, if Eva passes the 1998 bar examinations. Luckily for Eva, she passed
said examinations. Suppose Manuel had sold the same house and lot to another before
Eva passed the 1998 bar examinations, is such sale valid? Why?
Yes, the sale to the other person is valid. However, the buyer acquired the
property subject to a resolutory condition of Eva passing the 1998 Bar Examinations.
Hence, upon Eva's passing the Bar, the rights of the other buyer terminated and Eva
acquired ownership of the property.

Assuming that it is Eva who is entitled to buy said house and lot, is she entitled to the
rentals collected by Manuel before she passed the 1998 bar examinations? Why?
No, she is not entitled to the rentals collected by Manuel because at the time they
accrued and were collected, Eva was not yet the owner of the property.

In a deed of sale of realty, it was stipulated that the buyer would construct a commercial
building on the lot while the seller would construct a private passageway bordering the
lot. The building was eventually finished but the seller failed to complete the
passageway as some of the squatters, who were already known to be there at the time
they entered into the contract, refused to vacate the premises. In fact, prior to its
execution, the seller filed ejectment cases against the squatters. The buyer now sues
the seller for specific performance with damages. The defense is that the obligation to
construct the passageway should be with a period which, incidentally, had not been
fixed by them, hence, the need for fixing a judicial period. Will the action for specific
performance of the buyer against the seller prosper?
No, the action for specific performance filed by the buyer is premature under Art.
1197 of the Civil Code. If a period has not been fixed although contemplated by the
parties, the parties themselves should fix that period, failing in which, the Court may be
asked to fix it taking into consideration the probable contemplation of the parties. Before
the period is fixed, an action for specific performance is premature.

In June 1988, X obtained a loan from A and executed with Y as solidary co-maker a
promissory note in favor of A for the sum of 200,000. The loan was payable at 20,000
with interest monthly within the first week of each month beginning July 1988 until
maturity in April 1989. To secure the payment of the loan, X put up as security a chattel
mortgage on his car, a Toyota Corolla sedan. Because of failure of X and Y to pay the
principal amount of the loan, the car was extrajudicially foreclosed. A acquired the car at
A’s highest bid of 120,000 during the auction sale. After several fruitless letters of
demand against X and Y, A sued Y for the recovery of 80,000 constituting the
deficiency. Y resisted the suit raising the following defenses. That Y should not be liable
at all because X was not sued together with Y.
The first defense of Y is untenable. Y is still liable as solidary debtor. The creditor
may proceed against any one of the solidary debtors. The demand against one does not
preclude further demand against the others so long as the debt is not fully paid.
That the obligation has been paid completely by A’s acquisition of the car through
“dacion en pago” or payment by cession.
The second defense of Y is untenable. Y is still liable. The chattel mortgage is
only given as security and not as payment for the debt in case of failure to pay. Y as a
solidary co-maker is not relieved of further liability on the promissory note as a result of
the foreclosure of the chattel mortgage.

That Y should not be held liable for the deficiency of 80,000 because he was not a co-
mortgagor in the chattel mortgage of the car, which contract was executed by X alone
as owner and mortgagor.
The third defense of Y is untenable. Y is a surety of X and the extrajudicial
demand against the principal debtor is not inconsistent with a judicial demand against
the surety. A suretyship may co-exist with a mortgage.

That assuming he is liable, he should only pay the proportionate sum of 40,000.
Decide the defense with reasons.
The fourth defense is untenable. Y is liable for the entire prestation since Y
incurred a solidary obligation with X.

Four foreign medical students rented the apartment of Thelma for a period of one year.
After one semester, three of them returned to their home country and the fourth
transferred to a boarding house. Thelma discovered that they left unpaid telephone bills
in the total amount of P80, 000.00. The lease contract provided that the lessees shall
pay for the telephone services in the leased premises. Thelma demanded that the fourth
student pay the entire amount of the unpaid telephone bills, but the latter is willing to
pay only one fourth of it. Who is correct? Why?
The fourth student is correct. His liability is only joint, hence, pro rata. There is
solidary liability only when the obligation expressly so states or when the law or nature
of the obligation requires solidarity (Art. 1207). The contract of lease in the problem
does not, in any way, stipulate solidarity.

Joey, Jovy and Jojo are solidary debtors under a loan obligation of 300,000 which has
fallen due. The creditor has, however, condoned Jojo's entire share in the debt. Since
Jovy has become insolvent, the creditor makes a demand on Joey to pay the debt. How
much, if any, may Joey be compelled to pay?
Joey can be compelled to pay only the remaining balance of 200,000, in view of
the remission of Jojo's share by the creditor (Art. 1219).

To what extent, if at all, can Jojo be compelled by Joey to contribute to such payment?
Jojo can be compelled by Joey to contribute 50,000 Art. 1217. par. 3, Civil Code
provides. "When one of the solidary debtors cannot, because of his insolvency,
reimburse his share to the debtor paying the obligation, such share shall be borne by all
his co- debtors, in proportion to the debt of each."
 Since the insolvent debtor's share which Joey paid was 100,000, and there are
only two remaining debtors - namely Joey and Jojo - these two shall share equally the
burden of reimbursement. Jojo may thus be compelled by Joey to contribute 50.000.

Extinguishment
Butch got a loan from Hagibis Corporation (Hagibis) but he defaulted in the payment. A
case for collection of a sum of money was filed against him. As a defense, Butch claims
that there was already an arrangement with Hagibis on the payment of the loan. To
implement the same, Butch already surrendered five service utility vehicles (SUVs) to
the company for it to sell and the proceeds to be credited to the loan as payment. Was
the obligation of Butch extinguished by reason of dacion en pago upon the surrender of
the SUVs? Decide and explain.
No, the obligation of Butch to Hagibis was not extinguished by the mere
surrender of the SUV’s to the latter. Dation in payment, whereby property is alienated to
the creditor in satisfaction of a debt in money, shall be governed by the law on sales
(Art. 1245). In dacion en pago, as a special mode of payment, the debtor offers another
thing to the credtor who accepts it as equivalent of payment of an outstanding debt. The
undertaking really partakes in one sense of the nature of sale, that is, the creditor is
really buying the thing or property of the debtor, payment for which is to be charged
against the debtor’s debt. As such, the essential elements of a contract of sale, namely,
consent, object certain, and cause or consideration must be present. In dacion en pago,
there is in reality an objective novation of the obligation where the thing offered as an
accepted equivalent of the performance of an obligation is considered as the object of
the contract of sale, while the debt is considered as the purchase price. In any case,
common consent is an essential pre-requisite, be it sale or innovation to have the effect
of totally extinguishing the debt or obligation. There being no mention in the facts that
Hagibis has given its consent to accept the SUCs as equivalent payment, the obligation
of Butch is not thereby extinguished be mere delivery of the SUVs.

Jerico, the project owner, entered into a Construction Contract with Ivan for the latter to
construct his house. Jojo executed a Surety undertaking to guarantee the performance
of the work by Ivan. Jerico and Ivan later entered into a Memorandum of Agreement
(MOA) revising the work schedule of Ivan and the subcontractors. The MOA stated that
all the stipulations of the original contract not in conflict with said agreement shall
remain valid and legally effective. Jojo filed a suit to declare him relieved of his
undertaking as a result of the MOA because of the change in the work schedule. Jerico
claims there is no novation of the Construction Contract. Decide the case and explain.
I will decide in favor of Jerico as there is no novation of the Construction
Contract. Novation is never presumed, and may only take place when the following are
present: (1) a previous valid obligation; (2) the agreement of all the parties to the new
contract; (3) the extinguishment of the old contract; (4) validity of the new one. There
must be consent of all the parties to the substitution, resulting in the extinction of the old
obligation and the creation of a new valid one. In this case, the revision of the work
schedule of Ivan and the subcontractors is not shown to be so substantial as to
extinguish the old contract, and there was also no irreconcilable incompatibility between
the old and new obligations. It has also been held in jurisprudence that a surety may
only be relieved of his undertaking if there is a material change in the principal contract
and such would make the obligation of the surety onerous. The principal contract
subject of the surety agreement still exists, and Jojo is still bound as a surety.

A, B, C, D and E made themselves solidarity indebted to X for the amount of 50,000.

When X demanded payment from A, the latter refused to pay on the following grounds.
B is only 16 years old.
A may avail the minority of B as a defense, but only for B’s share of 10,000. A
solidary debtor may avail himself of any defense which personally belongs to a solidary
co-debtor, but only as to the share of that co-debtor.

C has already been condoned by X.

A may avail of the condonation by X of C’s share of 10,000. A solidary debtor
may, in actions filed by the creditor, avail himself of all defenses which are derived from
the nature of the obligation and of those which are personal to him or pertain to his own
share. With respect to those which personally belong to others, he may avail himself
thereof only as regards that part of the debt for which the latter are responsible (Art.
1222).

D is insolvent.
A may not interpose the defense of insolvency of D as a defense. Applying the
principle of mutual guaranty among solidary debtors, A guaranteed the payment of D’s
share and of all the other co-debtors. Hence, A cannot avail of the defense of D’s
insolvency.

E was given by X an extension of 6 months without the consent of the other four co-
debtors.
The extension of six months given by X to E may be availed of by A as a partial
defense but only for the share of E, there is no novation of the obligation but only an act
of liberality granted to E alone.

The renunciation by a co-owner of his undivided share in the co-owned property in lieu
of the performance of his obligation to contribute to taxes and expenses for the
preservation of the property constitutes dacion en pago.
True. Under the Civil Code, a co-owner may renounce his share in the co-owned
property in lieu of paying for his share in the taxes and expenses for the preservation of
the co-owned property. In effect, there is dacion en pago because the co-owner is
discharging his monetary obligation by paying it with his non-monetary interest in the
co-owned property. The fact that he is giving up his entire interest simply means that he
is accepting the value of his interest as equivalent to his share in the taxes and
expenses of preservation.

Define compensation as a mode of extinguishing an obligation, and distinguish it from

payment.
 Compensation is a mode of extinguishing to the concurrent amount, the
obligations of those persons who in their own right are reciprocally debtors and creditors
of each other. It involves the simultaneous balancing of two obligations in order to
extinguish them to the extent in which the amount of one is covered by that of the other.
Payment means not only delivery of money but also performance of an obligation
(Article 1232, Civil Code). In payment, capacity to dispose of the thing paid and capacity
to receive payment are required for debtor and creditor, respectively: in compensation,
such capacity is not necessary, because the compensation operates by law and not by
the act of the parties. In payment, the performance must be complete; while in
compensation there may be partial extinguishment of an obligation.

Felipe borrowed $100 from Gustavo in 1998, when the Phil P - US$ exchange rate was
56 - US$1. On March 1, 2008, Felipe tendered to Gustavo a cashier's check in the
amount of P4,135 in payment of his US$ 100 debt, based on the Phil P - US$ exchange
rate at that time. Gustavo accepted the check, but forgot to deposit it until Sept. 12,
2008. His bank refused to accept the check because it had become stale. Gustavo now
wants Felipe to pay him in cash in the amount of P5, 600. Claiming that the previous
payment was not in legal tender, and that there has been extraordinary deflation since
1998, and therefore, Felipe should pay him the value of the debt at the time it was
incurred. Felipe refused to pay him again, claiming that Gustavo is estopped from
raising the issue of legal tender, having accepted the check in March, and that it was
Gustavo's negligence in not depositing the check immediately that caused the check to
become stale. Can Gustavo now raised the issue that the cashier's check is not legal
tender?
No, because Gustavo is guilty of estoppel by laches. He led Felipe to believe he
could pay by cashier’s check, and Felipe relied that such cashier’s check would be
encashed thus extinguishing his obligation. Because of Gustavo’s inaction of more than
six months the check became stale and Felipe will prejudiced if he will be required to
pay $100 at the exchange rate of 56 to $1.00. The exchange should be the rate at the
time of payment.

Can Felipe validly refuse to pay Gustavo again?

Yes, if the payment is valid. Since the bank considered the cashier’s check as
being stale for not having been encashed on time, then the cahsier’s check may be
issued again. At any rate, non-payment of the amount to Gustavo would constitute
unjust enrichment.

Can Felipe compel Gustavo to receive $100 instead?

Yes, Felipe can compel Gustavo to $100 instead. Under the prior law, RA 529,
as amended by R.A.4100, payment can only be in Philippine currency as it would be
against public policy, null and void and of no effect. However, under RA 8183, payment
may be made in the currency agreed upon by the parties, and the rate of exchange to
be followed is at the time of payment.

X, who has a savings deposit with Y Bank in the sum of 1,000,000, incurs a loan
obligation with the said Bank in the sum of 800,000 which has become due. When X
tries to withdraw his deposit, Y Bank allows only 200,000.00 to be withdrawn, less
service charges, claiming that compensation has extinguished its obligation under the
savings account to the concurrent amount of X’s debt. X contends that compensation is
improper when one of the debts, as here, arises from a contract of deposit. Assuming
that the promissory note signed by X to evidence the loan does not provide for
compensation between said loan and his savings deposit, who is correct?
Y bank is correct. Art. 1287, Civil Code, does not apply. All the requisites of Art.
1279, Civil Code are present. The Supreme Court held: “The Civil Code contains
provisions regarding compensation set off and deposit. These portions of Philippine law
provide that compensation shall take place when two persons are reciprocally creditor
and debtor of each other. In this connection, it has been held that the relation existing
between a depositor and a bank is that of creditor and debtor. As a general rule, a bank
has a right of set off of the deposits in its hands for the payment of any indebtedness to
it on the part of a depositor.” Hence, compensation took place between the mutual
obligations of X and Y bank.

Stockton is a stockholder of Core Corp. He desires to sell his shares in Core Corp. In
view of a court suit that Core Corp. has filed against him for damages in the amount of
10million, plus attorney’s fees of 1million, as a result of statements published by
Stockton which are allegedly defamatory because it was calculated to injure and
damage the corporation’s reputation and goodwill. The articles of incorporation of Core
Corp. provide for a right of first refusal in favor of the corporation. Accordingly, Stockton
gave written notice to the corporation of his offer to sell his shares of 10 million. The
response of Core corp. was an acceptance of the offer in the exercise of its rights of first
refusal, offering for the purpose payment in form of compensation or set-off against the
amount of damages it is claiming against him, exclusive of the claim for attorney’s fees.
Stockton rejected the offer of the corporation, arguing that compensation between the
value of the shares and the amount of damages demanded by the corporation cannot
legally take effect. Is Stockton correct? Give reason for your answer.
Stockton is correct. There is no right of compensation between his price of 10
million and Core Corp.’s unliquidated claim for damages. In order that compensation
may be proper, the two debts must be liquidated and demandable. The case for the 10
million damages being still pending in court, the corporation has as yet no claim which is
due and demandable against Stockton.

Sarah had a deposit in a savings account with Filipino Universal Bank in the amount of
five million pesos. To buy a new car, she obtained a loan from the same bank in the
amount of 1,200,000, payable in twelve monthly installments. Sarah issued in favor of
the bank post-dated checks, each in the amount of 100,000 to cover the twelve monthly
installment payments. On the third, fourth and fifth months, the corresponding checks
bounced. The bank then declared the whole obligation due, and proceeded to deduct
the amount of one million pesos from Sarah’s deposit after notice to her that this is a
form of compensation allowed by law. Is the bank correct? Explain.
No, the bank is not correct. While the Bank is correct about the applicability of
compensation, it was not correct as to the amount compensated. A bank deposit is a
contract of loan, where the depositor is the creditor and the bank the debtor. Since
Sarah is also the debtor of the bank with respect to the loan, both are mutually principal
debtors and creditors of each other. Both obligation are due, demandable and liquidated
but only up to the extent of 300,000 (covering the unpaid third, fourth and fifth monthly
installments). The entire one million was not yet due because the loan has no
acceleration clause in case of default. And since there is no retention or controversy
commenced by third person and communicated in due time to the debtor, then all the
requisites of legal compensation are present but only up to the amount of 300,000. The
bank, therefore, may deduct 300,000 from Sarah’s bank deposit by way of
compensation.

In 1978, Bobby borrowed 1,000,000 form Chito payable in two years. The loan, which
was evidenced by a promissory note, was secured by a mortgage on real property. No
action was filed by Chito to collect the loan or to foreclose the mortgage. But in 1991,
Bobby, without receiving any amount from Chito, executed another promissory note,
except for the date thereof, which was the date of its execution. Can Chito demand
payment on the 1991 promissory note in 1994?
Yes, Chito can demand payment on the 1991 promissory note in 1994. Although
the 1978 promissory note for 1 million payable two years later or in 1980 became a
natural obligation after the lapse of ten years, such natural obligation can be a valid
consideration of a novated promissory note dated in 1991 and payable two years later,
or in 1993. All the elements of an implied real novation are present:
a) An old valid obligation;
b) A new valid obligation;
c) Capacity of the parties;
d) Animus novandi or intention to novate; and
e) The old and the new obligation should be incompatible with each other on all material
points (Article 1292). The two promissory notes cannot stand together, hence, the
period of prescription of ten years has not yet lapsed.

Can Chito foreclose the real estate mortgage if Bobby fails to make good his obligation
under the 1991 promissory note?
No. The mortgage being an accessory contract prescribed with the loan. The
novation of the loan, however, did not expressly include the mortgage, hence, the
mortgage is extinguished under Article 1296 of the NCC. The contract has been
extinguished by the novation or extinction of the principal obligation insofar as third
parties are concerned.

Baldomero leased his house with a telephone to Jose. The lease contract provided that
Jose shall pay for all electricity, water and telephone services in the leased premises
during the period of the lease. Six months later, Jose surreptitiously vacated the
premises. He left behind unpaid telephone bills for overseas telephone calls amounting
to over 20, 000. Baldomero refused to pay the said bills ont he ground that Jose had
already substituted him as the customer of the telephone company. The latter
maintained that Baldomero remained as his customer as far as their service contract
was concerned, notwithstanding the lease contract between Baldomero and Jose. Who
is correct, Baldomero or the telephone company? Explain.
 The telephone company is correct because as far as it is concerned, the only
person it contracted with was Baldomero. The telephone company has no contract with
Jose. Baldomero cannot substitute Jose in his stead without the consent of the
telephone company (ART. 1293, NCC). Baldomero is, therefore, liable under the
contract.

The sugar cane planters of Batangas entered into a long-term milling contract with the
Central Azucarera de Don Pedro Inc. Ten years later, the Central assigned its rights to
the said milling contract to a Taiwanese group which would take over the operations of
the sugar mill. The planters filed an action to annul the said assignment on the ground
that the Taiwanese group was not registered with the Board of Investments. Will the
action prosper or not? Explain briefly.
The action will prosper not on the ground invoked but on the ground that the
farmers have not given their consent to the assignment. The milling contract imposes
reciprocal obligations on the parties. The sugar central has the obligation to mill the
sugar cane of the farmers while the latter have the obligation to deliver their sugar cane
to the sugar central. As to the obligation to mill the sugar cane, the sugar central is a
debtor of the farmers. In assigning its rights under the contract, the sugar central will
also transfer to the Taiwanese its obligation to mill the sugar cane of the farmers. This
will amount to a novation of the contract by substituting the debtor with a third party.
Under Article 1293 of the Civil Code, such substitution cannot take effect without the
consent of the creditor. The formers, who are creditors as far as the obligation to mill
their sugar cane is concerned, may annul such assignment for not having given their
consent thereto.

Contracts
General provisions
Essential requisites
Dr. and Mrs. Almeda are prominent citizens of the country and are frequent travellers
abroad. In 1996, they booked round-trip business class tickets for the Manila-Hong
Kong-Manila route of the Pinoy Airlines, where they are holders of Gold Mabalos Class
Frequent Flier cards. On their return flight, Pinoy Airlines upgraded their tickets to first
class without their consent and, in spite of their protestations to be allowed to remain in
the business class so that they could be with their friends, they were told that the
business class was already fully booked, and that they were given priority in upgrading
because they are elite members/holders of Gold Mabalos Class cards. Since they were
embarrassed at the discussions with the flight attendants, they were forced to take the
flight at the first class section apart from their friends who were in the business class.
Upon their return to Manila, they demanded a written apology from Pinoy Airlines. When
it went unheeded, the couple sued Pinoy Airlines for breach of contract claiming moral
and exemplary damages, as well as attorney's fees. Will the action prosper? Give
reasons.
Yes, Pinoy Airlines breached its contract of carriage by upgrading the seat
accommodation of the Almedas without their consent. The object of their contract was
the transportation of the Almedas from Manila to Hongkong and back to Manila, with
seats in the business class section of the aircraft. They should have been consulted first
whether they wanted to avail themselves of the privilege and would consent to a change
of seat accommodation. I should not have been imposed on them over their vehement
objection. By insisting on the upgrade, Pinoy Airlines breached its contract of carriage
with the Almedas. However, the upgrading or the breach of contract was not attended
by fraud or bad faith. They were not induced to agree to the upgrading through insidious
words or deceitful machination or through willful concealment of material facts. Bad faith
does not simply connote bad judgment or negligence; it imports a dishonest purpose or
some moral obliquity and conscious doing of a wrong, breach of a known duty through
some motive or interest or ill will that partakes of the nature of fraud. Neither is Pinoy
Airlines in bad faith since Section 3 of the Economic Regulation No. 7 of the Civil
Aeronautics Board provides that an overbooking that does not exceed ten percent is not
considered deliberate and therefore does not amount to bad faith.
As a result, the Almedas are not entitled to recover moral damages. Moral
damages predicated upon a breach of contract of carriage may only be recoverable in
instances where the carrier is guilty of fraud or bad faith or when the mishap resulted in
the death of a passenger. Where in breaching the contract of carriage the airline is not
shown to have acted fraudulently or in bad faith, liability for damages is limited to the
natural and probable consequence of the breach of the obligation which the parties had
foreseen or could have reasonably foreseen. In such a case the liability does not
include moral and exemplary damages.
It is a requisite in the grant of exemplary damages that the act of the offender be
accompanied by bad faith or done in wanton, fraudulent or malevolent manner. Such
requisite is absent in this case. Moreover, to be entitled thereto the claimant must first
establish his right to moral, temperate, or compensatory damages. Since the Almedas
are not entitled to any of these damages, the award for exemplary damages has no
legal basis. And where the awards for moral and exemplary damages are eliminated, so
must the award for attorney’s fees.
The most that can be awarded for the breach of contract is an award for nominal
damages. Pinoy Airlines may be said to have disturbed the spouses’ wish to be with
their companions at the Business Class on their flight to Manila.

Marvin offered to construct the house of Carlos for a very reasonable price of 900, 000,
giving the latter 10 days within which to accept or reject the offer. On the fifth day,
before Carlos could make up his mind, Marvin withdrew his offer. What is the effect of
the withdrawal of Marvin's offer?
The withdrawal of Marvin’s offer is valid because there was no consideration paid
for the option. An option is a separate contract from the contract which is the subject of
the offer, and if not supported by any consideration, the option contract is not deemed
perfected. Thus, Marvin may withdraw the offer at any time before acceptance of the
offer.

Will your answer be the same if Carlos paid Marvin 10,000 as consideration for that
option? Explain.
If Carlos paid 10,000 as consideration for that option, Marvin cannot withdraw the
offer prior to expiration of the option period. The option is a separate contract and if
founded on consideration is a perfected option contract and must be respected by
Marvin.

Supposing that Carlos accepted the offer before Marvin could communicate his
withdrawal thereof? Discuss the legal consequences.
If Carlos has already accepted the offer and such acceptance has been
communicated to Marvin before Marvin communicates the withdrawal, the acceptance
creates a perfected construction contract, even if no consideration was as yet paid for
the option. If Marvin does not perform his obligations under the perfected contract of
construction, he shall be liable for all consequences arising from the breach thereof
based on any of the available remedies which may be instituted by Carlos, such as
specific performance, or rescission with damages in both cases.

Reformation of instruments
Interpretation of contracts
Rescissible contracts
In a 20-year lease contract over a building, the lessee is expressly granted a right of first
refusal should the lessor decide to sell both the land and building. However, the lessor
sold the property to a third person who knew about the lease and in fact agreed to
respect it. Consequently, the lessee brings an action against both the lessor-seller and
the buyer (a) to rescind the sale and (b) to compel specific performance of his right of
first refusal in the sense that the lessor should be ordered to execute a deed of absolute
sale in favor of the lessee at the same price. The defendants contend that the plaintiff
can neither seek rescission of the sale nor compel specific performance of a “mere”
right of first refusal. Decide the case.
The action filed by the lessee, for both rescission of the offending sale and
specific performance of the right of first refusal which was violated, should prosper. Both
rights of action is proper because the buyer in the subsequent sale knew the existence
of right of first refusal, hence in bad faith.

Voidable contracts
Distinguish briefly but clearly between inexistent and annullable contracts.
Inexistent contracts are considered as not having been entered into and,
therefore, void ab initio. They do not create any obligation and cannot be ratified or
validated, as there is no agreement to ratify or validate. In the other hand, annullable or
voidable contracts are valid until invalidated by the court but may be ratified. In
inexistent contracts, one or more requisites of a valid contract are absent. In annullable
contracts, all the elements of a contract are present except that the consent of one of
the contracting parties was vitiated or one of them has no capacity to give consent.

X was the owner of a 10, 000 square meter property. X married Y and out of their union,
A, B and C were born. After the death of Y, X married Z and they begot as children, D,
E and F. After the death of X, the children of the first and second marriages executed an
extrajudicial partition of the aforestated property on May 1, 1970. D, E and F were given
a one thousand square meter portion of the property. They were minors at the time of
the execution of the document. D was 17 years old, E was 14 and F was 12; and they
were made to believe by A, B and C that unless they sign the document they will not get
any share. Z was not present then. In January 1974, D E and F filed an action in court
to nullify the suit alleging they discovered the fraud only in 1973. Can the minority of D,
E and F be a basis to nullify the partition? Explain your answer.
Yes, minority can be a basis to nullify the partition because D, E and F were not
properly represented by their parents or guardians at the time they contracted the
extrajudicial partition. (Articles 1327, 1391, Civil Code)

How about fraud? Explain your answer.

In the case of fraud, when through insidious words or machinations of one of the
other is induced to enter into the contract without which he would not have agreed to,
the action still prosper because under Art. 1391 of the Civil Code, in case of fraud, the
action for annulment may be brought within four years from the discovery of the fraud.

Sometime in 1955, Tomas donated a parcel of land to his stepdaughter Irene, subject to
the condition that she may not sell, transfer or cede the same for twenty years. Shortly
thereafter, he died. In 1965, because she needed money for medical expenses, Nene
sold the land to Conrado. The following year, Irene died, leaving as her sole heir a son
by the name of Armando. When Armando learned that the land which he expected to
inherit had been sold by Irene to Conrado, he filed an action against the latter for
annulment of the sale, on the ground that it violated the restriction imposed by Tomas.
Conrado filed a motion to dismiss, on the ground that Armando did not have the legal
capacity to sue. If you were the judge, how will you rule on this motion to dismiss?
Explain.
As judge, I will grant the motion to dismiss. Armando has no personality to bring
the action for annulment of the sale to conrado. Only an aggrieved party to the contract
may bring the action for annulment thereof (Art. 1397, NCC). While Armando is heir and
successor-in-interest of his mother (Art. 1311, NCC), he (standing in place of his
mother) has no personality to annul the contract. Both are not aggrieved parties on
account of their own violation of the condition of, or restriction on, their ownership
imposed by the donation. Only the donor or his heirs would have the personality to bring
an action to revoke a donation for violation of a condition thereof or a restriction thereon.
Consequently, while the donor or his heirs were not parties to the sale, they have the
right to annul the contract of sale because their rights are prejudiced by one of the
contracting parties thereof. Since Armando is neither the donor nor heir of the donor, he
has no personality to bring the action for annulment.

Unenforceable contracts
May a person sell something that does not belong to him?
Yes, a person may sell something which does not belong to him. For the sale to
be valid, the law does not require the seller to be the owner of the property at the time of
the sale. (Art. 1434, NCC). If the seller cannot transfer ownership over the thing sold at
the time of delivery because he was not the owner thereof, he shall be liable for breach
of contract.

Void or inexistent contracts

Maria Enriquez failed to pay the realty taxes on her unregistered agricultural land
located in Magdugo, Toledo City. In 1989, to satisfy the taxes due, the City sold it at
public auction to Juan Miranda, an employee at the Treasurer’s Office of said City,
whose bid at P10, 000.00 was the highest. In due time, a final bill of sale was executed
in his favor. Maria refused to turn-over the possession of the property to Juan alleging
that (1) she had been, in the meantime, granted a free pantent and on the basis thereof
an Original Cetificate of Title was issued to her, and (2) the sale in favor of Juan is void
from the beginning in view of the provision in the Administrative Code of 1987 which
prohibits officers and employees of the government from purchasing directly or indirectly
any property sold by the government for non-payment of any tax, fee or other public
charge. Is the sale to Juan valid? If so, is the effect of the issuance of the Certificate of
Title to Maria?
The sale of the land to Juan is not valid, being contrary to law. Therefore, no
transfer of ownership of the land was effected from the delinquent taxpayer to him. The
original certificates of title obtained by Maria thru a free patent grant from the Bureau of
Lands is valid but in view of her delinquency, the said title is subject to the right of the
City Government to sell the land at public auction. The issuance of the OCT did not
exempt the land from the tax sales. Section 44 of P.D. No. 1529 provides that every
registered owner receiving a Certificate of Title shall hold the same free from all
encumbrances, subject to certain exemptions.

If the sale is void, may Juan recover the 10,000? If not, why not?
Juan may recover because he was not a party to the violation of the law.

If the sale is void, did it not nevertheless, operate to divert Maria of her ownership? If it
did, who then is the owner of the property?
No, the sale did not divest Maria of her title precisely because the sale is void. It
is as good as if no sale ever took place. In tax sales, the owner is divested of his land
initially upon award and issuance of a Certificate of Sale, and finally after the lapse of
the 1 year period from date of registration, to redeem, upon execution by the treasurer
of an instrument sufficient in form and effects to convey the property. Maria remained
owner of the land until another tax sale is to be performed in favor of a qualified buyer.

In 1950, the Bureau of Lands issued a Homestead patent to A. Three years later, A sold
the homestead to B. A died in 1990, and his heirs filed an action to recover the
homestead from B on the ground that its sale by their father to the latter is void under
Section 118 of the Public Land Law. B contends, however, that the heirs of A cannot
recover the homestead from him anymore because their action has prescribed and that
furthermore, A was in pari delicto. Decide.
The sale of the land by A to B 3 years after issuance of the homestead patent,
being in violation of Section 118 of the Public Land Act, is void from its inception. The
action filed by the heirs of B to declare the nullity or inexistence of the contract and to
recover the land should be given due course. B’s defense of prescription is untenable
because an action which seeks to declare the nullity or inexistence of a contract does
not prescribe.
 On the other hand, B’s defense of pari delicto is equally untenable. While as a
rule, parties who are in pari delicto have no recourse against each other on the principle
that a transgressor cannot profit from his own wrongdoing, such rule does not apply to
violations of Section 118 of the Public Land Act because of the underlying public policy
in the said Act “to conserve the land which a homesteader has acquired by gratuitous
grant from the government for himself and his family”. In keeping with this policy, it has
been held that one who purchases a homestead within the five-year prohibitory period
can only recover the price which he has paid by filing a claim against the estate of the
deceased seller under the principle that no one shall enrich himself at the expense of
another. Applying the pari delicto rule to violations of Section 118 of the Public Land
Act, the Court of Appeals has ruled that “the homesteader suffers the loss of the fruits
realized by the vendee who in turn forfeits the improvement that he has introduced into
the land.”

Natural obligations
Distinguish briefly but clearly between Civil Obligation and Natural Obligation:
Civil obligation is a juridical necessity to give, to do and not to do. It gives the
creditor the legal right to compel by an action in court the performance of such
obligation.
A natural obligation is based on equity and natural law. There is no legal right to compel
performance thereof but if the debtor voluntarily pays it, he cannot recover what was
paid.

Estoppel
In 1965, Renren bought from Robyn a parcel of registered land evidenced by a duly
executed deed of sale. The owner presented the deed of sale and the owner's
certificate of title to the Register of Deeds. The entry was made in the daybook and
corresponding fees were paid as evidenced by official receipt. However, no transfer of
certificate of title was issued to Renren because the original certificate of title in Robyn's
name was temporarily misplaced after fire partly gutted the Office of the Register of
Deeds. Meanwhile, the land had been possessed by Robyn's distant cousin, Mikaelo,
openly, adversely and continuously in the concept of owner since 1960. It was only in
April 1998 that Renren sued Mikaelo to recover possession. Mikaelo invoked acquisitive
prescription and laches, asking that he be declared owner of the land.
Renren's action to recover possession of the land will prosper. In 1965, after
buying the land from Robyn, he submitted the Deed of Sale to the Registry of Deeds for
registration together with the owner's duplicate copy of the title, and paid the
corresponding registration fees. Under Sec. 56 of PD No. 1529, the Deed of Sale to
Renren is considered registered from the time the sale was entered in the Day Book
(now called the Primary Entry Book). For all legal intents and purposes, Renren is
considered the registered owner of the land. After all, it was not his fault that the
Registry of Deeds could not issue the corresponding transfer certificate of title.
Mikaelo's defense of prescription cannot be sustained. A Torrens title is imprescriptible.
No title to registered land in derogation of the title of the registered owner shall be
acquired by prescription or adverse possession (Sec. 47, P.D. No. 1529). The right to
recover possession of registered land likewise does not prescribe because possession
is just a necessary incident of ownership.
Mikaelo's defense of laches, however, appears to be more sustainable. Renren
bought the land and had the sale registered way back in 1965. From the facts, it
appears that it was only in 1998 or after an inexplicable delay of 33 years that he took
the first step asserting his right to the land. It was not even an action to recover
ownership but only possession of the land. By ordinary standards, 33 years of neglect
or inaction is too long and may be considered unreasonable. As often held by the
Supreme Court, the principle of imprescriptibility sometimes has to yield to the equitable
principle of laches which can convert even a registered land owner's claim into a stale
demand. Mikaelo's claim of laches, however, is weak insofar as the element of equity is
concerned, there being no showing in the facts how he entered into the ownership and
possession of the land.

In an action brought to collect a sum of money based on a surety agreement, the

defense of laches was raised as the claim was filed more than seven years from the
maturity of the obligation. However, the action was brought within the ten-year
prescriptive period provided by law wherein actions based on written contracts can be
instituted. Will the defense prosper? Reason.
No, the defense will not prosper. The problem did not give facts from which
laches may be inferred. Mere delay in filing an action, standing alone, does not
constitute laches.

What are the essential elements of laches? CDLI

The four basic elements of laches are:
1) Conduct on the part of the defendant or of one under whom he claims, giving rise to
the situation of which complainant seeks a remedy;
2) Delay in asserting the complainant’s rights, the complainant having had knowledge or
notice of the defendant’s conduct and having been afforded an opportunity to institute
suit;
3) Lack of knowledge on the part of the defendant that the complainant would assert the
right on which he bases his suit; and
4) Injury or prejudice to the defendant in the event relief is accorded to the complainant,
or the suit is not held to be barred.

Way back in 1948, Winda’s husband sold in favor of Verde Sports Center Corp. (Verde)
a 10-hectare property belonging to their conjugal partnership. The sale was made
without Winda’s knowledge, much less consent. In 1950, Winda learned of the sale,
when she discovered the deed of sale among the documents in her husband’s vault
after his demise. Soon after, she noticed that the construction of the sports complex had
started. Upon completion of the construction in 1952, she tried but failed to get free
membership privileges in Verde. Winda now files a suit against Verde for the annulment
of the sale on the ground that she did not consent to the sale. In answer, Verde
contends that, in accordance with the Spanish Civil Code which was then in force, the
sale in 1948 of the property did not need her concurrence. Verde contends that in any
case the action has prescribed or is barred by laches. Winda rejoins that her Torrens
title covering the property is indefeasible, and imprescriptible. Define or explain the term
“laches”.
LACHES means failure or neglect, for an unreasonable and unexplained length
of time, to do what, by exercising due diligence, could or should have been done earlier.
It is negligence or omission to assert a right within a reasonable time.

Decide the case, stating your reasons for your decision.

While Art. 1413 of the Spanish Civil Code did not require the consent of the wife
for the validity of the sale, an alienation by the husband in fraud of the wife is void as
held in a case. Assuming that the alienation in 1948 was in fraud of Winda and,
therefore, makes the sale to Verde void, the action to set aside the sale, nonetheless, is
already barred by prescription and laches. More than 52 years have already elapsed
from her discovery of the sale in 1950.

Trusts
Joaquin Reyes bought from Julio Cruz a residential lot of 300 square meters in Quezon
City for which Joaquin paid Julio the amount of P300, 000.00. When the deed was
about to be prepared Joaquin told Julio that it be drawn in the name of Joaquina Roxas,
his acknowledged natural child. Thus, the deed was so prepared and executed by Julio.
Joaquina then built a house on the lot where she, her husband and children resided.
Upon Joaquin’s death, his legitimate children sought to recover possession and
ownership of the lot, claiming that Joaquina Roxas was but a trustee of their father. Will
the action against Joaquina Roxas prosper?
Yes, because there is a presumed donation in favor of Joaquina under Art. 1448
of the Civil Code. However, the donation should be collated to the hereditary estate and
the legitime of the other heirs should be preserved.

In 1980, Maureen purchased two lots in a plush subdivision registering Lot 1 in her
name and Lot 2 in the name of her brother Walter with the latter’s consent. The idea
was to circumvent a subdivision policy against the acquisition of more than one lot by
one buyer. Maureen constructed a house on Lot 1 with an extension on Lot 2 to serve
as a guest house. In 1987, Walter who had suffered serious business losses demanded
that Maureen remove the extension house since the lot on which the extension was built
was his property. In 1992, Maureen sued for the reconveyance to her of Lot 2 asserting
that a resulting trust was created when she ha dteh lot registered in Walter’s name even
if she paid the purchase price. Walter opposed the suit arguing that assuming the
existence of a resulting trust the action of Maureen has already prescribed since ten
years have already elapsed from the registration of the title in his name. Decide.
Discuss fully.
This is a case of an implied resulting trust. If Walter claims to have acquired
ownership of the land by prescription or if he anchors his defense on extinctive
prescription, the ten year period must be reckoned from 1987 when he demanded that
Maureen remove the extension house on Lot No. 2 because such demand amounts to
an express repudiation of the trust and it was made known to Maureen. The action for
reconveyance filed in 1992 is not yet barred by prescription.
Explain the concept of trust de son tort (Constructive Trust)
A constructive trust is a trust not created by any word or phrase, either expressly
or impliedly, evincing a direct intention to create a trust, but is one that arises in order to
satisfy the demands of justice. It does not come about by agreement or intention but
mainly operation of law and construed as a trust against one who, by fraud, duress or
abuse of confidence, obtains or holds the legal right to property which he ought not, in
equity and good conscience, to hold.
The following are examples of constructive trust:
1. Article 1456 NCC which provides: “If property is acquired through mistake or fraud,
the person obtaining it is, by force of law considered a trustee of an implied trust for the
benefit of the person from whom the property comes.”
2. Article 1451 NCC which provides: “When land passes by succession to any person
and he causes the legal title to be put in the name of another, a trust is established by
implication of law for the benefit of the true-owner.”
3. Article 1454 NCC which provides: “If an absolute conveyance of property is made in
order to secure the performance of an obligation of the grantor toward the grantee, a
trust by virtue of law is established. If the fulfillment of the obligation is offered by the
grantor when it becomes due, he may demand the reconveyance of the property to
him.”
4. Article 1455 NCC which provides: “When any trustee, guardian or other person
holding a fiduciary relationship uses trust funds for the purchase of property, and
causes the conveyance to be made to him or to a third person, a trust is established to
whom the findings belong.