OBLIGATIONS AND CONTRACTS

For the Exclusive Use of SHARMEN D. GALLENERO

Acceleration Clause
An acceleration clause is a stipulation stating that, on the occasion of
the mortgagors default, the whole sum remaining unpaid automatically
becomes due and payable. (Luzon Development Bank v. Benedicto C.
Conquilla, GR No. 163338, September 21, 2005)
Agency
In a contract of agency, one binds oneself to render some service or to
do something in representation or on behalf of another, with the latters
consent or authority. The following are the elements of agency: (1) the
parties consent, express or implied, to establish the relationship; (2) the
object, which is the execution of a juridical act in relation to a third person; (3)
the representation, by which the one who acts as an agent does so, not for
oneself, but as a representative; (4) the limitation that the agent acts within
the scope of his or her authority. As the basis of agency is representation,
there must be, on the part of the principal, an actual intention to appoint, an
intention naturally inferable from the principals words or actions. In the same
manner, there must be an intention on the part of the agent to accept the
appointment and act upon it. Absent such mutual intent, there is generally no
agency. (Maria Tuazon v. Heirs of Ramos, GR No. 156262, July 14, 2005)
The declarations of agents alone are generally insufficient to establish
the fact or extent of their authority. The law makes no presumption of agency;
proving its existence, nature and extent is incumbent upon the person alleging
it. (Maria Tuazon v. Heirs of Ramos, GR No. 156262, July 14, 2005)
The rule is that the principal is responsible for the acts of the agent,
done within the scope of his authority, and should bear the damage caused to
third persons. On the other hand, the agent who exceeds his authority is
personally liable for the damages. (Pleasantville Development v. Court of
Appeals, GR No. 79688, February 1, 1996)
Assignment of Credit
An assignment of credit is an agreement by virtue of which the owner of
a credit (known as the assignor), by a legal cause -- such as sale, dation in
payment, exchange or donation -- and without the need of the debtors
consent, transfers that credit and its accessory rights to another (known as
the assignee), who acquires the power to enforce it, to the same extent as the
assignor could have enforced it against the debtor. (Far East Bank v. Diaz
Realty, GR No. 138588, August 23, 2001)
Bad Faith
Bad faith does not simply connote bad judgment or simple negligence.
It imports a dishonest purpose or some moral obliquity and conscious doing of
a wrong, a breach of a known duty due to some motive or interest or ill will
that partakes of the nature of fraud. (Eduardo M. Cojuangco Jr. v. Court of
Appeals, GR No. 119398, July 2, 1999)
Breach of Obligation

The right of rescission of a party to an obligation under Article 1191 of

the Civil Code is predicated on a breach of faith by the other party who
violates the reciprocity between them. The breach contemplated in the said
provision is the obligors failure to comply with an existing obligation. When
the obligor cannot comply with what is incumbent upon it, the obligee may
seek rescission and, in the absence of any just cause for the court to
determine the period of compliance, the court shall decree the rescission.
(Spouses Velarde v. Court of Appeals, GR No. 108346, July 11, 2001)
Brokerage
Since a brokerage relationship is essentially a contract for the
employment of an agent, principles of contract law also govern the brokerprincipal relationship. (Abacus Securities v. Ruben U. Ampil, GR No. 160016,
February 27, 2006)
In securities trading, the brokers are essentially the counterparties to
the stock transactions at the Exchange. Since the principals of the broker are
generally undisclosed, the broker is personally liable for the contracts thus
made. (Abacus Securities v. Ruben U. Ampil, GR No. 160016, February 27,
2006)
Conditional Obligation
Condition has been defined as every future and uncertain event upon
which an obligation or provision is made to depend. It is a future and
uncertain event upon which the acquisition or resolution of rights is made to
depend by those who execute the juridical act. Without it, the sale of the
property under the Contract cannot be perfected, and petitioner cannot be
obliged to purchase the property. When the consent of a party to a contract
is given subject to the fulfillment of a suspensive condition, the contract is not
perfected unless that condition is first complied with.
The Court has held that when the obligation assumed by a party to a
contract is expressly subjected to a condition, the obligation cannot be
enforced against him unless the condition is complied with. Furthermore,
[t]he obligatory force of a conditional obligation is subordinated to the
happening of a future and uncertain event, so that if that event does not take
place, the parties would stand as if the conditional obligation had never
existed. (Felix L. Gonzales v. Heirs of Cruz, GR No. 131784, September 16,
1999)
Conditions precedent are not favored. Unless impelled by plain and
unambiguous language or by necessary implication, courts will not construe a
stipulation as laden with such burden, particularly when that stipulation would
result in a forfeiture or in inequitable consequences. (Philippine National
Bank v. RBL Enterprises, GR No. 149569, May 28, 2004)
In this jurisdiction, the filing of a claim with the carrier within the time
limitation therefore actually constitutes a condition precedent to the accrual of a
right of action against a carrier for loss of or damage to the goods. The shipper
or consignee must allege and prove the fulfillment of the condition. If it fails to do
so, no right of action against the carrier can accrue in favor of the former. The
aforementioned requirement is a reasonable condition precedent; it does not

constitute a limitation of action. (Federal Express v. American Home Assurance,

GR No. 150094, August 18, 2004)
Consignation
Consignation is made by depositing the proper amount to the judicial
authority, before whom the tender of payment and the announcement of the
consignation shall be proved. (Myrna Ramos v. Susana S. Sarao, GR No.
149756, February 11, 2005)
Contract of Adhesion
The agreement involved here is a contract of adhesion, which was
prepared entirely by one party and offered to the other on a take it or leave it
basis. Following the general rule, the contract must be read against the party
that prepared it, more so because a bank is held to high standards of care in
the conduct of its business. (Solidbank v. Mindanao Ferroalloy, GR No.
153535, July 28, 2005; Victorino Savellano v. Northwest Airlines, GR No.
151783, July 8, 2003; Pilipinas Shell v. John Bordman Ltd., GR No. 159831,
October 14, 2005)
Contracts; Definition
A contract is a meeting of minds between two persons, whereby one is
bound to give something or to render some service to the other. (Archipelago
Management v. Court of Appeals, GR No. 128850, November 20, 1998; Sta.
Clara Homeowners v. Spouses Gaston, GR No. 141961, January 23, 2002)
Contracts have the force of law between the contracting parties who may
establish such stipulations, clauses, terms and conditions as they may want,
subject only to the limitation that their agreements are not contrary to law,
morals, customs, public policy or public order. (Solid Homes v. Court of
Appeals, GR No. 117501, July 8, 1997)
Contracts; Interpretation
When the words of a contract are clear and readily understandable,
there is no room for construction. Contracts are to be interpreted according to
their literal meaning and should not be interpreted beyond their obvious
intendment. The contract is the law between the parties. (Heirs of the Late
Spouses Balite v. Rodrigo N. Lim, GR No. 152168, December 10, 2004;
Pryce Corporation v. Philippine Amusement and Gaming Corporation, GR No.
157480, May 6, 2005)
In determining the nature of a contract, the Court looks at the intent of
the parties and not at the nomenclature used to describe it. Pivotal to
deciding this issue is the true aim and purpose of the contracting parties as
shown by the terminology used in the covenant, as well as by their conduct,
words, actions and deeds prior to, during and immediately after the executing
the agreement. In this regard, parole evidence becomes admissible to prove
the true intent and agreement of the parties. (Lao v. Court of Appeals; GR No.
115307, July 8, 1997; Edilberto Cruz v. Bancom Finance Corporation, GR No.
147788, March 19, 2002; Ramon Ramos v. Heirs of Ramos Sr., GR No.
140848, April 25, 2002; Myrna Ramos v. Susana S. Sarao, GR No. 149756,
February 11, 2005)

When the text of a contract is explicit and leaves no doubt as to its

intention, the court may not read into it any intention that would contradict its
plain import. The hornbook rule on interpretation of contracts gives primacy to
the intention of the parties, which is the law among them. Ultimately, their
intention is to be deciphered not from the unilateral post facto assertions of
one of the parties, but from the language used in the contract. And when the
terms of the agreement, as expressed in such language, are clear, they are to
be understood literally, just as they appear on the face of the contract.
Indeed, the legal effects of a contract are determined by extracting the
intention of the parties from the language they used and from their
contemporaneous and subsequent acts. This principle gains more force
when third parties are concerned. To require such persons to go beyond what
is clearly written in the document is unfair and unjust. They cannot possibly
delve into the contracting parties minds and suspect that something is amiss,
when the language of the instrument appears clear and unequivocal.
(Adoracion Cruz v. Court of Appeals, GR No. 126713, July 27, 1998)
Basic is the rule in the interpretation of contracts that if some stipulation
therein should admit of several meanings, it shall be understood as bearing
that import most adequate to render it effectual. (Felix L. Gonzales v. Heirs of
Cruz, GR No. 131784, September 16, 1999)
The various stipulations in a contract should be interpreted together.
Ambiguous ones should be so construed as to conform to the sense that
would result if all the provisions are comprehended jointly. (Philippine
National Construction Corporation v. Mars Construction, GR No. 133909,
February 15, 2000; Republic v. Jerry V. David, GR No. 155634, August 16,
2004)
Contracts; Requisites
A valid contract requires the concurrence of the following essential
requisites: (1) consent of the contracting parties, (2) object certain which is the
subject matter of the contract, and (3) cause of the obligation which is
established. (Archipelago Management v. Court of Appeals, GR No. 128850,
November 20, 1998; Uraca v. Court of Appeals, GR No. 115158, September
5, 1997; Genaro Cordial v. David Miranda, GR No. 135495, December 14,
2000; Desamparados M. Soliva v. Intestate Estate of Villalba, GR No. 154017,
December 8, 2003)
Contracts: Stipulation pour autrui
A stipulation pour autrui is one in favor of a third person who may
demand its fulfillment, provided he communicated his acceptance to the
obligor before its revocation. An incidental benefit or interest, which another
person gains, is not sufficient. The contracting parties must have clearly and
deliberately conferred a favor upon a third person. (Associated Bank v. Court
of Appeals, GR No. 123793, June 29, 1998)
Contracts; Terms
Obligations arising from a contract have the force of law between the
parties. Not being contrary to law, morals, good customs, public order or
public policy, the parties to the contract are bound by its terms and conditions.

(L&L Lawrence Footwear v. PCI Leasing, GR No. 160531, August 30, 2005;
Fidela del Castillo v. Spouses Naguiat, GR No. 137909, December 11, 2003;
International Finance Corporation v. Imperial Textile Mills, GR No. 160324,
November 15, 2005)
The law is clear that when its terms have been reduced to writing, an
agreement must be presumed to contain all the terms agreed upon; and there
can be, between the parties and their successors in interest, no evidence of
such terms other than the contents of the written agreement. (Apolonia Ll.
Ocampo v. Fidela Ll. Ocampo, GR No. 150707, April 14, 2004)
Parties are free to enter into any contractual stipulation, provided it is
not illegal or contrary to public morals. When such agreement, freely and
voluntarily entered into, turns out to be disadvantageous to a party, the courts
cannot rescue it without crossing the constitutional right to contract. They are
not authorized to extricate parties from the necessary consequences of their
acts, and the fact that the contractual stipulations may turn out to be
financially disadvantageous will not relieve the latter of their obligations. (LL
and Company v. Huang Chao Chun, GR No. 142378, March 7, 2002; Antonia
Torres v. Court of Appeals, GR No. 134559, December 9, 1999; Oscar C.
Fernandez v. Spouses Tarun, GR No. 143868, November 14, 2002;
Luzviminda J. Villareal v. Donaldo Efren C. Ramirez, GR No. 144214, July 14,
2003)
Default
Mora solvendi, or debtors default, is defined as a delay in the fulfillment
of an obligation, by reason of a cause imputable to the debtor. There are three
requisites necessary for a finding of default. First, the obligation is
demandable and liquidated; second, the debtor delays performance; third, the
creditor judicially or extrajudicially requires the debtors performance.
(Selegna Management v. United Coconut Planters Bank, GR No. 165662,
May 3, 2006)
Equity
Equity as the complement of legal jurisdiction seeks to reach and to
complete justice where courts of law, through the inflexibility of their rules and
want of power to adapt their judgments to the special circumstances of cases,
are incompetent to do so. Equity regards the spirit and not the letter, the intent
and not the form, the substance rather than the circumstance, as it is
variously expressed by different courts. (Josie Go Tamio v. Encarnacion
Ticson, GR No. 154895, November 18, 2004)
Equity, which has been aptly described as justice outside legality, is
applied only in the absence of, and never against, statutory law or judicial
rules of procedure. Positive rules prevail over all abstract arguments based
on equity contra legem. (Republic v. Court of Appeals, GR No. 100709,
November 14, 1997)
Financial Leasing Agreement
Under a financial leasing agreement, a finance company purchases, on
behalf of or at the instance of the lessee, the equipment that the latter is
interested to buy but has insufficient funds for. Simultaneous with the

purchase, the finance company then leases the equipment to the lessee in
consideration of the periodic payment of a fixed amount of rental. Recognized
by this Court as fairly common transactions in the commercial world, such
agreements have been accepted as genuine and legitimate. (L&L Lawrence
Footwear v. PCI Leasing, GR No. 160531, August 30, 2005)
Fortuitous Event
In order for a fortuitous event to exempt one from liability, it is necessary
that one has committed no negligence or misconduct that may have
occasioned the loss. An act of God cannot be invoked to protect a person
who has failed to take steps to forestall the possible adverse consequences of
such a loss. Ones negligence may have concurred with an act of God in
producing damage and injury to another; nonetheless, showing that the
immediate or proximate cause of the damage or injury was a fortuitous event
would not exempt one from liability. When the effect is found to be partly the
result of a persons participation -- whether by active intervention, neglect or
failure to act -- the whole occurrence is humanized and removed from the
rules applicable to acts of God.
This often-invoked doctrine of fortuitous event or caso fortuito has
become a convenient and easy defense to exculpate an obligor from liability.
To constitute a fortuitous event, the following elements must concur: (a) the
cause of the unforeseen and unexpected occurrence or of the failure of the
debtor to comply with obligations must be independent of human will; (b) it
must be impossible to foresee the event that constitutes the caso fortuito or, if
it can be foreseen, it must be impossible to avoid; (c) the occurrence must be
such as to render it impossible for the debtor to fulfill obligations in a normal
manner; and (d) the obligor must be free from any participation in the
aggravation of the injury or loss.
Article 1174 of the Civil Code states that no person shall be responsible
for a fortuitous event that could not be foreseen or, though foreseen, was
inevitable. In other words, there must be an exclusion of human intervention
from the cause of injury or loss. (Mindex Resources Development v. Ephraim
Morillo, GR No. 138123, March 12, 2002; Lea Mer Industries v. Malayan
Insurance, GR No. 161745, September 30, 2005)
Fraud
Fraud cannot be presumed, and the failure of petitioner to prove it
defeats its own cause. (Republic v. Court of Appeals, GR No. 116111,
January 21, 1999; Inocelia S. Autencio v. City Administrator, GR No. 152752,
January 19, 2005; Solidbank v. Mindanao Ferroalloy, GR No. 153535, July 28,
2005)
There is fraud when one party is induced by the other to enter into a
contract, through and solely because of the latters insidious words or
machinations. But not all forms of fraud can vitiate consent. Under Article
1330, fraud refers to dolo causante or causal fraud, in which, prior to or
simultaneous with the execution of a contract, one party secures the consent
of the other by using deception, without which such consent would not have
been given. (Archipelago Management v. Court of Appeals, GR No. 128850,
November 20, 1998)

Fraud refers to all kinds of deception -- whether through insidious

machination, manipulation, concealment or misrepresentation -- that would
lead an ordinarily prudent person into error after taking the circumstances into
account. Needless to say, the deceit employed must be serious. (Solidbank v.
Mindanao Ferroalloy, GR No. 153535, July 28, 2005)
Fraud is present when the debtor knows that its actions would cause
injury. (Coastal Pacific Trading v. Southern Rolling Mills, GR No. 118692, July
28, 2006)
Good Faith
Good faith is a question of intention. It consists in the possessors
belief that the person from whom a thing has been received is its owner and
can convey title. It is determined by outward acts and proven conduct.
(Spouses Tan v. Gorgonia Bantegui, GR No. 154027, October 24, 2005; Casa
Montessori Internationale v. Bank of the Philippine Islands, GR Nos. 149454 &
149507, May 28, 2004; Spouses Domingo v. Guillermo Reed, GR No. 157701,
December 9, 2005; Eastworld Motor Industries v. Skunac Corp., GR No.
163994, December 16, 2005)
Interest Rate
Interest shall be computed in accordance with the stipulation of the
parties. In the absence of such agreement, the rate shall be twelve percent
(12%) per annum when the obligation arises out of a loan or a forbearance of
money, goods or credits. In other cases, it shall be six percent (6%).
(Crismina Garments v. Court of Appeals, GR No. 128721, March 9, 1999;
Philrock v. Construction Industry Arbitration Commission, GR Nos. 132848-49,
June 26, 2001; Asset Privatization Trust v. Sandiganbayan, GR No. 138598,
June 29, 2001)
Iniquitous and unconscionable stipulations on interest rates, penalties
and attorneys fees are contrary to morals. Consequently, courts are granted
authority to reduce them equitably. (Restituta M. Imperial v. Alex A. Jaucian,
GR No. 149004, April 14, 2004)
Joint Obligation
A joint obligation is one in which each debtors is liable only for a
proportionate part of the debt, and the creditor is entitled to demand only a
proportionate part of the credit from each debtor. (PH Credit v. Court of
Appeals, GR No. 109648, November 22, 2001)
Article 1207 of the Civil Code, which provides that obligations are
generally considered joint, except when otherwise expressly stated or when the
law or the nature of the obligation requires solidarity. (Lafarge Cement v.
Continental Cement, GR No. 155173, November 23, 2004)

Laches
Laches is defined as failure or neglect for an unreasonable and
unexplained length of time to do that which, by exercising due diligence, could

or should have been done earlier. It is negligence or omission to assert a

right within an unreasonable time, warranting the presumption that the party
entitled to assert it has either abandoned or declined to assert it. The
question of laches is addressed to the sound discretion of the court, and since
it is an equitable doctrine, its application is controlled by equitable
considerations. It cannot work to defeat justice or to perpetrate fraud and
injustice. (PAL Employees Savings and Loan Association v. NLRC, GR No.
105963, August 22, 1996; Jose Manuel Stilianopulos v. City of Legaspi, GR
No. 133913, October 12, 1999; Gilda C. Lim v. Patricia Lim-Yu, GR No.
138343, February 19, 2001; Antonio Talusan vs. Herminigildo Tayag, GR No.
133698, April 4, 2001; Asuncion San Juan v. Court of Appeals, GR No.
110055, August 20, 2001; Ramon Ramos v. Heirs of Honorio Ramos Sr., GR
No. 140848, April 25, 2002; Spouses Benito v. Agapita Saquitan-Ruiz, GR No.
149906, December 26, 2002; State Investment Trust v. Delta Motors, GR No.
144444, April 3, 2003; Aquila Larena v. Fructuosa Mapili, GR No. 146341,
August 7, 2003; Desamparados M. Soliva v. Intestate Estate of Villalba, GR
No. 154017, December 8, 2003; Miguel Cuenco v. Concepcion Cuenco, GR
No. 149844, October 13, 2004; Francel Realty v. Ricardo T. Sycip, GR No.
154684, September 8, 2005; Catalina Jandoc-Gatdula v. Julio Dimalanta, GR
No. 139503, July 25, 2006)
(1)
(2)
(3)
(4)

The following are the essential elements of laches:

Conduct on the part of the defendant that gave rise to the situation
complained of; or the conduct of another which the defendant claims
gave rise to the same;
Delay by the complainant in asserting his right after he has had
knowledge of the defendants conduct and after he has had an
opportunity to sue;
Lack of knowledge by or notice to the defendant that the complainant
will assert the right on which he bases his suit; and
Injury or prejudice to the defendant in the event relief is accorded to the
complainant. (Desamparados M. Soliva v. Intestate Estate of Villalba,
GR No. 154017, December 8, 2003)

The principle of laches is a creation of equity, which is applied not to

penalize neglect or failure to assert a right within a reasonable time, but rather
to avoid recognizing a right when to do so would result in a clearly inequitable
situation or in an injustice. (Associated Bank v. Court of Appeals, GR No.
123793, June 29, 1998; Antonio R. Agra v. Philippine National Bank, GR No.
133317, June 29, 1999; Heirs of Ermac v. Heirs of Ermac, GR No. 149679,
May 30, 2003)
The defense of laches, which is a question of inequity in permitting a
claim to be enforced, applies independently of prescription, which is a
question of time. Prescription is statutory; laches is equitable. (Delfina Vda.
de Rigonan v. Zoroaster Derecho, GR No. 159571, July 15, 2005)
Relief has been denied to litigants who, by sleeping on their rights for
an unreasonable length of time -- either by negligence, folly or inattention -have allowed their claims to become stale. Vigilantibus, sed non
dormientibus, jura subveniunt. The laws aid the vigilant, not those who

slumber on their rights. (Desamparados M. Soliva v. Intestate Estate of

Villalba, GR No. 154017, December 8, 2003)
In several decisions, this Court has held that laches will bar recovery of
a property, even if the mode of transfer used by an alleged member of a
cultural minority lacks executive approval. (Catalina Jandoc-Gatdula v. Julio
Dimalanta, GR No. 139503, July 25, 2006)
Lease
A stipulation in a lease contract stating that its five-year term is subject
to an option to renew shall be interpreted to be reciprocal in character.
Unless the language shows an intent to allow the lessee to exercise it
unilaterally, such option shall be deemed to benefit both the lessor and the
lessee who must both consent to the extension or renewal, as well as to its
specific terms and conditions. (LL and Company v. Huang Chao Chun, GR
No. 142378, March 7, 2002)
In general, the power of the courts to fix a longer term for a lease is
discretionary. Such power is to be exercised only in accordance with the
particular circumstances of a case: a longer term to be granted where equities
demanding extension come into play; to be denied where none appear -always with due deference to the parties freedom to contract. Thus, courts
are not bound to extend the lease. Article 1675 of the Civil Code excludes
cases falling under Article 1673 from those under Article 1687. Article 1673
provides, among others, that the lessor may judicially eject the lessee upon
the expiration of the period agreed upon or that which is fixed for the duration
of the leases. Where no period has been fixed by the parties, the courts,
pursuant to Article 1687, have the potestative authority to set a longer period
of lease. (LL and Company v. Huang Chao Chun, GR No. 142378, March 7,
2002)
The extension of a lease contract must be made before the term of the
agreement expires, not after. Upon the lapse of the stipulated period, courts
cannot belatedly extend or make a new lease for the parties, even on the
basis of equity. (LL and Company v. Huang Chao Chun, GR No. 142378,
March 7, 2002)
True, mere failure to pay rentals does not make possession unlawful,
but when a valid demand to vacate the premises is made by the lessor, the
lessees continued withholding of possession becomes unlawful. Well-settled
is the rule that the failure of the owners/lessors to collect or their refusal to
accept the rentals is not a valid defense. (LL and Company v. Huang Chao
Chun, GR No. 142378, March 7, 2002)
Article 1658 of the Civil Code provides only two instances in which the
lessee may suspend payment of rent; namely, in case the lessor fails to make
the necessary repairs or to maintain the lessee in peaceful and adequate
enjoyment of the property leased. (LL and Company v. Huang Chao Chun,
GR No. 142378, March 7, 2002)
Article 1667 of the Civil Code holds the lessee responsible for the
deterioration or loss of the thing leased. In addition, Article 1665 of the same

Code provides that the lessee shall return the thing leased, upon the
termination of the lease, just as he received it, save what has been lost or
impaired by the lapse of time, or by ordinary wear and tear, or from an
inevitable cause. (Mindex Resources v. Ephraim Morillo, GR No. 138123,
March 12, 2002)
Lease; Assignment
The assignment of a lease by the lessee involves a transfer of rights
and obligations pertaining to the contract; hence, the consent of the lessor is
necessary. Article 1649 of the Civil Code is explicit.
The objective of the law in prohibiting the assignment of the lease
without the lessors consent is to protect the owner or lessor of the leased
property. In the case of cession or assignment of lease rights on real
property, there is a novation by the substitution of the person of one of the
parties -- the lessee. The personality of the lessee, who dissociates from the
lease, disappears; only two persons remain in the juridical relation -- the
lessor and the assignee who is converted into the new lessee. (Josie Go
Tamio v. Encarnacion Ticson, GR No. 154895, November 18, 2004)
Lease; Lessors Title
The relation of lessor and lessee does not depend on the formers title
but on the agreement between the parties, followed by the possession of the
premises by the lessee under such agreement. As long as the latter remains
in undisturbed possession, it is immaterial whether the lessor has a valid title
-- or any title at all -- at the time the relationship was entered into. Between
the present parties, the lease -- which was actually a sublease -- was
effective. And respondent had a colorable right to lease the premises by
virtue of the assignment even if, as against the owner, both the assignment
and the sublease were ineffectual. (Josie Go Tamio v. Encarnacion Ticson,
GR No. 154895, November 18, 2004)
Misrepresentation
The act of the Commission on Higher Education enjoining petitioner
from using the word university in its corporate name and ordering it to revert
to its authorized name does not violate its proprietary rights or constitute
irreparable damage to the school. Indeed, petitioner has no vested right to
misrepresent itself to the public. An injunction is a remedy in equity and
should not be used to perpetuate a falsehood. (Indiana Aerospace University
v. Commission on Higher Education, GR No. 139371, April 4, 2001)
Mortgage
The Civil Code provides that an essential requisite of a contract of
mortgage is that the mortgagor be the absolute owner of the thing mortgaged.
Co-ownership cannot be presumed even if only a portion of the property was
mortgaged, because a co-owner may dispose only of ones interest in the
ideal or abstract part of the undivided thing co-owned with others. The effect
of a mortgage by a co-owner shall be limited to the portion that may be
allotted to that person upon the termination of the co-ownership. (Apolonia Ll.
Ocampo v. Fidela Ll. Ocampo, GR No. 150707, April 14, 2004; Lucio Robles
v. Court of Appeals, GR No. 123509, March 14, 2000)

Article 2126 of the Civil Code describes the real nature of a mortgage: it
is a real right following the property, such that in subsequent transfers by the
mortgagor, the transferee must respect the mortgage. A registered mortgage
lien is considered inseparable from the property inasmuch as it is a right in
rem. The mortgage creates a real right or a lien which, after being recorded,
follows the chattel wherever it goes. Under Article 2129 of the same Code,
the mortgage on the property may still be foreclosed despite the transfer.
(Philippine National Bank v. RBL Enterprises, GR No. 149569, May 28, 2004)
The right to attack the validity of a mortgage may be lost by a waiver of
defects and objections, such as alleged fraud or misrepresentation.
Mortgagors desiring to attack the validity of a mortgage should act with
promptness. Otherwise, unreasonable delay may amount to ratification. A
duly executed mortgage is presumed to be valid until the contrary is shown.
To the party attacking rests the burden of proving its invalidity due to fraud,
duress or illegality. It should be stressed that, as a general rule, courts will
adopt such construction as will sustain rather than defeat the mortgage.
(Asuncion San Juan v. Court of Appeals, GR No. 110055, August 20, 2001)
True, registration is not the operative act for a mortgage to be binding
between the parties. But to third persons, it is indispensible. x x x. Settled in
this jurisdiction is the doctrine that a prior registration of a lien creates a
preference. Even a subsequent registration of the prior mortgage will not
diminish this preference, which retroacts to the date of the annotation of the
notice of lis pendens and the adverse claim. (Edilberto Cruz v. Bancom
Finance Corporation, GR No. 147788, March 19, 2002)
The nonpayment of the debt when due gives the mortgagee the right to
foreclose the mortgage, sell the property, and apply the proceeds of the sale
to the satisfaction of the loan obligation. (Myrna Ramos v. Susana S. Sarao,
GR No. 149756, February 11, 2005)
Negligence
Negligence, as commonly understood, is that conduct that naturally or
reasonably creates undue risk or harm to others. It may be a failure to
observe that degree of care, precaution or vigilance that the circumstances
justly demand; or to do any other act that would be done by a prudent and
reasonable person, who is guided by considerations that ordinarily regulate
the conduct of human affairs. (Mindex Resources v. Ephraim Morillo, GR No.
138123, March 12, 2002)
Negligence is not presumed, but proven by whoever alleges it. Its mere
existence is not sufficient without proof that it, and no other cause, has given
rise to damages. (Casa Montessori Internationale v. Bank of the Philippine
Islands, GR Nos. 149454 & 149507, May 28, 2004)
When both parties to a transaction are mutually negligent in the
performance of their obligations, the fault of one cancels the negligence of the
other. Thus, their rights and obligations may be determined equitably. No one
shall enrich oneself at the expense of another. (Rodzssen Supply v. Far East
Bank, GR No. 109087, May 9, 2001)

Loss brought about by the concurrent negligence of two persons shall

be borne by the one who was in the immediate, primary and overriding
position to prevent it. In the present case, the mortgagee -- who is engaged in
the business of lending money secured by real estate mortgages -- could
have easily avoided the loss by simply exercising due diligence in
ascertaining the identity of the impostor who claimed to be the registered
owner of the property mortgaged. (Guillermo Adriano v. Romulo Pangilinan,
GR No. 137471, January 16, 2002)
Novation
We have ruled previously that there are only two ways to effect novation
and thereby extinguish an obligation. First, novation must be explicitly stated
and declared in unequivocal terms. Novation is never presumed. Second,
the old and new obligations must be incompatible on every point. The test of
incompatibility is whether the two obligations can stand together, each one
having its independent existence. If they cannot, they are incompatible and
the latter obligation novates the first. Novation must be established either by
the express terms of the new agreement or by the acts of the parties clearly
demonstrating the intent to dissolve the old obligation as a consideration for
the emergence of the new one. The will to novate, whether totally or partially,
must appear by express agreement of the parties, or by their acts which are
too clear and unequivocal to be mistaken. (Fortune Motors v. Court of
Appeals, GR No. 112191, February 7, 1997; Uraca v. Court of Appeals, GR
No. 115158, September 5, 1997; Security Bank v. Rodolfo M. Cuenca, GR No.
138544, October 3, 2000)
Novation is a mode of extinguishing an obligation by changing its
objects or principal obligations, by substituting a new debtor in place of the old
one, or by subrogating a third person to the rights of the creditor.
In general, there are two modes of substituting the person of the debtor:
(1) expromision and (2) delegacion. In expromision, the initiative for the
change does not come from -- and may even be made without the knowledge
of -- the debtor, since it consists of a third persons assumption of the
obligation. As such, it logically requires the consent of the third person and
the creditor. In delegacion, the debtor offers, and the creditor accepts, a third
person who consents to the substitution and assumes the obligation; thus, the
consent of these three persons are necessary. Both modes of substitution by
the debtor require the consent of the creditor.
Novation may also be extinctive or modificatory. It is extinctive when an
old obligation is terminated by the creation of a new one that takes the place
of the former. It is merely modificatory when the old obligation subsists to the
extent that it remains compatible with the amendatory agreement. Whether
extinctive or modificatory, novation is made either by changing the object or
the principal conditions, referred to as objective or real novation; or by
substituting the person of the debtor or subrogating a third person to the rights
of the creditor, an act known as subjective or personal novation. For novation
to take place, the following requisites must concur:
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new contract.

3) The old contract must be extinguished.

4) There must be a valid new contract.
Novation may also be express or implied. It is express when the new
obligation declares in unequivocal terms that the old obligation is
extinguished. It is implied when the new obligation is incompatible with the
old one on every point. The test of incompatibility is whether the two
obligations can stand together, each one with its own independent existence.
(Romeo C. Garcia v. Dionisio V. Llamas, GR No. 154127, December 8, 2003)
Obligations
Right is one thing; obligation is quite another. A right may not be
exercised; it may even be waived. An obligation, however, must be
performed; those who do not discharge it prudently must necessarily face the
consequence of their dereliction or omission. (Abacus Securities v. Ruben U.
Ampil, GR No. 160016, February 27, 2006)
The Civil Code prohibits purely potestative, suspensive, conditional
obligations that depend on the whims of the debtor, because such obligations
are usually not meant to be fulfilled. Indeed, to allow the fulfillment of
conditions to depend exclusively on the debtors will would be to sanction
illusory obligations. (Fidela del Castillo v. Spouses Naguiat, GR No. 137909,
December 11, 2003)
As a general rule, the death of either the creditor or the debtor does not
extinguish the obligation. Obligations are transmissible to the heirs, except
when the transmission is prevented by the law, the stipulations of the parties,
or the nature of the obligation. Only obligations that are personal or are
identified with the persons themselves are extinguished by death. (Stronghold
Insurance v. Republic-Asahi Glass, GR No. 147561, June 22, 2006)
Law and logic require that a contract be used as basis and foundation
for the accurate determination of the extent and the amount of obligations
arising therefrom. In the determination of these obligations, the
Sandiganbayan cannot override the valid and existing provisions embodied in
the loan documents by supplanting them with extraneous matters, which the
parties have not mutually agreed upon. (Asset Privatization Trust v.
Sandiganbayan, GR No. 138598, June 29, 2001)
Obligations with Penal Clause
In obligations with a penal clause, the general rule is that the penalty
serves as a substitute for the indemnity for damages and the payment of
interests in case of noncompliance; that is, if there is no stipulation to the
contrary, in which case proof of actual damages is not necessary for the
penalty to be demanded. There are exceptions to the aforementioned rule,
however, as enumerated in paragraph 1 of Article 1226 of the Civil Code: 1)
when there is a stipulation to the contrary, 2) when the obligor is sued for
refusal to pay the agreed penalty, and 3) when the obligor is guilty of fraud. In
these cases, the purpose of the penalty is obviously to punish the obligor for
the breach. Hence, the obligee can recover from the former not only the
penalty, but also other damages resulting from the nonfulfillment of the

principal obligation. (Pryce Corporation v. Philippine Amusement and Gaming

Corporation, GR No. 157480, May 6, 2005)
Pari Delicto
The principle of in pari delicto provides that when two parties are
equally at fault, the law leaves them as they are and denies recovery by either
one of them. However, this principle does not apply with respect to inexistent
and void contracts. (Yu Bun Guan v. Elvira Ong, GR No. 144735, October 18,
2001; Abacus Securities v. Ruben U. Ampil, GR No. 160016, February 27,
2006)
Partnership
By the contract of partnership, two or more persons bind themselves to
contribute money, property or industry to a common fund, with the intention of
dividing the profits among themselves. (Fernando Santos v. Spouses Reyes,
GR No. 135813, October 25, 2001; AFISCO Insurance v. Court of Appeals,
GR No. 112675, January 25, 1999)
A partnership may be deemed to exist among parties who agree to
borrow money to pursue a business and to divide the profits or losses that
may arise therefrom, even if it is shown that they have not contributed any
capital of their own to a "common fund." Their contribution may be in the form
of credit or industry, not necessarily cash or fixed assets. Being partners, they
are all liable for debts incurred by or on behalf of the partnership. (Lim Tong
Lim v. Philippine Fishing Gear Industries, GR No. 136448, November 3, 1999)
The partnership has a juridical personality separate and distinct from
that of each of the partners. Since the capital was contributed to the
partnership, not to petitioners, it is the partnership that must refund the equity
of the retiring partners.
Since it is the partnership, as a separate and distinct entity, that must
refund the shares of the partners, the amount to be refunded is necessarily
limited to its total resources. In other words, it can only pay out what it has in
its coffers, which consists of all its assets. However, before the partners can
be paid their shares, the creditors of the partnership must first be
compensated. After all the creditors have been paid, whatever is left of the
partnership assets becomes available for the payment of the partners
shares. (Luzviminda J. Villareal v. Donaldo Efren C. Ramirez, GR No.
144214, July 14, 2003)
For the purpose of determining the profit that should go to an industrial
partner (who shares in the profits but is not liable for the losses), the gross
income from all the transactions carried on by the firm must be added
together, and from this sum must be subtracted the expenses or the losses
sustained in the business. Only in the difference representing the net profits
does the industrial partner share. But if, on the contrary, the losses exceed
the income, the industrial partner does not share in the losses. (Fernando
Santos v. Spouses Reyes, GR No. 135813, October 25, 2001)

Payment
True, jurisprudence holds that, in general, a check does not constitute
legal tender, and that a creditor may validly refuse it. It must be emphasized,
however, that this dictum does not prevent a creditor from accepting a check
as payment. In other words, the creditor has the option and the discretion of
refusing or accepting it. (Far East Bank v. Diaz Realty, GR No. 138588,
August 23, 2001)
Partial payment did not extinguish the obligation. The Civil Code states
that a debt is not paid unless the thing in which the obligation consists has
been completely delivered. Besides, a late partial payment could not have
possibly forestalled a long-expired maturity date. (Selegna Management v.
United Coconut Planters Bank, GR No. 165662, May 3, 2006)
When creditors receive partial payment, they are not ipso facto deemed
to have abandoned their prior demand for full payment. (Selegna
Management v. United Coconut Planters Bank, GR No. 165662, May 3, 2006)
Nonpayment of the full consideration did not invalidate the contract of
sale. Under settled doctrine, nonpayment is a resolutory condition that
extinguishes the transaction existing for a time and discharges the obligations
created thereunder. The remedy of the unpaid seller is to sue for collection or,
in case of a substantial breach, to rescind the contract. (Desamparados M.
Soliva v. Intestate Estate of Villalba, GR No. 154017, December 8, 2003;
Fidela del Castillo v. Spouses Naguiat, GR No. 137909, December 11, 2003)
Penalty
The question of whether a penalty is reasonable or iniquitous is
addressed to the sound discretion of the courts. To be considered in fixing the
amount of penalty are factors such as -- but not limited to -- the type, extent
and purpose of the penalty; the nature of the obligation; the mode of the
breach and its consequences; the supervening realities; the standing and
relationship of the parties; and the like. (Pryce Corporation v. Philippine
Amusement and Gaming Corporation, GR No. 157480, May 6, 2005)
Prescription of Actions
Elementary is the rule that prescription does not run against the State
and its subdivisions. When the government is the real party in interest, and it
is proceeding mainly to assert its own right to recover its own property, there
can as a rule be no defense grounded on laches or prescription. (Republic v.
Heirs of Angeles, GR No. 141296, October 7, 2002)
All civil actions have a prescriptive period. Unless a law makes an
action imprescriptible or lays down no other period, the action is subject to a
bar by prescription five (5) years after the right of action accrued. Criminal
offenses -- even the most heinous ones -- as well as the penalties therefor,
likewise prescribe. Relatedly, even so-called perpetual penalties and multiple
sentences have maximum periods. (Separate Opinion in PCGG v.
Sandiganbayan, GR No. 151809-12, April 12, 2005)
Prescription is intended to suppress stale and fraudulent claims arising
from transactions or facts that have been obscured by defective memory or

the lapse of time. It was designed to promote justice by preventing surprises

through the revival of claims that have been allowed to slumber until relevant
proofs are lost, memories faded, and witnesses no longer available.
Consistent with law and jurisprudence and the purpose of statutes of
limitations, the prohibition on former government attorneys from involvement
in matters in which they took part long ago, pursuant to their official functions
while in public service, should likewise have an expiry or duration. (Separate
Opinion in PCGG v. Sandiganbayan, GR No. 151809-12, April 12, 2005)
Actions based upon a written contract should be brought within ten
years from the time the right of action accrues. (Pilipinas Shell v. John
Bordman Ltd., GR No. 159831, October 14, 2005)
Actions for the annulment of contracts prescribe in four years. If the
ground for annulment is vitiation of consent by intimidation, the four-year
period starts from the time such defect ceases. The running of this
prescriptive period cannot be interrupted by an extrajudicial demand made by
the party whose consent was vitiated. If the facts demonstrating the lapse of
the prescriptive period are apparent from the records, the complaint should be
dismissed. (William Alain Miailhe v. Court of Appeals, GR No. 108991, March
20, 2001)
Prescription of the action is without prejudice to acquisitive
prescription. (Desamparados M. Soliva v. Intestate Estate of Villalba, GR No.
154017, December 8, 2003)
Quasi-Contracts
The school-student relationship is also reciprocal. Thus, it has
consequences appurtenant to and inherent in all contracts of such kind -- it
gives rise to bilateral or reciprocal rights and obligations. The school
undertakes to provide students with education sufficient to enable them to
pursue higher education or a profession. On the other hand, the students
agree to abide by the academic requirements of the school and to observe its
rules and regulations. (Khristine Rea M. Regino v. Pangasinan Colleges of
Science and Technology, GR No. 156109, November 18, 2004)
Reciprocal Contracts
When the obligor fails to comply with a reciprocal obligation, the
remedies of the injured party are (1) specific performance or (2) judicial
rescission. A seller cannot unilaterally and extrajudicially rescind a contract of
sale where there is no express stipulation authorizing it. Unilateral rescission
will not be judicially favored or allowed if the breach is not substantial and
fundamental to the fulfillment of the obligation, as in the present case.
(Spouses Benito v. Agapita Saquitan-Ruiz, GR No. 149906, December 26,
2002)
The right to rescind is implied in reciprocal obligations, as provided for
in Article 1191 of the Civil Code x x x. Therefore, absent any provision
providing for a right to rescind, the parties may nevertheless rescind the
contract should the other obligor fail to comply with its obligations.
(Multinational Village Homeowners v. Ara Security, GR No. 154852, October
21, 2004)

Relativity Principle
A fundamental rule in contracts is the principle of relativity embodied in
Article 1311 of the Civil Code.
In consonance with the axiom res inter alios acta aliis neque nocet
prodest, a contract can only obligate the parties who had entered into it, or
their successors who assumed their personalities or juridical positions, and
that, concomitantly, a contract can neither favor nor prejudice third persons,
although, in some ways, such persons may be affected in varying degrees.
Thus, in contracts creating real rights, third persons who come into
possession of the object of the contract may be bound thereby under the
provisions of mortgage laws and land registration laws. Creditors are
protected in cases of contracts intended to defraud them. Accion directa is
allowed by law in certain cases. Any third person who induces another to
violate his contract can be made liable for damages to the other contracting
party. Exceptionally, contracts may confer benefits to a third person or what
are otherwise also known as stipulation pour autrui. But that should be just
about all. (Sps. Lagandaon v. Court of Appeals, GR Nos. 102526-31, May 21,
1998)
Rescission
Rescission creates the obligation to return the object of the contract. It
can be carried out only when the one who demands rescission can return
whatever he may be obliged to restore. To rescind is to declare a contract
void at its inception and to put an end to it as though it never was. It is not
merely to terminate it and release the parties from further obligations to each
other, but to abrogate it from the beginning and restore the parties to their
relative positions as if no contract has been made. (Spouses Velarde v. Court
of Appeals, GR No. 108346, July 11, 2001; Republic v. Jerry V. David, GR No.
155634, August 16, 2004)
Rescission has likewise been defined as the unmaking of a contract, or
its undoing from the beginning, and not merely its termination. Rescission
may be effected by both parties by mutual agreement; or unilaterally by one of
them declaring a rescission of contract without the consent of the other, if a
legally sufficient ground exists or if a decree of rescission is applied for before
the courts. (Pryce Corporation v. Philippine Amusement and Gaming
Corporation, GR No. 157480, May 6, 2005)
Elementary is the principle that the validity of a contract does not
preclude its rescission. Under Articles 1380 and 1381 (3) of the Civil Code,
contracts that are otherwise valid between the contracting parties may
nonetheless be subsequently rescinded by reason of injury to third persons,
like creditors. In fact, rescission implies that there is a contract that, while
initially valid, produces a lesion or pecuniary damage to someone. (Coastal
Pacific Trading v. Southern Rolling Mills, GR No. 118692, July 28, 2006)
Mutual restitution is required in all cases involving rescission. But when
it is no longer possible to return the object of the contract, an indemnity for
damages operates as restitution. The important consideration is that the
indemnity for damages should restore to the injured party what was lost.

(Coastal Pacific Trading v. Southern Rolling Mills, GR No. 118692, July 28,
2006)
Rescission will not be permitted for a slight or casual breach of a
contract, but only for such breaches as are so substantial and fundamental as
to defeat the object of the parties in entering into the agreement.
(Multinational Village Homeowners Association v. Ara Security, GR No. 154852,
October 21, 2004; Philippine National Construction Corporation v. Mars
Construction Enterprises, GR No. 133909, February 15, 2000; Fidela del
Castillo v. Spouses Naguiat, GR No. 137909, December 11, 2003; Republic v.
Jerry V. David, GR No. 155634, August 16, 2004)
Simulated Contracts
Simulation occurs when an apparent contract is a declaration of a
fictitious will, deliberately made by agreement of the parties, in order to
produce, for the purpose of deception, the appearance of a juridical act which
does not exist or is different from that which was really executed. (Vicente
Villaflor v. Court of Appeals, GR No. 95694, October 9, 1997)
Article 1345 of the Civil Code provides that the simulation of a contract
may either be absolute or relative. In absolute simulation, there is a colorable
contract but without any substance, because the parties have no intention to
be bound by it. An absolutely simulated contract is void, and the parties may
recover from each other what they may have given under the contract.
On the other hand, if the parties state a false cause in the contract to conceal
their real agreement, such a contract is relatively simulated. Here, the parties
real agreement binds them. (Heirs of Spouses Balite v. Rodrigo N. Lim, GR
No. 152168, December 10, 2004)
When [the parties to a contract] have no intention to be bound at all, the
purported contract is absolutely simulated and void. When they conceal their
true agreement, it is not completely void and they are bound to their real
agreement, provided it is not prejudicial to a third person and is not intended
for any purpose that is contrary to law, morals, good customs, public order or
public policy. A duly executed contract carries with it the presumption of
validity. The party who impugns its regularity has the burden of proving its
simulation. (Ramon Ramos v. Heirs of Ramos Sr., GR No. 140848, April 25,
2002; Alfonso D. Zamora v. Court of Appeals, GR No. 102557, July 30, 1996)
Simulation takes place when the parties do not really want the contract
they have executed to produce the legal effects expressed by its wordings.
Simulation or vices of declaration may be either absolute or relative. Article
1345 of the Civil Code distinguishes an absolute simulation from a relative
one while Article 1346 discusses their effects (Edilberto Cruz v. Bancom
Finance Corporation, GR No. 147788, March 19, 2002)
Where the essential requisites are present and the simulation refers
only to the content or terms of the contract, the agreement is absolutely
binding and enforceable between the parties and their successors in interest.
(Heirs of Spouses Balite v. Rodrigo N. Lim, GR No. 152168, December 10,
2004)

The burden of proving the alleged simulation of a contract falls on those

who impugn its regularity and validity. A failure to discharge this duty will
result in the upholding of the contract. The primary consideration in
determining whether a contract is simulated is the intention of the parties as
manifested by the express terms of the agreement itself, as well as the
contemporaneous and subsequent actions of the parties. The most striking
index of simulation is not the filial relationship between the purported seller
and buyer, but the complete absence of any attempt in any manner on the
part of the latter to assert rights of dominion over the disputed property.
(Ramon Ramos v. Heirs of Ramos Sr., GR No. 140848, April 25, 2002)
Solidary Obligation
A solidary obligation is one in which each of the debtors is liable for the
entire obligation, and each of the creditors is entitled to demand the
satisfaction of the whole obligation from any or all of the debtors. On the
other hand, a joint obligation is one in which each debtors is liable only for a
proportionate part of the debt, and the creditor is entitled to demand only a
proportionate part of the credit from each debtor. The well-entrenched rule is
that solidary obligations cannot be inferred lightly. They must be positively
and clearly expressed. A liability is solidary only when the obligation
expressly so states, when the law so provides or when the nature of the
obligation so requires. (PH Credit Corporation v. Court of Appeals, GR No.
109648, November 22, 2001; Smith, Bell & Co. v. Court of Appeals, GR No.
110668, February 6, 1997; Romeo C. Garcia v. Dionisio V. Llamas, GR No.
154127, December 8, 2003)
Article 1207 of the Civil Code, which provides that obligations are
generally considered joint, except when otherwise expressly stated or when the
law or the nature of the obligation requires solidarity. However, obligations
arising from tort are, by their nature, always solidary. (Lafarge Cement
Philippines v. Continental Cement Corporation, GR No. 155173, November
23, 2004)
Statute of Frauds
The statute of frauds applies only to executory contracts and not to
partially or completely executed ones. The application of such statute
presupposes the existence of a perfected contract and requires only that a
note or memorandum be executed in order to compel judicial enforcement
thereof. (Gamaliel C. Villanueva v. Court of Appeals, GR No. 107624,
January 28, 1997; Genaro Cordial v. David Miranda, GR No. 135495,
December 14, 2000)
Suretyship
Suretyship arises upon the solidary binding of a person -- deemed the
surety -- with the principal debtor, for the purpose of fulfilling an obligation.
In enforcing a surety contract, the complementary-contracts-construedtogether doctrine finds application. According to this principle, an accessory
contract must be read in its entirety and together with the principal
agreement. (Philippine Bank of Communications v. Elena Lim, GR No.
158138, April 12, 2005)

A suretyship is merely an accessory or a collateral to a principal

obligation. Although a surety contract is secondary to the principal obligation,
the liability of the surety is direct, primary and absolute; or equivalent to that of
a regular party to the undertaking. A surety becomes liable to the debt and
duty of the principal obligor even without possessing a direct or personal
interest in the obligations constituted by the latter. (International
Finance Corporation v. Imperial Textile Mills, GR No. 160324, November 15,
2005)
When qualified by the term jointly and severally, the use of the word
guarantor to refer to a surety does not violate the law. As Article 2047
provides, a suretyship is created when a guarantor binds itself solidarily with
the principal obligor.
The use of the word guarantee does not ipso facto make the contract
one of guaranty. This Court has recognized that the word is frequently
employed in business transactions to describe the intention to be bound by a
primary or an independent obligation. The very terms of a contract govern the
obligations of the parties or the extent of the obligors liability. (International
Finance Corporation v. Imperial Textile Mills, GR No. 160324, November 15,
2005)
Under Article 29 of Act 2031, an accommodation party is liable for the
instrument to a holder for value even if, at the time of its taking, the latter
knew the former to be only an accommodation party. The relation between an
accommodation party and the party accommodated is, in effect, one of
principal and surety -- the accommodation party being the surety. It is a
settled rule that a surety is bound equally and absolutely with the principal and
is deemed an original promissor and debtor from the beginning. The liability
is immediate and direct. (Romeo C. Garcia v. Dionisio V. Llamas, GR No.
154127, December 8, 2003)
A surety companys liability under the performance bond it issues
is solidary. The death of the principal obligor does not, as a rule,
extinguish the obligation and the solidary nature of that liability.
(Stronghold Insurance v. Republic-Asahi Glass, GR No. 147561, June 22,
2006)
Suspensive Condition
When a contract is subject to a suspensive condition, its birth or
effectivity can take place only if and when the condition happens or is fulfilled.
Thus, the intestate courts grant of the Motion for Approval of the sale filed by
respondent resulted in petitioners obligation to execute the Deed of Sale of
the disputed lots in his favor. The condition having been satisfied, the
contract was perfected. Henceforth, the parties were bound to fulfill what they
had expressly agreed upon. (Felipe Seville v. National Development
Company, GR No. 129401, February 2, 2001)
Tender of Payment
Tender of payment is the manifestation by debtors of their desire to
comply with or to pay their obligation. If the creditor refuses the tender of
payment without just cause, the debtors are discharged from the obligation by

the consignation of the sum due. (Myrna Ramos v. Susana S. Sarao, GR No.
149756, February 11, 2005)
For a valid tender of payment, it is necessary that there be a fusion of
intent, ability and capability to make good such offer, which must be absolute
and must cover the amount due. Though a check is not legal tender, and a
creditor may validly refuse to accept it if tendered as payment, one who in fact
accepted a fully funded check after the debtors manifestation that it had been
given to settle an obligation is estopped from later on denouncing the efficacy
of such tender of payment. (Far East Bank v. Diaz Realty, GR No. 138588,
August 23, 2001)
Termination of Contract
In legal contemplation, the termination of a contract is not equivalent to
its rescission. When an agreement is terminated, it is deemed valid at
inception. Prior to termination, the contract binds the parties, who are thus
obliged to observe its provisions. However, when it is rescinded, it is deemed
inexistent, and the parties are returned to their status quo ante. Hence, there
is mutual restitution of benefits received. The consequences of termination
may be anticipated and provided for by the contract. (Pryce Corporation v.
Philippine Amusement and Gaming Corporation, GR No. 157480, May 6,
2005)
Trusts
A trust is a legal relationship between one having an equitable
ownership in a property and another having legal title to it.
Trust relations between parties may either be express or implied.
Express trusts are created by the direct and positive acts of the parties,
indicated through some writing, deed, will, or words evidencing an intention to
create a trust. On the other hand, implied trusts are those that, without being
express, are deducible from the nature of the transaction as matters of
intent[;] or which are superinduced on the transaction by operation of law as a
matter of equity, independently of the particular intention of the parties.
Implied trusts may either be resulting or constructive trusts, both coming into
being by operation of law. (Miguel Cuenco v. Concepcion Cuenco, GR No.
149844, October 13, 2004; Rodolfo Tigno v. Court of Appeals, GR No.
110115, October 8, 1997; Benigna Secuya v. Gerarda M. Vda. De Selma, GR
No. 136021, February 22, 2000; Spouses Oco v. Victor Limbaring, GR No.
161298, January 31, 2006)
Implied trusts are those which, without being expressed, are deducible
from the nature of the transaction by operation of law as matters of equity,
independently of the particular intention of the parties. Constructive trusts are
created in order to satisfy the demands of justice and prevent unjust
enrichment. They arise against one who, by fraud, duress or abuse of
confidence obtains or holds the legal right to property which he ought not, in
equity and good conscience, to hold. (Meynardo Policarpio v. Court of
Appeals, GR No. 116211, March 7, 1997; Rodolfo Tigno v. Court of Appeals,
GR No. 110115, October 8, 1997; Heirs of Clemente Ermac v. Heirs of
Vicente Ermac, GR No. 149679, May 30, 2003)

There are recognized exceptions to the establishment of an implied

resulting trust. The first is stated in the last part of Article 1448 itself. Thus,
where A pays the purchase money and title is conveyed by absolute deed to
As child or to a person to whom A stands in loco parentis and who makes no
express promise, a trust does not result, the presumption being that a gift was
intended. Another exception is, of course, that in which an actual contrary
intention is proved. Also where the purchase is made in violation of an
existing statute and in evasion of its express provision, no trust can result in
favor of the party who is guilty of the fraud. (Rodolfo Tigno v. Court of
Appeals, GR No. 110115, October 8, 1997)
A trust is the right, enforceable solely in equity, to the beneficial
enjoyment of property, the legal title to which is vested in another. It is a
fiduciary relationship concerning property which obliges a person holding it
(i.e., the trustee) to deal with the property for the benefit of another (i.e., the
beneficiary). (Rizal Surety v. Court of Appeals, GR No. 96727, August 28,
1996)
An action to enforce an implied trust may be circumscribed by laches.
Under this circumstance, repudiation is not even required, unless the facts
that give rise to the trust are concealed. This principle holds because of the
nature of an implied trust, which involves a certain antagonism between the
cestui que trust and the trustee. There is neither promise nor fiduciary
relation; the trustee does not recognize any trust and has no intention of
holding the property for the beneficiary; therefore, the latter is not justified in
delaying action to recover the property. (Delfina Vda. de Rigonan v. Zoroaster
Derecho, GR No. 159571, July 15, 2005)
While no time limit is imposed for the enforcement of rights under
express trusts, prescription may, however, bar a beneficiary's action for
recovery, if a repudiation of the trust is proven by clear and convincing
evidence and made known to the beneficiary. (Benigna Secuya v. Gerarda M.
Vda. De Selma, GR No. 136021, February 22, 2000)
Void Contracts
Since the principal obligation was void, there was no contract that could
have been breached by petitioners; thus, the stipulation on liquidated
damages was inexistent. The nullity of the principal obligation carried with it
the nullity of the accessory obligation of liquidated damages. (Jose
Menchavez v. Florentino Teves Jr., GR No. 153201, January 26, 2005)
Courts will not aid either party to enforce an illegal contract, but will
leave them both where they find them. Neither party can recover damages
from the other arising from the act contrary to law, or plead the same as a
cause of action or as a defense. Each must bear the consequences of his
own acts. (City of Angeles v. Court of Appeals, GR No. 97882, August 28,
1996)
Prescription cannot be invoked as a ground if the contract is alleged to
be void ab initio. It is axiomatic that the action or defense for the declaration
of nullity of a contract does not prescribe. (Virginia O. Gochan v. Richard G.
Young, GR No. 131889, March 12, 2001)

The imprescriptibility of an action to annul a contract does not mean that

the present respondents are perpetually allowed to recover the property,
the subject of the void contract. They may file the action to annul, but their
right to recover based on ownership is contingent on the premise that they
still own the property. Ownership may have been lost in the interval during
which they remained inactive. For this reason, the Court constantly
reminds parties to remain vigilant over their rights. (Delfina Vda. de
Rigonan v. Zoroaster Derecho, GR No. 159571, July 15, 2005)
Voidable Contracts
Although allegedly voidable, [the Contract of Sale] is binding unless
annulled by a proper action in court. Not being a determinate conduct that
can be extrajudically demanded, it cannot be considered as an obligation
either. Since Article 1390 of the Civil Code states that voidable contracts are
binding, unless they are annulled by a proper action in court, it is clear that
the defendants were not obligated to accede to any extrajudicial demand to
annul the Contract of Sale. (William Alain Miailhe v. Court of Appeals, GR No.
108991, March 20, 2001)