illusory.

The debtor would have no incentive to preserve the thing because he stands
OBLIGATIONS AND CONTRACTS to lose nothing if it is lost.
MODULE 2: NATURE AND EFFECT OF CIVIL OBLIGATIONS
2. Standard of care
1. Three Kinds of Prestation: Absent a specific stipulation, the standard of care to be observed in the preservation
of the thing is that of the good father of the family. This standard of care is defined
Prestation Requires the debtor to deliver to the creditor either a specific or
negatively as, “the fault or negligence of the obligor consists in the omission of that
to Give determinate thing or right, or an indeterminate or generic thing
diligence which is required by the nature of the obligation and corresponds with the
Prestation Requires the debtor to render service to the creditor
to Do circumstances of the persons, of the time and of the place.”
Prestation Not Requires the debtor to refrain from doing something for the
to Do benefit of the creditor The parties to an obligation may, however, stipulate a different standard of care while
the obligor has yet to deliver the thing to the obligee. In specific instances, the law
may impose a higher standard of care, such as extraordinary diligence required of a
2. Prestation to Give common carrier in a contract of carriage.

2.1. Distinction between Generic and Determinate Thing

Article 1164. The creditor has a right to the fruits of the thing from the time the
Generic Thing Determinate Thing obligation to deliver it arises. However, he shall acquire no real right over it until
Identified only by its kind (genus) Set aside from the rest of its class and the same has been delivered to him.
without being handpicked from the can be identified from other things of
other things of the same kind its kind 1. Right of Accession
Examples: the obligor’s car (if he has
Examples: a pen, a chair, a table only one car), a car with plate number Article 440. The ownership of property gives the right by accession to everything which
AAA 1234 is produced thereby, or which is incorporated or attached thereto, either naturally or
artificially
2.2. Accessory obligations of a debtor in a prestation to give
NOTE:
Prior to the delivery of the thing due, the debtor is obliged to preserve
Article the thing with the diligence of a good father of the family unless the law • By right of accession, the owner of a thing is likewise the owner of everything
1163 or the stipulation between the debtor and the creditor requires a that is produced by the thing and anything that is incorporated or attached
different standard of care. thereto, either naturally or artificially.
Article From the time the obligation to deliver a thing arises, the debtor is
1164 obliged to deliver to the creditor the fruits of the thing that is due. 2. What are Fruits
The debtor is obliged to deliver to the creditor the accessions and the
Article Three Categories of Fruits under the Civil Code
accessories of the thing that is due, even though they may not have
1166 The spontaneous products of the soil, and the young and other
mentioned. Natural
products of animals
Industrial Those produced by land or any kind through cultivation or labor
The rents of buildings, the price of leases of lands and other
Article 1163. Every person is obliged to give something is also obliged to take Civil property and the amount of perpetual or life annuities or similar
care of it with the proper diligence of a good father of a family, unless the law or income
the stipulation of the parties requires another standard of care.

1. Reason for the accessory obligation of care and preservation of the thing

In an obligation to give a specific thing, the debtor is required to observe diligence in

preserving the thing to be delivered, as otherwise, the obligation would become
Right to the Fruits

Article 1164 provides that the right to the fruits of the thing which the debtor is obliged to
deliver accrues to the creditor from the time the debtor’s obligation to deliver arose. This
provision applies to cases where the debtor has an obligation to deliver a specific thing.
Hence, in cases where the thing to be delivered is a generic thing, the creditor’s accessory 2.2.1. Rights/Duties of Subjects in Prestation to Give a Generic Thing:
right to the fruits is irrelevant.

Real Right v. Personal Right Rights of the Creditor Duties of the Debtor
1. Compel the debtor to perform 1. Deliver the thing of the quality
Real Right (jus in re or in rem) Personal Right the obligation intended by the parties, taking into
A right to a specific thing vested in the consideration the purpose of the
A right that attaches to a specific thing In case of breach, demand obligation, and other
person of the holder of the thing
specific performance, or obtain considerations.
May be reinforced only against a
May be enforced against anyone compliance from another person
specific person or persons who are
indiscriminately at the expense of the debtor.
obliged to respect such personal right
Examples:
Rescission if the obligation is
1. Right of ownership Example:
reciprocal
2. Usufructuary right An unemancipated child to receive
3. Rights of pledgee to the thing support from his or her parents (cannot
2.
Demand damages in case of 2. Pay damages in case of breach.
pledged demand support from any other person
breach – equivalent
4. Registered mortgage lien on unless the law obliges such person)
performance
a mortgaged property
Article 1166. The obligation to give a determinate thing includes that of delivering all
its accessions and accessories even though they may not have been mentioned.
Rights/Duties of the Subjects in a Prestation to Give a Specific Thing:
NOTE:
Rights of the Creditor Duties of the Debtor
1. Compel debtor to perform the 1. Deliver the thing agreed upon
• Under this article, accessories refer to those things which are destined for the
obligation;
embellishment, use, or preservation of the principal thing. It does not refer to
accessories as understood in relation to the law of accession. Examples of
2. Hold debtor responsible for the 2. Preserve or take care of the thing
accessories under this article are the air conditioning unit and the sound system
preservation of the thing until the with due diligence prior to its
installed in a car.
same is delivered, and to hold him delivery
liable even for a fortuitous event, if
• A debtor who is obliged to deliver a thing must deliver it in its entirety. As such,
he delays delivery, or if he
honesty is the fundamental rule in this article. For example, it would be dishonest
promised to deliver the same thing
for the seller of a motor vehicle to pull out the spare tire and sell the same
to two or more persons having
separately to the operator of a junk shop. However, certain specified accessories,
different interests;
as understood under this article, may be dispensed by the parties through an
agreement.
3. Receive the fruits, interests, 3. Deliver the fruits of the thing from
accessions, but the creditor the time the obligation arises
acquires no real right to such fruits including accessions and
until the same are delivered to him; accessories 3. Prestation to Do

4. Specific performance plus 4. Pay damages in case of breach Article 1167. If a person obliged to do something fails to do it, the same shall
damages or Rescission plus be executed at his cost.
damages, if the obligation is
reciprocal.
 This same rule shall be observed if he does it in contravention of the tenor of his to the whole cost of labor and materials that went into the repair of the typewriter? YES,
obligation. Furthermore, it may be decreed that what has been poorly done be the Court ruled that Chavez is entitled to the whole cost of labor and materials that
undone. went into the repair of the typewriter. Article 1167 of the Civil Code states that if a
person obliged to do something fails to do it, the same shall be executed at his cost. This
same rule shall be observed if he does it in contravention of the tenor of the obligation. In
3.1. Rights and Duties of the Subjects in Ordinary Prestation to Do: the case at bar, it is clear that Gonzales contravened the tenor of his obligation because
he only did not repair the typewriter but returned it in “shambles”.
Rights of the Creditor Duties of the Debtor
1. Demand for specific performance, 1. Perform the service NOTE:
but cannot compel the debtor to completely • It is clear that Gonzales contravened the tenor of his obligation because he only
perform the service did not repair the typewriter but returned it in “shambles”. For such contravention,
Gonzales is liable under Article 1167 for the cost of executing the obligation in a
Recission, if the obligation is proper manner. The cost of the execution of the obligation in this case should be
reciprocal the cost of the labor or service expended in the repair of the typewriter, which is in
the amount of Php 58.75 because the obligation or contract was to repair it.
2. Have the same executed by a third
person at the cost of the obligor – 2. Shoulder the cost of having a • In addition, Gonzales is likewise liable under Article 1170 of the Code, for the cost
substitute performance third person do it of the missing parts, in the amount of Php 31.10, for in his obligation to repair the
typewriter he was bound, but failed or neglected, to return it in the same condition
3. Ask that it may be decreed that as when he received it.
what has been poorly done de 3. Undo what has been poorly
undone, provided it can still be done
Mackay v. Spouses Caswell
undone.
G.R. No. 183872 (17 November 2014)
4. Demand for damages in case of
breach – equivalent performance. The Casswell spouses executed a joint affidavit to charge petitioner and his group for
4. Pay damages in case of swindling them of P227,000. They alleged them of misrepresenting themselves to be from
breach NAPOCOR. They filed for a case of Estafa to which he was acquitted. Owen argues that
the spouses paid him P227,000 of the P250,000 and demanded payment of the P23,000
as well as damages. Spouses argue that Owen’s failure to finish the job and walk out of
the contract does not entitle him to reimbursement. Owen countered that he and his group
rectified all the discrepancies found. Are the spouses entitled to compel the petitioner to
CASES:
remove the defect or execute another work for the deficiencies caused? YES, the
spouses entitled to compel the petitioner to remove the defect or execute another
Chaves v. Gonzales
work for the deficiencies caused. To the Court there was sufficient sign of delay in the
G.R. No. L-27454 (30 April 1970) energization of the home. Owen’s obligation was to provide quality materials to ensure
that electricity would flow to their home. It is expected that the materials should meet the
Rosendo Chavez delivered to Fructuoso Gonzales, who is a typewriter repairer, a portable
requirements imposed by Zameco II which was the only distributor of electricity in the
typewriter for routine cleaning and servicing. Gonzales was not able to finish the job after
area. Owen’s work has failed to meet these standards. The Court took into consideration
some time despite repeated reminders made by Chavez. Gonzales asked from Chavez
that the spouses searched for Owen in order to demand rectification but was nowhere to
P6.00 for the purchase of spare parts, which amount Chaves gave to Gonzales. After
be found. The spouses exercised due diligence in demanding from Owen said rectification
getting exasperated with the delay of the repair of the typewriter, Chavez got the typewriter
as provided for in Art 1715.
from Gonzales and found out that the same was in shambles. Chavez had his typewriter
repaired by Freixas Business Machines, and the repair job cost him a total of P89.85,
NOTE:
including labor and materials. Chavez then commenced this action before the City Court
of Manila, demanding from Gonzales the payment of P90.00 as actual and compensatory • Under Art 1715 of the Civil Code, if the work of a contractor has defects that destroy
damages. The Court rendered its decision in favor of Chavez, ordering Gonzales to pay its value or lessen its fitness for ordinary use, he may be required to remove the
him P31.10. Chavez contended that he should be awarded the whole cost of labor and defect or execute another work. Failure to do so would render him liable for the
materials as provided for in Article 1167 of the Civil Code. Is Chavez (petitioner) entitled expenses by the employer for the correction of the work.
Tanguilig v. Court of Appeals and Herce, Jr. 5. Prestation Not to Do
G.R. No. 117190 (2 January 1997)
Article 1168. When the obligation consists in not doing, and the obligor does
Sometime in April 1987 petitioner Jacinto M. Tanguilig proposed to respondent Vicente what has been forbidden him, it shall also be undone at his expense.
Herce Jr. to construct a windmill system for him. They agreed on the construction of the
windmill for a consideration of P60,000 with a one-year guarantee from the date of Rights and Duties of Subjects in Prestation Not to Do:
completion. Petitioner disowned any obligation to repair or reconstruct the system and
insisted that he delivered it in good and working condition to respondent who accepted Rights of Creditor Duties of Debtor
the same without protest. Besides, its collapse was attributable to a typhoon, a force 1. Have the same undone at the 1. Not to do what is prohibited
majeure, which relieved him of any liability. Is the petitioner under obligation to reconstruct expense of the debtor – (inaction).
the windmill after it collapsed? In order for a party to claim exemption from liability by substitute performance.
reason of fortuitous event under Art. 1174 of the Civil Code, the event should be Shoulder the cost of undoing
the sole and proximate cause of the loss or destruction of the object of the contract. what should not be done
Petitioner failed to show that the collapse of the windmill was due solely to a fortuitous
event. The evidence does not disclose that there was actually a typhoon on the day the 2. Demand for damages where it 2. Pay damages in case of
windmill collapsed. Petitioner merely stated that there was a “strong wind”. But a strong would be impossible to undo breach
wind in this case cannot be fortuitous — unforeseeable nor unavoidable. On the contrary, what has been done, or if the act
a strong wind should be present in places where windmills are constructed, otherwise the and its consequences are
windmills will not turn. definite and will not cease even
if undone.

4. Prestation to Do a Purely Personal Act

6. Modes of Breaching a Civil Obligation
Rights and Duties of the Subjects in Prestation to Do a Purely Personal Act:
6.1. Acts of the Creditor
Rights of Creditor Duties of Debtor
1. Demand of damages in case of 1. Perform the service completely; The debtor is released from liability when the non-performance of the obligation is due to
breach since personal the acts of the creditor himself.
qualifications of the obligor are
involved. Specific performance Article 1203. If through the creditor’s act the debtor cannot make a choice according to
is not available as it violates the the terms of the obligation, the latter may rescind the contract with damages.
involuntary servitude clause of
the Constitution. 6.1.1. Basis of the rule
The basis of this rule is the principle of fairness. The creditor shall not
Recission, if the obligation is curtail the right of choice of the debtor by making it impossible for the
reciprocal. latter to freely exercise such right, or by maliciously limiting the options
available to the debtor.
2. Ask a third person to do if
possible – substitute Article 1256. If the creditor to whom tender of payment has been made refuses without
performance. 2. Pay damages in case of breach just cause to accept it, the debtor shall be released from responsibility by the consignation
of the thing or sum due.
3. Demand damages in case of
breach. Consignation alone shall produce the same effect in the following cases:
 (1) When the creditor is absent or unknown, or does not appear at the place of 6.2.2. Ordinary Delay v. Legal Delay or Default or Mora
payment;
(2) When he is incapacitated to receive the payment at the time it is due; Ordinary Delay Legal Delay or Default or Mora
(3) When, without just cause, he refuses to give a receipt; - Mere failure to perform the - Failure to perform an obligation on
(4) When two or more persons claim the same right to collect; obligation on time time which failure constitutes a
(5) When the title of the obligation has been lost. - Mere delay (without being in breach of obligation
default) has no legal - Has legal consequences as it is a
6.1.2. Tender of payment is a voluntary act of the debtor in offering to pay the consequences breach of obligation
debt of the creditor. If it is unusually rejected by the creditor, it becomes the - Default
antecedent of consignation. Tender of payment, if rejected, followed by - Failure to perform the obligation
consignation that is validly made, produces the effect of payment and extinguished after extra/judicial demand
the obligation.

Article 2080. The guarantors, even though they be solidary, are released from their Types of Mora and their Consequences
obligation whenever by some act of the creditor they cannot be subrogated to the rights,
mortgages, and preferences of the latter.
Mora Solvendi Mora Accipiendi Compensatio Morae
Delay on the part of the Delay on the part of the Delay of the OBLIGORS in
6.2. Delay
DEBTOR to fulfill his CREDITOR to accept the reciprocal obligations
obligation (to give or to do) performance of the
Article 1169. Those obliged to deliver or to do something incur in delay from the
obligation fulfilled by the - Delay of the obligor
time the obligee judicially or extrajudicially demands from them the fulfillment of
2 KINDS: debtor cancels the delay of the
their obligation.
§ Ex re (to give) obligee and vice versa,
§ Ex persona (to do) Why does this happen? - net result: no actionable
However, the demand by the creditor shall not be necessary in order that delay
- factors affecting when default on the part of both
may exist:
Requisites creditor accepts payment parties.
1-Demandable and already - “Neither party incurs in
(1) When the obligation or the law expressly so declare; or
liquidated BUT must be with JUST delay if the other does not
(2) When from the nature and the circumstances of the obligation it
CAUSE comply or is not ready to
appears that the designation of the time when the thing is to be delivered
Liquidated – to know the comply in a proper manner
or the service is to be rendered was a controlling motive for the
basis of demand, basis for Requisites with what is incumbent
establishment of the contract; or
damages 1-Debtor’s obligation is upon him”
(3) When demand would be useless, as when the obligor has rendered it
due - since performance of one
beyond his power to perform.
2-Debtor delays is conditioned upon
performance; and 2-Debtor offered to conditioned upon the
In reciprocal obligations, neither party incurs in delay if the other does not comply
perform the prestation simultaneous fulfillment of
or is not ready to comply in a proper manner with what is incumbent upon him.
3-Creditor requires the another
debtor to perform either 3-the offered
From the moment one of the parties fulfills his obligation, delay by the other
judicially or extra-judicially performance is consistent Ex: Contract of Sale
begins.
with the nature of the
prestation There must be
simultaneous performance
6.2.1. Meaning of Delay or Mora
4-creditor without just
This pertains to the non-fulfillment of obligation in a timely manner.
cause refuses the
performance
 Effects of Delay Cavite. Moonwalk made a total payment of P23,657,901.84 to SSS for the loan principal
of P12,254,700.00 released to it. The last payment made by Moonwalk in the amount of
P15,004,905.74 were based on the Statement of Account prepared by SSS for Moonwalk.
Mora Solvendi Mora Accipiendi Compensatio Morae
After settlement of the account, SSS issued to defendant Moonwalk the Release of
- Debtor is GUILTY - CREDITOR is - No default or delay Mortgage for Moonwalk's mortgaged properties in Cavite and Rizal. However, in a series
of breach or guilty of breach of on part of both of letter, SSS alleged that it committed an honest mistake in releasing Moonwalk— to
violation of obligation parties (legally which it responded that it had completely paid its obligation to the former. As a
obligation. - Liable for any speaking) consequence, SSS filed a complaint against Moonwalk alleging that they failed: (1) to
- Liable to the damages suffered - If delay of one party compute the 12% interest due on delayed payments on the loan of Moonwalk, and (2) not
creditor for by the debtor due is followed by that of to reflect in its statement of account an unpaid balance on the said penalties for delayed
interest or to the breach the other, liability of payments. After trial, the trial court dismissed the complaint filed by SSS ruling that the
damages - CREDITOR bears the first infractor obligation was already extinguished by the payment by Moonwalk of its indebtedness to
- In absence of the risk of losing SHALL be equitably SSS. On appeal, the Intermediate Appellate Court affirmed in toto the lower court. Is the
Extra-J demand, the thing (1262) tempered by the penalty demandable even after the extinguishment of the principal obligation? NO, the
the interest shall - Where the courts penalty is not demandable anymore once the principal obligation has been
commence upon obligation is to - If cannot be extinguished. The Supreme Court noted that what is sought to be recovered here is not
filing of the pay money, determined which of the 12% interest on the loan but the 12% penalty for failure to pay on time the amortization.
complaint debtor is not liable the parties is guilty What is sought to be enforced therefore is the penal clause of the contract entered into
- Liable even for a for interest FROM of delay, the between the parties. According to the Supreme Court, a penalty is demandable in case
fortuitous event THE TIME OF contract shall be of non-performance or late performance of the main obligation. In other words, in order
when the CREDITOR’S deemed that the penalty may arise there must be a breach of the obligation either by total or partial
obligation is to DELAY extinguished and non fulfillment or there is non-fulfillment in point of time which is called mora or delay.
deliver a - Debtor may each shall bear their There is no mora or delay unless there is a demand. Here, although there were late
DETERMINATE release himself own damages amortizations, there was no demand made by the SSS for the payment of the penalty.
thing from the (1192)
- Not relieved from obligation by - BUT, in reciprocal NOTE:
liability from loss if consigning or obligations, from the
the obligation was depositing to the moment a party § Mere delinquency in payment does not necessarily mean delay in the legal
to deliver a court the amount fulfills or is ready to concept.
GENERIC due of him. fulfill his obligation,
THING. delay by the other Rivera v. Sps. Chua
begins. G.R. No. 18448 (14 January 2015)

The petitioner obtained a loan of Php 120,000 from herein respondents, the Spouses
Requisites of Demand Chua. He signed a promissory note which provides that the petitioner would pay interest
1. Obligation is demandable and liquidated from the date of default, as well as an attorney’s fees. Almost three (3) years after the
2. Fact of delay debt had become due, the petitioner issued two checks in favor of the respondents. Both
3. Form: extra/judicial checks bounced, and further demands from the respondents were left unheeded. Is
4. The obligation must be the main subject demand necessary for the petitioner to be in delay, the date of which would determine the
5. Definitive insistence proper interest due to the respondents? The Court cited Article 1169 of the NCC which
provides for the general rule that demand is necessary for a debtor to be in delay,
6.2.3. Illustrative Cases as well as the exceptions thereto. The instant case falls under one of the exceptions
provided by the law. The promissory note signed by the petitioner expressly states that
Social Security System v. Moonwalk Development and Housing Corporation G.R. default would commence and interest would begin to accrue from the moment the
No. 73345 (7 April 1993) petitioner fails to pay his dues on the stipulated date. As such, demand by the creditor
was not necessary for the petitioner to be found in delay.
SSS approved the application of defendant Moonwalk for a P30,000,000.00 loan for the
purpose of developing and constructing a housing project in the provinces of Rizal and
NOTE: Petitioner countered that respondents have no cause of action against it since it had fully
paid its obligation to the latter. It further claimed that the alleged delay in the payment of
§ Article 1169 provides for the general rule that for an obligor or debtor to be in the balance was due to its valid exercise of its rights to protect its interests as provided
delay or default, the obligee or creditor must first make a demand, as well as the under the Rules. Whether or not the respondent is entitled to legal interest? Yes. The
exceptions to the general rule. petitioner is liable for damages for the delay in the performance of its obligation. This is
provided for in Article 1170 of the New Civil Code. The obligation was already due and
There are four (4) instances when demand is not necessary to constitute the demandable after the lapse of the two-year period from the execution of the contract. The
debtor in default: two-year period ended on October 26, 1992. When the respondents gave a demand letter
a. when there is an express stipulation to that effect; on October 28, 1992, to the petitioner, the obligation was already due and demandable.
b. where the law so provides; Furthermore, the obligation is liquidated because the debtor knows precisely how much
c. when the period is the controlling motive or the principal inducement for he is to pay and when he is to pay it. Petitioner delayed in the performance. It was able
the creation of the obligation; to fully settle its outstanding balance only on February 8, 1995, which is more than two
d. where demand would be useless. years after the extrajudicial demand. Moreover, it filed several motions and elevated
adverse resolutions to the appellate court to hinder the execution of a final and executory
For the first two instances, it is not sufficient that the law or obligation fixes a date for judgment, and further delay the fulfillment of its obligation.
performance; it must expressly state that after the period lapses, default will commence.1
Spouses Vasquez v. Ayala Corporation
Maybank v. Sps. Tarrosa G.R. No. 149734 (19 November 2004)
G.R. 213014 (14 October 2015)
On April 23, 1981, spouses Daniel Vasquez and Ma. Luisa M. Vasquez entered into a
The Spouses Tarrosa had executed a Real Estate Mortgage over a parcel of land in order MOA with Ayala Corporation AYALA buying from the Vazquez spouses, all of the latter's
to secure some loans from Maybank Philippines, Inc. (formerly known as PNB-Republic shares of stock in Conduit Development, Inc. Under the MOA, Ayala was to develop the
Bank). One such loan was payable on March 11, 1984. The spouses failed to pay this entire property, less what was defined as the "Retained Area.” However, no demand after
loan, and in April of 1998, they received a Final Demand Letter from Maybank requiring April 23, 1984, was ever made by the Vasquez spouses for Ayala to sell the 4 lots. By
them to settle their loan. The spouses offered to pay a lower amount, which Maybank early 1990 Ayala finished the development of the vicinity of the 4 lots to be offered for
refused. Following such refusal, Maybank commenced the extrajudicial foreclosure sale. The four lots were then offered to be sold to the Vasquez spouses at the prevailing
proceedings and public auction upon the mortgaged property. The spouses filed a motion price in 1990. This was rejected by the Vasquez spouses who wanted to pay at 1984
before the lower courts to oppose this foreclosure and sale of the mortgaged properties, prices. Can Ayala be compelled to sell the property to the Vasquez spouses at the 1984
which the lower courts granted. The lower courts held that as the debt had become due price? No. Paragraph 5.15 of the agreement is obviously a mere right of first refusal
and payable more than 14 years from the date of the foreclosure, their right to foreclose and not an option contract. The "offer" may be withdrawn anytime by communicating
the property had already prescribed and they were barred by laches from such actions. the withdrawal to the other party. In this case, Ayala Corporation reduced the price to
Whether or not the period for prescription began to run from the moment the debt became P5,000.00/square meter but again, petitioners rejected the offer and instead made a
payable in 1984. The Court overturned the rulings of the lower courts, and held that counter-offer in the amount of P2,000.00/square meter. Ayala Corporation rejected
the period for prescription began to run only when the debtors were in default of petitioners' counter-offer. With this rejection, petitioners lost their right to purchase the
their obligation. The general rule is that demand, whether judicial or extrajudicial, is subject lots
necessary before a debtor can be deemed in default or delay. Maybank had no cause of
action to foreclose the mortgaged property until the spouses were deemed to have NOTE:
defaulted on their obligation, and the spouses can only be held to have been in delay after
Maybank made its demand for the payment owed to them. As such, the period for § An option contract is a preparatory contract in which one party grants to another,
prescription began to run from the date of the Final Demand Letter in 1998, and not from for a fixed period and at a determined price, the privilege to buy or sell, or to
the date the loan became payable in 1984. decide whether or not to enter into a principal contract. In a right of first refusal,
while the object might be made determinate, the exercise of the right would be
Santos Ventura v. Ernesto Santos dependent not only on the grantor's eventual intention to enter into a binding
G.R. No. 153004 (5 November 2004) juridical relation with another but also on terms, including the price, that are yet
to be firmed up. The "offer" may be withdrawn anytime by communicating the
The parties in this case executed a Compromise Agreement. Santos and Riverland Inc withdrawal to the other party
alleged that under the Compromise Agreement, he obligation became due on October 26,
1992, but payment of the remaining P12 million was effected only on November 22, 1994. Spouses Agner v. BPI
G.R. No. 182963 (3 June 2013) petitioner received a letter from Lutgarda’s daughter Aurora, stating that she is the owner
of the said premises, and is offering to petitioner the sale of the same. Petitioner then
Spouses Deo Agner and Maricon Agner (petitioners) executed a Promissory Note with went to the residence of Lutgarda’s collector and tendered her payment for rentals but
Chattel Mortgage in favor of Citimotors, Inc. The contract provides, among others that the was refused without justification. Was there mora accipiendi on the part of the lessor when
loan is secured by a 2001 Mitsubishi Adventure Super Sport. The Promissory Note with petitioner’s tender of payment was refused to be accepted by Lutgarda’s collector? NO.
Chattel Mortgage was assigned to respondent BPI Family Savings Bank, Inc. The The Court ruled that the lessor is not guilty of mora accipiendi and that the refusal
petitioners failed to pay 4 successive installments; hence, the respondent sent a demand of Lutgarda’s collector to accept her rental payment is NOT without justification. In
letter requiring the payment of Php 576,664.04, but the demand was unheeded. this case, the refusal of Lutgarda’s collector to accept the proffered rentals made by
Respondent filed an action for Replevin and Damages before the Manila RTC. A writ of Petitioner is not without just cause. Since her lease agreement with Lutgarda was of verbal
replevin was issued. Can the petitioners be considered to have defaulted in payment nature, case law provides that the contract of lease executed UNLESS RECORDED (or
despite their claim that there is lack of competent proof that they received the demand written) ceases to have effect when the property is sold, in absence of a contrary
letter? YES. The Court held that when co-signors expressly waived demand in the agreement. The fact that ownership of the premises had been transferred to Benjamin,
promissory notes, demand is unnecessary for them to be in default. The Court Lutgarda’s collector cannot be under mora accipiendi as she is not the creditor or has no
explained that Art. 1169 of the Civil Code provides that one incurs in delay or is in default authority to accept payment. Benjamin’s letter demanding surrender of possession of the
from the time the obligor demands the fulfillment of the obligation from the obligee; premises, and the failure of petitioner to perform such prestation, places her in delay as
however, demand is unnecessary under certain circumstances, and one of these she failed to vacate and pay rent in arrears to Benjamin.
circumstances is when the parties expressly waive demand. In the present case, there is
no need for a demand letter for the petitioners to be considered in default because the Note:
petitioners have legally waived the necessity of notice or demand in the Promissory Note Tengco was in default for her failure to vacate and pay rent in arrears the moment
with Chattel Mortgage. Benjamin judicially demanded from her payment of rent through the unlawful detainer
case.
Cabanting v. BPI Family Savings Bank, Inc.
G.R. No, 201927 (17 February 2016) The Court also took note that Petitioner should have consigned her payment to the Court
under Article 1256 to release her from default upon any demand made, due to her
Spouses Cabanting executed a Promissory Note with Chattel Mortgage on the vehicle in confusion as to who the real owner is.
favor of Diamond Motors. The parties stipulated that in case of failure to pay, the entire
sum outstanding under the note shall immediately become due and payable without the
necessity of notice or demand which the petitioners waive. On the same day, Diamond Central Bank of the PH v. Court of Appeals
Motors assigned to BPI Family Savings Bank, Inc. all its right, title, and interest to the G.R. No. L-45710 (3 October 1985)
Promissory Note. When Cabanting failed to pay his monthly amortizations, BPI filed a
case for Replevin and damages against Cabanting. Is prior demand by the respondent In April 1965, Island Savings Bank (ISB) approved the loan application for Php80,000
bank necessary before the obligation of the petitioner becomes due and demandable? No applied for by Private Respondent Sulpicio Tolentino, who, as a security for said loan,
prior demand by the respondent bank was necessary. The petitioners are bound by executed a real estate mortgage over his 100-hectare land. The loan was repayable in
the stipulation in the Promissory Note with Chattel Mortgage waiving the necessity of semi-annual installments for 3 years, with 12% annual interest. ISB was only able to
notice and demand to make the obligation due and demandable. In Agner v. BPI Family release Php17,000 of the total loan, to which Tolentino executed a promissory note to pay
Savings Bank, Inc., the court ruled that no demand was necessary because the petitioners for the Php17,000 partial loan release. After a couple of months, Petitioner issued a
legally waived the necessity of demand in the Promissory Note and Chattel Mortgage. resolution prohibiting ISB from issuing new loans due to liquidity problems. Subsequently
Article 1169 (1) of the Civil Code allows a party to waive the need for notice and demand. in 1968, petitioner issued another resolution totally prohibiting ISB from doing business in
Hence, the petitioner’s argument that their liability cannot be deemed due and payable for the Philippines. Petitioner then assumed all the assets and liabilities of ISB. The remaining
lack of proof of demand must be struck down. Php 63,000 could not be released, while on the other hand, Tolentino failed to pay the
Php17,000 pursuant to the promissory note he executed. Tolentino filed for specific
Tengco v. Court of Appeals performance against ISB to which the CA dismissed due to the prohibition and held that
G.R. No. L-49852 (19 October 1989) ISB could not foreclose the mortgage nor collect the Php 17,000. Was there compensatio
morae on the part of ISB and Tolentino for their failure to perform their obligations? YES.
In 1942, petitioner Emilia Tengco entered into a verbal agreement with Lutgarda Cifra The Court held that there was a reciprocal obligation made between ISB and
over the lease of the premises at 164 Pascual Street, Navotas. Petitioner paid monthly Tolentino, where ISB defaulted by not releasing the entire loan amount, while
rents to Lutgarda’s collector, but in 1947 the collector stopped her collection of rents from Tolentino defaulted by not paying the Php 17,000 loan as executed in a promissory
petitioner. Petitioner waited to pay rent until a demand against her was made. In 1976, note. Since both parties were in default, they are both liable for damages. The Court
ordered Tolentino to pay Php 17,000 plus interest to petitioners, while rescission of the 6.4.1. Test of Fraud
Php 63,000 loan be made by the petitioners. Since what was released by ISB was only
12% of the total loan, petitioners may only claim 21.25 hectares of the mortgage in case The test is the element of intent to deceive on the part of the debtor and not
Tolentino still fails to pay his Php 17,000 debt. The real estate mortgage covering the the degree of damage or injury caused to the creditor.
remaining 78.75 hectares is deemed unenforceable and released in favor of Tolentino.
Woodhouse v. Halili
Note: G.R. No. L-4811 (31 July 1953)
Compensatio Morae is the bilateral default on the part of both parties in reciprocal
obligations, which is also called reciprocal delay. The assumption in reciprocal obligations Woodhouse entered into a written agreement with defendant Halili stating among
is that performance should be simultaneously made unless an order of performance is others that: 1) that they shall organize a partnership for the bottling and
stipulated. One party may not demand performance from the other unless he distribution of Mission soft drinks, Woodhouse to act as industrial partner or
simultaneously offers to comply with his counterpart obligation. manager, and the defendant as a capitalist, furnishing the capital necessary
therefore; 2) that Woodhouse was to secure the Mission Soft Drinks franchise
In reciprocal obligations, from the moment one party fulfills, or is ready to fulfill his for and in behalf of the proposed partnership and 3) that the Woodhouse was to
obligation, delay by the other party begins. As a general rule, demand is necessary for receive 30% of the net profits of the business. When the bottling plant was
delay to exist unless exempted under Art. 1196. already in operation, the Woodhouse demanded Halili that the partnership
papers be executed. Halili gave excuses and would not execute said agreement,
6.3. Negligence or Culpa thus the complaint by the plaintiff. Did the plaintiff falsely represent that he had
an exclusive franchise to bottle Mission beverages? [YES] If false representation
Article 1173. The fault or negligence of the obligor consists in the omission of existed did it annul the agreement to form the partnership? [NO] Woodhouse
that diligence which is required by the nature of the obligation and corresponds misrepresented himself that he has already acquired the exclusive
with the circumstances of the persons, of the time and of the place. When franchise through his letters to Halili. However, such fraud was not serious
negligence shows bad faith, the provisions of Articles 1171 and 2201, paragraph enough to void their partnership agreement because the false representation
2, shall apply. was only used for Woodhouse to secure the 30% net profits from their
partnership and was not causal consideration, or the principal inducement, that
If the law or contract does not state the diligence which is to be observed in the led the plaintiff to enter into the partnership agreement.
performance, that which is expected of a good father of a family shall be required.

It is synonymous to fault. It is the lack of due care in the performance of an obligation. Tongson v. Emergency Pawnshop Bula, Inc.
G.R. No. 167874 (15 January 2010)
6.3.1. Types of Culpa
(1) Culpa criminal (Art 356, RPC) Danilo Napala purchased a 364 sq.m. parcel of land from Sps. Tongson in Davao
(2) Civil negligence: City for ₱3M. As payment, Napala paid ₱200,000 in cash to the Sps.Tongson
(a) Culpa contractual - It is the negligence in the performance and issued a postdated PNB check in the amount of ₱2.8M for the remaining
of an obligation. Such liability gives rise to a liability for balance of the subject property. However, when presented for payment, the PNB
damages check was dishonored for the reason “Drawn Against Insufficient Funds.”
(b) Culpa aquiliana or quasi-delict Despite the repeated demands to Napala to either pay the full value of the check
or to return the subject parcel of land, the latter failed to do either. Left with no
6.4. Fraud or Dolo other recourse, the Spouses Tongson filed for Annulment of Contract and
Damages to RTC. Whether the Contract of Sale can be annulled based on the
Art. 1170 refers to the Incidental Fraud (Dolo Incidente) committed in the fraud employed by Napala. Yes, there is fraud in general sense, which
performance of an obligation already existing because of contract. There is fraud involves a false representation of a fact, that the post-dated check issued
in the performance of an obligation when the obligor has the intention to evade would be sufficiently funded at its maturity. The fraud surfaced not during the
negotiation and perfection stages of the sale but rather it existed in the
the proper fulfillment of the obligation. It may take the form of a willful act or
consummation stage of the sale when the parties are in the process of
omission. performing their respective obligations under the perfected contract of sale.
Respondents' failure to render payment clearly showed he committed a
substantial breach of his reciprocal obligation, entitling the Sps. Tongson to the Metropolitan Fabrics, Inc. v. Prosperity Credit Resources, Inc.
annulment of the sales contract. G.R. No. 154390 (17 March 2014)

Geraldez v. Court of Appeals Metropolitan Fabrics (MFI) owned 7 lots. MFI sought from PCRI a loan in the
G.R. No.108253 (23 February 1994) amount of Php3.44 million. PCRI approved the loan with an interest ranging from
24%-26% per annum and a term of between 5 and 10 years. The court gave
Geraldez booked with Kenstar a 22-day European tour (“Volare 3”) for credence to the uncorroborated lone testimony that the blank loan forms,
$2,990.00. She paid the total equivalent amount of Php190,000.00 for her and consisting of the real estate mortgage contract, promissory note, comprehensive
her sister. Geraldez claimed that during the tour, she was very uneasy and surety agreement and disclosure statement, had no entries specifying the rate
disappointed when it turned out that, contrary to what was stated in the brochure, of interest and schedules of amortization. The officers of MFI also signed the
there was no European tour manager for their group of tourists, the hotels in forms in blank and left it to PRCI to choose among the 7 titles those which would
which she and the group were billeted were not first-class, the UGC Leather be sufficient to cover the Php3.5 million. Later on, MFI received Notice that their
Factory which was specifically added as a highlight of the tour was not visited, 7 lots were to be auctioned because the blank checks bounced. In their appeal,
and the Filipino lady tour guide by Kenstar was a first timer. Is petitioner Geraldez MFI insists that PCRI committed fraud when their officers were made to sign the
entitled to moral and exemplary damages from respondent Kenstar, who deed of real estate mortgage in blank. Did MFI clearly and convincingly establish
committed fraudulent misrepresentations amounting to bad faith, to the prejudice their allegation of fraud in the execution of the deed of real estate mortgage?
of Geraldez and the members of the tour group? Yes, whether Kenstar has NO, MFI undeniably failed to adduce clear and convincing evidence against
committed dolo causante or dolo incidente, it is indubitably liable for the genuineness and authenticity of the deed. Their actuations even
damages in the light of after-events when, contrary to its representations, demonstrated that their transactions with PCRI had been regular and at arms-
it employed an inexperienced tour guide, housed the tourist group in length, thereby belying the intervention of fraud. Circumstances also indicate that
substandard hotels, and reneged on its promise of a European tour fraud was not attendant during the transactions (freely and voluntarily
manager and the visit to the leather factory. Moral damages may be awarded surrendering the 7 certificates of title, pleading with PCRI for the resetting of
in breaches of contract where the obligor acted fraudulently or in bad faith. This foreclosure sale of the properties after receiving the notice of impending sale,
fraud or dolo which is present or employed at the time of birth or perfection of a negotiating with PCRI on the partial redemption of 3 of 7 lots, and sending letters
contract may either be dolo causante or dolo incidente. Dolo causante with an apologetic tenor). Fraud cannot be presumed but must be proved by
determines or is the essential cause of the consent, while dolo incidente refers clear and convincing evidence. Whoever alleges fraud affecting a transaction
only to some particular or accident of the obligations. The effects of dolo must substantiate his allegation, because a person is always presumed to take
causante are the nullity of the contract and the indemnification of damages, and ordinary care of his concerns, and private transactions are similarly presumed to
dolo incidente also obliges the person employing it to pay damages. have been fair and regular. Mere allegation definitely not evidence; hence, it
must be proved by sufficient evidence.
6.4.2. Types of Dolo
6.5. Contravention of the Tenor of the Obligation
DOLO INCIDENTE DOLO CAUSANTE
This includes any illicit act which impairs the strict and faithful fulfillment of the
Art. 1170 Art. 1338
obligation, or every kind of defective performance. It must, however, be malicious or
Fraud is committed at the time of Fraud is perpetrated at the time of
negligent to be actionable.
the performance of an obligation. perfection of the contract through
the use of insidious words or
6.6. Fortuitous Event
machinations by one party with the
purpose of inducing the other party
It is an event which is either impossible to foresee or impossible to
to give consent to the contract.
avoid. It may either be an act of man or an act of God.

6.6.1. Requisites of Fortuitous Event

Entitles the creditor to the Remedy of the defaulted party is to
(1) Event must be independent the human will or at least the debtor’s
alternate remedies of specific seek the annulment of the voidable
will;
performance or recission, with a contract
(2) Event could not be foreseen, or if foreseen, is inevitable;
right to damages in either case
(3) Event must be of such character as to render impossible for the
debtor to comply with his obligation in a normal manner; and
 (4) Debtor must be free from any participation in, or the aggravation
of, the injury of the creditor, that is, no concurrent negligence on his part. Respondent Spouses Conrado and Maria Victoria Ronquillo purchased from
Petitioner Fil-Estate an 82-square meter condominium unit for a pre-selling
6.6.2. Illustrative Cases contract price of P5,174,000.00. On 29 August 1997, respondents executed and
signed a Reservation Application Agreement wherein they deposited
Nakpil v. CA P200,000.00 as a reservation fee. As agreed, respondents paid the full down
G.R. L-47851 (3 October 1986) payment of P1,552,200.00 and had been paying the P63,363.33 monthly
amortizations until September 1998. Upon learning that construction works had
Philippine Bar Association (PBA), a non-profit organization formed under the stopped, respondents likewise stopped paying their monthly amortization.
corporation law, decided to put up a building in Intramuros, Manila. Juan Nakpil Claiming to have paid a total of P2,198,949.96 to petitioners, respondents,
& Sons were hired to plan the building specifications, while United Construction through two successive letters, demanded a full refund of their payment with
was hired to construct it. The proposal was approved by the Board of Directors interest. When their demands went unheeded, respondents were constrained to
and signed by the President, Ramon Ozaeta. In 1968, 2 years after its file a Complaint for Refund and Damages before the Housing and Land Use
completion, an unusually strong earthquake caused great damage to the Regulatory Board (HLURB). Respondents prayed for a reimbursement/refund of
building, which led it to tiling forward, requiring the tenants to vacate the P2,198,949.96 representing the total amortization payments, P200,000.00 as
premises. PBA filed a suit for damage against United Construction; moreover, and by way of moral damages, attorney’s fees, and other litigation expenses.
United Construction subsequently filed a suit against Nakpil & Sons, alleging Moreover, the Arbiter considered petitioners’ failure to develop the condominium
defects in the plans and specifications. Technical issues in the case were project as a substantial breach of their obligation, which entitles respondents to
referred to Mr. Hizon, as a court-appointed Commissioner. PBA moved for the seek rescission with payment of damages because a mere economic hardship
demolition of the building but was opposed and eventually paid for the demolition is not an excuse for contractual and legal delay. Did the Asian financial crisis
after the building suffered more damages in 1970 due to previous earthquakes. amount to a fortuitous event that would justify the delay in the performance of
The Commissioner found that there were deviations in the specifications and contractual obligations by petitioners? [NO] The Court rules that the Asian
plans and defects in the construction of the building. Does an act of God financial crisis is not a fortuitous event that would excuse petitioners and
(fortuitous event) exempts parties who would otherwise be held liable due to justify their delay from performing their contractual obligation. The Court
negligence? [YES] The Court ruled that although the damage was untimely ruled that they cannot generalize that the Asian financial crisis in 1997 was
and unforeseeable as it was caused by the earthquake, which was an act unforeseeable and beyond the control of a business corporation. Although
of God; the defects in the construction, as well as the deviations in the unfortunate that the petitioner was met with considerable difficulties, such as an
specifications and plans aggravated the damage, and lessened the increased cost of materials and labor, even before the scheduled
preventive measures that the building would otherwise have had. However, commencement of its real estate project as early as 1995. However, a real estate
if it were entirely a fortuitous event, it would exempt a party who would otherwise enterprise engaged in the pre-selling of condominium units is concededly a
be held liable due to negligence. Art. 1174 provides that no person shall be master in projections on commodities and currency movements and business
responsible for the event, which could not be foreseen. Moreover, to be exempt risks. The fluctuating movement of the Philippine peso in the foreign exchange
from liability due to an act of God, the following circumstances must occur: (1) market is an everyday occurrence, and fluctuations in currency exchange rates
That the cause of breach must be independent of the will of the debtor; (2) That happen every day, thus, not an instance of caso fortuito.
the event must be unforeseeable or unavoidable; (3) That the event must be
such that it would render it impossible for the debtor to fulfill the obligation; and NOTE:
(4) That the debtor must be free from any participation or aggravation of the
industry to the creditor. The non-performance of the petitioners’ obligation entitles respondents to
rescission under Article 1191 of the New Civil Code because a case of a financial
NOTE: crisis is not a fortuitous event that excuses petitioners herein from performing
When the negligence of a person concurs with an act of God in producing a contractual obligations.
loss, such person is not exempt from liability by showing that the immediate
cause of the damage was an act of God. To be exempt from liability for loss Phoenix Construction v. IAC
because of an act of God, he must be free from any previous negligence or G.R. No. L-65295 (10 March 1987)
misconduct by which the loss or damage may have been occasioned.
In this case, Dionisio, driving home in a Volkswagen coming from a cocktails-
Fil-Estate Properties v. Sps. Conrado and-dinner meeting with his boss, collided with a Ford dump truck (owned by the
GR No. 185798 (13 January 2014) employer Phoenix and driven by Carbonel) which had no lights nor any so-called
 "early warning" reflector devices near, parked at the right-hand side of the road, 8. Payment of Interest and Installment
facing the oncoming traffic, and facing in the same direction towards which
Dionisio’s car was heading. As a result of the collision, initial suffered some Art. 1176. The receipt of the principal by the creditor, without reservation with
physical injuries. An action for damages commenced in the CFI of Pampanga respect to interest, shall give rise to the presumption that said interest has been paid.
claiming that the legal and proximate cause of his injuries was the negligent The receipt of a later installment of a debt without reservation as to prior
manner in which the dump truck was parked. The trial court rendered a judgment installments, shall likewise raise the presumption that such installments have been paid.
in favor of Dionisio. Phoenix and Carbonel appealed to the IAC. However, the
IAC affirmed the CFI’s decision but modified the award of damages. Both the
Rule as to Interest:
trial court and appellate court held that there was negligence on the part of
Carbonel and that such negligence was the proximate cause of the accident and The rule with respect to the application of payment for an interest-bearing loan
Dionisio’s injuries. Phoenix and Carbonel contended, among others, that is that interest must be paid before the principal. Hence, if a creditor issues a
Dionisio’s negligence was an efficient intervening cause which should therefore receipt acknowledging receipt of the payment of the principal without making a
be regarded as the legal proximate cause of the accident rather than the earlier reservation for the payment of interest, a disputable presumption arises that
negligence of Carbonel. Should Phoenix and Carbonel be held liable for the interest has been paid in full.
accident and physical injuries suffered by Dionisio? [YES] The Supreme Court
held that Dionisio’s negligence was “only contributory” and can therefore Rule as to Payment of an Installment:
recover damages under Art. 2719 of the NCC. The “immediate and proximate The creditor’s receipt of an installment payment of a loan presumes that all prior
cause” of the injury still remained as Carbonel’s “lack of due care” and that installments have been paid. The law presumes that the debtor followed the
consequently, under the aforementioned provision, Dionisio may recover sequence of installment payments. However, this presumption is disputable.
damages.
Marquez v. Elisan Credit Corporation
NOTE:
Contributory negligence that is not an independent and overpowering nature as G.R. No. 194642 (6 April 2015)
to cut the proximate cause of an offense/accident does not sever the juris
vinculum of liability. Since Dionisio’s negligence is merely contributory and the After his complete payment for his first loan, petitioner obtained subsequent loan
proximate cause of the collision was due to the negligent manner the truck driven with the respondent and signed a promissory note which provided that such loan
by Carbonel was parked, Dionisio may still recover damages from the latter was payable in weekly installments and subject to 26% annual interest. It also
though such damages are subject to mitigation by the courts. stated that, in case of non-payment, the petitioner would pay 10% monthly
penalty based on the total amount unpaid and another 25% of such amount for
attorney’s fees exclusive of costs, and judicial and extrajudicial expenses. The
7. Usurious Transactions petitioner also issued a chattel mortgage over a motor vehicle. Upon maturity of
the 2nd loan, the petitioner was only able to pay P29,660 out of the P55,000 he
Art. 1175. Usurious transactions shall be governed by special law. had loaned. Because of this, the petitioner asked the respondent if he could pay
in daily installments until the 2nd loan was paid. 21 months after the 2nd loan’s
§ Usury - the charging of interest for the forbearance of money in excess of that maturity, the petitioner had already paid a total of P56,440, an amount greater
which is permitted by law. than the principal. Despite this, the respondent filed a judicial foreclosure of the
§ Interest - the price a debtor pays the creditor for the temporary use of the latter’s chattel mortgage because the petitioner allegedly failed to settle the balance of
money. the 2nd loan. Petitioner argued that his daily payments should be deemed to have
been credited against the principal as the official receipts issued by the
The rate of interest for the forbearance of money is governed by the Usury Law respondent were silent with respect to the payment of interest and penalties,
(Act. No. 2655, as amended). However, Central Bank Circular No. 905, series of pursuant to Art. 1176 of the CC. On the other hand, the respondent argued that
1982, lifted the interest rate ceiling on loans and forbearance of money. the daily payments were properly credited against the interest and not against
Accordingly, there is no usurious interest rate at the present time. This is not to the principal because the petitioner incurred delay in the full payment of the 2nd
loan. This was based by the respondent on Art. 1253 of the CC. Are the daily
suggest that the Usury Law has been repealed. The Monetary Board may, at
payments to be credited against the interest or against the principal? Yes, the
any time, reimpose an interest rate ceiling if in its judgment the same is Court ruled that the daily payments should be credited against the interest.
warranted by the prevailing economic conditions. The presumption under Art. 1176 resolves the question of whether or not the
interest is waived because the creditor accepts the payment for the principal
 without reservation with respect to the interest. The presumption under Art. 1253 2. The execution on the property of the judgment debtor did not satisfy the
pertains to the application of payments, specifically the payment of interest- creditor’s claim to the debtor’s insolvency.
bearing debts. This resolves the question on whether the amount received by 3. The judgment debtor has a claim against a third part but has maliciously
the creditor is payment for the principal or interest. To resolve, the provision or negligently failed or refused to exercise or otherwise enforce such
provided for a hierarchy: the payments shall be applied to the principal only after right.
the interest has been fully paid. The facts for Art. 1253 were present here: (1) 4. The judgment debtor’s refusal to exercise or enforce his right frustrates
the promissory note securing the 2nd loan provided for payment of interest (debt
the satisfaction of the judgment creditor’s claim.
produces interest); (2) a portion of the 2nd loan remained unpaid upon maturity;
5. The judgment debtor’s right against the third person is patrimonial in
and (3) respondent did not waive the payment of interest.
character. Thus, an unpaid judgment creditor cannot bring an action on
NOTE: behalf of the judgment debtor to revoke a donation made by the latter
1. To harmonize the two provisions, Art 1253 is applied to the interest and not to to an ungrateful donee.
the principal if the ff. facts exist:
(1) the debt produces interest (e.g. payment of interest is expressly Exceptions:
stipulated); and 1. Inherent rights of the debtor:
(2) the principal remains unpaid. a. Right to existence
b. Rights or relations of a public character
The exception for this is Art. 1176, that is, when the creditor waives the payment c. Rights of an honorary character
of the interest despite the presence of (1) and (2). As such, the payments shall d. Rights pertaining to the affairs of the home and the family
be credited to the principal. e. Right to appear in court proceedlngs

2. There was no waiver of interest because petitioner made the payments 2. Only those who at the time of the donor’s death have a right to the
AFTER the 2nd loan had already matured and a portion of the principal remained legitime and their successors-in-interest may ask for the reductior on
unpaid. It was stipulated also in the promissory note that the principal was inofficious donations (Art. 772).
subject to 26% interest and, aside from that, there was a penalty of 10% monthly
interest if the petitioner failed to pay such loan upon maturity. These Accion Pauliana
circumstances showed that the petitioner was already in default of the principal The creditor may also impugn the acts which the debtor may have done to
when he started making the daily payments. defraud them.

9. Subsidiary Remedies of a Creditor Requisites:

1. Plaintiff asking for rescission has a credit prior to the alienation,
although demandable later.
Art. 1177. The creditor, after having pursued the property in possession of the
2. Debtor has made a subsequent contract conveying a patrimonial
debtor to satisfy their claims, may exercise all the rights and bring all the actions
benefit to a third persons.
of the latter for the same purpose, save those which are inherent in his person; 3. Creditor has no other legal remedy to satisfy his claim, but would benefit
they may also impugn the acts which the debtor may have done to defraud them. by rescission of the conveyance to the person.
4. Act being impugned is fraudulent.
Accion Subragatoria 5. The third persons who received the property conveyed, if by onerous
The creditor, after having pursued the property in possession of the debtor to title, has been an accomplice in the fraud.
satisfy their claims, may exercise all the rights and bring all the actions of the
latter for the same purpose, save those which are inherent in his person.
Khe Hong Cheng v. Court of Appeals,
Requisites: G.R. No. 144169 (28 March 2001)
1. The creditor has a proven claim against the debtor under a final and
executory judgment. The petitioner, Khe Hong Cheng, is the owner of Butuan Shipping Lines. When
the M/V Prince Eric, carrying bags of copra owned by the Philippine Agricultural
Trading Corporation, sunk, the respondent, Philam Insurance Co., Inc. had to no fraud prejudicing Siguan. Did the respondents contract the Deed of Donation
pay the rights of the consignee since it was covered by the marine insurance with fraud which would then prejudice the petitioner, and thus, such Deed should
policy. The respondent instituted an action to recover the money paid to the be rescinded? No, the Court ruled that the respondents did not contract the
consignee. While such action was still pending, the petitioner executed deeds of Deed of Donation with fraud and, as such, the Deed should not be
donations of parcels of land in favor of his children. The trial court ruled against rescinded. Art. 1381, CC enumerates the contracts which are rescissible, and
the petitioner four years after the donations were made and the TCTs were among them are those contracts that are entered into in fraud of creditors when
registered under the petitioner’s children. After the decision became final and the latter cannot in any other manner collect the claims due them. As a general
executory, a writ of execution was issued. In January 1997, they discovered that rule, the action to rescind contracts which is done through an accion pauliana
the petitioner no longer had any property and that he had conveyed the subject requires the existence of a creditor at the time of the alleged fraudulent
properties to his children. Respondent then filed a complaint for the rescission of alienation. Without any prior existing debt, there can neither be injury nor fraud.
the deeds of donation executed by the petitioner and for the nullification of their In this instance, the date of the judgment enforcing the accion pauliana is
titles. Has the action to rescind the donation already prescribed? No, Art. 1389 immaterial; even if the judgment is subsequent to the alienation, it is merely
of the NCC provides that the action to claim rescission must be declaratory with retroactive effect to the date when the credit was constituted.
commenced within 4 years. When the law is silent as to the commencement The Deed showed that it was contracted on August 10, 1989. On the other hand,
of the prescriptive period, the general rule is that it will commence when the the respondent incurred her debt in August 1990. Therefore, it could not be said
moment the action accrues. An accion pauliana occurs only when the creditor that the respondents antedated the Deed of Donation with fraud so as to
discovers that he has no other legal remedy for the satisfaction of his claim other prejudice the petitioner.
than an accion pauliana. In the case at bar, the CA maintained that the four-year
period began only in January 1997 which was the time the respondent first NOTE:
discovered that the judgment award could not be satisfied since the petitioner no The 3rd and 4th requisites of accion pauliana are not present in the case:
longer has any property under his name. Since the respondent filled the action
a month after its discovery, the action for rescission of subject deed has not yet 3. Creditor has no other legal remedy to satisfy his claim, but would benefit by
prescribed. rescission of the conveyance to the person.
o Even assuming that Siguan became a creditor of Lim prior to the
NOTE: celebration of the contract of donation, still her action for rescission
A minor who is a party to a contract of sale must bring the action for rescission would not meet the third requisite.
within four years AFTER attaining the age of majority, because under the present o It is essential that the party asking for rescission prove that he has
article the claim for rescission prescribes in four years from removal of one’s exhausted all other legal means to obtain satisfaction of his claim. (Art.
capacity. 1381, CC)
o Art 1383, CC: Action for rescission is a subsidiary remedy. Subsidiary
remedy = exhaustion of all remedies by the prejudiced creditor to
Siguan v. Lim et. Al. collect claims due him before rescission is resorted to.
G.R. No. 134685 (19 November 1999) o Siguan neither alleged nor proved that she did so.

On 25th and 26th of August 1990, Lim issued 2 bank checks which, however, was 4. Act being impugned is fraudulent
dishonored by the drawee bank upon presentment of Siguan. On July 2, 1991, o Not present in this case
Lim allegedly executed a Deed of Donation of parcels of land in favor of her o Art. 1387, 1st par.: All contracts by virtue of which the debtor alienates
children. Because of this, Siguan filed an accion pauliana against Lim and her property by gratuitous title are presumed to have been entered into in
children to rescind the questioned Deed of Donation and to declare as null and fraud of creditors, when the donor did not reserve sufficient property to
void the new TCT issued for the lots covered by the questioned deed. The trial pay all debts contracted before the donation.
court decided in favor of the petitioner which was then reversed by the CA. The o Art. 759, 2nd par.: The donation is always presumed to be in fraud of
CA explained that the 2 requisites for filing of an accion pauliana were absent, creditors, when at the time thereof the donor did not reserve sufficient
namely, (1) the existence of a credit prior to the celebration of the contract; and property to pay his debts prior to the donation.
(2) the existence of fraud or at least the intent to commit fraud, to the prejudice o For this presumption to apply, it must be established that the donor did
of the creditor seeking rescission. The CA found out that the Deed of Donation not leave adequate properties which creditors might have recourse for
was not antedated as claimed by the petitioner. The Deed showed that it had collection of their credits existing before the execution of the donation
been executed on August 10, 1989 which was a year earlier when Lim incurred
her indebtedness to petitioner. As such, the CA concluded that there could be
 o It was not sufficiently established that the properties left behind by LIM rescission. However, rescission cannot be allowed by the Court if the violation is
were not sufficient to cover her debts existing before the donation was only slight or casual breach. This means that it must be proven that the obligation
made. cannot be performed that the only remedy left is rescission or resolution.

2. Boysaw et. al. v. Interphil Promotions, Inc. et. Al.

10. Transmissibility of Rights G.R. No. L-22590 (10 March 1987)
Art. 1178. Subject to the laws, all rights acquired in virtue of an obligation are Plaintiffs-Appellants Solomon Boysaw (Boysaw) and his then Manager, Willie
transmissible, if there has been no stipulation to the contrary. Ketchum (Ketchum), signed with Defendants-Appellees Interphil Promotions Inc.
(Interphil), represented by Lope Sarreal, Sr. (Sarreal), a contract to engage
As a general rule, rights arising from an obligation are patrimonial in character. Gabriel “Flash” Elorde in a Boxing Contest for the junior lightweight
Thus, unless prohibited by law or by stipulation of the parties, such rights are championship of the world. Stipulated in their contract was: a. the fight to be held
transmissible. on 30 September 1961 or not later than 30 days thereafter, should a
postponement be mutually agreed upon, and; b. Boysaw would not engage in
any other contest prior to the date of said boxing contest without the written
Additional Cases in the Outline: consent of Interphil Promotions, Inc. In June 1961, Boysaw entered into a non-
title bout. Afterwards, in July of the same year, Ketchum assigned J. Amando
RESCISSION: Araneta the managerial rights over Boysaw. In turn, Araneta transferred such
managerial rights to Alfredo Yulo, Jr. (Yulo). All actions went about without the
1. Buenviaje v Sps. Salonga consent of Interphil. Was there a breach of the Contract to Engage in a Boxing
G.R. 216923 (5 October 2016) Contest? Yes, the Court finds that the evidence established that the
contract was violated by appellant Boysaw himself when, without the
Jebson, an entity engaged in the real estate business, entered into a Joint approval or consent of Interphil, he fought Louis Avila on June 19, 1961 in
Venture Agreement (JVA) with Sps. Salonga. Under the JVA, Sps. Salonga Las Vegas Nevada. Yulo admitted this fact during the trial. While the contract
agreed for Jebson to construct ten (10) high-end single detached residential did not stipulate any penalty for such violation, this does not grant any of the
units in their land. On the other hand, Jebson undertook to construct the units at parties the unbridled liberty to breach it with impunity. The law on contracts
its own expense, secure the building and development permits, and the license emphasizes the principle of actionable injury which is inherent in every
to sell from the HLURB. Jebson entered into a Contract to Sell with Buenviaje contractual breach.
over Unit 5 for a total consideration of P10,500,000.00, without the conformity of
Sps. Salonga. Despite full payment of the contract price, Jebson was unable to NOTE:
complete the unit in violation of its contractual obligation. Spouses Buenviaje In this case, there was indeed breach of obligation committed and the Court
filed a Complaint for Specific Performance with Damages. In the alternative, he explained that as a remedy, the power to rescind must be given to Interphil for
prayed for the rescission of the subject CTS, and the return of all payments made being the injured party in the present case.
thereunder. Is rescission proper as an alternative remedy without sufficiently "Where the plaintiff is the party who did not perform the undertaking which he
demonstrating the impossibility of fulfillment of the obligation? No, resolution was bound by the terms of the agreement to perform 4 he is not entitled to insist
under Article 1191 of the Civil Code "will not be permitted for a slight or upon the performance of the contract by the defendant, or recover damages by
casual breach, but only for such substantial and fundamental violations as reason of his own breach.” (Seva v. Berwin, 48 Phil. 581)
would defeat the very object of the parties in making the agreement.
Ultimately, the question of whether a breach of contract is substantial depends
upon the attending circumstances. In this case, the impossibility of fulfillment was 3. Miguel v. Montañez
not sufficiently demonstrated in the proceedings conducted in this case. G.R. No. 191336 (25 January 2012)

NOTE: Jerry Montanez (Montanez) secured a loan of One Hundred Forty-Three

Specific performance and "rescission" (more accurately referred to as resolution) Thousand Eight Hundred Sixty-Four Pesos (P143,864.00), payable in one (1)
are alternative remedies available to a party who is aggrieved by a counter- year, or until February 1, 2002, from the petitioner. He gave as collateral therefor
party's breach of a reciprocal obligation. It is alternative because the party cannot his house and lot. Due to his failure to pay the loan, the petitioner filed a
avail both. The election of one remedy is the waiver of another. This case complaint against the respondent before the Lupong Tagapamayapa of
exemplified that there should only be one remedy as between performance and Barangay San Jose, Rodriguez, Rizal. The parties entered into a Kasunduang
 Pag-aayos wherein Montanez agreed to pay his loan in installments in the the rescission of the Deed of Conditional Sale. Again, Pacific made another
amount of Two Thousand Pesos (P2,000.00) per month, and in the event the demand on petitioners to fulfill all their obligations under the Deed of Conditional
house and lot given as collateral is sold, the respondent would settle the balance Sale or to return all payments it had already made plus legal interest. Petitioners
of the loan in full. However, Jerry still failed to pay. On April 7, 2005, the petitioner continued to ignore the demand. Is Pacific entitled to ask for specific
filed before the Metropolitan Trial Court a complaint for Collection of Sum of performance? Yes, Article 1191 par. 1 of the Civil Code states: The power to
Money. MeTC ordered Montañez to pay the petitioner. RTC affirmed. CA rescind obligations is implied in reciprocal ones, in case one of the
reversed. Is a complaint for a sum of money the proper remedy, notwithstanding obligors should not comply with what is incumbent upon him. The injured
the Kasunduan? Yes, because the respondent failed to comply with the party may choose between fulfillment and the rescission of the obligation, with
terms of the Kasunduang Pag-aayos, said agreement is deemed rescinded payment of damages in either case. He may also seek rescission, even after he
pursuant to Article 2041 of the New Civil Code and the petitioner can insist has chosen fulfillment, if the latter should become impossible. The Deed of
on his original demand. In the instant case, the respondent did not comply with Conditional Sale clearly spells out the obligations of each party. Based on the
the terms and conditions of the Kasunduang Pag-aayos. Such non-compliance allegations of the parties and the findings of the lower courts, Pacific has already
may be construed as repudiation because it denotes that the respondent did not partially fulfilled its obligation while petitioners have not. The obligation of
intend to be bound by the terms thereof, thereby negating the very purpose for petitioners under the Deed of Conditional Sale is to "guarantee removal of
which it was executed. Perforce, the petitioner has the option either to enforce tenants" and not merely to pay disturbance compensation. It is an undertaking
the Kasunduang Pag-aayos, or to regard it as rescinded and insist upon his specifically given to petitioners under the Deed of Conditional Sale, considering
original demand, in accordance with the provision of Article 2041 of the Civil that Pacific is not yet the owner of the property and will have no personality to
Code. evict the property's present occupants. Petitioners failed to fulfill this obligation,
as well as the obligation to deliver the necessary documents to complete the
NOTE: sale. As previously held by the Court, “the injured party is the party who has
faithfully fulfilled his obligation or is ready and willing to perform his obligation.”
ART. 1191 speaks of Tacit Resolutory Condition. It means that in every From the foregoing, it is clear that Pacific is the injured party, entitled to elect
reciprocal obligation, the injured party has the right to rescind the obligation in between rescinding of the contract and exacting fulfillment of the obligation. It
case the other party should not comply with the obligation. has opted for the remedy of specific performance, as embodied in its Amended
Complaint.
How is this right exercised? Generally, it can be done extrajudicially
(Declaration). However, if the party has partly done the performance of the 5. University of the Philippines v. De Los Angeles
obligation. He must do it judicially (meaning file it in court) G.R. No. L-28602 (29 September 1970)
4. Cupino and Colocado v. Pacific Rehouse Corporation
G.R. No. 205113 (26 August 2015) University of the Philippines (UP) and Associated Lumber Manufacturing
Company, Inc. (ALUMCO) entered into a logging agreement in which, ALUMCO
Petitioners Ascanos, entered into a Deed of Conditional Sale with Pacific was granted exclusive authority, for a period of 5 years, starting November 1960,
Rehouse Corporation. Pacific obliged itself to purchase from the Ascanos a and under the same agreement may extend the agreement for a further period
parcel of land. In the Deed of Conditional Sale, Pacific paid a downpayment of of five (5) years by mutual agreement of the parties starting December 1965.
P1,792,590 with a remaining balance of P4,182,710 payment of this will be Under the logging agreement ALUMCO would have exclusive authority to cut,
fulfilled upon the completion of the following conditions, namely: (1) the collect and remove timber from a land that UP owned and in consideration of
completion of all documents necessary for the transfer of the certificate of title of pay royalties to UP. However, by December 1964, it had incurred an unpaid
the land; (2) the Ascanos shall guarantee removal of the tenants, squatters and account of P219,362.94, which, despite repeated demands, it had failed to pay;
other occupants on the land, with the disturbance compensation to said tenants that after it had received notice that UP would rescind or terminate the logging
to be paid by vendors; and (3) submission by the Ascanos to Pacific of the agreement and has entered into a new agreement with another logging
Affidavit of Non-Tenancy and the land operation transfer documents. Following company. ALUMCO is now claiming the rescission of the lumber agreement by
month came, however, petitioners failed to submit the necessary documents a contract and without a court order is invalid. Would a recission of a contract
despite several demands from Pacific to do so. Instead, they informed Pacific still need a court order if the recission is stipulated within the contract? No, a
that they wanted to rescind the contract and refused to accept Pacific's tender of recission of an obligation would not need a court order if the recission
additional payments amounting to P1,005,180. Pacific made several demands itself is stipulated following Article 1191. However, the injured party may still
on petitioners to fulfill their obligations under the Deed of Conditional Sale. resort to judicial action when the other party denies the recission in order to settle
Instead of heeding the demands, petitioners began negotiating with Pacific for the dispute. In this case, the contract between UP and ALUMCO contained a
 stipulation for rescission thus court order is no longer needed. Supreme Court held, citing Jurisprudence, that "a sale of shares of stock,
physical delivery of a stock certificate is one of the essential requisites for the
6. Fidela vda. de Mistica v. Naguiat transfer of ownership of the stocks purchased. Vertex fully paid the purchase
G.R. No. 137909 (11 December 2003) price by February 11, 1999 but the stock certificate was only delivered on
January 23, 2002 after Vertex filed an action for rescission against FEGDI. On
the amount of damages, the CA is correct in not awarding damages since Vertex
failed to prove by sufficient evidence that it suffered actual damage due to the
On 1979 Eulalio Mistica entered into a contract to sell with respondent
Bernardino Naguiat over a portion of lot containing an area of 200 square delay in the issuance of the certificate of stock.
meters.The contract stated stipulated that payment could be made even after
ten years from the execution of the Contract, provided the vendee paid 12
percent interest. Upon the death of Eulalio. Petitioner, Eulalio's widow, filed with
the trial court a complaint for rescission of the contract to sell alleging that the
8. Swire Realty Development Corporation v. Yu
failure of respondent to pay within 10 years, the balance of the purchase price
G.R. No. 207133 (9 March 2015)
constitutes a violation of the contract which entitles her to rescind the same. The
respondent, Naguiat, is now claiming that the contract cannot be rescinded on
Jayne Yu (Yu) and Swire Realty Development Corporation (Swiss) entered into
the ground that it clearly stipulates that in case of failure to pay the balance as
a Contract to Sell on July 25, 1995 covering one residential condominium unit.
stipulated, a yearly interest of 12% is to be paid. Should the contract to sell be
On September 24, 1997, Yu paid the full purchase price for the unit. However,
rescinded because of the unfulfillment to pay the balance within 10 years? No,
Swiss failed to complete and deliver the subject unit on time. The completion
the contract to sell should not be rescinded even though the balance was
date of the condominium unit was was extended to December 1999 as per
not paid within 10 years, due to the contract stipulating that the debtor may
License to Sell No. 99-05-3401 dated May 8, 1999.This prompted Yu to file a
still pay past 10 years but with a 12% interest. The stipulations of the contract
Complaint for Rescission of Contract with Damages before the Housing and
constitute the law between the parties; thus, courts have no alternative but to
Land Use Regulatory Board (HLURB) Expanded National Capital Region Field
enforce them as agreed upon and written. In this case, the contract stipulates
Office (ENCRFO). At the time of the ocular inspection conducted by the HLURB
that payments can be made past 10 years but only with a 12% interest, thus the
ENCRFO, the unit was not yet completely finished as the kitchen cabinets and
contract cannot be rescinded.
fixtures were not yet installed and the agreed amenities were not yet available.
Is Yu entitled the right to rescind the contract? Yes, Swire had incurred delay
7. Fil-Estate Golf and Development, Inc. v. Vertex Sales and Trading, Inc.
in the performance of its obligation amounting to breach of contract as it
G.R. No. 202079 (30 June 2013)
failed to finish and deliver the unit to Yu within the stipulated period. The
delay in the completion of the project as well as of the delay in the delivery
FEGDI sold, on installment, to RS Asuncion Construction Corporation (RSACC)
of the unit are breaches of statutory and contractual obligations which
one Class "C" Common Share of Forest Hills for P1,100,000.00. Prior to the full
entitle Yu to rescind the contract, demand a refund and payment of
payment of the purchase price, RSACC sold the Class "C" Common Share to
damages. According to Article 1191 of the New Civil Code, when the obligor
respondent Vertex Sales and Trading, Inc. (Vertex). RSACC advised FEGDI of
cannot comply with what is incumbent upon it, the obligee may seek rescission
the sale to Vertex and FEGDI, in turn, instructed Forest Hills to recognize Vertex
and, in the absence of any just cause for the court to determine the period of
as a shareholder. Despite Vertex's full payment, the share remained in the name
compliance, the court shall decree the rescission. Basic is the rule that the right
of FEGDI. Vertex demanded from FEDGI the issuance of a stock certificate in its
of rescission of a party to an obligation under Article 1191 of the Civil Code is
name but was unheeded. Vertex filed a Complaint for Rescission with Damages
predicated on a breach of faith by the other party who violates the reciprocity
and Attachment against FEGDI, FELI and Forest Hills. On the basis of its rights
between them. The breach contemplated in the said provision is the obligor's
under Article 1191 of the Civil Code, Vertex prayed for the rescission of the sale
failure to comply with an existing obligation. In this case, the initial completion
and demanded the reimbursement of the amount it paid (or P1,100,000.00), plus
date of the condominium unit was November 1998 but was extended to
interest. During the pendency of the rescission action, a certificate of stock was
December 1999. However, the report on the ocular inspection conducted on the
issued in Vertex's name, but Vertex refused to accept it. Can the delay in the
subject condominium project and subject unit shows that the amenities under
issuance of a stock certificate be considered a substantial breach as to warrant
the approved plan have not yet been provided as of May 3, 2002, and that the
rescission of the contract of sale? Yes, as FEGDI clearly failed to deliver the
subject unit has not been delivered to respondent as of August 28, 2002, which
stock certificates, representing the shares of stock purchased by Vertex,
is beyond the period of development of December 1999 under the license to sell.
within a reasonable time from the point the shares should have been
delivered, this was a substantial breach of their contract that entitles
NOTE:
Vertex the right to rescind the sale under Article 1191 of the Civil Code. The
 Basic is the rule that the right of rescission of a party to an obligation under Article NOTE:
1191 of the Civil Code is predicated on a breach of faith by the other party who Negligence is defined as the omission of that diligence required by the nature of
violates the reciprocity between them. The breach contemplated in the said the obligation and corresponds to the circumstances of the persons, of the time
provision is the obligor's failure to comply with an existing obligation. When the and of the place. The injured party may choose between the fulfillment and the
obligor cannot comply with what is incumbent upon it, the obligee may seek rescission of the obligation, with the payment of damages in either case. He may
rescission and, in the absence of any just cause for the court to determine the also seek rescission, even after he has chosen fulfillment, if the latter should
period of compliance, the court shall decree the rescission. become impossible.

10. Spouses Velarde v. Court of Appeals

9. Bank of the Philippine Islands v. Sanchez et. Al. G.R. No. 108346 (11 July 2001)
G.R. No. 179517 (19 November 2014)
A parcel of land with a house and other improvements located at 1918 Kamias
Vicente Victor, Kenneth Nereo, and Imelda Sanchez entered into an agreement St., Dasmarinas Village, Makati was owned by David Raymundo. David’s father,
with Jesus Garcia doing business under the name TransAmerican Sales and George Raymundo, negotiated with Avelina and Mariano Velardo for the sale of
Exposition, Inc. (TSEI) to sell the former’s property (TCT 156256) at the amount said property, which was, however, under lease. A Deed of Sale with Assumption
of P1.850 million with the modification that Garcia would be taking care of all the of Mortgage was executed with the agreement that the Spouses Velardo were
registration and transfer of the name of the property. As such, Felisa Yap, widow to pay a down payment of P800,000 and assuming the mortgage amount of 1.8M
of Kenneth Nereo turned over the subject property to Garcia.Afterwards, Yap in favor of BPI. They further agreed upon “to strictly and faithfully comply with all
required the occupants of the subject property to vacate the premises. the terms and conditions appearing in the real estate mortgage signed and
Thereafter, without the knowledge and consent of the Sanchezes and Yap, after executed by the vendor in favor of BPI… as if the same were originally signed
the property was vacated, Garcia installed his own caretaker with a strict and executed by the vendee''. Spouses Velardo was able to pay for 3 months:
instruction not to let anyone enter the premises. It was also during this time that September 19, 1986 at P27,225; October 20, 1986 at P23,000 and November
Garcia started advertising about TSEI’s selling of townhouses in the subject land. 19, 1986 at P23, 925. On December 15, 1986 Spouses Velardo stopped making
6 checks were given, the first 4 amounted to P250,000 each and the latter 2 payments when they were informed that BPI denied the application for
amounted to P400,000 each. The first 4 were cleared, but the latter 2 bounced assumption of mortgage. While, on January 5, 1987, defendants, through their
due to insufficiency of funds. Garcia was informed to replace the check, which counsel, wrote to plaintiffs informing them that their non-payment to the
he failed to do so. Yap then wrote to Garcia informing him that she and Vicente mortgage bank constituted non-performance of their obligation. Thus, Spouses
decided to rescind the contract, to which Garcia replied offering 2 manager’s Velardo, through their counsel, sent a reply stating that the Spouses Velardo is
checks with an aggregate amount of P300,000 as replacement of the checks. willing to pay the balance in cash not later than January 21, 1987 provided: (a)
This was refused by the Sanchezes. Was there a valid rescission of the you deliver actual possession of the property to her not later than January 15,
Agreement between the Sanchezes and TSEI/Garcia? Yes, the court ruled that 187 for her immediate occupancy; (b) you cause the release of title and mortgage
there was a valid rescission of agreement. This is the effect of attributing bad from BPI and make the title available and free from any liens and encumbrances;
faith to the intervenors, BPI, Garcia and TSEI. The rescission of the Agreement and (c) you execute an absolute deed of sale in her favor free from any liens or
was not barred by subsequent transfer; Article 1191 of the Civil Code states that encumbrances not later than January 21, 1987.The defendants, in return, sent a
rescission is available to a party in a reciprocal obligation where one party fails notarial notice of cancellation/rescission of the intended sale of the subject
to comply therewith. The Sanchezes are to elect their options under Arts. 449- property for the latter’s failure to comply with the terms and conditions of the
450 of the Civil Code , to wit: (1) acquire the property with the townhouses and Deed of Sale with Assumption of Mortgage and Undertaking. Was the rescission
other buildings and improvements that may be thereon without indemnifying of the contract by private respondents justified? Yes, the private respondents
TSEI or intervenors; (2) to demolish what has been built at the expense of TSEI validly exercised their right to rescind the contract, because of the failure
or intervenors; (3) ask the intervenors to pay for the price of the land. Further, of petitioners to comply with their obligation to pay the balance of the
Article 1385 of the Civil Code does provide that rescission shall not take place if purchase price. Indubitably, the latter violated the very essence of reciprocity
the subject matter of the prior agreement is already in the hands of a third party in the contract of sale, a violation that consequently gave rise to private
who did not act in bad faith. In the case at bar, the failure of TSEI to pay the respondents’ right to rescind the same in accordance with law. Thus, mutual
consideration for the sale of the subject property entitled the Sanchezes to restitution is required to bring back the parties to their original situation prior to
rescind the agreement. And in view of the finding that the intervenors acted in the inception of the contract. Rescission creates the obligation to return the
bad faith in purchasing the property, the subsequent transfer in their favor did object of the contract. It can be carried out only when the one who demands
not and cannot bar rescission. rescission can return whatever he may be obliged to restore. To rescind is to
 declare a contract void at its inception and to put an end to it as though it never
existed.

NOTE:
The injured party may choose between fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek
rescission even after he has chosen fulfillment, if the latter should become
impossible.

11. Fong v. Duenas

G.R. No. 185592 (15 June 2015)

Petitioner, Fong, and respondent, Duenas, entered into a verbal joint venture
contract where they agreed to engage in the food business and to incorporate a
holding company. The petitioner promised to contribute in cash while the
respondent promised to contribute in shares. Petitioner sent a letter to the
respondent informing him of his decision to limit his total contribution. Despite
the petitioner’s contribution, respondent still failed to give him the financial
documents on the valuation of his shares. Further, the respondent failed to
incorporate and register their company with the SEC which led to the petitioner
informing the respondent that he would cancel the joint venture agreement. He
also admitted that he could not immediately return the money since he used it to
defray his business expenses. Respondent proposed several payment schemes
which were denied by the petitioner and despite petitioner’s last letter of demand
for payment, the respondent still failed to pay after its receipt. This led to the
petitioner filing a complaint against him. Can the petitioner’s action for collection
of a sum of money be considered as an action for rescission? Yes, the body
rather than the title of the complaint determines the nature of the contract.
The petitioner’s allegations primarily pertained to his cancellation of the
agreement since respondent failed to perform his obligations to provide the
verifying documents for his shares and to incorporate their proposed corporation
therefore what the petitioner sought was rescission of the agreement. Rescission
is available when one of the parties substantially fails to do what he has obligated
himself to perform. It aims to address the breach of faith and the violation of
reciprocity between two parties in a contract.

NOTE:
Art. 1191 of the NCC provides that the right to rescission is inherent in
reciprocal obligations. Therefore, respondent not being able to perform his
obligations gives the petitioner the right to rescind their contract. Rescission
declares the contract void at its inception and restore the parties to their
position as if no contract has been made.