Article 1401 and 1402 of Obligations and Contracts

by Nil Jay Perolina

CHAPTER 7 - VOIDABLE CONTRACTS

Art. 1401. The action for annulment of contracts shall be extinguished when the thing which is the object thereof is lost through the fraud or fault of the person who has a right to institute the proceedings.

If the right of action is based upon the incapacity of any one of the contracting parties, the loss of the thing shall not be an obstacle to the success of the action, unless said loss took place through the fraud or fault of the plaintiff. (1314a)

What is the article all about?

It is about the extinguishment of action for annulment.

What is the meaning of this article?

If the person who had the right of action for annulment is unable to restore the thing because the thing is lost through his fault, the right to annul is extinguished.

If the right of action is based upon the incapacity of any one of the contracting parties, the loss of the thing shall not be a bar to the action for annulment, unless said loss took place through the fraud or fault of the plaintiff.

What is the reason behind Article 1401?

No one can come to court with unclean hands.

What is the effect when upon annulment a party cannot restore the thing he is obliged to return?

 (1) If the person, who has a right to institute an action for annulment (Art. 1397.), will not be able to restore the thing which he may be obliged to return in case the contract is annulled because such thing is lost through his fraud or fault, his right to have the contract annulled is extinguished. If the loss is not due to his fault or fraud, Article 1402 applies.

The action for annulment shall be extinguished only if the loss is through the fault or fraud of the plaintiff.

(2) Under the second paragraph, the right of action is based upon the incapacity of any one of the contracting parties. Whether the right of action is based upon incapacity or not, the rule is still the same. It is no longer necessary that the fraud or fault on the part of the plaintiff (the incapacitated person) resulting in the loss must have occurred “after having acquired capacity” as under the old Code. This qualification has been deleted in the present article. The deletion has made the second paragraph redundant.

Illustrations/Examples

Illustration 1

If Ivan coerces Lawrence to sell him an iPad, Lawrence can seek annulment. However, if Lawrence takes the iPad apart and destroys the wiring and parts inside intentionally, his right to file the action would be extinguished

Illustration 2

C was forced by B to enter into a contract of barter whereby B exchanges his fountain pen with C’s ring. If the fountain pen is lost due to the fault of C. C’s right of the annulment is extinguished.

Art. 1402. As long as one of the contracting parties does not restore what in virtue of the decree of annulment he is bound to return, the other cannot be compelled to comply with what is incumbent upon him. (1308) 

What is the article all about?

This is about the effect where a party cannot restore what he is bound to return.

What is the meaning of this article?

When a contract is annulled, a reciprocal obligation of restitution is created. The return by one party of what he is obliged to restore by the decree of annulment may be regarded as a condition to the fulfillment by the other of what is incumbent upon him. This is true even if the loss is due to a fortuitous event.

What is the reason behind the article?

When a contract is annulled, a reciprocal obligation of restitution is in order. There will be no annulment if the party cannot restore what he is bound to return.

What is the general rule where a party cannot restore what he is bound to return?

If one cannot restore to the other what he has received, such other person cannot be compelled to return what he has received.

What is exemption to general rule?

If one of the parties is incapacitated, he is not obliged to return what he has received except insofar as he has been benefited by the thing or price he received.

Illustration/Example

In a situation where A and B’s contract is annulled but A upon the annulment of contract cannot restore the object of contract to B then B cannot be compelled by A to return his payment for the same object.

Case Digest from Original Case

Citation:

Go Chan v Heirs of Baba 409 SCRA 306 2003

Case Docket:

G.R. No. 138945

Date:

August 19, 2003

Petitioners:

FELIX GOCHAN AND SONS REALTY CORPORATION and STA. LUCIA REALTY AND DEVELOPMENT CORPORATION

Respondents:

HEIRS OF RAYMUNDO BABA, namely, BESTRA BABA, MARICEL BABA, CRESENCIA BABA, ANTONIO BABA, and PETRONILA BABA, represented by Attorney-in-fact VIRGINIA SUMALINOG

Ponente:

YNARES-SANTIAGO, J.

FACTS:

The facts show that Lot No. 3537, a conjugal property of spouses Raymundo Baba and Dorotea Inot, was originally titled under Original Certificate of Title No. RO-0820, 6 in the name of Dorotea. After Raymundo’s demise in 1947, an extrajudicial settlement of his estate, including Lot No. 3537, was executed on December 8, 1966, among the heirs of Raymundo, namely, Dorotea Inot and his 2 children, Victoriano Baba and Gregorio Baba. One-half undivided portion of the 6,326 square meter lot was adjudicated in favor of Dorotea, and the other half divided between Victoriano and Gregorio. 

On December 28, 1966, Dorotea, Victoriano and Gregorio, in consideration of the amount of P2,346.70, sold Lot No. 3537 to petitioner Felix Gochan and Sons Realty Corporation (Gochan Realty). Consequently, OCT No. RO-0820 was cancelled and in lieu thereof, Transfer Certificate of Title No. T-1842, dated February 23, 1968 was issued in favor of Gochan Realty. Sometime in 1995, the latter entered into a joint venture agreement with Sta. Lucia Realty and Development Corporation Inc. for the development, among others, of Lot No. 3537, into a subdivision. 

On June 13, 1996, respondents Bestra, Maricel, Crecencia, Antonio and Petronila, all surnamed Baba, filed a complaint for quieting of title and reconveyance with damages against petitioners with the RTC of Lapu-Lapu City, Branch 54, docketed as Civil Case No. 4494-L. They alleged that they are among the 7 children of Dorotea Inot and Raymundo Baba; that petitioners connived with Dorotea Inot, Victoriano and Gregorio Baba in executing the extrajudicial settlement and deed of sale which fraudulently deprived them of their hereditary share in Lot No. 3537; and that said transactions are void insofar as their respective shares are concerned because they never consented to the said sale and extrajudicial settlement, which came to their knowledge barely a year prior to the filing of the complaint. 

ISSUE:

Whether or not from the allegations of the complaint, there exists a cause of action to declare the inexistence of the contract of sale with respect to the shares of respondents in Lot No. 3537 on the ground of absence of any of the essential requisites of a valid contract.

RULING:

The Court ruled that in view of all the foregoing, the petition is DENIED. The Decision of the Court of Appeals in CA-G.R. CV No. 57080, which ordered that the instant case be REMANDED to the Regional Trial Court of Lapu-Lapu City, Branch 54, for trial and judgment on the merits is AFFIRMED.

Yes, the allegations of the complaint, there exists a cause of action to declare the inexistence of the contract of sale with respect to the shares of respondents in Lot No. 3537 on the ground of absence of any of the essential requisites of a valid contract.

Nemo dat quod non habet — No one can give more than what he has. Assuming that the allegations in respondents’ complaint are true, their claim that the execution of the extrajudicial settlement and the deed of sale involving Lot No. 3537, which led to the issuance of a certificate of title in the name of Gochan Realty, was without their knowledge or consent, gives rise to an imprescriptible cause of action to declare said transactions inexistent on the ground of absence of legal capacity and consent. Hence, the dismissal of respondents’ complaint on the ground of prescription was erroneous.

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Thank you very much! :)

Article 1366 and 1367 of Obligations and Contracts

 by Nil Jay Perolina

CHAPTER 4 - REFORMATION OF INSTRUMENTS

ART. 1366. There shall be no reformation in the following cases:

 (1) Simple donations inter vivos wherein no condition is imposed;

 (2) Wills;

 (3) When the real agreement is void

Art. 1367. When one of the parties has brought an action to enforce the instrument, he cannot subsequently ask for its reformation. 

What is the meaning of these articles?

When reformation is not allowed:

1. Simple donations inter vivos with no condition imposed

2. Wills 

3. When the real agreement is void

4. When one of the parties has brought an action to enforce the instrument

What is the reason behind the article?

• Both donations and wills are gratuitous dispositions of property.

• Void agreements are agreements which are not valid, nothing to reform because reformation presumes valid agreement.

• Courts deny relief of reformation when the party seeking reformation has brought an action to enforce the instrument, because there has been an election as between inconsistent remedies, one in affirmance of the written contract and the other in disaffirmance.

What is the exemption to the general rule?

If the donation is onerous in character or involves a condition, the deed may be reformed so that real intent may be expressed.

Not every mistake in a will can be corrected. Only imperfect or erroneous descriptions of persons or property can be corrected; but the manner in which the testator disposes of his property cannot be changed by a reformation of the instrument.

What is the effect in these cases where reformation is not allowed?

1. In donation, the act is essentially gratuitous and the donee has, therefore, no just cause for complaint. If in the deed of donation, a mistake or defect has been committed, it is a mere failure in a bounty which, as the donor was not bound to make, he is not bound to correct. (see 45 Am. Jur. 599.) Of course, the donor may ask for the reformation of a deed of donation.

2. Like a donation, the making of a will is a strictly personal and a free act which cannot be left to the discretion of a third person (see Art. 784.); hence, upon the death of the testator, the right to reformation is lost. Furthermore, a will may be revoked by the testator any time before his death and this right is not subject to waiver or restriction. (see Art. 828.)

3. If the real agreement is void, there is nothing to reform. Reformation would be useless because the real agreement being void, it is unenforceable.

Therefore, an instrument which when corrected will be void or inoperative, will not be reformed

4. Article 1367 is based on estoppel (Art. 1431.) or ratification. (see Arts. 1392, 1396.) When a party brings an action to enforce the contract, he admits its validity and that it expresses the true intention of the parties. The bringing of the action is thus inconsistent with reformation. There is no prohibition against joining in one action the reformation of instrument and its enforcement as reformed.

Courts deny relief of reformation when the party seeking reformation has brought an action to enforce the instrument, because there has been an election as between inconsistent remedies, one in affirmance of the written contract and the other in disaffirmance. The party suing under the written contract may be said to have ratified the same.

Illustrations/Examples

1. Simple donations inter vivos with no condition imposed

A donated the trademark recipe for his fried chicken to B without conditions. In this case, the act is essentially gratuitous and B has no just cause for complaint.

2. Wills 

A, the testator, is the husband of B and the father of C and D. A made his will and upon his death as the testator, the right to reformation is lost. However, his will may be revoked by him as the testator any time before his death and this right is not subject to waiver or restriction.

3. When the real agreement is void

X and Y has an existing agreement which they wish for reformation to express their true intentions, however their real agreement is void, therefore reformation is not allowed.  

4. When one of the parties has brought an action to enforce the instrument

Anna who is in need of money negotiated a contract of chattel mortgage with Ben using Anna’s Car for security. Through machination perpetrated by Ben, Anna signed a document of sale believing that it was a chattel mortgage. Later Anna filed a case against Ben for delivery of the car based on the deed of sale. The action failed. Ben can no longer seek the reformation of the instrument to consider it a chattel mortgage.  He is estopped for the law has deemed him to have waived the action for reformation.

Case Digest from Original Case

Citation:

Veluz v Veluz 24 SCRA 559 1968

Case Docket:

G.R. No. L-23261

Date:

July 31, 1968

Plaintiff-Appellant:

ERNESTO VELUZ

Defendants-Appellees:

SOCORRO VELUZ, ET AL.

Counsel for Plaintiff- Appellant:

Lucio B. Bondad

Counsel for Defendants-Appellees:

De Mesa & De Mesa

Ponente:

ZALDIVAR, J.

FACTS:

Original plaintiff Ernesto Veluz filed a complaint before the Court of First Instance of Quezon on July 30, 1958. On a motion for bill of particulars by defendants, the court ordered plaintiff to file an amended complaint, which plaintiff did. In the amended complaint plaintiff alleged that on January 2, 1953 he asked defendants for a loan of five thousand pesos, to secure the payment of which he proposed to mortgage his share on a parcel of land covered by TCT No. 27247 of the Registry of Deeds of Quezon; that the defendants agreed and caused forthwith the preparation of a deed, a copy of which is attached to the complaint as Annex A; that when defendants asked plaintiff to sign the deed as prepared, the latter noticed that the deed was an absolute sale instead of a mortgage, and so he asked defendants why the document was couched that way, to which query defendants answered that it had to be so in order that defendants could take possession and enjoy the fruits of the land and that plaintiff had nothing to worry about the document as defendants, being his brothers and sisters, would not take advantage of the deed of sale, and that plaintiff could redeem the property anytime; that because of the assurance of his brothers and sisters, plaintiff affixed his signature on the document; that said document did not express the real intention of the parties; that in May 1956 plaintiff wanted to redeem the property but the defendants refused, claiming that what plaintiff had executed was a deed of sale; that several days later, plaintiff came to know that the property had been registered already in defendants’ name; that the value of the land with its improvements would be no less than P80,000.00 yielding a monthly produce valued at no less than P1,000.00. Plaintiff prayed that judgment be issued "ordering the reformation of the deed of sale attached hereto as Annex ‘A’ to express the true intention of the parties, to wit: the same be made as a deed of mortgage and that defendants be ordered to pay actual and moral damages and attorney’s fees.

ISSUE:

When does an action for the reformation of instrument prescribe?

RULING:

The Court ruled that, the appealed order of the lower court, dated June 28, 1960, dismissing plaintiff’s complaint, should be, as it is hereby, set aside; and this case is remanded to the court a quo for further proceedings. Costs against defendants-appellees. 

The Court believed that the decision in the Conde case should prevail, not only because it is of a later date but also because the issue decided therein refers to the period of prescription in an action for reformation of instruments; whereas, in the Carlota case, the issue decided refers to the annulment of contracts. The ruling in the Conde case is squarely applicable to the case now before Us because, as in the Conde case, the question involved is the reformation of an instrument which appears to be a deed of absolute sale when the real intention of the parties was to execute a deed of mortgage.

Hence, in the case at bar, even if the ten-year period of prescription be computed from the date of the execution of the instrument on January 2, 1953, or from May, 1958 when defendants refused to allow redemption — evincing thus their intent not to live up to the true agreement and thereby giving rise to the right of action — until July 30, 1958 when the instant case was commenced, the ten-year period for prescription of the action had not yet elapsed.

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Thank you very much! :)

Article 1325, 1326 and 1327 of Obligations and Contracts

by Nil Jay Perolina

CHAPTER 2 - ESSENTIAL REQUISITES OF CONTRACTS

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

What is the meaning of Article 1325?

A business advertisement of things for sale may or may not constitute a definite offer. It is not a definite offer when the object is not determinate

What is the reason behind the article?

It is not a definite offer when the object is not determinate. 

When is an advertisement to constitute an offer?

As a general rule advertisement of things are mere invitations to make an offer.

When the advertisement does not have the necessaryspecification of essential elements of the future contract, it cannot constitute an offer.

Thus, an advertisement of things for sale, specifying prices but without stating the quantity of things to be sold, is not an offer but a mere invitation to make an offer. The advertiser is free to reject any offer that may be made.

What is the exception to the general rule?

When it appears otherwise or where advertisement may constitute a certain offer.

What is the general rule on offers?

As a general rule, an offer is made to a particular person. Consequently, only such person, and no other, can accept the offer. This is because “a party has a right to select and determine with whom he will contract, and cannot have another person thrust upon him without his consent.” (Boston & Co. vs. Potter, 123 Mass. 28.)

It is not necessary, however, that the offeror should know the person who receives his offer.

What is considered as general offer to the public?

A valid offer to the public can be made. The principle is that a general offer made to the public, or to a particular class of persons, may be accepted by any one or by any one coming within the description of the class, as for example, an offer of a prize for a design for a public building or a bonus to any one who will make a certain improvement, or of a reward, and other like cases. Such offers, although made to an unascertained person or persons, cannot, of course, be turned into an agreement until they have been accepted by an ascertained person. As soon as there is an acceptance by a person falling within the class to whom the offer is made, there is a binding contract. 

Thus, one who installs a slot machine makes an offer to the public, and the offer becomes a contract with any person who puts in the necessary coin. A merchant who places articles for sale in his store, with a price tag on each, makes an offer to the public, and anyone can accept the offer by paying the priced fixed.

What is the effect when a party withdraw his offer but before withdrawal a party acts upon it?

“It is an elementary principle that where a party publishes an offer to the world, and before it is withdrawn another acts upon it, the party making the offer is bound to perform his promise. This principle is frequently applied in cases of the offer of rewards.” (6 R.C.L. 607, cited in De la Rosa vs. Bank of the Phil. Islands, 51 Phil. 926 [1928].) But the acceptance must be in strict conformity with the offer and a qualified acceptance does not create a contract. (Montinola vs. Victoria Milling Co. and Copper, 54 Phil. 782 [1930].)

Illustration/Example:

Illustration 1:

JP puts up for sale the basketball Kobe Bryant used in his last ever game before retiring for Php 5,000,000. Gusty calls him up and says that he accepts it. There is a certain offer.

Illustration 2:

Ced advertises his yacht in the classified ads without stating a price or specifications. Geb calls up Ced and offers to buy it for P70,000,000. This is proper

Illustration 3:

“For sale: 1,000 square meters lot at Green Plains Village, Quezon City for P5,000,000.00 — Tel. No. 817-12-84.” This is not a definite offer.

Illustration 4:

“For sale: 1,000 square meters lot at Green Plains Village, Quezon City located at the corner of Geronimo and Magallanes Streets for P5,000,000.00 cash. — Tel. No. 817-12-84.” This is a definite offer.

Art. 1326. Advertisements for bidders are simply invitations to make proposals, and the advertiser is not bound to accept the highest or lowest bidder, unless the contrary appears. (n)

What is Article 1326 all about?

It is all about the purpose of advertisement for bidders.

What is the reason behind the article?

Once the bidder makes a bid, he makes an offer which is only binding when accepted. 

In an advertisement for bidders, the advertiser is not the one making the offer. In reality, the bidder is the one making the offer which the advertiser is free to accept or reject.

What is the general rule on advertisement for bidders?

As a general rule, the advertiser is not bound to accept the highest bidder (as when the offer is to buy) or the lowest bidder (as when the offer is to construct a building) unless the contrary appears.

Where a seller reserved the right to refuse to accept the bid made, a binding sale is not perfected until the seller accepts the bid. The seller may exercise his right to reject any bid after the auctioneer has accepted a bid. (Caugma vs. People, 486 SCRA 611 [2006].)

Acceptance by the advertiser of a given bid is necessary for a contract to exist between the advertiser and the bidder, regardless of the terms and conditions of his bid. (Surigao Mineral Reservation Board vs. Cloribel, 24 SCRA 898 [1968].) Where under the rules of the bidding it is only upon receipt of the notice of acceptance of the bid that the formal contract shall be executed, in the absence of such notice and execution of the contract, there is no meeting of the minds. (Santamaria vs. Court of Appeals, 187 SCRA 186 [1990].)

What is the exemption to the general rule?

Unless the contrary appears, meaning it is specifically stated.

When in the advertisement it can be inferred with certainty that the best bid (highest or lowest, as the case may be) will be considered as giving rise to a binding contract, each bid will imply the perfection of a contract, although subject to the condition that no better bid is made.

Illustration/Example

In an execution sale of properties attached for the payment of debts, it is generally understood that the property should be given to the highest bidder. In the case of the execution sale of the extrajudicial family home whose value is believed to be more than the P30,000 or P20,000 fi xed by law, the lowest bid that can be accepted is one that exceeds such values; therefore, the highest bid thereon must necessarily be higher than said values.

Art. 1327. The following cannot give consent to a contract:

 (1) Unemancipated minors;

 (2) Insane or demented persons, and deaf-mutes who do not know how to write.

What is the article all about?

This article is about persons incapacitated to consent.

What is the reason behind the article?

The reason behind Article 1327 is that those persons mentioned can easily be the victims of fraud as they are not capable of understanding or knowing the nature or importance of their actions. They can enter into a contract only through a parent or guardian

What is the general rule on capacity to give consent?

Capacity to give consent presumed.

There is no effective consent in law without the capacity to give such capacity. (Felix Gochan vs. Heirs of R. Baba, 409 SCRA 306 [2003].)

 A contract entered into where one of the parties is incapable of giving consent to a contract is voidable. A voidable contract is valid and binding until it is annulled by a proper action in court. It is susceptible of ratification. (Art. 1390.) If both parties are incapable of giving consent, the contract is unenforceable unless they are ratified. (Art. 1403[3].)

What is the exemption to the general rule?

To form a valid and legal agreement, it is necessary that there be a party capable of contracting and a party capable of being contracted with. 

What is the general rule on contracts entered into by unemancipated minors?

Any contract entered into by an unemancipated person is annullable or voidable.

The mere fact that one of the parties to the contract was a minor does not necessarily render it void ab initio, but merely voidable.

What are the exceptions?

• Ratification at the age of minority.

• The contract has been entered into through a guardian and approved by the guardianship court.

Who can only invoke minority and how can he do it? What is the effect of invoking minority?

Only the minor can invoke minority. Capable persons cannot allege the incapacity of those with those whom they contracted to annul the contract.

Minor must file a case to annul the contract upon coming of age. As a rule, incapacitated person is not obliged to make any restitution except insofar as he has been benefited by the thing or price received by him.

Illustration/Example

In Braganza v. De Villa Abrille, two minors signed a promissory note without telling the creditor their ages and where the debtor sought to enforce the promissory note against them. They can set up the defense of minority to resist the claim.

o Minors have no juridical duty to disclose their inability.

o The fraud must be actual and not constructive. Mere silence does not make him liable

o Minors not absolved from monetary responsibility. They are subject to beneficial reimbursement.

What is the general rule on contracts entered into by insane or demented persons?

Contracts entered into by such people are annullable, not void ab initio. Law presumes that the contract has been entered into by competent persons. Insanity at the time of the perfection of the contract must always be proven.

It is not necessary that there be a previous judicial declaration of mental incapacity in order that a contract entered into by a mentally defective person may be annulled; it is enough that the insanity existed at the time the contract was made.

Privilege of insanity is personal. When the insane person is not under a guardian and the other party has no reasonable cause to believe him otherwise insane, the agreement is valid if equitable and beneficial to such insane person. 

In case of lunatics, it is possible that there are lucid intervals, and a contract executed during such interval will be valid.

Insanity must have direct bearing on the agreement.

Classes of mental incapacity:

Idiot – insane since birth

Lunatic – insane at one time, but has lost his reason

Mentally Weak – does not render the person affected totally incapable of transacting business or managing his affairs

Illustration/Example

In Carilllo v Jaojoco, the vendor was judicially declared mentally incapacitated 9 days after the execution of deed of sale.

The Court ruled, however, that the mere fact that the vendor was judicially declared mentally incapacitated nine (9) days after the execution of the deed of sale does not prove conclusively that he was incapacitated when the contract was executed, and in the absence of sufficient proof that he was suffering from mental alienation at the specified time, the declaration does not warrant the annulment of said contract.

What is the general rule on contracts entered into by deaf mutes?

The mere condition of being deaf-mute does not render the contract voidable.

What is the exception?

Unless the deaf mute does not know how to write.

Illustration/Example

A, a deaf mute, entered into a contract with B. The contract will be valid if A was shown to have sufficient mental capacity and knows how to write.

Case Digest from Original Case

Citation:

Nicolas sanchez v severina rigos 45 scra 368 1972

Case Docket:

G.R. No. L-25494

Date:

June 14, 1972

Plaintiff-Appellee:

NICOLAS SANCHEZ

Defendant-Appellant:

Severina Rigos

Counsel for Plaintiff-Appellee:

Santiago F. Bautista

Counsel for Defendant-Appellant:

Jesus G. Villamar

Ponente:

Concepcion, C.J.

FACTS:

On April 3, 1961, plaintiff Nicolas Sanchez and defendant Severina Rigos executed an instrument entitled "Option to Purchase," whereby Mrs. Rigos "agreed, promised and committed ... to sell" to Sanchez the sum of P1,510.00, a parcel of land situated in the barrios of Abar and Sibot, municipality of San Jose, province of Nueva Ecija and more particularly described in Transfer Certificate of Title No. NT-12528 of said province, within two (2) years from said date with the understanding that said option shall be deemed "terminated and elapsed," if "Sanchez shall fail to exercise his right to buy the property" within the stipulated period. Inasmuch as several tenders of payment of the sum of Pl,510.00, made by Sanchez within said period, were rejected by Mrs. Rigos, on March 12, 1963, the former deposited said amount with the Court of First Instance of Nueva Ecija and commenced against the latter the present action, for specific performance and damages.

After the filing of defendant's answer - admitting some allegations of the complaint, denying other allegations thereof, and alleging, as special defense, that the contract between the parties "is a unilateral promise to sell, and the same being unsupported by any valuable consideration, by force of the New Civil Code, is null and void" - on February 11, 1964, both parties, assisted by their respective counsel, jointly moved for a judgment on the pleadings. 

Accordingly, on February 28, 1964, the lower court rendered judgment for Sanchez, ordering Mrs. Rigos to accept the sum judicially consigned by him and to execute, in his favor, the requisite deed of conveyance. Mrs. Rigos was, likewise, sentenced to pay P200.00, as attorney's fees, and other costs. Hence, this appeal by Mrs. Rigos.

ISSUE:

Whether or not an offer, once accepted, cannot be withdrawn, regardless of whether it is supported or not by a consideration.

RULING:

SC ruled that the decision appealed from is hereby affirmed, with costs against defendant-appellant Severina Rigos. 

In other words, since there may be no valid contract without a cause or consideration, the promisor is not bound by his promise and may, accordingly, withdraw it. Pending notice of its withdrawal, his accepted promise partakes, however, of the nature of an offer to sell which, if accepted, results in a perfected contract of sale.

Relying upon Article 1354 of our Civil Code, the lower court presumed the existence of said consideration, and this would seem to be the main factor that influenced its decision in plaintiff's favor. It should be noted, however, that:

(1) Article 1354 applies to contracts in general, whereas the second paragraph of Article 1479 refers to "sales" in particular, and, more specifically, to "an accepted unilateral promise to buy or to sell." In other words, Article 1479 is controlling in the case at bar.

(2) In order that said unilateral promise may be "binding upon the promisor, Article 1479 requires the concurrence of a condition, namely, that the promise be "supported by a consideration distinct from the price." Accordingly, the promisee cannot compel the promisor to comply with the promise, unless the former establishes the existence of said distinct consideration. In other words, the promisee has the burden of proving such consideration. Plaintiff herein has not even alleged the existence thereof in his complaint.

 

(3) Upon the other hand, defendant explicitly averred in her answer, and pleaded as a special defense, the absence of said consideration for her promise to sell and, by joining in the petition for a judgment on the pleadings, plaintiff has impliedly admitted the truth of said averment in defendant's answer. Indeed as early as March 14, 1908, it had been held, in Bauermann v. Casas, that:

One who prays for judgment on the pleadings without offering proof as to the truth of his own allegations, and without giving the opposing party an opportunity to introduce evidence, must be understood to admit the truth of all the material and relevant allegations of the opposing party, and to rest his motion for judgment on those allegations taken together with such of his own as are admitted in the pleadings. (La Yebana Company vs. Sevilla, 9 Phil. 210). (Emphasis supplied.)

This view was reiterated in Evangelista v. De la Rosa and Mercy's Incorporated v. Herminia Verde.

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Thank you very much! :)

Article 1294 and 1295 of Obligations and Contracts

  by Nil Jay Perolina

CHAPTER 4 – EXTINGUISHMENT OF OBLIGATIONS

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

What is the Article all about?

This article is about the effect of insolvency of new debtor in novation by expromision done without the knowledge or against the will of the debtor.

What is the meaning of Article?

Article 1294 pertains to novation by expromision wherein it states that there is no liability for the new debtor’s insolvency can be enforced against the old debtor, because the latter did not have the initiative in making the change, which might have been made even without his knowledge.

What is reason behind the article?

The literal wording of the law should yield to its obvious intention which is to exempt the old debtor from future liability when he did not propose the new debtor.

What is the effect of expromision done without the knowledge or against the will of the debtor?

As a general rule, the old debtor is generally released from any further liability to the creditor in passive subjective (debtor is change, subjective- obligation is real) novation  by expromision.

In effect, the new debtor/third party to the obligation who assumed the debtor’s obligation is entitled to reimbursement only up to the extent that the payment has been beneficial to the old debtor. On the other hand, he will not be entitled to the right of subrogation.

Subrogation: It is defined as the transfer of all rights of the creditor to a third person, who substitutes him in all his rights.

What is the exemption to the general rule?

If the old debtor had knowledge of the substitution, or had consented thereto, the exemption from liability provided in this article does not apply.

Illustrations/Examples

In an obligation where A is the old debtor and B is creditor, A is indebted to B for P20,000. Without A’s knowledge, X as new debtor commits to pay the indebtedness of A when it is due. B can still claim from A because there was no intention to release A from the obligation.

o Releasing A from the obligation must be express.

o However, if X agrees to extinguish A’s obligation, even if X just makes a payment of P10,000, B cannot run after A.

o X can request a reimbursement from A of the amount benefiting  her.

o If X paid the full amount, he can recover the same from A.

o If the debt was secured by a mortgage, X cannot ask B to subrogate her rights.

Article 1295. The insolvency of the new debtor, who has been proposed by the original debtor and accepted by the creditor, shall not revive the action of the latter against the original obligor, except when said insolvency was already existing and of public knowledge, or known to the debtor, when the delegated his debt. (1206a)

What is the article all about?

This is about the effect of insolvency of the new debtor in case of novation by delegacion.

What is the meaning of Article 1295?

In case of insolvency of the new debtor, this article permits the creditor to sue the old debtor only when insolvency was prior to the delegation and publicly known, or when the old debtor knew of such insolvency at the time he delegated the obligation 

What is the reason behind the article?

This aims to protect the old debtor from future liability in case of novation by delegacion which is accepted by the creditor  in cases when such insolvency of new debtor is not existing or not of public knowledge or not known to the debtor at the time of delegation of obligation.

What is the effect of insolvency of new debtor in case of novation by delegacion?

As a general rule, if the old debtor proposes to the creditor that he be substituted by a new debtor and the creditor allows it, the creditor cannot go against the old debtor.

What are the exceptions to the general rule?

The exceptions to this article include following cases:

1. When the insolvency of the new debtor has already been existing and of public knowledge when the old debtor delegated the debt;

2. When the insolvency of the new debtor is known to the old debtor when he delegates the debt.

• In this situations of exception, the creditor can go after the old debtor.

• In both cases, the creditor must not have knowledge of the insolvency of the new debtor and the insolvency must have existed during the delegation.

•If he knew, the creditor would be in estoppel. (Creditor already knew such insolvency of new debtor however still allowed such novation of new debtor, creditor done in bad faith, should be estoppel.)

Illustrations/Examples

D old debtor owes C creditor P1,000.00. D proposed to C that X new debtor would substitute him as old debtor. C agreed to the proposal. 

If, at the time of the delegacion, X was already insolvent but his insolvency was neither of public knowledge nor known to D , then D is not liable. Neither is D liable if the insolvency of X took place after he delegated his debt. It is believed that D is also not liable if C had knowledge that X was insolvent at the time the debt was delegated to him.

Case Digest from Original Case

Citation:

INTERPORT vs SECURITIES SPECIALIST, INC., AND R.C. LEE SECURITIES INC.

Case Docket:

G.R. No. 154069

Date:

June 06, 2016

Petitioners:

INTERPORT RESOURCES CORPORATION

Respondents:

SECURITIES SPECIALIST, INC., AND R.C. LEE SECURITIES INC.

Ponente:

BERSAMIN, J.

FACTS:

In January 1977, Oceanic Oil & Mineral Resources, Inc. (Oceanic) entered into a subscription agreement with R.C. Lee, a domestic corporation engaged in the trading of stocks and other securities, covering 5,000,000 of its shares with par value of P0.01 per share, for a total of P50,000.00. Thereupon, R.C. Lee paid 25% of the subscription, leaving 75% unpaid. Consequently, Oceanic issued Subscription Agreements Nos. 1805, 1808, 1809, 1810, and 1811 to R.C. Lee.

On July 28, 1978, Oceanic merged with Interport, with the latter as the surviving corporation. Interport was a publicly-listed domestic corporation whose shares of stocks were traded in the stock exchange. Under the terms of the merger, each share of Oceanic was exchanged for a share of Interport.

On July 28, 1978, Oceanic merged with Interport, with the latter as the surviving corporation. Interport was a publicly-listed domestic corporation whose shares of stocks were traded in the stock exchange. Under the terms of the merger, each share of Oceanic was exchanged for a share of Interport.

On April 16, 1979 and April 18, 1979, SSI, a domestic corporation registered as a dealer in securities, received in the ordinary course of business Oceanic Subscription Agreements Nos. 1805, 1808 to 1811, all outstanding in the name of R.C. Lee, and Oceanic official receipts showing that 25% of the subscriptions had been paid. The Oceanic subscription agreements were duly delivered to SSI through stock assignments indorsed in blank by R.C. Lee.

Later on, R.C. Lee requested Interport for a list of subscription agreements and stock certificates issued in the name of R.C. Lee and other individuals named in the request. In response, Atty. Rhodora B. Morales, Interport’s Corporate Secretary, provided the requested list of all subscription agreements of Interport and Oceanic, as well as the requested stock certificates of Interport. Upon finding no record showing any transfer or assignment of the Oceanic subscription agreements and stock certificates of Interport as contained in the list, R.C. Lee paid its unpaid subscriptions and was accordingly issued stock certificates corresponding thereto.

On February 8, 1989, Interport issued a call for the full payment of subscription receivables, setting March 15, 1989 as the deadline. SSI tendered payment prior to the deadline through two stockbrokers of the Manila Stock Exchange. However, the stockbrokers reported to SSI that Interport refused to honor the Oceanic subscriptions.

Still on the date of the deadline, SSI directly tendered payment to Interport for the balance of the 5,000,000 shares covered by the Oceanic subscription agreements, some of which were in the name of R.C. Lee and indorsed in blank. Interport originally rejected the tender of payment for all unpaid subscriptions on the ground that the Oceanic subscription agreements should have been previously converted to shares in Interport.

SSI then required Interport to furnish it with a copy of any notice requiring the conversion of Oceanic shares to Interport shares. However, Interport failed to show any proof of the notice. Thus, through a letter dated March 30, 1989, SSI asked the SEC for a copy of Interport's board resolution requiring said conversion. The SEC, through Atty. Fe Eloisa C. Gloria, Director of Brokers and Exchange Department, informed SSI that the SEC had no record of any such resolution.

ISSUES:

(a) whether or not Interport was liable to deliver to SSI the Oceanic shares of stock, or the value thereof, under Subscriptions Agreement No. 1805, and Nos. 1808 to 1811 to SSI; and 

(b)whether or not SSI was entitled to exemplary damages and attorney's fees.

RULING:

The appeal is meritorious. 

1. Interport was liable to deliver the Oceanic shares of stock, or the value thereof, under Subscription Agreements Nos. 1805, and 1808 to 1811 to SSI

Interport's claim cannot be upheld. It should be stressed that novation extinguished an obligation between two parties. We have stated in that respect that:

Novation may:

[E]ither be extinctive or modificatory, much being dependent on the nature of the change and the intention of the parties. Extinctive novation is never presumed; there must be an express intention to novate; in cases where it is implied, the acts of the parties must clearly demonstrate their intent to dissolve the old obligation as the moving consideration for the emergence of the new one. Implied novation necessitates that the incompatibility between the old and new obligation be total on every point such that the old obligation is completely superseded by the new one. The test of incompatibility is whether they can stand together, each one having an independent existence; if they cannot and are irreconcilable, the subsequent obligation would also extinguish the first.

An extinctive novation would thus have the twin effects of, first, extinguishing an existing obligation and, second, creating a new one in its stead. This kind of novation presupposes a confluence of four essential requisites: (1) a previous valid obligation, (2) an agreement of all parties concerned to a new contract, (3) the extinguishment of the old obligation, and (4) the birth of a valid new obligation. Novation is merely modificatory where the change brought about by any subsequent agreement is merely incidental to the main obligation (e.g., a change in interest rates or an extension of time to pay; in this instance, the new agreement will not have the effect of extinguishing the first but would merely supplement it or supplant some but not all of its provisions.

2. Interport and R.C. Lee were not liable to pay exemplary damages and attorney's fees.

We delete the attorney's fees for lack of legal basis.

In this case, the Court finds that Interport's act of refusing to accept SSI's tender of payment for the 75% balance of the subscription price was not performed in a wanton, fraudulent, oppressive or malevolent manner. In doing so, Interport merely relied on its records which did not show that an assignment of the shares had already been made between R.C. Lee and SSI as early as 1979. R.C. Lee, on the other hand, persisted in paying the 75% balance on the subscription price simply on the basis of Interport's representation that no transfer has yet been made in connection with Subscription Agreement Nos. 1805, and 1808 to 1811. Although Interport and R.C. Lee might have acted in bad faith35 in refusing to recognize the assignment of the subscription agreements in favor of SSI, their acts certainly did not fall within the ambit of being performed in a wanton, fraudulent, oppressive or malevolent manner as to entitle SSI to an award for exemplary damages.

The Court PARTIALLY GRANTS the petition for review on certiorari; and AFFIRMS the decision promulgated on February 11, 2002 subject to the following MODIFICATIONS, namely:

1. ORDERING Interport Resources Corporation: (a) To accept the tender of payment of Securities Specialist, Inc. corresponding to the 75% unpaid balance of the total subscription price under Subscription Agreements Nos. 1805, 1808, 1809, 1810 and 1811; (b) To deliver 5,000,000 shares of stock and to issue the corresponding stock certificates to Securities Specialist, Inc. upon receipt of the payment of the latter under Item No. (a); (c) To cancel the stock certificates issued to R.C. Lee Securities, Inc. corresponding to the 5,000,000 shares of stock covered by Subscription Agreements Nos. 1805, 1808, 1809, 1810 and 1811; (d) To reimburse R.C. Lee Securities, Inc. the amounts it paid representing the 75% unpaid balance of the total subscription price of Subscription Agreements Nos. 1805, 1808, 1809, 1810 and 1811; and (e) In the alternative, if the foregoing is no longer possible, Interport Resources Corporation shall pay Securities Specialist, Inc. the market value of the 5,000,000 shares of stock covered by Subscription Agreements Nos. 1805, 1808, 1809, 1810 and 1811 at the time of the promulgation of this decision; and

2. DELETING the award for exemplary damages and attorney's fees for lack of merit.

No pronouncement on costs of suit.

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Thank you very much! :)