Obligations and Contracts PDF

## TITLE I OBLIGATIONS (Arts. 1156-1304.) ### Chapter I GENERAL PROVISIONS **ARTICLE 1156.** An obligation is a juridical necessity to give, to do or not to do. (n) **Meaning of obligation** The term obligation is derived from the Latin word "obligatio" which means a "tying" or "binding." 1. It...

## TITLE I OBLIGATIONS (Arts. 1156-1304.) ### Chapter I GENERAL PROVISIONS **ARTICLE 1156.** An obligation is a juridical necessity to give, to do or not to do. (n) **Meaning of obligation** The term obligation is derived from the Latin word "obligatio" which means a "tying" or "binding." 1. It is a tie of law or a juridical bond by virtue of which one is bound in favor of another to render something - and this may consist in giving a thing, doing a certain act, or not doing a certain act. 2. Manresa defines the term as "a legal relation established between one party and another, whereby the latter is bound to the fulfillment of a prestation which the former may demand of him." (8 Manresa 13.) 3. Article 1156 gives the Civil Code definition of obligation, in its passive aspect. Our law merely stresses the duty of the debtor or obligor (he who has the duty of giving, doing, or not doing) when it speaks of obligation as a juridical necessity. **Meaning of juridical necessity** Obligation is a juridical necessity because in case of non-compliance, the courts of justice may be called upon to enforce its fulfillment or, in default thereof, the economic value that it represents. In a proper case, the debtor may also be made liable for damages, which represent the sum of money given as a compensation for the injury or harm suffered by the creditor or obligee (he who has the right to the performance of the obligation) for the violation of his rights. In other words, the debtor must comply with his obligation whether he likes it or not; otherwise, his failure will be visited with some harmful or undesirable legal consequences. If obligations were not made enforceable, then people can disregard them with impunity. If an obligation cannot be enforced, it may be only a natural obligation. **Nature of obligations under the Civil Code** Obligations which give to the creditor or obligee a right of action in courts of justice to enforce their performance are known as civil obligations. They are to be distinguished from natural obligations which, not being based on positive law but on equity and natural law, do not grant a right of action to enforce their performance although in case of voluntary fulfillment by the debtor, the latter may not recover what has been delivered or rendered by reason thereof. (Art.* 1423.) Natural obligations are discussed under the Title dealing with "Natural Obligations." (Title III, Arts. 1423-1430.) **Essential requisites of an obligation** An obligation as defined in Article 1156 is constituted upon the concurrence of the four (4) essential elements thereof, namely: 1. A passive subject (called debtor or obligor) or the person who is bound to the fulfillment of the obligation; he who has a duty; 2. An active subject (called creditor or obligee) or the person who is entitled to demand the fulfillment of the obligation; he who has a right; 3. Object or prestation (subject matter of the obligation) or the conduct required to be observed by the debtor. It may consist in giving, doing, or not doing. (see Art. 1232.) Without the prestation, there is nothing to perform. In bilateral obligations (see Art. 1191.), the parties are reciprocally debtors and creditors; and 4. A juridical or legal tie (also called efficient cause) or that which binds or connects the parties to the obligation. The tie in an obligation can easily be determined by knowing the source of the obligation. (Art. 1157.) **EXAMPLE:** Under a building contract, X bound himself to construct a house for Y for P1,000,000.00. Here, X is the passive subject, Y is the active subject, the building of the house is the object or prestation, and the agreement or contract, which is the source of the obligation, is the juridical tie. Suppose X had already constructed the house and it was the agreement that Y would pay X after the construction is finished. X, then, becomes the active subject and Y, the passive subject. **Form of obligation** 1. As a general rule, the law does not require any form in obligations arising from contracts for their validity or binding force. (see Art. 1356.) 2. Obligations arising from other sources (Art. 1157.) do not have any form at all. **Obligation, right, and wrong (cause of action) distinguished** 1. Obligation is the act or performance which the law will enforce. 2. Right, on the other hand, is the power which a person has under the law, to demand from another any prestation. 3. A wrong (cause of action), according to its legal meaning, is an act or omission of one party in violation of the legal right or rights of another, causing injury to the latter; **Essential elements of cause of action** 1. Its essential elements are: a. a legal right in favor of a person (creditor/plaintiff) by whatever means and under whatever law it arises or is created; b. a correlative legal obligation on the part of another (debtor/defendant) to respect or not to violate said right; and c. an act or omission in breach or violation of said right by the defendant with consequential injury or damage to the plaintiff for which he may maintain an action for the recovery of damages or other appropriate relief. (see Ma-ao Sugar Central Co. vs. Barrios, 79 Phil. 66 [1948]; Teves vs. People's Homesite and Housing Corp., 23 SCRA 1141 [1968]; Development Bank of the Phils. vs. Pundogar, 218 SCRA 118 [1993]; Parañaque King Enterprises vs. Court of Appeals, 269 SCRA 727 [1997]; Nadela vs. City of Cebu, 411 SCRA 315 [2003].) 2. If any of these elements is absent, the complaint becomes vulnerable to a motion to dismiss on the ground of failure to state a cause of action. (San Lorenzo Village Assoc., Inc. vs. Court of Appeals, 288 SCRA 115 [1998]; Uy vs. Evangelista, 361 SCRA 95 [2001].) The presence of a cause of action rests on the sufficiency, and not on the veracity, of the allegations in the complaint, which will have to be examined during the trial on the merits. (Pioneer International, Ltd. vs. Guadiz, Jr., 535 SCRA 584 [2007].) The test is whether the material allegations of the complaint, assuming to be true, state ultimate facts which constitutes plaintiff's cause of action such that plaintiff is entitled to a favorable judgment as a matter of law. (Rovels Enterprises, Inc. vs. Ocampo, 391 SCRA 176 [2002].) 3. A cause of action only arises when the last element occurs, i.e., at the moment a right has been transgressed. a. It is to be distinguished from right of action or the right to commence and maintain an action, in that the former is governed by the procedural law while the latter depends on substantive law. The right of action springs from the cause of action, but does not accrue until all the facts which constitute the cause of action have occurred. (Multi-Realty Dev. Corp. vs. Makati Tuscany Condominium Corp., 491 SCRA 9 [2006]; Borbe vs. Calalo, 535 SCRA 89 [2007].) The action shall be brought in the name of the party who by law is entitled to the right to be enforced. b. An obligation on the part of a person cannot exist without a corresponding right existing in favor of another, and vice-versa, for every right enjoyed by a person, there is a corresponding obligation on the part of another to respect such right. **ILLUSTRATIVE CASE:** S rejected or cancelled a contract to sell his property even before the arrival of the period in the exercise of the option to buy by the purchaser who has already made a downpayment. **Facts:** S and B entered into a contract to sell, whereby B, after making a downpayment, was given the option to pay the balance of the purchase price of a parcel of land. Later, S "rejected the contract to sell" even before the arrival of the period for the exercise of said option on the ground that the terms and conditions of the contract are grossly disadvantageous and highly prejudicial to his interest. S sent two (2) checks to B in an apparent effort to return the downpayment. **S contends that the complaint was prematurely filed because at the time of the institution of the complaint, B has yet to exercise his option under the "Option of Buyer" clause of the contract. **Issue:** Has B a cause of action against S for prematurity? **Held:** Yes. (1) All the elements of a cause of action are present. - First, there is a legal right in favor of B, i.e., the right to complete the payment of the purchase price should he choose to do so; there is an obligation on the part of S to sell the subject property exclusively to B upon full payment of the purchase price; and there was a breach of S's obligation to sell the property, when S rejected the contract to sell even before B could exercise his option to buy notwithstanding that he had already made a downpayment. (2) S rejected contract to sell in no uncertain terms. The fact that the rejection or cancellation of the contract by S was not made judicially or by notarial act (see Art. 1592.) is of no moment. It is enough for purposes of determining the existence of a cause of action that S has declared in no uncertain terms his refusal to be bound by the contract to sell. Such declaration, coupled with S's act of returning B's down payment, clearly indicates S's rejection of the contract to sell. (Leberman Realty Corporation vs. Typingco, 293 SCRA 316 [1998].) **Cause of action based upon a written contract** Actions based upon a written contract should be brought within 10 years from the time the right of action accrues. (Art. 1144.) The accrual refers to the cause of action. Accordingly, an action based on a contract accrues only when an actual breach or violation thereof occurs. (China Banking Corp. vs. Court of Appeals, 461 SCRA 162 [2005]; see Art. 1169.) Therefore, the period of prescription commences, not from the date of execution of the contract but from the occurrence of the breach. The cause of action resulting from breach of contract is dependent on the facts of each particular case. (Pilipinas Shell Petroleum Corporation vs. John Bordman Ltd., 473 SCRA 151 [2006].) 1. In an action to rescind a contract of sale on installment basis, for non-payment, the cause of action arises at the time the last installment is not paid. (Nabus vs. Court of Appeals, 193 SCRA 732 [1991].) 2. Where an overdraft agreement stipulates that the obligation is payable on demand, the breach starts only when demand is made. (Elido vs. Court of Appeals, 216 SCRA 637 [1992]; China Banking Corporation vs. Court of Appeals, supra.) 3. In a contract of loan with real estate mortgage, whereby the creditor could unilaterally increase the interest rate, where the creditor foreclosed the mortgage when the debtor failed to pay the loan, the cause of action for the annulment of the foreclosure sale should be counted from the date the debtor discovered the increased interest rate (Banco Filipino Savings & Mortgage Bank vs. Court of Appeals, 388 Phil. 27, 332 SCRA 241 [2000].) 4. Where the agreement to buy and sell was conditioned upon the conduct of a preliminary survey of the land to verify, whether it contained the area stated in the tax declaration, the right of action for specific performance arose only when the plaintiff discovered the completion of the survey. (Cole vs. Gregorio, 202 Phil. 226, 116 SCRA 670 [1982].) 5. With respect to money claims arising from a contract of employment, which would prescribe in three (3) years from the time the cause of action accrued, the cause of action would arise from the date the employer made a definite denial of the employee's claim, for prior to such denial, it is deemed that the issues had not yet been joined because the employee could have still been reinstated (Serrano vs. Court of Appeals, 415 Phil. 447, 363 SCRA 223 [2001].) 6. In an action for reformation of a contract, where the plaintiff alleged, among others, that the contract was one-sided in favor of the defendant, and that certain events had made the arrangement inequitable, the cause of action for reformation would arise only when the contract appeared disadvantageous. (Naga Telephone Co. vs. Court of Appeals, 230 SCRA 351 [1994].) 7. The nature of the product sold is a major factor in determining when the cause of action has accrued. For example, when fuel oil is delivered in drums, a buyer readily assumes that the agreed volume can be and actually is, contained in those drums. He is not expected to make a meticulous measurement of each and every delivery. In case of short deliveries, the cause of action will arise only from the discovery of the same with certainty. (Pilipinas Shell Petroleum Corporation vs. John Bordment, Ltd., supra.) **Injury, damage, and damages distinguished** The words "injury," "damage," and "damages" are sometimes used synonymously, although there is a material difference among them. 1. Injury is the illegal invasion of a legal right; it is the wrongful act or omission which causes loss or harm to another, while damage is the loss, hurt, or harm which results from the injury. On the other hand, damages denote the sum of money recoverable as amends for the wrongful act or omission; and 2. Injury is the legal wrong to be redressed, while damages are the recompense or compensation awarded or recoverable for the damage or loss suffered. (Custodio vs. Court of Appeals, 253 SCRA 483 [1996].) **Existence of one without the other** There may be injury without damage and damage without injury. 1. Proof of loss for injury. - A wrongful violation of his legal right is not sufficient to entitle a person to sue another in a court of justice for the enforcement or protection of said right. As a rule, there must be, in addition, loss or damage caused to him by the violation of his right. But except for actual or compensatory damages (Art. 2199.), no pecuniary proof is necessary in order that moral, nominal, temperate, liquidated, or exemplary damages may be awarded. (Art. 2216.) 2. Liability for damages of a person for exercising his legal rights. - A person has the right to take all legal steps to enforce his legal and/ or equitable rights. One who makes use of his legal right does no injury. Qui jure suo utitur mullum damnum facit. If damage results from a person's exercising his legal rights, it is damnum absque injuria (damage without injury). (Auyong Hian vs. Court of Appeals, 59 SCRA 110 [1974].) The plaintiff must establish that the damage to him resulted from a breach or violation of legal duty which the defendant owned to him; otherwise, the consequences must be borne by the plaintiff alone. In other words, in order that the law will give redress for an act (or omission) causing damage, that act must be not only hurtful, but wrongful. (Custodio vs. Court of Appeals, supra; see Philippine National Bank vs. Court of Appeals, 367 SCRA 198 [2001].) **ILLUSTRATIVE CASE:** Acts of importer contesting forfeiture, delay in the delivery of goods to highest bidder. **Facts:** X imported certain goods. The Collector of Customs declared the goods forfeited in favor of the government and ordered the sale thereof at public auction. The bid of Y was approved and the goods were awarded to him. Under the law, X has the right to have the decision of the Collector of Customs reviewed by the Commissioner of Customs, and from the decision of the latter, to appeal to the Court of Tax Appeals (Secs. 2313, 402, Tariff and Customs Code.), and from the latter's decision, to the Supreme Court. X will be prejudiced if the sale is not set aside. (see Art. 1397.) **Issue:** Is X liable to Y for damages from the consequent delay in the delivery of the goods? **Held:** Such delay is an incident to the exercise by X of his right to contest the forfeiture and the sale of his goods. (see Auyong Hian vs. Court of Appeals, supra.) **Kinds of obligation according to subject matter** From the viewpoint of the subject matter, obligation may either be: 1. Real obligation (obligation to give) or that in which the subject matter is a thing which the obligor must deliver to the obligee; or 2. Personal obligation (obligation to do or not to do) or that in which the subject matter is an act to be done or not to be done. There are thus two (2) kinds of personal obligation: a. Positive personal obligation or obligation to do or to render service (see Art. 1167.); and b. Negative personal obligation or obligation not to do (which naturally includes obligations "not to give"). (see Art. 1168.) **ART. 1157.** Obligations arise from: 1. Law; 2. Contracts; 3. Quasi-contracts; 4. Acts or omissions punished by law; and 5. Quasi-delicts. (1089a) **Sources of obligations** An obligation imposed on a person and the corresponding right granted to another must be rooted in at least any of the following sources: 1. Law. - when they are imposed by the law itself, e.g., obligation to pay taxes; obligation to support one's family (see Art. 195, Family Code.); 2. Contracts. - when they arise from the stipulation of the parties (Art. 1306.), e.g., the obligation to repay a loan by virtue of an agreement; 3. Quasi-contracts. - when they arise from lawful, voluntary and unilateral acts and which are enforceable to the end that no one shall be unjustly enriched or benefited at the expense of another (Art. 2142.), e.g., the obligation to return money paid by mistake or which is not due. (Art. 2154.) In a sense, these obligations may be considered as arising from law; 4. Crimes or acts or omissions punished by law. - when they arise from civil liability which is the consequence of a criminal offense (Art. 1161.), e.g., the obligation of a thief to return the car stolen by him; the duty of a killer to indemnify the heirs of his victim; and 5. Quasi-delicts or torts. - when they arise from damage caused to another through an act or omission, there being fault or negligence, but no contractual relation exists between the parties (Art. 2176.), e.g., the obligation of the head of a family that lives in a building or a part thereof to answer for damages caused by things thrown or falling from the same (Art. 2193.); the obligation of the possessor of an animal to pay for the damage which it may have caused. (Art. 2183.) The enumeration by the law is exclusive; hence, there is no obligation as defined in Article 1156, if its source is not any of those enumerated. **Sources classified** The law enumerates five (5) sources of obligations. They may be classified as follows: 1. Those emanating from law; and 2. Those emanating from private acts which may be further subdivided into: a. those arising from licit acts, in the case of contracts and quasi-contracts; and b. those arising from illicit acts, which may be either punishable by law in the case of delicts, or not punishable in the case of quasi-delicts. Actually, there are only two (2) sources: law and contracts, because obligations arising from quasi-contracts, crimes, and quasi-delicts are really imposed by law. (see Leung Ben vs. O'Brien, 38 Phil. 182 [1918].) Where the source of the obligation is a private act, the law merely recognizes or acknowledges the existence of the obligation. **ILLUSTRATIVE CASE:** Liability of sheriff lawfully enforcing a judgment in an ejectment suit. **Facts:** A judgment was rendered by a justice of the peace court (now municipal court) in favor of X who brought an ejectment suit against Y, the owner of the house built on the land of X. Z, the deputy sheriff who executed the judgment, was obliged to remove the house of Y from the land according to the usual procedure in the action for ejectment. **Issue:** Is Y entitled to indemnity arising from the destruction of his house? **Held:** No proof has been submitted that a contract had been entered into between plaintiff (Y) and the defendants (X and Z) or that the latter had committed illegal acts or omissions or incurred in any kind of fault or negligence, from any of which an obligation might have arisen on the part of X and Z to indemnify Y. For this reason, the claim for indemnity, on account of acts performed by the sheriff, while enforcing a judgment, cannot under any consideration be sustained. (Navales vs. Rias, 8 Phil. 508 [1907].) **ART. 1158.** Obligations derived from law are not presumed. Only those expressly determined in this Code or in special laws are demandable, and shall be regulated by the precepts of the law which establishes them; and as to what has not been foreseen, by the provisions of this Book. (1090) **Legal obligations** Article 1158 refers to legal obligations or obligations arising from law. They are not presumed because they are considered a burden upon the obligor. They are the exception, not the rule. To be demandable, they must be clearly set forth in the law, i.e., the Civil Code or special laws. Thus: 1. An employer has no obligation to furnish free legal assistance to his employees because no law requires this, and, therefore, an employee may not recover from his employer the amount he may have paid a lawyer hired by him to recover damages caused to said employee by a stranger or strangers while in the performance of his duties. (De la Cruz vs. Northern Theatrical Enterprises, 95 Phil. 739 [1954].) 2. A private school has no legal obligation to provide clothing allowance to its teachers because there is no law which imposes this obligation upon schools. But a person who wins money in gambling has the duty to return his winnings to the loser. This obligation is provided by law. (Art. 2014.) Under Article 1158, special laws refer to all other laws not contained in the Civil Code. **ILLUSTRATIVE CASES:** 1. Liability of husband for medical assistance rendered to his wife but contracted by his parents. **Facts:** X, by virtue of having been sent for by B and C, attended as physician and rendered professional services to a daughter-in-law of B and C during a difficult and laborious childbirth. **Issue:** Who is bound to pay the bill: B and C, the parents-in-law of the patient, or the husband of the latter? **Held:** The rendering of medical assistance in case of illness is comprised among the mutual obligations to which spouses are bound by way of mutual support. If spouses are mutually bound to support each other, there can be no question that when either of them by reason of illness should be in need of medical assistance, the other is to render the unavoidable obligation to furnish the services of a physician and is liable for all expenses, including the fees for professional services. This liability originates from the above-mentioned mutual obligation which the law has expressly established between the married couple. B and C not having personally bound themselves to pay are not liable. (Pelayo vs. Lauron, 12 Phil. 453 [1909].) 2. Title to property purchased by a person for his own benefit but paid by another. **Facts:** X, of legal age, bought two vessels from B, the purchase price thereof being paid by C, X's father. Subsequently, differences arose between X and C. The latter brought action to recover the vessels, he having paid the purchase price. **Issue:** Is there any obligation on the part of X to transfer the ownership of the vessel to C? **Held:** None. If any such obligation was ever created on the part of X, said obligation must arise from law. But obligations derived from law are not presumed. Only those expressly determined in the Civil Code or in special laws are demandable. Whatever right C may have against X either for the recovery of the money paid or for damages, it is clear that such payment gave him no title, either legal or equitable, to these vessels. (Martinez vs. Martinez, 1 Phil. 647 [1902].) Note: If X were a minor, the vessels would belong to C in ownership and usufruct under Article 161 of the old Civil Code. (now Art. 324.5) Under Article 1448, the payment may give rise to a gift or an implied trust. **ART. 1159.** Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. (1091a) **Contractual obligations** The above article speaks of contractual obligations or obligations arising from contracts or voluntary agreements. A contract is a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service. (Art. 1305.) It is the formal expression by the parties of their rights and obligations they have agreed upon with respect to each other. 1. Binding force. - Obligations arising from contracts are governed primarily by the agreement of the contracting parties. Once perfected, valid contracts have the force of law between the parties who are bound to comply therewith in good faith, and neither one may without the consent of the other, renege therefrom. (Tiu Peck vs. Court of Appeals, 221 SCRA 618 [1993].) In characterizing contracts as having the force of law between the parties, the law stresses the obligatory nature of a binding and valid agreement (William Golangco Construction Corporation vs. Phil. Commercial International Bank, 485 SCRA 293 [2006].), absent any allegation that it is contrary to law, morals, good customs, public order, or public policy. (Art. 1306.) a. The law, recognizing the obligatory force of contracts (Arts. 1139, 1308, 1315, 1356.), 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. (Art. 1170.) The mere proof of the existence of the contract and the failure of its compliance justify, prima facie, a corresponding right of relief. (FGU Insurance Corp. vs. G.P. Sarmiento Trucking Corp., G.R. No. 141910, Aug. 6, 2002.) b. In law, whatever fairly puts a person on inquiry is sufficient notice, where the means of knowledge are at hand, which if pursued by proper inquiry, the full truth might have been ascertained. Thus, where a purchaser of a memorial lot, on installment basis, had full knowledge of the terms and conditions of the sale, including the rules and regulations issued by the seller governing the memorial park, to which she obliged herself to abide, cannot later feign ignorance of said rules. (Dio vs. St. Ferdinand Memorial Park, Inc., 509 SCRA 453 [2006].) c. If it occurs to one of the contracting parties to allege some defect in a contract as a reason for invalidating it, such alleged defect must be proved by him by convincing evidence since its validity or compliance cannot be left to will of one of them. (see Art. 1308.) "An experienced businessman who signs important legal papers cannot disclaim the consequent liabilities therefor after being a signatory thereon." (Blade International Marketing Corp. vs. Court of Appeals, 372 SCRA 333 [2001].) It behooves every contracting party to learn and to know the contents of an instrument before signing and agreeing to it. (Dio vs. St. Ferdinand Memorial Park, Inc., supra.) d. Courts have no alternative but to enforce contracts as they were agreed upon and written when the terms thereof are clear and leave no room for interpretation. (Art. 1370.). This does not mean, however, that contract is superior to the law. Although a contract is the law between the contracting parties, the provisions of positive law which regulate such contracts are deemed included and shall limit and govern the relations between the parties. (Asia World Recruitment, Inc. vs. National Labor Relations Commission, 313 SCRA 1 [1999].) e. A compromise agreement is immediately executory and not appealable, except for vices of consent (Art. 1330.) or forgery. Upon the parties, it has the effect and the authority of res judicata, once entired into. To have the force of law between the parties, it must comply with the requisites of contracts. (Art. 1318.) It may be either extrajudicial (to prevent litigation) or judicial (to end a litigation). (Magbanua vs. Uy, 458 SCRA 184 [2005].) 2. Requirements of a valid contract. As a source of obligation, a contract must be valid and enforceable. (see Art. 1403.) A contract is valid (assuming all the essential elements are present, Art. 1318.) if it is not contrary to law, morals, good customs, public order, and public policy. It is invalid or void if it is contrary to law, morals, good customs, public order, or public policy. (Art. 1306; see Phoenix Assurance Co., Ltd. vs. U.S. Lines, 22 SCRA 675 [1968].) In the eyes of the law, a void contract does not exist. (Art. 1409.) Consequently, no obligations will arise. 3. Where contract requires approval by the government. Where a contract is required to be verified and approved by the government before it can take effect (e.g., contract for overseas employment must be approved by the Philippine Overseas Employment Administration [POEA] under Art. 21[c] of the Labor Code), such contract becomes the law between the contracting parties only when approved, and where there is nothing in it which is contrary to law, etc., its validity must be sustained. (Intetrod Maritime, Inc. vs. National Labor Relations Commission, 198 SCRA 318 [1991].) 4. Compliance in good faith. It means compliance or performance in accordance with the stipulations or terms of the contract or agreement. Good faith and fair dealing must be observed to prevent one party from taking unfair advantage over the other. Evasion by a party of legitimate obligations after receiving the benefits under the contract would constitute unjust enrichment on his part. (see Royal Lines, Inc. vs. Court of Appeals, 143 SCRA 608 [1986].) 5. Liability for breach of contract. - Although the contract imposes no penalty for its violation, a party cannot breach it with impunity. Our law on contracts recognizes the principle that actionable injury inheres in every contractual breach. (Boysaw vs. Interphil Promotions, Inc., 148 SCRA 635 [1987]; see Arts. 1170, 1191.) Interest may, in the discretion of the court, on equitable grounds, be allowed upon damages awarded for breach of contract. (see Art. 2210.) The failure of either party to a contract to demand performance of the obligation of the other for an unreasonable length of time may render the contract ineffective where the contract does not provide for the period within which the parties may demand the performance of their respective undertakings but the parties did not contemplate that the same could be made indefinitely. (Villamor vs. Court of Appeals, 202 SCRA 607 [1991].) The mere failure of a party to respond to a demand letter in the absence of other circumstances making an answer requisite or natural does not constitute an implied admission of liability. (Phil. First Insurance Co., Inc. vs. Wallen Phils. Shipping, Inc., 582 SCRA 457 [2009].) 6. Preservation of interest of promisee. - 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 interest of the promisee of having the benefit of his bargain, or in being reimbursed for loss caused by reliance on the contract, or in having restored to him any benefit that he has conferred on the other party. 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. (FGU Insurance Corporation vs. G.P. Sarmiento Trucking Corporation, 386 SCRA 312 [2002]; see Art. 1170.) **ILLUSTRATIVE CASES:** 1. Binding force of an oral agreement inconsistent with a prior written one. **Facts:** X verbally agrees to pay Y the balance of an account in advance, notwithstanding the different stipulation of a prior written agreement. **Issue:** Is X bound to perform said obligation? **Held:** Yes. Since he agreed to pay Y the balance of the account independently of the terms of the written contract, he must perform his obligation to pay according to the tenor of his verbal agreement which has the force of law between them. (Hijos de I. de la Rama vs. Inventor, 12 Phil. 45 [1908].) 2. Validity of contract stipulating that in case of failure of debtor to pay amount of loan, his property shall be considered sold to creditor. **Facts:** D borrowed from C money to be paid within a certain period, under the agreement that, if D fails to pay at the expiration of said period, the house and lot described in the contract would be considered sold for the amount of the loan. **D failed to pay as promised. C brought action for the delivery of the house and lot. **Issue:** Are both contracts valid and, therefore, should be given effect? **Held:** Yes. The fact that the parties have agreed at the same time, in such a manner that the fulfillment of the promise of sale would depend upon the non-payment or return of the amount loaned has not produced any change in the nature and legal conditions of either contract, or any essential defect which would nullify them. As the amount loaned has not been paid and continues in possession of the debtor, it is only just that the promise of sale be carried into effect, and the necessary instruments be executed. That which is agreed to in a contract is law between the parties, and must be enforced. (Alcantara vs. Alinea, 8 Phil. 111 [1907].) Note: In the above case, the court found that no contract of mortgage, pledge, or antichresis was entered into. (see Arts. 2088, 2137.) 3. Validity of contract for attorney's fees where amount stipulated is unreasonable. **Facts:** D executed a promissory note in favor of C for the purchase price of a truck sold by the latter. In the note, D bound himself to pay an additional 25% as attorney's fees in the event of becoming it necessary for C to employ counsel to enforce its collection. **Issue:** Has the court the power to ignore the contract as to attorney's fees, considering that a contract has the force of law between the contracting parties? **Held:** Yes. Where no special agreement is made by the parties with reference thereto, the courts are authorized to determine the amount to be paid to an attorney as reasonable compensation for his professional services; and even where parties have made a written agreement as to the fee, the courts have the power to ignore their contract, if the amount fixed is unconscionable or unreasonable, and to limit the fee to a reasonable amount. (Bachrach vs. Golingco, 35 Phil. 138 [