OBLIGATIONS AND CONTRACTS DOCTRINES (Casio)

ELAINE MADAMBA | 2017

GENERAL PROVISIONS ART. 1167

ELEMENTS ART. 1168
ART. 19 ART. 1169 (Delay)
ART. 21 ART. 1170
SOURCES OF OBLIGATIONS ART. 1171 (Fraud/Bad Faith)
ART. 1158 ART. 1173 (Negligence)
ART. 1159 ART. 1174 (Fortuitous Event)
CULPA CONTRACTUAL ART. 1175
ER/owner liable ART. 1176
Presumption of fault/negligence arises ART. 1177
from mere breach
CULPA AQUILIANA KINDS OF OBLIGATIONS
EMPLOYEE AND EMPLOYER SOLIDARILY CONDITIONAL OBLIGATIONS (ART. 1179 -
LIABLE 1192)
If ER sued, EE not indispensable party ART. 1191
ERs fault, negligence presumed OBLIGATIONS WITH A PERIOD (ART. 1193
Presumption is rebuttable by proof of 1198)
due diligence ALTERNATIVE AND FACULTATIVE (ART.
Quasi-delictual liability may arise even 1199 1206)
where there is an existing contractual JOINT AND SOLIDARY OBLIGATIONS (ART.
relationship 1207 1222)
ART. 109, RPC
NATURE AND EFFECTS OF OBLIGATIONS ART. 110, RPC
ART. 1164 DIVISIBLE AND INDIVISIBLE OBLIGATIONS
ART. 1165 (ART. 1223 1225)
ART. 1166 OBLIGATIONS WITH A PENAL CLAUSE
(ART. 1226 1230)

GENERAL PROVISIONS
ELEMENTS
An obligation is a juridical necessity to give, to do or not to do (Art. 1156, Civil Code). The
obligation is constituted upon the concurrence of the essential elements thereof, viz: (a)
The vinculum juris or juridical tie which is the efficient cause established by the various sources
of obligations (law, contracts, quasi-contracts, delicts and quasi-delicts); (b) the object which is
the prestation or conduct; required to be observed (to give, to do or not to do); and (c)
the subject-persons who, viewed from the demandability of the obligation, are the active
(obligee) and the passive (obligor) subjects.||| (Asuncion v. Court of Appeals, G.R. No. 109125,
[December 2, 1994])
 ART. 19
First of these fundamental precepts is the principle commonly known as abuse of rights
under Article 19 of the Civil Code. It provides that Every person must, in the exercise of his
rights and in the performance of his duties, act with justice, give everyone his due and observe
honesty and good faith. To find the existence of an abuse of right, the following elements
must be present: (1) there is a legal right or duty; (2) which is exercised in bad faith; (3) for the
sole intent or prejudicing or injuring another. When a right is exercised in a manner which
discards these norms resulting in damage to another, a legal wrong is committed for which the
actor can be held accountable. One is not allowed to exercise his right in a manner which
would cause unnecessary prejudice to another or if he would thereby offend morals or good
customs. Thus, a person should be protected only when he acts in the legitimate exercise of
his right, that is when he acts with prudence and good faith; but not when he acts with
negligence or abuse.||| Complementing the principle of abuse of rights are the provisions
of Articles 20 and 21 of the Civil Code. The foregoing rules provide the legal bedrock for the
award of damages to a party who suffers damage whenever one commits an act in violation of
some legal provision, or an act which though not constituting a transgression of positive law,
nevertheless violates certain rudimentary rights of the party aggrieved.|||

In the case at bar, petitioner's verbal reproach against respondent was certainly uncalled for
considering that by her own account nobody knew that she brought such kind and amount of
jewelry inside the paper bag. 17 This being the case, she had no right to attack respondent
with her innuendos which were not merely inquisitive but outrightly accusatory. By openly
accusing respondent as the only person who went out of the room before the loss of the
jewelry in the presence of all the guests therein, and ordering that she be immediately bodily
searched, petitioner virtually branded respondent as the thief. True, petitioner had the right to
ascertain the identity of the malefactor, but to malign respondent without an iota of proof that
she was the one who actually stole the jewelry is an act which, by any standard or principle of
law is impermissible. Petitioner had willfully caused injury to respondent in a manner which is
contrary to morals and good customs. Her firmness and resolve to find her missing jewelry
cannot justify her acts toward respondent. She did not act with justice and good faith for
apparently, she had no other purpose in mind but to prejudice respondent. Certainly,
petitioner transgressed the provisions of Article 19 in relation to Article 21 for which she
should be held accountable.||| (Carpio v. Valmonte, G.R. No. 151866, [September 9, 2004],
481 PHIL 352-365)

ART. 21
TRANSFER AND REASSIGNMENT OF EMPLOYEE; AN EMPLOYER'S EXCLUSIVE RIGHT AND
PREROGATIVE; MUST BE EXERCISED WITHOUT GRAVE ABUSE OF DISCRETION. We hold that
petitioner is entitled to damages. Under Article 21 of the Civil Code, any person who willfully
causes loss or injury to another in a manner that is contrary to morals, good customs or public
policy shall compensate the latter for the damage. The illegal transfer of petitioner to a
functionless office was clearly an abuse by respondent PLDT of its right to control the structure
of its organization. The right to transfer or reassign an employee is decidedly an employer's
exclusive right and prerogative. In several cases, however, we have ruled that such managerial
 prerogative must be exercised without grave abuse of discretion, bearing in mind the basic
elements of justice and fair play. Having the right should not be confused with the manner by
which such right is to be exercised. As found by both the NLRC and the Court of Appeals, there
is no clear justification for the transfer of petitioner except that it was done as a result of
petitioner's disagreement with his superiors with regard to company policies.||| (Paguio v.
Philippine Long Distance Telephone Co., G.R. No. 154072, [December 3, 2002], 441 PHIL 679-
694)

SOURCES OF OBLIGATIONS
We cannot understand how the trial court, from the mere fact that plaintiff-appellee was the
owner of the property and the defendant-appellant the occupant, which used it for its own
benefit but by the express permission of the Alien Property Custodian of the United States, so
easily jumped to the conclusion that the occupant is liable for the value of such use and
occupation. If defendant appellant is liable at all, its obligations must arise from any of the
four sources of obligations, namely, law, contract or quasi-contract, crime, or negligence.
(Article 1089, Spanish Civil Code.) Defendant-appellant is not guilty of any offense at all,
because it entered the premises and occupied it with the permission of the entity which had
the legal control and administration thereof, the Alien Property Administration. Neither was
there any negligence on its part. There was also no privity (of contract or obligation) between
the Alien Property Custodian and the Taiwan Tekkosho, which had secured the possession of
the property from the plaintiff-appellee by the use of duress, such that the Alien Property
Custodian or its permittee (defendant-appellant) may be held responsible for the supposed
illegality of the occupation of the property by the said Taiwan Tekkosho.||| (Sagrada Orden de
Predicadores del Santisimo Rosario de Filipinas v. National Coconut Corp., G.R. No. L-3756,
[June 30, 1952], 91 PHIL 503-510)

Obligations arising from contracts have the force of law between the contracting parties and
should be complied with in good faith. 32 Unless the stipulations in a contract are contrary to
law, morals, good customs, public order or public policy, the same are bidding as between the
parties. 33
In this case, the contracts entered into by the parties were valid contracts. The two (2)
complementary instruments gave rise to reciprocal obligations which are defined as those that
arise from the same cause, and in which each party is a debtor and a creditor of the other,
such that the obligation of one is dependent upon the obligation of the other.
No error was committed by the appellate and trial courts in concluding that the private
respondent complied with the terms and conditions of the contracts. This is supported by the
evidence, both testimonial and documentary, presented by the private respondent during trial
before the lower court. Moreover, Presbitero's letter to the LBP authorizing the release of a
portion of the proceeds to the private respondent reinforces the latter's position that he has
actually complied with the terms and conditions of the contract.
In the interpretation of contracts, it is the general rule that if the terms thereof are clear as to
the intention of the contracting parties, the literal meaning of the stipulations shall
control. Furthermore, subsequent or contemporaneous acts of the contracting parties shall be
considered in judging their intention. In this case, it was clearly agreed upon by the contracting
parties that the private respondent would undertake, among others, the processing,
negotiation and follow-up of Presbitero's claim with the LBP within a stipulated period of 120
days. The collection of the proceeds from the LBP was not among the matters contemplated by
the parties in the said agreement. All they had in mind was that the preparation, processing
and filing of the necessary documents were needed to effect the recovery of proceeds from
the LBP.||| (In re Presbitero, Sr. v. Court of Appeals, G.R. No. 102432, [January 21, 1993])|||

OBLIGATIONS AND CONTRACTS; EXTRA-CONTRACTUAL OBLIGATIONS; QUASI-DELICTS; TO

ESCAPE SOLIDARY LIABILITY FOR QUASI-DELICT COMMITTED BY HIS EMPLOYEES, EMPLOYER
MUST REBUT THE PRESUMPTION OF NEGLIGENCE ON HIS PART. [W]henever an employee's
negligence causes damage or injury to another, there instantly arises a presumption juris
tantum that there was negligence on the part of the employer, either in the selection of the
employee (culpa in eligiendo) or the supervision over him after the selection (culpa in
vigilando). Hence, to escape solidary liability for a quasi-delict committed by his employee, an
employer must rebut the presumption by presenting convincing proof that in the selection and
supervision of his employee, he has exercised the care and diligence of a good father of a
family. In the present case, petitioner MMTC failed to rebut the presumption of negligence on
its part.||| (Metro Manila Transit Corp. v. Court of Appeals, G.R. No. 141089, [August 1, 2002],
435 PHIL 129-141)

Therefore, an obligation imposed on a person, and the corresponding right granted to

another, must be rooted in at least one of these five sources. The mere assertion of a right
and claim of an obligation in an initiatory pleading, whether a Complaint or Petition, without
identifying the basis or source thereof, is merely a conclusion of fact and law . A pleading
should state the ultimate facts essential to the rights of action or defense asserted, as
distinguished from mere conclusions of fact or conclusions of law. 10 Thus, a Complaint or
Petition filed by a person claiming a right to the Office of the President of this Republic, but
without stating the source of his purported right, cannot be said to have sufficiently stated a
cause of action. Also, a person claiming to be the owner of a parcel of land cannot merely
state that he has a right to the ownership thereof, but must likewise assert in the Complaint
either a mode of acquisition of ownership or at least a certificate of title in his name.
In the case at bar, although the Petition in SEC Case No. 02-94-4678 does allege respondent's
right to subscribe to the IPOs of corporations listed in the stock market at their offering
prices, and petitioners' obligation to continue respecting and observing such right, the
Petition utterly failed to lay down the source or basis of respondent's right and/or
petitioners' obligation. (Makati Stock Exchange, Inc. v. Campos, G.R. No. 138814, [April 16,
2009], 603 PHIL 121-134)

Petitioner's reliance on the "Hold Out" clause in the Application and Agreement for Deposit
Account is misplaced.
The "Hold Out" clause applies only if there is a valid and existing obligation arising from any of
the sources of obligation enumerated in Article 1157 of the Civil Code, to wit: law, contracts,
quasi-contracts, delict, and quasi-delict. In this case, petitioner failed to show that respondents
have an obligation to it under any law, contract, quasi-contract, delict, or quasi-delict. And
although a criminal case was filed by petitioner against respondent Rosales, this is not enough
reason for petitioner to issue a "Hold Out" order as the case is still pending and no final
 judgment of conviction has been rendered against respondent Rosales. In fact, it is significant
to note that at the time petitioner issued the "Hold Out" order, the criminal complaint had not
yet been filed. Thus, considering that respondent Rosales is not liable under any of the five
sources of obligation, there was no legal basis for petitioner to issue the "Hold Out" order.
Accordingly, we agree with the findings of the RTC and the CA that the "Hold Out" clause does
not apply in the instant case.
In view of the foregoing, we find that petitioner is guilty of breach of contract when it
unjustifiably refused to release respondents' deposit despite demand. Having breached its
contract with respondents, petitioner is liable for damages. (Metropolitan Bank and Trust Co.
v. Rosales, G.R. No. 183204, [January 13, 2014], 724 PHIL 66-80)

ART. 1158
In essence, the pivotal legal question presented by this appeal of defendant Central Bank of
the Philippines, is whether or not the issuance of a monetary policy by it, thereafter
implemented by the appropriate resolutions, as to the rate of exchange at which dollars after
being surrendered and sold to it could be re-acquired, creates a contractual obligation. A
monetary policy issued by the Central Bank and implemented by appropriate resolutions,
pursuant to the exercise of its regulatory power to implement statutory provisions, such as one
regarding the rate of exchange at which dollars after being surrendered and sold to it could be
re-acquired, does not create a contractual obligation.|||

The birth or perfection of a consensual contract, Article 1315, Civil Code of the Philippines,
commences from the moment the parties come to an agreement on a definite subject matter
and valid consideration.|| The consent, in the matter of contracts, is composed of a double
operation. (1) The parties must commence by agreeing as to the contents of the 'convention'
that is to say, by making sufficiently precise the object and the essential conditions, and
discussing the particular clauses which they desire to introduce to modify or to complete the
ordinary effects . . . (2) This first operation having been terminated, the parties are in accord on
the projected contract; there is between them what Littre calls the uniformity of opinions,
which is one sense of the word 'consent,' but the contract is not concluded, it still exists in a
projected state. There remains to give its obligatory force by an act of will, expressing the
individual adherence of each one of the parties to the act thus prepared. . . . When all the
necessary consents (sic) are obtained, and manifested in legal form, the contract is formed, the
lien of law is tied. It is therefore the union of these adherences (sic) which constitute the
contract and which gives birth to the obligations which are derived from it. It is an act of
volition, while the preliminary operation of discussion of the project is a work of the mind and
reasoning||| (Batchelder v. Central Bank of the Philippines, G.R. No. L-25071, [March 29,
1972], 150 PHIL 866-880)

If every obligation consists in giving, doing, or not doing something (art. 1088), and spouses
are mutually bound to support each other, there can be no question but that, when either of
them by reason of illness should be in need of medical assistance, the other is under the
unavoidable obligation to furnish the necessary services of a physician in order that health
may be restored, and he or she may be freed from the sickness by which life is jeopardized;
the party bound to furnish such support is therefore liable for all expenses, including the fees
 of the medical expert for his professional services. This liability originates from the above-
cited mutual obligation which the law has expressly established between the married couple.
In the face of the above legal precepts it is unquestionable that the person bound to pay the
fees due to the plaintiff for the professional services that he rendered to the daughter-in-law
of the defendants during her childbirth is the husband of the patient and not her father and
mother- in-law, the defendants herein. The fact that it was not the husband who called the
plaintiff and requested his assistance for his wife is no bar to the fulfillment of the said
obligation, as the defendants, in view of the imminent danger to which the life of the patient
was at that moment exposed, considered that medical assistance was urgently needed, and
the obligation of the husband to furnish his wife with the indispensable services of a
physician at such critical moments is specially established by the law, as has been seen, and
compliance therewith is unavoidable; therefore, the plaintiff, who believes that he is entitled
to recover his fees, must direct his action against the husband who is under obligation to
furnish medical assistance to his lawful wife in such an emergency.

RECIPROCAL OBLIGATION OF HUSBAND AND WIFE; SUPPORT. Among the reciprocal

obligations existing between a husband and wife is that of support, which obligation is
established by law.

SUPPORT OF STRANGERS. The law does not compel any person to support a stranger
unless such person bound himself to do so by an express contract.

SUPPORT OF WIFE. Where a husband whom the law compels to support his wife in living,
the father and mother-in-law of the latter are under no liability to provide for her.
(Pelayo v. Lauron, G.R. No. 4089, [January 12, 1909], 12 PHIL 453-457)

ART. 1159
Petitioner does not dispute that the 1988 contract was executed freely and willingly between
him and his late brother, and the Nisperos spouses. "The freedom of contract is both a
constitutional and statutory right," 53 and "the contracting parties may establish such
stipulations, clauses, terms and conditions as they may deem convenient, provided they are
not contrary to law, morals, good customs, public order, or public policy." 54 The 1988
contract neither shortens the period provided under Section 119 nor does away with it.
Instead, it gives the Nisperos spouses more time to reacquire the land that the State
gratuitously gave them. The 1988 contract therefore is not contrary to law; instead it is
merely in keeping with the purpose of the homestead law. Since the 1988 contract is valid, it
should be given full force and effect. In Roxas v. De Zuzuarregui, Jr., 55 we held:
It is basic that a contract is the law between the parties. Obligations arising from
contracts have the force of law between the contracting parties and should be
complied with in good faith. Unless the stipulations in a contract are contrary to
law, morals, good customs, public order or public policy, the same are binding as
between the parties. 56
Petitioner, who freely signed the 1988 contract, cannot now be allowed to renege on his
obligation under it, simply because he changed his mind. Article 1308 of the Civil Code
provides:
 The contract must bind both contracting parties; its validity or compliance cannot
be left to the will of one of them.
Petitioner is thus bound by the terms of the 1988 Contract, and must comply with it in good
faith. Since the right to repurchase was exercised by the Nisperos spouses before the
expiration of the time given to them by the Morla brothers, the lower courts correctly ruled
in their favor. (Morla v. Belmonte, G.R. No. 171146, [December 7, 2011], 678 PHIL 102-117)

It will thus be seen that while the terms of article 1902 of the Civil Code seem to be broad
enough to cover the driver's negligence in the instant case, nevertheless article 1093
limits cuasi-delitos to acts or omissions "not punishable by law." But inasmuch as article 365
of the Revised Penal Code punishes not only reckless but even simple imprudence or
negligence, the fault or negligence under article 1902 of the Civil Code has apparently been
crowded out. It is this overlapping that makes the "confusion worse confounded." However, a
closer study shows that such a concurrence of scope in regard to negligent acts does not
destroy the distinction between the civil liability arising from a crime and the responsibility
for cuasi- delitos or culpa extra-contractual. The same negligent act causing damages may
produce civil liability arising from a crime under article 100 of the Revised Penal Code, or
create an action for cuasi-delito or culpa extra-contractual under articles 1902-1910 of the
Civil Code.

Coming now to the sentences of the Supreme Tribunal of Spain, that court has upheld the
principles above set forth: that aquasi- delict or culpa extra-contractual is a separate and
distinct legal institution, independent from the civil responsibility arising from criminal
liability, and that an employer is, under article 1903 of the Civil Code, primarily and directly
responsible for the negligent acts of his employee.

The acts to which these articles are applicable are understood to be those not growing out of
pre-existing duties of the parties to one another. But where relations already formed give rise
to duties, whether springing from contract or quasi contract, then breaches of those duties
are subject to articles 1101, 1103, and 1104 of the same code. A typical application of this
distinction may be found in the consequences of a railway accident due to defective
machinery supplied by the employer. His liability to his employee would arise out of the
contract of employment, that to the passengers out of the contract for passage, while that to
the injured bystander would originate in the negligent act itself.||| (Barredo v. Garcia, G.R.
No. 48006, [July 8, 1942], 73 PHIL 607-621)

CULPA CONTRACTUAL
Employer/Owner liable
Respondent G.P. Sarmiento trucking company (GTS) undertook to transport cargoes for
Concepcion Industries, Inc. when it collided with an unidentified truck, causing damage to the
cargoes. Petitioner, FGU, insurer of the shipment, paid to Concepcion Industries the value of
the covered cargoes. Then, as subrogee of Concepcion Industries, Inc., petitioner FGUsued GPS
for breach of contract of carriage for reimbursement. Instead of filing an answer, GPS filed a
demurrer to evidence, claiming that it cannot be held liable as a common carrier because it
was only a private carrier, being the exclusive hauler only of Concepcion Industries, Inc. since
1988. The lower court granted the motion, ruling that plaintiff FGU failed to prove that GPS is a
common carrier. The CA affirmed the trial court's order.

On appeal, the Supreme Court held; that GPS cannot be considered a common carrier as it
renders service exclusively to Concepcion Industries; that notwithstanding, GPS cannot escape
from liability since in culpa contractual, mere proof of the existence of the contract and the
failure of its compliance justify prima facie a corresponding right of relief. Respondent driver,
however, who is not a party to the contract of carriage, may not be held liable under the
agreement without concrete proof of his negligence or fault. Petitioner's civil action against
the driver can only be based on culpa aquiliana, which, unlike culpa contractual, would require
the claimant for damages to prove negligence or fault on the part of the defendant.|||

Hence, the Supreme Court affirmed the assailed order of the trial court and the CA insofar as
the respondent driver was concerned but GPS trucking company was ordered to pay the
petitioner FGU the value of the damaged and lost cargoes.

CULPA CONTRACTUAL; MERE PROOF OF THE EXISTENCE OF THE CONTRACT AND FAILURE OF
ITS COMPLIANCE JUSTIFY,PRIMA FACIE, A CORRESPONDING RIGHT OF RELIEF; CASE AT BAR.
In culpa contractual, upon which the action of petitioner rests as being the subrogee of
Concepcion Industries, Inc., the mere proof of the existence of the contract and the failure of
its compliance justify, prima facie, a corresponding right of relief. The law, recognizing the
obligatory force of contracts, will not permit a party to be set free from liability for any kind of
misperformance of the contractual undertaking or a contravention of the tenor thereof. A
breach upon the contract confers upon the injured party a valid cause for recovering that
which may have been lost or suffered. The remedy serves to preserve the interests of the
promisee that may include his "expectation interest," which is his interest in having the benefit
of his bargain by being put in as good a position as he would have been in had the contract
been performed, or his "reliance interest," which is his interest in being reimbursed for loss
caused by reliance on the contract by being put in as good a position as he would have been in
had the contract not been made; or his "restitution interest," which is his interest in having
restored to him any benefit that he has conferred on the other party. Indeed, agreements can
accomplish little, either for their makers or for society, unless they are made the basis for
action. The effect of every infraction is to create a new duty, that is, to make recompense to
the one who has been injured by the failure of another to observe his contractual obligation
unless he can show extenuating circumstances, like proof of his exercise of due diligence
(normally that of the diligence of a good father of a family or, exceptionally by stipulation or by
law such as in the case of common carriers, that of extraordinary diligence) or of the
attendance of fortuitous event, to excuse him from his ensuing liability. Respondent trucking
corporation recognizes the existence of a contract of carriage between it and petitioner's
assured, and admits that the cargoes it has assumed to deliver have been lost or damaged
while in its custody. In such a situation, a default on, or failure of compliance with, the
obligation in this case, the delivery of the goods in its custody to the place of destination
gives rise to a presumption of lack of care and corresponding liability on the part of the
contractual obligor the burden being on him to establish otherwise. GPS has failed to do
 so.||| (FGU Insurance Corp. v. G.P. Sarmiento Trucking Corp., G.R. No. 141910, [August 6,
2002], 435 PHIL 333-345)

Presumption of fault/negligence arises from mere breach

Respondent trucking corporation recognizes the existence of a contract of carriage between it
and petitioner's assured, and admits that the cargoes it has assumed to deliver have been lost
or damaged while in its custody. In such a situation, a default on, or failure of compliance with,
the obligation in this case, the delivery of the goods in its custody to the place of destination
gives rise to a presumption of lack of care and corresponding liability on the part of the
contractual obligor the burden being on him to establish otherwise. GPS has failed to do
so.||| (FGU Insurance Corp. v. G.P. Sarmiento Trucking Corp., G.R. No. 141910, [August 6,
2002], 435 PHIL 333-345)

RESIPSA LOQUITOR; RELIEVES THE PLAINTIFF OF THE BURDEN OF PRODUCING SPECIFIC PROOF
OF NEGLIGENCE; CASE AT BAR. Res ipsa loquitur, a doctrine being invoked by petitioner,
holds a defendant liable where the thing which caused the injury complained of is shown to be
under the latter's management and the accident is such that, in the ordinary course of things,
cannot be expected to happen if those who have its management or control use proper care. It
affords reasonable evidence, in the absence of explanation by the defendant, that the accident
arose from want of care. It is not a rule of substantive law and, as such, it does not create an
independent ground of liability. Instead, it is regarded as a mode of proof, or a mere
procedural convenience since it furnishes a substitute for, and relieves the plaintiff of, the
burden of producing specific proof of negligence. The maxim simply places on the defendant
the burden of going forward with the proof. Resort to the doctrine, however, may be allowed
only when (a) the event is of a kind which does not ordinarily occur in the absence of
negligence; (b) other responsible causes, including the conduct of the plaintiff and third
persons, are sufficiently eliminated by the evidence; and (c) the indicated negligence is within
the scope of the defendant's duty to the plaintiff. Thus, it is not applicable when an
unexplained accident may be attributable to one of several causes, for some of which the
defendant could not be responsible. Res ipsa loquitur generally finds relevance whether or not
a contractual relationship exists between the plaintiff and the defendant, for the inference of
negligence arises from the circumstances and nature of the occurrence and not from the
nature of the relation of the parties. Nevertheless, the requirement that responsible causes
other than those due to defendant's conduct must first be eliminated, for the doctrine to
apply, should be understood as being confined only to cases of pure (non-contractual) tort
since obviously the presumption of negligence in culpa contractual, as previously so pointed
out, immediately attaches by a failure of the covenant or its tenor. In the case of the truck
driver, whose liability in a civil action is predicated on culpa acquiliana, while he admittedly
can be said to have been in control and management of the vehicle which figured in the
accident, it is not equally shown, however, that the accident could have been exclusively due
to his negligence, a matter that can allow, forthwith, res ipsa loquitur to work against
him.||| (FGU Insurance Corp. v. G.P. Sarmiento Trucking Corp., G.R. No. 141910, [August 6,
2002], 435 PHIL 333-345)

CULPA AQUILIANA
 ISSUE: Whether or not the registered owner of a motor vehicle be held liable for damages
arising from a vehicular accident involving his motor vehicle while being operated by the
employee of its buyer without the latter's consent and knowledge.

RULING: Yes. The registered owner of any vehicle is directly and primarily responsible to the
public and third persons while it is being operated. In dealing with vehicles registered under
the Public Service Law, the public has the right to assume or presume that the registered
owner is the actual owner thereof, for it would be difficult for the public to enforce the actions
that they may have for injuries caused to them by the vehicles being negligently operated if
the public should be required to prove who the actual owner is. However, it is not implied by
this doctrine that the registered owner may not recover whatever amount he had paid by
virtue of his liability to third persons from the person to whom he had actually sold, assigned
or conveyed the vehicle. The main purpose of vehicle registration is the easy identification of
the owner who can be held responsible for any accident, damage or injury caused by the
vehicle. Easy identification prevents inconvenience and prejudice to a third party injured by
one who is unknown or unidentified. To allow a registered owner to escape liability by claiming
that the driver was not authorized by the new, actual owner results in the public detriment the
law seeks to avoid. Whether the driver is authorized or not by the actual owner is irrelevant to
determining the liability of the registered owner who the law holds primarily and directly
responsible for any accident, injury or death caused by the operation of the vehicle in the
streets and highways. To require so would defeat the purpose of the enactment of motor
vehicle registration. Thus, the petition for review is denied and the Court of Appeals decision is
affirmed. (Villanueva v. Domingo)

EMPLOYEE AND EMPLOYER SOLIDARILY LIABLE

If ER sued, EE not indispensable party
Contrary to Mrs. Cerezo's assertion, Foronda is not an indispensable party to the case. An
indispensable party is one whose interest is affected by the courts action in the litigation,
and without whom no final resolution of the case is possible. 39However, Mrs. Cerezo's
liability as an employer in an action for a quasi-delict is not only solidary, it is also primary
and direct. Foronda is not an indispensable party to the final resolution of Tuazons action
for damages against Mrs. Cerezo.
The responsibility of two or more persons who are liable for a quasi-delict is
solidary. 40 Where there is a solidary obligation on the part of debtors, as in this case, each
debtor is liable for the entire obligation. Hence, each debtor is liable to pay for the entire
obligation in full. There is no merger or renunciation of rights, but only mutual
representation. 41 Where the obligation of the parties is solidary, either of the parties is
indispensable, and the other is not even a necessary party because complete relief is
available from either. 42 Therefore, jurisdiction over Foronda is not even necessary
as Tuazon may collect damages from Mrs. Cerezo alone.
Moreover, an employer's liability based on a quasi-delict is primary and direct, while the
employer's liability based on a delict is merely subsidiary. 43 The words "primary and
direct," as contrasted with "subsidiary," refer to the remedy provided by law for enforcing
the obligation rather than to the character and limits of the obligation. 44 Although liability
under Article 2180 originates from the negligent act of the employee, the aggrieved party
may sue the employer directly. When an employee causes damage, the law presumes that
the employer has himself committed an act of negligence in not preventing or avoiding the
damage. This is the fault that the law condemns. While the employer is civilly liable in a
subsidiary capacity for the employee's criminal negligence, the employer is also civilly liable
directly and separately for his own civil negligence in failing to exercise due diligence in
selecting and supervising his employee. The idea that the employers liability is solely
subsidiary is wrong. (Cerezo v. Tuazon, G.R. No. 141538, [March 23, 2004], 469 PHIL 1020-
1046)

AN EMPLOYER CANNOT BE HELD LIABLE FOR DAMAGES ABSENT PROOF OF FAULT OR

NEGLIGENCE ON THE PART OF ITS EMPLOYEE; CASE AT BAR. The foundation of LRTA's
liability is the contract of carriage and its obligation to indemnify the victim arises from the
breach of that contract by reason of its failure to exercise the high diligence required of the
common carrier. In the discharge of its commitment to ensure the safety of passengers, a
carrier may choose to hire its own employees or avail itself of the services of an outsider or
an independent firm to undertake the task. In either case, the common carrier is not
relieved of its responsibilities under the contract of carriage. Should Prudent be made
likewise liable? If at all, that liability could only be for tort under the provisions of Article
2176 and related provisions, in conjunction with Article 2180, of the Civil Code. The
premise, however, for the employer's liability is negligence or fault on the part of the
employee. Once such fault is established, the employer can then be made liable on the
basis of the presumption juris tantum that the employer failed to exercise diligentissimi
patris familias in the selection and supervision of its employees. The liability is primary and
can only be negated by showing due diligence in the selection and supervision of the
employee, a factual matter that has not been shown. Absent such a showing, one might ask
further, how then must the liability of the common carrier, on the one hand, and an
independent contractor, on the other hand, be described? It would be solidary. A
contractual obligation can be breached by tort and when the same act or omission causes
the injury, one resulting in culpa contractualand the other in culpa aquiliana, Article 2194
of the Civil Code can well apply. In fine, a liability for tort may arise even under a contract,
where tort is that which breaches the contract. Stated differently, when an act which
constitutes a breach of contract would have itself constituted the source of a quasi-
delictual liability had no contract existed between the parties, the contract can be said to
have been breached by tort, thereby allowing the rules on tort to apply. Regrettably for LRT,
as well as perhaps the surviving spouse and heirs of the late Nicanor Navidad, this Court is
concluded by the factual finding of the Court of Appeals that "there is nothing to link
(Prudent) to the death of Nicanor (Navidad), for the reason that the negligence of its
employee, Escartin, has not been duly proven . . . ." This finding of the appellate court is
not without substantial justification in our own review of the records of the case. There
being, similarly, no showing that petitioner Rodolfo Roman himself is guilty of any culpable
act or omission, he must also be absolved from liability. Needless to say, the contractual tie
between the LRT and Navidad is not itself a juridical relation between the latter and
Roman; thus, Roman can be made liable only for his own fault or negligence.||| (Light Rail
Transit Authority v. Navidad, G.R. No. 145804, [February 6, 2003], 445 PHIL 31-42)
Petitioner Viron Transportation Co., Inc. filed a civil action to recover damages based on
quasi-delict as a result of a vehicular accident between a passenger bus owned by
petitioner and a Forward Cargo Truck owned by private respondent Rudy Samidan. After
trial, the lower court dismissed petitioner's complaint and sustained the private
respondents' counterclaim for actual damages. Not satisfied therewith, petitioner appealed
to the Court of Appeals which affirmed in toto the decision of the lower court. Its motion
for reconsideration having been denied, petitioner filed the instant petition for review
on certiorariclaiming that the Court of Appeals gravely erred in finding that the accident
was due to the fault of its driver and in awarding compensatory or actual damages, as well
as travelling expenses and attorney's fees when the same were not substantiated or
buttressed by evidence on record.
The Supreme Court ruled that the fault or negligence was attributable to the driver of
the Viron passenger bus. The Viron passenger bus collided with the cargo truck in a vain
attempt to overtake the latter. At the sight of an incoming bus in the appropriate direction;
the Viron passenger bus swerved to the right lane which was then occupied by the cargo
truck resulting in the collision of the two vehicles. The Court modified the decision of the
Court of Appeals insofar as it awarded actual damages to private respondents
Alberto delos Santos y Natividad and Rudy Samidan in the amount of P19,500.00 and an
additional P10,000.00 as expenses for transportation and accommodation during the trial
for lack of evidentiary bases therefor. Considering that in the present case the actual
damages suffered by private respondents were based only on a job estimate and a photo
showing the damage to the truck, there was absence of competent proof on the specific
amounts of actual damages suffered. Neither were the transportation and accommodation
expenses during the trial supported by competent proof, the lower court having relied
merely on the unsubstantiated allegations of private respondents. The Court likewise
deleted the award of attorney's fees for lack of factual and legal basis and the case does
not fall under any of the instances found in Article 2208 of the Civil Code for the proper
award of attorney's fees.
||| (Viron Transportation Co., Inc. v. Delos Santos, G.R. No. 138296, [November 22, 2000],
399 PHIL 243-257)

QUASI-DELICTS; IT IS NOT NECESSARY TO STATE IN THE COUNTERCLAIM THAT PETITIONER

WAS NEGLIGENT IN THE SUPERVISION OR SELECTION OF ITS EMPLOYEES; AS ITS
NEGLIGENCE IS PRESUMED BY OPERATION OF LAW; CASE AT BAR. We find that the
counterclaim of private respondents alleges the ultimate facts constituting their cause of
action. It is not necessary to state that petitioner was negligent in the supervision or
selection of its employees, as its negligence is presumed by operation of law. The liability of
the employer was explained in a case thus: "As employers of the bus driver, the petitioner
is, under Article 2180 of the Civil Code, directly and primarily liable for the resulting
damages. The presumption that they are negligent flows from the negligence of their
employee. That presumption, however, is only juris tantum, not juris et de jure. Their only
possible defense is that they exercised all the diligence of a good father of a family to
prevent the damage. Article 2180 reads as follows: "The obligation imposed by Article 2176
is demandable not only for one's own acts or omissions, but also for those of persons for
whom one is responsible. . . . Employers shall be liable for the damages caused by their
 employees and household helpers acting within the scope of their assigned tasks, even
though the former are not engaged in any business or industry. . . . The responsibility
treated of in this article shall cease when the persons herein mentioned prove that they
observed all the diligence of a good father of a family to prevent damage." The diligence of
a good father referred to means the diligence in the selection and supervision of
employees (Viron Transportation Co., Inc. v. Delos Santos, G.R. No. 138296, [November 22,
2000], 399 PHIL 243-257)

ERs fault, negligence presumed

OBLIGATIONS AND CONTRACTS; EXTRA-CONTRACTUAL OBLIGATIONS; QUASI-DELICTS;

RESPONSIBILITY OF EMPLOYERS FOR NEGLIGENCE OF THEIR EMPLOYEES IN THE
PERFORMANCE OF THEIR DUTIES IS PRIMARY; RATIONALE. Article 2180 provides for the
solidary liability of an employer for the quasi-delict committed by an employee. The
responsibility of employers for the negligence of their employees in the performance of
their duties is primary and, therefore, the injured party may recover from the employers
directly, regardless of the solvency of their employees. The rationale for the rule on
vicarious liability has been explained thus: "What has emerged as the modern justification
for vicarious liability is a rule of policy, a deliberate allocation of a risk. The losses caused by
the torts of employees, which as a practical matter are sure to occur in the conduct of the
employer's enterprise, are placed upon that enterprise itself, as a required cost of doing
business. They are placed upon the employer because, having engaged in an enterprise,
which will on the basis of all past experience involve harm to others through the tort of
employees, and sought to profit by it, it is just that he, rather than the innocent injured
plaintiff, should bear them; and because he is better able to absorb them and to distribute
them, through prices, rates or liability insurance, to the public, and so to shift them to
society, to the community at large. Added to this is the makeweight argument that an
employer who is held strictly liable is under the greatest incentive to be careful in the
selection, instruction and supervision of his servants, and to take every precaution to see
that the enterprise is conducted safely."
MAY BE OVERCOME BY DEFENSE THAT EMPLOYER HAS EXERCISED ALL THE DILIGENCE OF A
GOOD FATHER OF A FAMILY BOTH IN THE SELECTION OF THE EMPLOYEE AND IN THE
SUPERVISION OF THE PERFORMANCE OF HIS DUTIES. Employers may be relieved of
responsibility for the negligent acts of their employees acting within the scope of their
assigned task only if they can show that "they observed all the diligence of a good father of
a family to prevent damage." For this purpose, they have the burden of proving that they
have indeed exercised such diligence, both in the selection of the employee and in the
supervision of the performance of his duties. In the selection of prospective employees,
employers are required to examine them as to their qualifications, experience and service
records. With respect to the supervision of employees, employers must formulate standard
operating procedures, monitor their implementation and impose disciplinary measures for
breaches thereof. These facts must be shown by concrete proof, including documentary
evidence.
In the instant case, petitioner presented the results of Joson, Jr.'s written
examination, 21 actual driving tests, 22 x-ray examination, 23 psychological
examination, 24 NBI clearance, 25 physical examination, 26 hematology
examination, 27 urinalysis,28 student driver training, 29 shop training, 30 birth
certificate, 31 high school diploma 32 and reports from the General Maintenance Manager
and the Personnel Manager showing that he had passed all the tests and training sessions
and was ready to work as a professional driver. 33 However, as the trial court noted,
petitioner did not present proof that Joson, Jr. had nine years of driving experience. 34
Petitioner also presented testimonial evidence that drivers of the company were given
seminars on driving safety at least twice a year. 35 Again, however, as the trial court noted
there is no record of Joson, Jr. ever attending such a seminar. 36Petitioner likewise failed to
establish the speed of its buses during its daily trips or to submit in evidence the trip
tickets, speed meters and reports of field inspectors. The finding of the trial court that
petitioner's bus was running at a very fast speed when it overtook the Dalin bus and hit the
deceased was not disputed by petitioner. For these reasons, we hold that the trial court did
not err in finding petitioner to be negligent in the supervision of its driver Joson, Jr. (Victory
Liner Inc. v. Heirs of Malecdan, G.R. No. 154278, [December 27, 2002], 442 PHIL 784-797)

Under Article 2180, when an injury is caused by the negligence of a servant or an

employee, the master or employer is presumed to be negligent either in the selection or in
the supervision of that employee. This presumption may be overcome only by satisfactorily
showing that the employer exercised the care and the diligence of a good father of a family
in the selection and the supervision of its employee. 15
In fine, when the employee causes damage due to his own negligence while performing his
own duties, there arises the juris tantum presumption that the employer is negligent,
rebuttable only by proof of observance of the diligence of a good father of a
family. 16 Thus, in the selection of prospective employees, employers are required to
examine them as to their qualifications, experience and service records. With respect to
the supervision of employees, employers must formulate standard operating procedures,
monitor their implementation and impose disciplinary measures for breaches thereof.
These facts must be shown by concrete proof, including documentary evidence. 17
In the present case, petitioners presented several documents 18 in evidence to show the
various tests and pre-qualification requirements imposed upon petitioner Pleyto before his
hiring as a driver by PRBL. However, no documentary evidence was presented to prove that
petitioner PRBL exercised due diligence in the supervision of its employees,
including Pleyto. (Pleyto v. Lomboy, G.R. No. 148737, [June 16, 2004], 476 PHIL 373-392)

As the employer of Gerosano, petitioner is primarily and solidarily liable for the quasi-
delict committed by the former. Petitioner is presumed to be negligent in the selection and
supervision of his employee by operation of law and may be relieved of responsibility for
the negligent acts of his driver, who at the time was acting within the scope of his assigned
task, only if he can show that he observed all the diligence of a good father of a family to
prevent damage.
|
 Petitioner failed to show that he examined driver Gerosano as to his qualifications,
experience and service records. In fact, the testimony of driver Gerosano in his cross-
examination showed the non-observance of these requirements. Gerosano testified that
petitioner was his first employer in Dumaguete and that he was accepted by petitioner on
the very day he applied for the job; 29 that his driver's license was issued in Mindanao
where he came from 30 and that while petitioner asked him about his driving record in
Mindanao, he did not present any document of his driving record. 31 Such admission
clearly established that petitioner did not exercise due diligence in the selection of his
driver Gerosano.
Moreover, the fact that petitioner's driver Gerosano was driving in an efficient manner
when petitioner was with him in his first two trips would not conclusively establish that
Gerosano was not at all reckless. It could not be considered as due diligence in the
supervision of his driver to exempt petitioner from liability. In the supervision of his driver,
petitioner must show that he had formulated training programs and guidelines on road
safety for his driver which the records failed to show. We find that petitioner failed to rebut
the presumption of negligence in the selection and supervision of his employees.
Moreover, there was also no proof that he exercised diligence in maintaining his cargo
truck roadworthy and in good operating condition. While petitioner's mechanic driver
testified that he made a routine check up on October 15, 1982, one day before the mishap
happened, and found the truck operational, there was no record of such inspection.
(Estacion v. Bernardo, G.R. No. 144723, [February 27, 2006], 518 PHIL 388-408)

Presumption is rebuttable by proof of due diligence

In fine, when the employee causes damage due to his own negligence while performing his
own duties, there arises the juris tantum presumption that the employer is negligent,
rebuttable only by proof of observance of the diligence of a good father of a family.
Petitioner, through its witnesses, namely, Danilo Azardon, a shop supervisor and Fernando
Mallare, an administrative officer, failed to rebut such legal presumption of negligence in
the selection and supervision of employees, thus, petitioner as the employer is responsible
for damages, the basis of the liability being the relationship of pater familias or on the
employer's own negligence. Hence, with the allegations and subsequent proof of
negligence against the bus driver of petitioner, the lower court correctly adjudged
petitioner liable for damages. (Viron Transportation Co., Inc. v. Delos Santos, G.R. No.
138296, [November 22, 2000], 399 PHIL 243-257)

From the above provision, when an injury is caused by the negligence of an employee, a
legal presumption instantly arises that the employer was negligent in the selection and/or
supervision of said employee. The said presumption may be rebutted only by a clear
showing on the part of the employer that he exercised the diligence of a good father of a
family in the selection and supervision of his employee. If the employer successfully
overcomes the legal presumption of negligence, he is relieved of liability. 6 In other words,
the burden of proof is on the employer.|||

Based therefore on jurisprudential law, the employer must not merely present testimonial
evidence to prove that he observed the diligence of a good father of a family in the
selection and supervision of his employee, but he must also support such testimonial
evidence with concrete or documentary evidence. The reason for this is to obviate the
biased nature of the employer's testimony or that of his witnesses. 9
In this case, petitioner's evidence consisted entirely of testimonial evidence. He testified
that before he hired Elizalde Sablayan, he required him to submit a police clearance in
order to determine if he was ever involved in any vehicular accident. He also required
Sablayan to undergo a driving test conducted by his mechanic, Esteban Jaca. Petitioner
claimed that he, in fact, accompanied Sablayan during the driving test and that during the
test, Sablayan was taught to read and understand traffic signs like "Do Not Enter," "One
Way," "Left Turn" and "Right Turn."
Petitioner's mechanic, Esteban Jaca, on the other hand, testified that Sablayan passed the
driving test and never figured in any vehicular accident except the one in question. He also
testified that he maintained in good condition all the trucks of petitioner by checking the
brakes, horns and tires thereof before providing hauling services. 10
Petitioner, however, never presented the alleged police clearance given to him by Sablayan
nor the results of Sablayan's driving test. Petitioner also did not present records of the
regular inspections that his mechanic allegedly conducted. The unsubstantiated and self-
serving testimonies of petitioner and his mechanic were, without doubt, insufficient to
overcome the legal presumption that petitioner was negligent in the selection and
supervision of his driver. Accordingly, we affirm the ruling of the Court of Appeals that
petitioner is liable for the injuries suffered by respondent.
It should be emphasized that the legal obligation of employers to observe due diligence in
the selection and supervision of their employees provided in Article 2180 of the Civil Code
is not an empty provision or a mere formalism since the non-observance thereof actually
becomes the basis of the employers' vicarious liability. 11 Employers should thus seriously
observe such a degree of diligence (and prove it in court by sufficient and concrete
evidence) that would exculpate them from liability. (Syki v. Begasa, G.R. No. 149149,
[October 23, 2003], 460 PHIL 381-392)

In the case at bar, the Court of Appeals was correct in holding that Capt. Jusep was
negligent in deciding to transfer the vessel only at 8:35 in the morning of October 21, 1994.
As early as 12:00 midnight of October 20, 1994, he received a report from his radio head
operator in Japan 19 that a typhoon was going to hit Manila 20 after 8 hours. 21 This,
notwithstanding, he did nothing, until 8:35 in the morning of October 21, 1994, when he
decided to seek shelter at the North Harbor, which unfortunately was already congested.
The finding of negligence cannot be rebutted upon proof that the ship could not have
sought refuge at the North Harbor even if the transfer was done earlier. It is not the
speculative success or failure of a decision that determines the existence of negligence in
the present case, but the failure to take immediate and appropriate action under the
circumstances. Capt. Jusep, despite knowledge that the typhoon was to hit Manila in 8
hours, complacently waited for the lapse of more than 8 hours thinking that the typhoon
might change direction. 22 He cannot claim that he waited for the sun to rise instead of
moving the vessel at midnight immediately after receiving; the report because of the
difficulty of traveling at night. The hour of 8:35 a.m. is way past sunrise. Furthermore, he
did not transfer as soon as the sun rose because, according to him, it was not very
 cloudy 23 and there was no weather disturbance yet.||| When he ignored the weather
report notwithstanding reasonable foresight of harm, Capt. Jusep showed an inexcusable
lack of care and caution which an ordinary prudent person would have observed in the
same situation. 25 Had he moved the vessel earlier, he could have had greater chances of
finding a space at the North Harbor considering that the Navotas Port where they docked
was very near North Harbor. 26 Even if the latter was already congested, he would still have
time to seek refuge in other ports. (Delsan Transport Lines Inc. v. C & A Construction Inc.,
G.R. No. 156034, [October 1, 2003], 459 PHIL 156-166)

Quasi-delictual liability may arise even where there is an existing contractual relationship

Generally, liability for tort arises only between parties not otherwise bound by a contract.
An academic institution, however, may be held liable for tort even if it has an existing
contract with its students, since the act that violated the contract may also be a tort. We
ruled thus in PSBA vs. CA, 34 from which we quote:

". . . A perusal of Article 2176 [of the Civil Code] shows that obligations arising
from quasi-delicts or tort, also known as extra-contractual obligations, arise only
between parties not otherwise bound by contract, whether express or implied.
However, this impression has not prevented this Court from determining the
existence of a tort even when there obtains a contract. In Air France v.
Carrascoso (124 Phil. 722), the private respondent was awarded damages for his
unwarranted expulsion from a first-class seat aboard the petitioner airline. It is
noted, however, that the Court referred to the petitioner-airline's liability as one
arising from tort, not one arising form a contract of carriage. In effect, Air France is
authority for the view that liability from tort may exist even if there is a contract,
for the act that breaks the contract may be also a tort. . . . This view was not all
that revolutionary, for even as early as 1918, this Court was already of a similar
mind. In Cangco v. Manila Railroad (38 Phil. 780), Mr. Justice Fisher elucidated
thus: '. . . . When such a contractual relation exists the obligor may break the
contract under such conditions that the same act which constitutes a breach of the
contract would have constituted the source of an extra-contractual obligation had
no contract existed between the parties.' (Regino v. Pangasinan Colleges of Science
and Technology, G.R. No. 156109, [November 18, 2004], 485 PHIL 446-465)

Petitioners contend that McLoughlin's case was mounted on the theory of

contract, but the trial court and the appellate court upheld the grant of the claims
of the latter on the basis of tort. 45 There is nothing anomalous in how the lower
courts decided the controversy for this Court has pronounced a jurisprudential rule
that tort liability can exist even if there are already contractual relations. The act
that breaks the contract may also be tort. ||| (YHT Realty Corp. v. Court of
Appeals, G.R. No. 126780, [February 17, 2005], 492 PHIL 29-51)

In order that an obligation based on quasi-delict may arise, there must be no pre-existing
contractual relation between the parties. But there are exceptions. There may be an action
for quasi-delict notwithstanding that there is a subsisting contract between the parties. A
liability for tort may arise even under a contract, where tort is that which breaches the
contract. Stated differently, when an act which constitutes a breach of contract would have
itself constituted the source of a quasi-delictual liability, the contract can be said to have
been breached by tort, thereby allowing the rules on tort to apply. 11

Furthermore, to constitute quasi-delict, the fault or negligence must be the proximate

cause of the damage or injury suffered by the plaintiff. Proximate cause is that cause which,
in natural and continuous sequence, unbroken by any efficient intervening cause, produces
the injury and without which the result would not have occurred. Proximate cause is
determined by the facts of each case upon mixed considerations of logic, common sense,
policy and precedent.

It bears reiterating that the subject card would not have been confiscated and cut had
respondent talked to petitioner's representative and identified himself as the genuine
cardholder. It is thus safe to conclude that there was no negligence on the part of
petitioner and that, therefore, it cannot be held liable to respondent for
damages.||| (American Express International, Inc. v. Cordero, G.R. No. 138550, [October
14, 2005], 509 PHIL 619-628)

Action Based on Contract

Petitioner avers that respondent's action a claim for damages as a result of over-billing
has already prescribed. Respondent's claim supposedly constitutes a quasi-delict, which
prescribes in four years. 61
We do not agree. It is elementary that a quasi-delict, as a source of an obligation, occurs
only when there is no preexisting contractual relation between the parties. 62 The action of
respondent for specific performance was founded on short deliveries, which had arisen
from its Contract of Sale with petitioner, and from which resulted the former's obligation in
the present case. Any action to enforce a breach of that Contract prescribes in ten
years. (Pilipinas Shell Petroleum Corp. v. John Bordman Ltd. of Iloilo Inc., G.R. No. 159831,
[October 14, 2005], 509 PHIL 728-753)
NATURE AND EFFECTS OF OBLIGATIONS
ART. 1164

[T]he point may be raised that under Article 1164 of the Civil Code, Equatorial as buyer
acquired a right to the fruits of the thing sold from the time the obligation to deliver the
property to petitioner arose. That time arose upon the perfection of the Contract of Sale on
July 30, 1978, from which moment the laws provide that the parties to a sale may reciprocally
demand performance. Does this mean that despite the judgment rescinding the sale, the right
to the fruits belonged to, and remained enforceable by, Equatorial? Article 1385 of the Civil
Code answers this question in the negative, because "[r]escission creates the obligation to
return the things which were the object of the contract, together with their fruits, and the
price with its interest; . . . ." Not only the land and building sold, but also the rental payments
paid, if any, had to be returned by the buyer.|||(Equatorial Realty Development, Inc. v. Mayfair
Theater, Inc., G.R. No. 133879, [November 21, 2001], 421 PHIL 709-768)

Therefore, in our Civil Code it is a fundamental principle in all matters of contracts and a well-
known doctrine of law that "non mudis pactis, sed traditione dominia rerum transferuntur."
In conformity with said doctrine as established in paragraph 2 of article 609 of said code, that
"the ownership and other property rights are acquired and transmitted by law, by gift, by
testate or intestate succession, and, in consequence of certain contracts, by tradition." And
as the logical application of this disposition article 1095 prescribes the following: " A creditor
has the rights to the fruits of a thing from the time the obligation to deliver it arises.
However, he shall not acquire a real right." (and the ownership is surely such) "until the
property has been delivered to him."

In accordance with such disposition and provisions the delivery of a thing constitutes a
necessary and indispensable requisite for the purpose of acquiring the ownership of the
same by virtue for a contract. As Manresa states in his Commentaries on the Civil Code,
volume 10, pages 339 and 340: "Our law does not admit the doctrine of the transfer of
property by mere consent but limits the effect of the agreement to the due execution of the
contract . . . The ownership, the property right, is only deprived from the delivery of a
thing . . ."

Applying this doctrine concretely to the contract of transfer set up by Terrell as the basis of
his complaint in intervention, the author says, at page 341 of the volume and work above
cited: "The transfer of the ownership in the contract of such transfer, does not produce the
effect by the fact of the mere consent, but is acquired by tradition and in the due observance
of general precepts." Therefore, by reason of the non-delivery Terrell did not acquire the
ownership of the property transferred to him by Wilson. It is only the jus ad rem, and not
the jus in re, that was acquired by Terrell by virtue of the transfer, made by the consent of
 the transferor and the transferee but not consummated by the delivery which never came to
pass and which delivery was the object of such transfer.

||| (The Fidelity and Deposit Co. of Maryland v. Wilson, G.R. No. L-2684, [March 15, 1907], 8
PHIL 51-59)

ART. 1165

On July 18, 1990, petitioner entrusted his car to private respondent for some repair including
battery replacement, the latter undertaking to return the vehicle on July 21, 1990 fully
serviced and supplied in accordance with the job contract. But came July 21, 1990, the latter
could not release the vehicle as its battery was weak and was not yet replaced. Left with no
option, petitioner himself bought a new battery nearby and delivered it to private respondent
for installation on the same day. However, the battery was not installed and the delivery of the
car was rescheduled to July 24, 1990. When petitioner sought to reclaim his car in the
afternoon of July 24, 1990, he was told that it was carnapped earlier that morning while being
road-tested by an employee of private respondent.
The RTC, in a suit for damages filed by petitioner against private respondent, found the latter
guilty of delay in the performance of its obligation and held it liable to petitioner for the value
of the lost vehicle and its accessories plus interest and attorney's fees. On appeal, the Court of
Appeals reversed the lower court's ruling. It ruled that the vehicle was lost due to a fortuitous
event. Hence this petition for review.
In reversing the Court of Appeals, the Supreme Court held that carnapping per se cannot be
considered as a fortuitous event. To be considered as such, carnapping entails more than the
mere forceful taking of another's property. It must be proved and established that the event
was an act of God or was done solely by third parties and that neither the claimant nor the
person alleged to be negligent has any participation. In accordance with the Rules of Evidence,
the burden of proving that the loss was due to a fortuitous event rests on him who invokes it.
Even assuming arguendo that carnapping was duly established as a fortuitous event, still
private respondent cannot escape liability. Article 1165 of the New Civil Code makes an obligor
who is guilty of delay responsible even for a fortuitous event until he has effected the delivery.

In this case, private respondent was already in delay as it was supposed to deliver petitioner's
car three (3) days before it was lost. Petitioner's agreement to the rescheduled delivery does
not defeat his claim as private respondent had already breached its obligation. Moreover, such
occasion cannot be construed as waiver of petitioner's right to hold private respondent liable
because the car was unusable and thus, petitioner had no option but to leave it.||| (Co v.
Court of Appeals, G.R. No. 124922, [June 22, 1998], 353 PHIL 305-317)

ART. 1166
Although in her petition for delivery of specific legacy, appellant did not expressly seek
recovery of the fruits or rents of the property given to her in devise, she should receive the
 said fruits or rents. Article 948 of the Civil Code provides that a devise of a specific thing
includes its fruits and income accruing after the testator's death. And Article 951 of the same
Code provides that these fruits and income shall be delivered with the thing devised.
Furthermore, fruits or rents being, strictly speaking, accessions (Article 441 and 442, Civil
Code), Article 1166 of the Code, which provides that the "obligation to give a determinate
thing includes that of delivering all its accessions and accessories, even though they may not
have been mentioned," applies

To remove doubts on the matter, however, We here expressly state that appellant is also
entitled to, and appellee should deliver to her, the fruits or rents of the devised fishpond
accruing after the testatrix's death. The precise determination of the same, however, should
be threshed out in the court below, before which appellee must render an
accounting.||| (Vda. de Blas v. Blas de Buenaventura, G.R. No. L-22797, [September 22, 1966],
124 PHIL 611-625)

ART. 1167
The CA held that FILSYSTEMS failed to prove that the delay it incurred was attributable to
CCC's failure to deliver the P3.5 million payment in cement. 38 It also held that FILSYSTEMS
could not unilaterally declare or claim the time extensions in order to excuse itself or justify
the delay in the project. 39
We agree with the CA.

FILSYSTEMS has not shown that it was CCC's delay that caused the former to fail to complete
the project. On the contrary, it appears that despite CCC's delays, FILSYSTEMS was able to
accomplish 92.83% of the work. This proves that the completion of the project was not
entirely dependent on CCC's payment or prompt payment of its obligation. FILSYSTEMS'
failure to finish the project is, therefore, unjustified. Accordingly, it must be held liable for the
cost of completing the project. Article 1167 of the Civil Code provides:
Art. 1167. If a person obliged to do something fails to do it, the same shall be
executed at his cost.
This same rule shall be observed if he does it in contravention of the tenor of the
obligation. Furthermore, it may be decreed that what has been poorly done be
undone.
We do not believe, however, that FILSYSTEMS should be made to pay the entire cost CCC
paid to CE Construction, which finished the project.
It has been shown that at the time FILSYSTEMS stopped work, the project was 92.83%
finished, although such work was accomplished beyond the initial deadline of 23 January
1993. But, as already discussed above, FILSYSTEMS was entitled to time extensions
equivalent to the delay in the payment of its progress billings. Hence, FILSYSTEMS must be
held liable only for the remaining 7.17% of the project. To make it answer for more would
unjustly enrich CCC, which has already benefited from the former's work. (Continental
 Cement Corp. v. Filipinas (PREFAB) Systems, Inc., G.R. No. 176917, 176919, [August 4, 2009],
612 PHIL 524-544)

Rhogen failed to finish even a substantial portion of the works due to the stoppage order
issued just two months from the start of construction. Despite the down payment received
from The Plaza, Rhogen, upon evaluation of the Project Manager, was able to complete a
meager percentage much lower than that claimed by it under the first progress billing between
July and September 1980. Moreover, after it relinquished the project in January 1981, the site
inspection appraisal jointly conducted by the Project Manager, Building Inspector Engr.
Gregory and representatives from FGU and Rhogen, Rhogen was found to have executed the
works not in accordance with the approved plans or failed to seek prior approval of the
Municipal Engineer. Article 1167 of the Civil Code is explicit on this point that if a person
obliged to do something fails to do it, the same shall be executed at his cost.||| (Heirs of Gaite
v. The Plaza, Inc., G.R. No. 177685, [January 26, 2011], 655 PHIL 574-594)

Respondents contend that under Clause 7 of the General Conditions their liability "does not
extend to consequential damages either direct or indirect." 35 This contention, however, is
unavailing because respondents failed to show that petitioner was duly furnished with a copy
of said General Conditions. Hence, it is not binding on petitioner.
Having breached the contract it entered with petitioner, respondent ABB is liable for damages
pursuant to Articles 1167, 1170, and 2201 of the Civil Code, which state:
Art. 1167. If a person obliged to do something fails to do it, the same shall be
executed at his cost.
This same rule shall be observed if he does it in contravention of the tenor of
the obligation. Furthermore, it may be decreed that what has been poorly done
be undone. (Continental Cement Corp. v. Asea Brown Boveri, Inc., G.R. No.
171660, [October 17, 2011], 675 PHIL 169-182)

ART. 1168

LACK OF SPECIFIC PROVISION PRESCRIBING THE PENALTY OF DEMOLITION IN THE EVENT OF

BREACH THEREOF, ARTICLE 1168 OF THE NEW CIVIL CODE APPLIES. [P]etitioners argue that
for lack of a specific provision, prescribing the penalty of demolition in the "Restrictive
Covenant" in the event of a breach thereof, the prayer of respondent to demolish the structure
should fail. This argument has no merit; Article 1168 of the New Civil Code states: "When the
obligation consists in not doing and the obligor does what has been forbidden him, it shall be
undone at his expense."||| (Fajardo, Jr. v. Freedom To Build, Inc., G.R. No. 134692, [August 1,
2000], 391 PHIL 799-809)

ART. 1169 (Delay)

A simple reading of the terms of the Joint Affidavit of Undertaking readily discloses that it
contains stipulations characteristic of a contract. As quoted in the CA decision, 10 the Joint
Affidavit of Undertaking contained a stipulation where Cruz and Leonardo promised to replace
the damaged car of Gruspe, 20 days from October 25, 1999 or up to November 15, 1999, of
the same model and of at least the same quality. In the event that they cannot replace the car
within the same period, they would pay the cost of Gruspe's car in the total amount of
P350,000.00, with interest at 12% per month for any delayed payment after November 15,
1999, until fully paid. These, as read by the CA, are very simple terms that both Cruz and
Leonardo could easily understand.||| Nevertheless, the CA glossed over the issue of demand
which is material in the computation of interest on the amount due. The RTC ordered Cruz and
Leonardo to pay Gruspe "P350,000.00 as cost of the car . . . plus fifteen percent (15%) per
annum from November 15, 1999 until fully paid[.]" 12 "In order that the debtor may be in
default[,] it is necessary that the following requisites be present: (1) that the obligation be
demandable and already liquidated; (2) that the debtor delays performance; and (3) that the
creditor requires the performance judicially and extrajudicially." 13 Default generally begins
from the moment the creditor demands the performance of the obligation. In this case,
demand could be considered to have been made upon the filing of the complaint on
November 19, 1999, and it is only from this date that the interest should be
computed.||| (Cruz v. Gruspe, G.R. No. 191431, [March 13, 2013], 706 PHIL 406-413)

The right to rescind a contract arises once the other party defaults in the performance of his
obligation. In determining when default occurs, Art. 1191 should be taken in conjunction
with Art. 1169 of the same law, which provides:
Art. 1169. Those obliged to deliver or to do something incur in delay from the
time the obligee judicially or extrajudicially demands from them the fulfillment
of their obligation.
However, the demand by the creditor shall not be necessary in order that delay
may exist:
(1) When the obligation or the law expressly so declares; or
(2) When from the nature and the circumstances of the obligation it
appears that the designation of the time when the thing is to be delivered
or the service is to be rendered was a controlling motive for the
establishment of the contract; or
(3) When demand would be useless, as when the obligor has rendered it
beyond his power to perform.
In reciprocal obligations, neither party incurs in delay if the other does not
comply or is not ready to comply in a proper manner with what is incumbent
upon him. From the moment one of the parties fulfills his obligation, delay by the
other begins.
In reciprocal obligations, as in a contract of sale, the general rule is that the fulfillment of the
parties' respective obligations should be simultaneous. Hence, no demand is generally
necessary because, once a party fulfills his obligation and the other party does not fulfill his,
the latter automatically incurs in delay. But when different dates for performance of the
obligations are fixed, the default for each obligation must be determined by the rules given in
the first paragraph of the present article, 19 that is, the other party would incur in delay only
from the moment the other party demands fulfillment of the former's obligation. Thus, even
in reciprocal obligations, if the period for the fulfillment of the obligation is fixed, demand
upon the obligee is still necessary before the obligor can be considered in default and before
a cause of action for rescission will accrue. cEDaTS
Evident from the records and even from the allegations in the complaint was the lack
of demand by petitioner upon respondent to fulfill its obligation to manufacture and deliver
the boxes. The Complaint only alleged that petitioner made a "follow-up" upon respondent,
which, however, would not qualify as a demand for the fulfillment of the obligation.
Petitioner's witness also testified that they made a follow-up of the boxes, but not a demand.
Note is taken of the fact that, with respect to their claim for reimbursement, the Complaint
alleged and the witness testified that a demand letter was sent to respondent. Without a
previous demand for the fulfillment of the obligation, petitioner would not have a cause of
action for rescission against respondent as the latter would not yet be considered in breach
of its contractual obligation. (Solar Harvest, Inc. v. Davao Corrugated Carton Corp. , G.R. No.
176868, [July 26, 2010], 639 PHIL 461-473)

The two-year period must be counted from October 26, 1990, the date of execution of the
compromise agreement, and not on the judicial approval of the compromise agreement on
September 30, 1991. When respondents wrote a demand letter to petitioner on October 28,
1992, the obligation was already due and demandable. When the petitioner failed to pay its
due obligation after the demand was made, it incurred delay.
Article 1169 of the New Civil Code provides:
Those obliged to deliver or to do something incur in delay from the time the
obligee judicially or extrajudicially demands from them the fulfillment of their
obligation. [Emphasis supplied]
Delay as used in this article is synonymous to default or mora which means delay in the
fulfillment of obligations. It is the non-fulfillment of the obligation with respect to time. 23
In order for the debtor to be in default, it is necessary that the following requisites be present:
(1) that the obligation be demandable and already liquidated; (2) that the debtor delays
performance; and (3) that the creditor requires the performance judicially or extrajudicially. 24
In the case at bar, the obligation was already due and demandable after the lapse of the two-
year period from the execution of the contract. The two-year period ended on October 26,
1992. When the respondents gave a demand letter on October 28, 1992, to the petitioner, the
obligation was already due and demandable. Furthermore, the obligation is liquidated because
the debtor knows precisely how much he is to pay and when he is to pay it. ADcSHC
The second requisite is also present. Petitioner delayed in the performance. It was able to fully
settle its outstanding balance only on February 8, 1995, which is more than two years after the
extra-judicial demand. Moreover, it filed several motions and elevated adverse resolutions to
the appellate court to hinder the execution of a final and executory judgment, and further
delay the fulfillment of its obligation.
Third, the demand letter sent to the petitioner on October 28, 1992, was in accordance with
an extra-judicial demand contemplated by law.
Verily, the petitioner is liable for damages for the delay in the performance of its obligation.
This is provided for in Article 117025 of the New Civil Code.
When the debtor knows the amount and period when he is to pay, interest as damages is
generally allowed as a matter of right. 26 The complaining party has been deprived of funds to
which he is entitled by virtue of their compromise agreement. The goal of compensation
requires that the complainant be compensated for the loss of use of those funds. This
compensation is in the form of interest. 27 In the absence of agreement, the legal rate of
interest shall prevail. 28 The legal interest for loan as forbearance of money is 12% per
annum 29 to be computed from default, i.e., from judicial or extra-judicial demand under and
subject to the provisions of Article 1169 of the Civil Code.
||| (Santos Ventura Hocorma Foundation v. Santos, G.R. No. 153004, [November 5, 2004],
484 PHIL 447-459)

As an aside, let it be underscored that "[e]ven where time is of the essence, a breach of the
contract in that respect by one of the parties may be waived by the other party's subsequently
treating the contract as still in force." 46 Petitioner's receipt of the cylinder liners when they
were delivered to its warehouse on 20 April 1990 clearly indicates that it considered the
contract of sale to be still subsisting up to that time. Indeed, had the contract of sale been
cancelled already as claimed by petitioner, it no longer had any business receiving the cylinder
liners even if said receipt was "subject to verification." By accepting the cylinder liners when
these were delivered to its warehouse, petitioner indisputably waived the claimed delay in the
delivery of said items.
We, therefore, hold that in the subject contracts, time was not of the essence. The delivery of
the cylinder liners on 20 April 1990 was made within a reasonable period of time considering
that respondent had to place the order for the cylinder liners with its principal in Japan and
that the latter was, at that time, beset by heavy volume of work.
||| (Lorenzo Shipping Corp. v. BJ Marthel International, Inc., G.R. No. 145483, [November
19, 2004], 485 PHIL 546-565)

Petitioner Titan Construction Corporation (petitioner) is engaged in the construction business,

while respondent Uni-FieldEnterprises, Inc. 4 (respondent) is engaged in the business of selling
various construction materials.
From 1990 to 1993, petitioner purchased on credit various construction supplies and materials
from respondent. Petitioner's purchases amounted to P7,620,433.12 but petitioner was only
able to pay P6,215,795.70, leaving a balance of P1,404,637.42. On 19 October 1994,
respondent sent a demand letter to petitioner. 5 But the balance remained unpaid.
On 26 June 1995, respondent filed with the trial court a complaint for collection of sum of
money with damages againstpetitioner.
A careful reading of the records of the case shows that in the answer to the complaint, the
existence of the delivery receipts and invoices were not denied by appellant, rather, it
admitted the transactions subject of the instant case. Clearly, if the damages alleged are
liquidated or stipulated, they are deemed admitted when not specifically denied.||| (Titan
Construction Corp. v. Uni-Field Enterprises, Inc., G.R. No. 153874, [March 1, 2007], 546 PHIL
12-22)

A penalty is demandable in case of non performance or late performance of the main

obligation. In other words in order that the penalty may arise there must be a breach of the
obligation either by total or partial non fulfillment or there is non fulfillment in point of time
which is called mora or delay. The debtor therefore violates the obligation in point of time if
there is mora or delay. Now, there is no mora or delay unless there is a demand. It is
noteworthy that in the present case during all the period when the principal obligation was
still subsisting, although there were late amortizations there was no demand made by the
creditor, plaintiff-appellant for the payment of the penalty. Therefore up to the time of the
letter of plaintiff-appellant there was no demand for the payment of the penalty, hence the
debtor was no in mora in the payment of the penalty.|||

DEFAULT, WHEN INCURRED; WHEN DEMAND NOT NECESSARY; NOT APPLICABLE IN CASE AT
BAR. Under the Civil Code,delay begins from the time the obligee judicially or extrajudicially
demands from the obligor the performance of the obligation. There are only three instances
when demand is not necessary to render the obligor in default. These are the following: "(1)
When the obligation or the law expressly so declares; (2) When from the nature and the
circumstances of the obligation it appears that the designation of the time when the thing is to
be delivered or the service is to be rendered was a controlling motive for the establishment of
the contract; or (3) When the demand would be useless, as when the obligor has rendered it
beyond his power to perform." (Civil Code,Art. 1169) This case does not fall within any of the
established exceptions. Hence, despite the provision in the promissory note that "(a)ll
amortization payments shall be made every first five (5) days of the calendar month until the
principal and interest on the loan or any portion thereof actually released has been fully paid,"
petitioner is not excused from making a demand. It has been established that at the time of
payment of the full obligation, private respondent Moonwalk has long been delinquent in
meeting its monthly arrears and in paying the full amount of the loan itself as the obligation
matured sometime in January, 1977. But mere delinquency in payment does not necessarily
mean delay in the legal concept.|||

To be in default ". . . is different from mere delay in the grammatical sense, because it involves
the beginning of a special condition or status which has its own peculiar effects or results." In
order that the debtor may be in default it is necessary that the following requisites be present:
(1) that the obligation be demandable and already liquidated; (2) that the debtor delays
performance; and (3) that the creditor requires the performance judicially and extrajudicially.
Default generally begins from the moment the creditor demands the performance of the
 obligation. Nowhere in this case did it appear that SSSdemanded from Moonwalk the payment
of its monthly amortizations. Neither did it show that petitioner demanded the payment of the
stipulated penalty upon the failure of Moonwalk to meet its monthly amortization. What the
complaint itself showed was that SSS tried to enforce the obligation sometime in September,
1977 by foreclosing the real estate mortgages executed by Moonwalk in favor of SSS. But this
foreclosure did not push through upon Moonwalk's requests and promises to pay in full. The
next demand for payment happened on October 1, 1979 when SSS issued a Statement of
Account to Moonwalk. And in accordance with said statement, Moonwalk paid its loan in full.
What is clear, therefore, is that Moonwalkwas never in default because SSS never compelled
performance. Though it tried to foreclose the mortgages, SSS itself desisted from doing so
upon the entreaties of Moonwalk. If the Statement of Account could properly be considered as
demand for payment, the demand was complied with on time. Hence, no delay occurred and
there was, therefore, no occasion when the penalty became demandable and enforceable.
Since there was no default in the performance of the main obligation payment of the loan
SSS was never entitled to recover any penalty, not at the time it made the Statement of
Account and certainly, not after the extinguishment of the principal obligation because then,
all the more that SSS had no reason to ask for the penalties. Thus, there could never be any
occasion for waiver or even mistake in the application for payment because there was nothing
for SSS to waive as its right to enforce the penalty did not arise.||| (Social Security System v.
Moonwalk Development & Housing Corp., G.R. No. 73345, [April 7, 1993])

There was, evidently, no malice or bad faith on the part of the plaintiff in suspending
payments. On the contrary, the defendants not only contributed, but had consented to the
delay or suspension of payments. They did not give the plaintiff a categorical answer that their
counter-proposals will not materialize."||| (Bricktown Development Corp. v. Amor Tierra
Development Corp., G.R. No. 112182, [December 12, 1994])

The petitioner did not incur delay in the performance of its obligation. Mora or delay is the
failure to perform the obligation in due time because of dolo or culpa. A debtor is deemed to
have violated his obligation to the creditor from the time the latter makes a demand. Once the
creditor makes a demand, the debtor incurs mora or delay. The construction contract provided
a procedure for protesting delay. It provided that, if at any time during the effectivity of this
contract, petitioner shall incur unreasonable delay or slippages of more than 15% of the
scheduled work program, respondent should notify petitioner in writing to accelerate the work
and reduce, if not erase, slippage. Respondent never sent petitioner a written demand asking
it to accelerate work on the project and reduce, if not eliminate, slippage. If delay had truly
been the reason why respondent took over the project, it would have sent a written demand
as required by the construction contract. Moreover, because petitioner did not consent to the
change of the designated construction manager, ITI's report could not bind it. (TITAN-IKEDA
CONSTRUCTION & DEVELOPMENT CORPORATION, petitioner, vs. PRIMETOWN PROPERTY
GROUP, INC.)

ART. 1170
The Court finds that since petitioners' complaint arose from a contract, the doctrine of
proximate cause finds no application to it:
The doctrine of proximate cause is applicable only in actions for quasi-delicts,
not in actions involving breach of contract. . . . The doctrine is a device for
imputing liability to a person where there is no relation between him and
another party. In such a case, the obligation is created by law itself. But, where
there is a pre-existing contractual relation between the parties, it is the parties
themselves who create the obligation, and the function of the law is merely to
regulate the relation thus created. 8 (emphasis and underscoring supplied)
What applies in the present case is Article 1170 of the Civil Code which reads:
Art. 1170. Those who in the performance of their obligations are guilty of fraud,
negligence or delay, and those who in any manner contravene the tenor thereof,
are liable for damages.
RCPI v. Verchez, et al. 9 enlightens:
In culpa contractual . . . the mere proof of the existence of the contract and the
failure of its compliance justify, prima facie, a corresponding right of relief. The
law, recognizing the obligatory force of contracts, will not permit a party to be
set free from liability for any kind of misperformance of the contractual
undertaking or a contravention of the tenor thereof. A breach upon the contract
confers upon the injured party a valid cause for recovering that which may have
been lost or suffered. The remedy serves to preserve the interests of the
promissee that may include his " expectation interest," which is his interest in
having the benefit of his bargain by being put in as good a position as he would
have been in had the contract been performed, or his "reliance interest," which
is his interest in being reimbursed for loss caused by reliance on the contract by
being put in as good a position as he would have been in had the contract not
been made; or his "restitution interest," which is his interest in having restored
to him any benefit that he has conferred on the other party. Indeed, agreements
can accomplish little, either for their makers or for society, unless they are made
the basis for action. The effect of every infraction is to create a new duty, that is,
to make RECOMPENSE to the one who has been injured by the failure of another
to observe his contractual obligation unless he can show extenuating
circumstances, like proof of his exercise of due diligence . . . or of
the attendance of fortuitous event, to excuse him from his ensuing liability.
(emphasis and underscoring in the original; capitalization supplied)

Breach of contract is defined as the failure without legal reason to comply with the terms
of a contract. It is also defined as the [f]ailure, without legal excuse, to perform any
promise which forms the whole or part of the contract. 11 The appellate court, and even
the trial court, observed that petitioners were remiss in their obligation to inform
respondent of the change in the expected number of guests. The observation is reflected in
the records of the case. Petitioners' failure to discharge such obligation thus excused, as the
above-quoted paragraph 4.5 of the parties' contract provide, respondent from liability for
"any damage or inconvenience" occasioned thereby.
 ||| (Spouses Guanio v. Makati Shangri-la Hotel and Resort, Inc., G.R. No. 190601, [February
7, 2011], 656 PHIL 608-619)

Respondents contend that under Clause 7 of the General Conditions their liability "does not
extend to consequential damages either direct or indirect." 35 This contention, however, is
unavailing because respondents failed to show that petitioner was duly furnished with a copy
of said General Conditions. Hence, it is not binding on petitioner.
Having breached the contract it entered with petitioner, respondent ABB is liable for
damages pursuant to Articles 1167, 1170, and 2201 of the Civil Code, which state:
Art. 1167. If a person obliged to do something fails to do it, the same shall be
executed at his cost.
This same rule shall be observed if he does it in contravention of the tenor of the
obligation. Furthermore, it may be decreed that what has been poorly done be
undone.
Art. 1170. Those who in the performance of their obligations are guilty of fraud,
negligence, or delay, and those who in any manner contravene the tenor thereof,
are liable for damages.
Art. 2201. In contracts and quasi-contracts, the damages for which the obligor who
acted in good faith is liable shall be those that are the natural and probable
consequences of the breach of the obligation, and which the parties have foreseen
or could have reasonably foreseen at the time the obligation was constituted.
In case of fraud, bad faith, malice or wanton attitude, the obligor shall be
responsible for all damages which may be reasonably attributed to the non-
performance of the obligation.
Based on the foregoing, a repairman who fails to perform his obligation is liable to pay for the
cost of the execution of the obligation plus damages. Though entitled, petitioner in this case is
not claiming reimbursement for the repair allegedly done by Newton Contractor, 36 but is
instead asking for damages for the delay caused by respondent ABB. a
||| (Continental Cement Corp. v. Asea Brown Boveri, Inc., G.R. No. 171660, [October 17, 2011],
675 PHIL 169-182)

ART. 1171 (Fraud/Bad Faith)

Bad faith and fraud are allegations of fact that demand clear and convincing proof. They are
serious accusations that can be so conveniently and casually invoked, and that is why they are
never presumed. They amount to mere slogans or mudslinging unless convincingly
substantiated by whoever is alleging them. Fraud has been defined to include an inducement
through insidious machination. Insidious machination refers to a deceitful scheme or plot with
an evil or devious purpose. Deceit exists where the party, with intent to deceive, conceals or
omits to state material facts and, by reason of such omission or concealment, the other party
was induced to give consent that would not otherwise have been given. Bad faith does not
simply connote bad judgment or negligence; it imports a dishonest purpose or some moral
obliquity and conscious doing of a wrong, a breach of a known duty through some motive or
interest or ill will that partakes of the nature of fraud. We find no persuasive proof of fraud or
bad faith in this case. The Vazquezes were not induced to agree to the upgrading through
insidious words or deceitful machination or through willful concealment of material facts.
Upon boarding, Ms. Chiu told the Vazquezes that their accommodations were upgraded to
First Class in view of their being Gold Card members of Cathay's Marco Polo Club. She was
honest in telling them that their seats were already given to other passengers and the Business
Class Section was fully booked. Ms. Chiu might have failed to consider the remedy of offering
the First Class seats to other passengers. But, we find no bad faith in her failure to do so, even
if that amounted to an exercise of poor judgment. Neither was the transfer of the Vazquezes
effected for some evil or devious purpose. As testified to by Mr. Robson, the First Class Section
is better than the Business Class Section in terms of comfort, quality of food, and service from
the cabin crew; thus, the difference in fare between the First Class and Business Class at that
time was $250. Needless to state, an upgrading is for the better condition and, definitely, for
the benefit of the passenger.||| (Cathay Pacific Airways Ltd. v. Spouses Vazquez, G.R. No.
150843, [March 14, 2003], 447 PHIL 306-327)

She alleges in her complaint that she was the proprietress of Kindergarten Wonderland
Canteen located in Dagupan City, an enterprise engaged in the sale of soft drinks (including
Coke and Sprite) and other goods to the students of Kindergarten Wonderland and to the
public; on or about 12 August 1989, some parents of the students complained to her that the
Coke and Sprite soft drinks sold by her contained fiber-like matter and other foreign
substances or particles; she then went over her stock of soft drinks and discovered the
presence of some fiber-like substances in the contents of some unopened Coke bottles and a
plastic matter in the contents of an unopened Sprite bottle; she brought the said bottles to the
Regional Health Office of the Department of Health at San Fernando, La Union, for
examination; subsequently, she received a letter from the Department of Health informing her
that the samples she submitted "are adulterated;" as a consequence of the discovery of the
foreign substances in the beverages, her sales of soft drinks severely plummeted from the
usual 10 cases per day to as low as 2 to 3 cases per day resulting in losses of from P200.00 to
P300.00 per day, and not long after that she had to close shop on 12 December 1989; she
became jobless and destitute|||

We find no merit in the petition. The public respondent's conclusion that the cause of action in
Civil Case No. D-9629 is founded on quasi-delict and that, therefore, pursuant to Article 1146
of the Civil Code, it prescribes in four (4) years is supported by the allegations in the complaint,
more particularly paragraph 12 thereof, which makes reference to the reckless and negligent
manufacture of "adulterated food items intended to be sold for public consumption."|||

The vendee may also ask for the annulment of the contract upon proof of error or fraud, in
which case the ordinary rule on obligations shall be applicable. Under the law on obligations,
responsibility arising from fraud is demandable in all obligations and any waiver of an action
for future fraud is void. Responsibility arising from negligence is also demandable in any
obligation, but such liability may be regulated by the courts, according to the circumstances.
 Those guilty of fraud, negligence, or delay in the performance of their obligations and those
who in any manner contravene the tenor thereof are liable for damages.||| Under American
law, the liabilities of the manufacturer or seller of injury-causing products may be based on
negligence, breach of warranty, tort, or other grounds such as fraud, deceit, or
misrepresentation. Quasi-delict, as defined in Article 2176 of the Civil Code, (which is known in
Spanish legal treatises as culpa aquiliana, culpa extra-contractual or cuasi-delitos) is
homologous but not identical to tort under the common law, which includes not only
negligence, but also intentional criminal acts, such as assault and battery, false imprisonment,
and deceit.||| Otherwise put, liability for quasi-delict may still exist despite the presence of
contractual relations.||| (Coca-Cola Bottlers Phil., Inc. v. Court of Appeals, G.R. No. 110295,
[October 18, 1993])

ART. 1173 (Negligence)

Petitioner, the registered owner of a passenger bus, was held jointly and severally liable with
the bus driver for damages for the untimely death of one Herminigildo Zuiga. The bus owned
by petitioner bumped Zuiga, a pedestrian. The CA affirmed the decision on appeal.
The Supreme Court held that the issue whether a person is negligent. or not is a question of
fact which the Court cannot pass upon in a petition for review on certiorari. The Court affirmed
the trial court's finding, as affirmed by the CA, that it was Venturina's reckless driving of
petitioner's bus, which was the proximate cause of the victim's death.
The Supreme Court also held that for the employer to avoid the solidary liability for a tort
committed by his employee, an employer must rebut the presumption by presenting adequate
and convincing proof that he exercised the diligence of a good father of a family in the
selection and supervision of his employee. In the instant case, the petitioner has failed to
rebut the presumption of negligence on her par
||| (Yambao v. Zuiga, G.R. No. 146173, [December 11, 2003], 463 PHIL 650-662)

The common carrier's duty to observe the requisite diligence in the shipment of goods lasts
from the time the articles are surrendered to or unconditionally placed in the possession of,
and received by, the carrier for transportation until delivered to, or until the lapse of a
reasonable time for their acceptance, by the person entitled to receive them When the goods
shipped either are lost or arrive in damaged condition, a presumption arises against the
carrier of its failure to observe that diligence, and there need not be an express
finding of negligence to hold it liable (Art. 1735, Civil Code; Philippine National Railways
vs.Court of Appeals, 139 SCRA 87; Metro Port Service vs. Court of Appeals, 131 SCRA 365).
There are, of course, exceptional cases when such presumption of fault is not observed but
these cases, enumerated in Article 1734 1 of the Civil Code, are exclusive, not one of which can
be applied to this case.||| (Eastern Shipping Lines, Inc. v. Court of Appeals, G.R. No. 97412,
[July 12, 1994])

ART. 1174 (Fortuitous Event)

We held: "To exempt the obligor from liability under Article 1174 of the Civil Code, for a breach
of an obligation due to an 'act of God,' the following must concur: (a) the cause of the breach
of the obligation must be independent of the will of the debtor; (b) the event must be either
unforeseeable or unavoidable; (c) the event must be such as to render it impossible for the
debtor to fulfill his obligation in a normal manner; and (d) the debtor must be free from any
participation in, or aggravation of the injury to the creditor. (Vasquez v. Court of Appeals, 138
SCRA 553; Estrada v. Consolacion, 71 SCRA 423; Austria v. Court of Appeals, 39 SCRA 527;
Republic of the Phil. v. Luzon Stevedoring Corp. 21 SCRA 279; Lasam v. Smith, 45 Phil. 657).
Thus, if upon the happening of a fortuitous event or an act of God, there concurs a
corresponding fraud, negligence, delay or violation or contravention in any manner of the
tenor of the obligation as provided for in Article 1170 of the Civil Code, which results in loss or
damage, the obligor cannot escape liability. The principle embodied in the act of God doctrine
strictly requires that the act must be one occasioned exclusively by the violence of nature and
all human agencies are to be excluded from creating or entering into the cause of the mischief.
When the effect, the cause of which is to be considered, is found to be in part the result of the
participation of man, whether it be from active intervention or neglect, or failure to act, the
whole occurrence is thereby humanized, as it were, and removed from the rules applicable to
the acts of God.||| (National Power Corp. v. Court of Appeals, G.R. Nos. 103442-45, [May 21,
1993])

Philcomsat argues that the termination of the RP-US Military Bases Agreement cannot be
considered a fortuitous event because the happening thereof was foreseeable. Although the
Agreement was freely entered into by both parties, Section 8 should be deemed ineffective
because it is contrary to Article 1174 of the Civil Code. Philcomsat posits the view that the
validity of the parties' definition of force majeure in Section 8 of the Agreement as
"circumstances beyond the control of the party involved including, but not limited to, any law,
order, regulation, direction or request of the Government of the Philippines, strikes or other
labor difficulties, insurrection riots, national emergencies, war, acts of public enemies, fire,
floods, typhoons or other catastrophies or acts of God," should be deemed subject to Article
1174 which defines fortuitous events as events which could not be foreseen, or which, though
foreseen, were inevitable. |||

A fortuitous event under Article 1174 may either be an "act of God," or natural occurrences
such as floods or typhoons, 24 or an "act of man," such as riots, strikes or wars. 25
Philcomsat and Globe agreed in Section 8 of the Agreement that the following events shall be
deemed events constitutingforce majeure:
1. Any law, order, 3. Insurrection;
regulation,
4. Riots;
direction or request
of the Philippine 5. National emergencies;
Government;
6. War;
2. Strikes or other labor
7. Acts of public enemies;
difficulties;
8. Fire, floods, typhoons or 9. Other circumstances
other catastrophies beyond the control
or acts of God; of the parties.
Clearly, the foregoing are either unforeseeable, or foreseeable but beyond the control of the
parties. There is nothing in the enumeration that runs contrary to, or expands, the concept of a
fortuitous event under Article 1174.
Furthermore, under Article 1306 26 of the Civil Code, parties to a contract may establish such
stipulations, clauses, terms and conditions as they may deem fit, as long as the same do not
run counter to the law, morals, good customs, public order or public policy. (Philippine
Communications Satellite Corp. v. Glove Telecom, Inc., G.R. No. 147324, 147334, [May 25,
2004], 473 PHIL 116-135)

Caso fortuito or force majeure (which in law are identical insofar as they exempt an obligor
from liability) 19 by definition, are extraordinary events not foreseeable or avoidable, events
that could not be foreseen, or which though foreseen, were inevitable. It is therefore not
enough that the event should not have been foreseen or anticipated, as is commonly believed
but it must be one impossible to foresee or to avoid. 20
In this case, the calamity which caused the loss of the cargoes was not unforeseen nor was it
unavoidable. In fact, the other vessels in the port of San Jose, Antique, managed to transfer to
another place, a circumstance which prompted SMC's District Sales Supervisor to request that
the D/B Lucio be likewise transferred, but to no avail. The D/B Lucio had no engine and could
not maneuver by itself. Even if ANCO's representatives wanted to transfer it, they no longer
had any means to do so as the tugboat M/T ANCO has already departed, leaving the barge to
its own devices. The captain of the tugboat should have had the foresight not to leave the
barge alone considering the pending storm.
While the loss of the cargoes was admittedly caused by the typhoon Sisang, a natural disaster,
ANCO could not escape liability to respondent SMC. The records clearly show the
failure of petitioners' representatives to exercise the extraordinary degreeof diligence
mandated by law. To be exempted from responsibility, the natural disaster should have been
the proximate and only cause of the loss. 21 There must have been no contributory negligence
on the part of the common carrier. (FGU Insurance Corp. v. Court of Appeals, G.R. No. 137775,
140704, [March 31, 2005], 494 PHIL 342-362)

In issue then are:

(1) Whether the loss of the cargoes was due to a fortuitous event, independent of any act of
negligence on the part of petitioner Black Sea and TVI, and

In order, to be considered a fortuitous event, however, (1) the cause of the unforeseen and
unexpected occurrence, or the failure of the debtor to comply with his obligation, must be
independent of human will; (2) it must be impossible to foresee the event which constitute
the caso fortuito, or if it can be foreseen it must be impossible to avoid; (3) the occurrence
must be such as to render it impossible for the debtor to fulfill his obligation in any manner;
and (4) the obligor must be free from any participation in the aggravation of the injury
resulting to the creditor.
||| TVI's failure to promptly provide a tugboat did not only increase the risk that might have
been reasonably anticipated during the shipside operation, but was the proximate cause of
the loss. A man of ordinary prudence would not leave a heavily loaded barge floating for a
considerable number of hours, at such a precarious time, and in the open sea, knowing that
the barge does not have any power of its own and is totally defenseless from the ravages of
the sea. That it was nighttime and, therefore, the members of the crew of a tugboat would be
charging overtime pay did not excuse TVI from calling for one such tugboat. (Schmitz Transport
& Brokerage Corp. v. Transport Venture Inc., G.R. No. 150255, [April 22, 2005], 496 PHIL 437-
456)
We can not accept the petitioners' contention that the period during which authoritarian
rule was in force had interrupted prescription and that the same began to run only on
February 25, 1986, when the Aquino government took power. It is true that under Article
1154: Art. 1154. The period during which the obligee was prevented by a fortuitous event
from enforcing his right is not reckoned against him. Fortuitous events have the
effect of tolling the period of prescription. However, we can not say, as a universal rule, that
the period from September 21, 1972 through February 25, 1986 involves a force majeure.
Plainly, we can not box in the 'dictatorial' period within the term without distinction, and
without, by necessity, suspending all liabilities, however demandable, incurred during that
period, including perhaps those ordered by this Court to be paid. While this Court is
cognizant of acts of the last regime, especially political acts, that might have indeed
precluded the enforcementof liability against that regime and/or its minions, the Court is
not inclined to make quite a sweeping pronouncement, considering especially the
unsettling effects such a pronouncement is likely to bring about. It is our opinion that
claims should be taken on a case-to-case basis. This selective rule is compelled, among
others, by the fact that not all those imprisoned or detained by the past dictatorship were
true political oppositionists, or, for that matter, innocent of any crime or wrongdoing.
Indeed, not a few of them were manipulators and scoundrels.
We are, therefore, convinced, from Vicente Tan's very behavior, that detention was not an
impediment to a judicial challenge, and the fact of the matter was that he was successful in
obtaining judicial assistance. Under these circumstances, we can not declare detention, or
authoritarian rule for that matter, as a fortuitous event insofar as he was concerned, that
interrupted prescription. To be sure, there is nothing in the petition which would remotely
suggest, assuming that Vicente Tan could not have freely and intelligently acted during the
period ofmartial rule, that his co-petitioners Victan & Company, Inc., Transworld
Investment Corporation, First International Investment Company, Inc., Far East Petroleum &
Minerals Corporation, and Philcontrust International Corporation, could not have similarly
acted during the martial law regime and shortly thereafter. As far as they are therefore
concerned, the Courthas even better reason to invoke prescription because none of them
acted and none now claims that it could not have acted.||| (National Development Co. v.
Court of Appeals, G.R. No. 98467, [July 10, 1992])
 It may be recalled that the separate deeds of sale 3 sought to be annulled under
petitioner's basic complaint were both executed on October 23, 1973. Per the
appellate court, citing Development Bank of the Philippines [DBP] vs. Pundogar 4 , the 4-
year prescriptive period for the annulment of the aforesaid deeds ended "in late 1977",
doubtless suggesting that petitioner's right to seek such annulment accrued four (4) years
earlier, a starting time-point corresponding, more or less, to the date of the conveying
deed, i.e., October 23, 1973. Petitioner contends, however, that the 4-year prescriptive
period could not have commenced to run on October 23, 1973, martial law being then in
full swing. Plodding on, petitioner avers that the continuing threats on the life of Mr.
Teodoro Locsin, Sr. and his family and other menacing effects of martial law which
should be considered as force majeure ceased only after the February 25, 1986 People
Power uprising. Petitioner presently faults the Court of Appeals for its misapplication of the
doctrinal rule laid down in DBP vs. Pundogar 6where this Court, citing and quoting excerpts
from the ruling in Tan vs. Court of Appeals 7 , as reiterated in National Development
Company vs. Court of Appeals,||| (Phil. Free Press Inc. v. Court of Appeals, G.R. No.
132864, [October 24, 2005], 510 PHIL 411-433)

Osmena III and 4 other members of the Senate and SSS members seek for nullification of
the following issuances of Social Security Commission
1. Res. No. 428, July 124, 2004- Swiss Challenge Method approved the sale of the entire
equity share of SSS to Equitable PCI bank
2. Res. 485, August 11, 2004 pertains to the timetable and instruction to bidders

SSS in order to liquefy its long term investments and diversify them into higher yielding and
less volatile investments which includes its shareholdings in EPCIB (Reason: shares in
question substantially declined in value and SSS could no longer afford to continue holding
on them)In a purchase agreement it was agreed in that SSS will sell all its EPCIB shares to
BDO

COA and DOJ (in its opinion) approved the agreement

Bidding was made subject to the right of BDO Capital to match the highest bid. BDO
turned out t be the highest bidder. Petitioner alleged that BDO to buy EPCIB shares is
inconsistent with the idea of public bidding. BDO and EPCIB had a merger, all EPCIB shares
were transferred to BDO
Issue W/N in questioning the alleged resolution can still recover the shares and subject it to a
proper bidding process
Ruling
No, petitioners can no longer recover the shares. The obligation to give a determinate thing is
extinguished if the object is lost without the fault of the debtor. Under the Civil Code, a thing is
considered lost when it perishes or disappears on such a way that it cannot be recovered. In
the very real sense, the interplay of the ensuing factor: a) the BDO-EPCIB merger and b) the
cancellation of subject shares and their replacement by totally new common shares of BDO
had rendered the erstwhile 187.84 M EPCIB shares of SSS unrecoverable in the contemplation
of Civil Code provision (Osmena v. SSS)

On July 18, 1990, petitioner entrusted his car to private respondent for some repair including
battery replacement, the latter undertaking to return the vehicle on July 21, 1990 fully
serviced and supplied in accordance with the job contract. But came July 21, 1990, the latter
could not release the vehicle as its battery was weak and was not yet replaced. Left with no
option, petitioner himself bought a new battery nearby and delivered it to private respondent
for installation on the same day. However, the battery was not installed and the delivery of the
car was rescheduled to July 24, 1990. When petitioner sought to reclaim his car in the
afternoon of July 24, 1990, he was told that it was carnapped earlier that morning while being
road-tested by an employee of private respondent.

The RTC, in a suit for damages filed by petitioner against private respondent, found the latter
guilty of delay in the performance of its obligation and held it liable to petitioner for the value
of the lost vehicle and its accessories plus interest and attorney's fees. On appeal, the Court of
Appeals reversed the lower court's ruling. It ruled that the vehicle was lost due to a fortuitous
event. Hence this petition for review.

In reversing the Court of Appeals, the Supreme Court held that carnapping per se cannot be
considered as a fortuitous event. To be considered as such, carnapping entails more than the
mere forceful taking of another's property. It must be proved and established that the event
was an act of God or was done solely by third parties and that neither the claimant nor the
person alleged to be negligent has any participation. In accordance with the Rules of Evidence,
the burden of proving that the loss was due to a fortuitous event rests on him who invokes it.
Even assuming arguendo that carnapping was duly established as a fortuitous event, still
private respondent cannot escape liability. Article 1165 of the New Civil Code makes an obligor
who is guilty of delay responsible even for a fortuitous event until he has effected the delivery.

BURDEN OF PROOF; RESTS ON HIM WHO INVOKES FORTUITOUS EVENT. It is a not a defense
for a repair shop of motorvehicles to escape liability simply because the damage or loss of a
thing lawfully placed in its possession was due to carnapping. Carnapping per se cannot be
considered as a fortuitous event. The fact that a thing was unlawfully and forcefully taken from
another's rightful possession, as in cases of carnapping, does not automatically give rise to a
fortuitous event. To be considered as such, carnapping entails more than the mere forceful
taking of another's property. It must be proved and established that the event was an act of
God or was done solely by third parties and that neither the claimant nor the person alleged to
be negligent has any participation. In accordance with the Rules of evidence, the burden of
proving that the loss was due to a fortuitous event rests on him who invokes it which in this
case is the private respondent. However, other than the police report of the alleged
carnapping incident, no other evidence was presented by private respondent to the effect that
the incident was not due to its fault. A police report of an alleged crime, to which only private
respondent is privy, does not suffice to establish the carnapping. Neither does it prove that
 there was no fault on the part of private respondent notwithstanding the parties' agreement
at the pre-trial that the car was carnapped. Carnapping does not foreclose the possibility of
fault or negligence on the part of private respondent.

3. CIVIL LAW; OBLIGATIONS AND CONTRACT; AN OBLIGOR GUILTY OF DELAY IS RESPONSIBLE

EVEN FOR A FORTUITOUS EVENT UNTIL HE HAS EFFECTED DELIVERY. Even
assuming arguendo that carnapping was duly established as a fortuitous event, still private
respondent cannot escape liability. Article 1165 of the New Civil Code makes an obligor who is
guilty of delay responsible even for a fortuitous event until he has effected the delivery. In this
case, private respondent was already in delay as it was supposed to deliver petitioner's car
three (3) days before it was lost. Petitioner's agreement to the rescheduled delivery does not
defeat his claim as private respondent had already breached its obligation. Moreover, such
occasion cannot be construed as waiver of petitioner's right to hold private respondent liable
because the car was unusable and thus, petitioner had no option but to leave it. (Co v. Court of
Appeals, G.R. No. 124922, [June 22, 1998], 353 PHIL 305-317)

ART. 1175

BSP CIRCULAR NO. 799-13

SUBJECT : Rate of Interest in the Absence of Stipulation

The Monetary Board, in its Resolution No. 796 dated 16 May 2013, approved the
following revisions governing the rate of interest in the absence of stipulation in loan
contracts, thereby amending Section 2 of Circular No. 905, Series of 1982:
SECTION 1. The rate of interest for the loan or forbearance of any money, goods
or credits and the rate allowed in judgments, in the absence of an express contract as to
such rate of interest, shall be six percent (6%) per annum.
SECTION 2. In view of the above, Subsection X305.1 of the Manual of Regulations
for Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations for
Non-Bank Financial Institutions are hereby amended accordingly.
This Circular shall take effect on July 1, 2013.

||| (Rate of Interest in the Absence of Stipulation, BSP Circular No. 799-13, [June 21,
2013])

In the " first group," the basic issue focus on the application of either the 6% (under the
Civil Code) or 12% (under the Central Bank Circular) interest per annum. It is easily
discernible in these cases that there has been a consistent holding that the Central Bank
 Circular imposing the 12% interest per annum applies only to loans or
forbearance 16 of money, goods or credits, as well as to judgments involving such loan or
forbearance of money, goods or credits, and that the 6% interest under the Civil Code
governs when the transaction involves the payment of indemnities in the
concept of damage arising from the breach of a delay in the performance of obligations in
general. Observe, too, that in these cases, a common time frame in the computation of the
6% interest per annum has been applied, i.e., from the time the complaint is filed until the
adjudged amount is fully paid.
The "second group," did not alter the pronounced rule on the application of the 6% or 12%
interest per annum, 17 depending on whether or not the amount involved is a loan or
forbearance, on the one hand, or one of indemnity for damage, on the other hand. Unlike,
however, the "first group" which remained consistent in holding that the running of the
legal interest should be from the time of the filing of the complaint until fully paid, the
"second group" varied on the commencement of the running of the legal interest. cdll
**16 Black's Law Dictionary defines the word forbearance, within the
context of usury law, as a contractual obligation of lender or creditor to refrain,
during given period of time, from requiring borrower or debtor to repay loan or
debt then due and payable.|||
Malayan held that the amount awarded should bear legal interest from the date of the
decision of the court a quo, explaining that "if the suit were for damages, 'unliquidated and
not known until definitely ascertained, assessed and determined by the courts after proof,'
then, interest 'should be from the date of the decision.'" American Express International v.
IAC, introduced a different time frame for reckoning the 6% interest by ordering it to be
"computed from the finality of (the) decision until paid." The Nakpil and Sons case ruled
that 12% interest per annum should be imposed from the finality of the decision until the
judgment amount is paid.

||| (Eastern Shipping Lines, Inc. v. Court of Appeals, G.R. No. 97412, [July 12, 1994])

On the 12% rate of interest the trial court applied on the principal obligation, this is
proper only when the obligation consists of loans or forbearance of money, in the
absence of stipulation to the contrary. 11 If, as here, the obligation is otherwise, the
applicable rate is 6% per annum computed from the time of extra-judicial or judicial
demand. Upon the finality of this ruling, the entire amount due shall earn interest at
12% per annum until its satisfaction.||| (JL Investment and Development, Inc. v. Tendon
Philippines, Inc., G.R. No. 148596, [January 22, 2007], 541 PHIL 82-93)

Courts have the authority to strike down or to modify provisions in promissory notes
that grant the lenders unrestrained power to increase interest rates, penalties and other
charges at the latter's sole discretion and without giving prior notice to and securing the
 consent of the borrowers. This unilateral authority is anathema to the mutuality of
contracts and enable lenders to take undue advantage of borrowers. Although
the Usury Law has been effectively repealed, courts may still reduce iniquitous or
unconscionable rates charged for the use of money. Furthermore, excessive interests,
penalties and other charges not revealed in disclosure statements issued by banks, even
if stipulated in the promissory notes, cannot be given effect under the Truth in Lending
Act.||| (New Sampaguita Builders Construction v. Philippine National Bank, G.R. No.
148753, [July 30, 2004], 479 PHIL 483-530)

The term "forbearance", within the context of usury law, has been described as a
contractual obligation of a lender or creditor to refrain, during a given period of time, from
requiring the borrower or debtor to repay the loan or debt then due and
payable. 31 HcISTE
Eastern Shipping Lines, Inc. synthesized the rules on the imposition of interest, if proper,
and the applicable rate, as follows: The 12% per annum rate under CB Circular No. 416 shall
apply only to loans or forbearance of money, goods, or credits, as well as to judgments
involving such loan or forbearance of money, goods, or credit, while the 6% per annum
under Art. 2209 of the Civil Code applies "when the transaction involves the payment of
indemnities in the concept of damage arising from the breach or a delay in the
performance of obligations in general", 32 with the application of both rates reckoned
"from the time the complaint was filed until the [adjudged] amount is fully paid." 33 In
either instance, the reckoning period for the commencement of the running of the legal
interest shall be subject to the condition "that the courts are vested with discretion,
depending on the equities of each case, on the award of interest."

Otherwise formulated, the norm to be followed in the future on the rates and application thereof
is: HTSaEC
I. When an obligation, regardless of its source, is breached, the contravenor can
be held liable for damages. The provisions under Title XVIII on "Damages" of the
Civil Code govern in determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is
imposed, as follows:
1. When the obligation breached consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due should be that which may have
been stipulated in writing. Furthermore, the interest due shall itself earn legal
interest from the time it is judicially demanded. In the absence of stipulation, the
rate of interest shall be 12% per annum to be computed from default, i.e., from
judicial or extrajudicial demand under and subject to the provisions of Article 1169
of the Civil Code.
 2. When an obligation not constituting loans or forbearance of money is breached,
an interest on the amount of damages awarded may be imposed at the discretion
of the court at the rate of 6% per annum. No interest, however, shall be adjudged
on unliquidated claims or damages except when or until the demand can be
established with reasonable certainty. Accordingly, where the demand is
established with reasonable certainty, the interest shall begin to run from the time
the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such
certainty cannot be so reasonably established at the time the demand is made, the
interest shall begin to run only from the date the judgment of the court is made (at
which time the quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the computation of legal interest
shall, in any case, be on the amount finally adjudged. EHaASD
3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such finality until its satisfaction,
this interim period being deemed to be by then an equivalent to a forbearance of
credit. 35
Guided by the foregoing rules, the award to Chua of the amount representing earned but
unremitted profits, i.e., PhP35,000 monthly, from January 1988 until May 30, 1992, must
earn interest at 6% per annum reckoned from October 7, 1997, the rendition date of the
RTC decision, until December 20, 2001, when the said decision became final and executory.
Thereafter, the total of the monthly profits inclusive of the add on 6% interest shall earn
12% per annum reckoned from December 20, 2001 until fully paid, as the award for that
item is considered to be, by then, equivalent to a forbearance of credit. Likewise, the
PhP250,000 award, representing the goodwill value of the business, the award of
PhP50,000 for moral and exemplary damages, PhP25,000 attorney's fee, and PhP25,000
litigation fee shall earn 12% per annum from December 20, 2001 until fully paid.
||| (Sunga-Chan v. Court of Appeals, G.R. No. 164401, [June 25, 2008], 578 PHIL 262-284)

ART. 1176
In a real estate mortgage, when the principal obligation is not paid when due, the mortgagee
has the right to foreclose on the mortgage, to have the property seized and sold, and to
apply the proceeds to the obligation. 18
RCBC's own Amortization Schedule readily shows the applicability of Article 1176 of the Civil
Code, which states:
Art. 1176. The receipt of the principal by the creditor, without reservation with
respect to the interest, shall give rise to the presumption that the said interest
has been paid.
The receipt of a later installment of a debt without reservation as to prior
installments, shall likewise raise the presumption that such installments have
been paid. 19
 Respondent's passbooks indicate that RCBC continued to receive his payments even
after it made demands for him to pay his past due accounts, and even after the auction sale.
RCBC cannot deny receipt of the payments, even when it claims that the deposits
were "not withdrawn." 20 It is not respondent's fault that RCBC did not withdraw the money
he deposited. His obligation under the mortgage agreement was to deposit his payment in
the savings account he had opened for that purpose, in order that RCBC may debit the
amount of his monthly liabilities therefrom. He complied with his part of the agreement.
This bolsters the conclusion of the CA that respondent had no unpaid installments and
was not in default as would warrant the application of the acceleration clause and the
subsequent foreclosure and auction sale of the property.

||| (Rizal Commercial Banking Corp. v. Buenaventura, G.R. No. 176479 (Resolution), [October
6, 2010], 646 PHIL 673-680)

ART. 1177

We are of the same opinion with the Court of Appeals that respondents Jimenas have a cause of
action against petitioner corporation and that the latter's joinder as one of the defendants before
the trial court is fitting and proper.|||

There first assigned error is the Trial Court erred in not dismissing this instant action as "there is
no privity of contract between Gold Star and Jimena." This contention is without merit. The
situation at bar is similar to the status of the first and second mortgagees of a duly registered real
estate mortgage. While there exists no privity of contract between them, yet the common subject-
matter supplies the juridical link. Borrowing the Spanish maxim cited by Jimena's counsel, "el
deudor de mi deudor es deudor mio," this legal maxim finds sanction in Article 1177, new Civil
Code which provides that "creditors, after having pursued the property in possession of the
debtor to satisfy their claims, may exercise all the rights and bring all the actions of the latter
(debtor) for the same purpose, save those which are inherent in his person; they may also impugn
the acts which the debtor may have done to defraud them (1111)." . . . it can be said that Lincallo,
in transferring the mining claims to Gold Star (without disclosing that Jimena was a co-owner
although Gold Star had knowledge of the fact as shown by the proofs heretofore mentioned)
acted as Jimena's agent with respect to Jimena's share of the claims. Under such conditions,
Jimena has an action against Gold Star, pursuant to Article 1883, New Civil Code, which provides
that the principal may sue the person with whom the agent dealt with in his (agent's) own name,
when the transaction "involves things belonging to the principal." As counsel for Jimena has
correctly contended, "the remedy of garnishment suggested by Gold Star is utterly inadequate for
the enforcement of Jimena's right against Lincallo because Jimena wanted an accounting and
wanted to receive directly his share of the royalties from Gold Star. That recourse is not open to
Jimena unless Gold Star is made a party in this action."

Considering that no writ of preliminary attachment was issued by the trial court, the condition
for its issuance not having been met by Jimena, nothing can be said to have superseded the writ
of preliminary injunction in question. The preliminary injunction was, therefore, subsisting and
evidently violated by petitioner corporation when it paid the sum of P30,691.92 to Lincallo and
Tolentino.

By sentencing Gold Star Mining Co., Inc., to pay, for the account of Lincallo, the sum aforesaid,
the court merely endeavoured to prevent its award from being rendered pro tanto nugatory and
ineffective, and thus make it conformable to law and justice.

That the questioned award was not intended to be a penalty against appellant Gold Star Mining
Co., Inc., is shown by the provision in the judgment that the P30,691.92 to be paid by it to Jimena
is "to be imputed to Lincallo's liability under this judgment." The court thus left the way open for
Gold Star Mining Co., Inc., to recover later the whole amount from Lincallo, whether by direct
action against him or by deducting it from the royalties that may fall due under his 1951 contract
with appellant.

(Gold Star Mining Co., Inc. v. Lim-Jimena, G.R. No. L-25301, [October 26, 1968], 134 PHIL 600-608)

In relation to an action for rescission, it should be noted that the remedy of rescission is subsidiary
in nature; it cannot be instituted except when the party suffering damage has no other legal
means to obtain reparation for the same. 24 Article 1177 of the New Civil Code provides:
The creditors, after having pursued the property in possession of the debtor to
satisfy their claims, may exercise all the rights and bring all the actions of the latter
for the same purpose, save those which are inherent in his person; they may also
impugn the actions which the debtor may have done to defraud them. (Emphasis
added)
Consequently, following the subsidiary nature of the remedy of rescission, a creditor would have a
cause of action to bring an action for rescission, if it is alleged that the following successive
measures have already been taken: (1) exhaust the properties of the debtor through levying by
attachment and execution upon all the property of the debtor, except such as are exempt by law
from execution; (2) exercise all the rights and actions of the debtor, save those personal to
him (accion subrogatoria); and (3) seek rescission of the contracts executed by the debtor in fraud
of their rights (accion pauliana). 25
With respect to an accion pauliana, it is required that the ultimate facts constituting the following
requisites must all be alleged in the complaint, viz.:
 1) That the plaintiff asking for rescission, has credit prior to the alienation,
although demandable later;
2) That the debtor has made a subsequent contract conveying a patrimonial
benefit to a third person;
3) That the creditor has no other legal remedy to satisfy his claim, but would
benefit by rescission of the conveyance to the third person; ACcHIa
4) That act being impugned is fraudulent; and
5) That the third person who received the property conveyed, if by onerous title,
has been an accomplice in the fraud. 26
A cursory reading of the allegations of ASB's complaint would show that it failed to allege the
ultimate facts constituting its cause of action and the prerequisites that must be complied before
the same may be instituted. ASB, without availing of the first and second remedies, that is,
exhausting the properties of CTS, Henry H. Furigay and Genilda C. Furigay or their transmissible
rights and actions, simply undertook the third measure and filed an action for annulment of the
donation. This cannot be done.
||| (Anchor Savings Bank v. Furigay, G.R. No. 191178, [March 13, 2013], 706 PHIL 378-396)

In this case, it is just and proper that Ronnie be compensated for the serious physical
injuries he suffered. It should be remembered that even though the vehicle that hit Ronnie
was registered in the name of Elenita, she was not made a party in the said criminal case.
Thus, she may not be compelled to answer for Eduardo's liability. Nevertheless, their conjugal
partnership property may be held accountable for it since Eduardo has no property in his
name. The payment of indemnity adjudged by the RTC of Bacolod City in Criminal Case No.
7155 in favor of Ronnie may be enforced against the partnership assets of spouses Elenita and
Eduardo after the responsibilities enumerated under Article 161 of the Civil Code have been
covered. This remedy is provided for under Article 163 of the Civil Code, viz.:
Art. 163. The payment of debts contracted by the husband or the wife before the
marriage shall not be charged to the conjugal partnership.
Neither shall the fines and pecuniary indemnities imposed upon them be
charged to the partnership.
However, the payment of debts contracted by the husband or the wife before the
marriage, and that of fines and indemnities imposed upon them, may be
enforced against the partnership assets after the responsibilities enumerated in
Article 161 have been covered, if the spouse who is bound should have no
exclusive property or if it should be insufficient; but at the time of the liquidation
of the partnership such spouse shall be charged for what has been paid for the
purposes above-mentioned. 28
Article 161 of the Civil Code enumerates the obligations which the conjugal partnership
may be held answerable,viz.:
Art. 161. The conjugal partnership shall be liable for:
 (1) All debts and obligations contracted by the husband for the benefit of the
conjugal partnership, and those contracted by the wife, also for the same purpose,
in the cases where she may legally bind the partnership;
(2) Arrears or income due, during the marriage, from obligations which constitute
a charge upon property of either spouse or of the partnership;
(3) Minor repairs or for mere preservation made during the marriage upon the
separate property of either the husband or the wife; major repairs shall not be
charged to the partnership; aAHISE
(4) Major or minor repairs upon the conjugal partnership property;
(5) The maintenance of the family and the education of the children of both the
husband and wife, and of legitimate children of one of the spouses;
(6) Expenses to permit the spouses to complete a professional, vocational or other
course.

The enumeration above-listed should first be complied with before the conjugal partnership
may be held to answer for the liability adjudged against Eduardo.

Finally, the indemnity imposed against Eduardo shall earn an interest at the rate of
twelve percent per annum, in accordance with our ruling in Eastern Shipping Lines, Inc. v.
Court of Appeals. 29
||| (Dewara v. Spouses Lamela, G.R. No. 179010, [April 11, 2011], 663 PHIL 35-47)

However, jurisprudence is clear that the following successive measures must be taken
by a creditor before he may bring an action for rescission of an allegedly fraudulent contract:
(1) exhaust the properties of the debtor through levying by attachment and execution upon all
the property of the debtor, except such as are exempt by law from execution; (2) exercise all
the rights and actions of the debtor, save those personal to him (accion subrogatoria); and (3)
seek rescission of the contracts executed by the debtor in fraud of their rights (accion
pauliana). 23 It is thus apparent that an action to rescind, or an accion pauliana, must be of
last resort, availed of only after the creditor has exhausted all the properties of the debtor not
exempt from execution or after all other legal remedies have been exhausted and have been
proven futile.24
It does not appear that Metrobank sought other properties of SSC other than the
subject lots alleged to have been transferred in fraud of creditors. Neither is there any showing
that Metrobank subrogated itself in SSC's transmissible rights and actions. Without availing of
the first and second remedies, Metrobank simply undertook the third measure and filed an
action for annulment of the chattel mortgages. This cannot be done. Article 1383 of the New
Civil Code is very explicit that the right or remedy of the creditor to impugn the acts which the
debtor may have done to defraud them is subsidiary in nature. 25 It can only be availed of in
the absence of any other legal remedy to obtain reparation for the injury. 26 This fact is not
present in this case. No evidence was presented nor even an allegation was offered to show
 that Metrobank had availed of the abovementioned remedies before it tried to question the
validity of the contracts of chattel mortgage between IEB and SSC.
||| (Metropolitan Bank and Trust Co. v. International Exchange Bank, G.R. No. 176008, 176131,
[August 10, 2011], 671 PHIL 15-32)