Documente Academic
Documente Profesional
Documente Cultură
IN
BUSINESS LAW
2013 EDITION
Copyright
By
______________________________
ALL RIGHTS RESERVED
Any copy of this book without the original signature
of the author on this page shall be considered
as having proceeded from illegal source
PREFACE
The "Business Law and Taxation" subject in the CPA board exam will now officially be
treated as two (2) separate subjects in the said exam starting on OCTOBER 2013 board exam.
It is now imperative that focus shall be given to all topics included in the syllabus for the CPA
Licensure Examinations for Business Law to increase the chances of passing the CPA licensure
Examinations.
The topics are incorporated in this Review Notes, and discussed in a manner that can
easily be understood by accounting students and CPA reviewees. The author adopted the
outline approach, with illustrations used to explain the provisions of law. Additionally, end of
chapter assessments varying from True or False, Multiple Choice Questions, Enumeration
Types and similar diagnostic means are included in this book to determine the competency and
understanding of the student/reviewee of the topics covered under the business law course.
The author wishes that this book will help students and CPA reviewees to better
understand the concept of business law and its applications, and further help them to achieve
their desire to become a full-pledged Certified Public Accountant in the future.
Malilipot, Albay, Philippines.
September 1, 2013
R.B. Blanza
ACKNOWLEDGEMENT
The author wishers to express his sincerest thanks to the following persons who inspire
him to devote time and efforts to create his first ever book:
To Divine Word College of Legazpi, Aquinas University of Legazpi and Tabaco College,
for the support and patronizing the authors book as reference materials for their subjects in
business law and other related subjects;
To his family, Mama, Mama Kikay, Mama Ding, Mama Iya; and siblings Jean, Gerardo,
Darwin, Glena, Gilbert, Myzel, Norvin, Rianne and Feevrey; and pamangkins Lyndon and Jack
Francis Bibal, Ma. Andrianna and Ma. Alyzel Blanza, Ernest James and Darwin James Blanza,
Symon James and Ayrinne Gaile Blanza,and Princess Genn Blanza for their unending support,
motivation and care;
To his bestfriends, Darwin Bonagua, Rodel Lorico and Carmela Monica Borromeo, for
the valuable encouragement and moral support to take the path where his passion is.
To Margarita Cheska Alonzo, for the inspiration to strive hard to reach goals in life.
To his students accountancy and law students, for their comments, recommendations
and suggestions to improve this book.
And above all, to Almighty God, the giver of all things, and the source of all wisdom.
R.B. Blanza
d. Persons bound
e. Consent
1. Capacitated persons
2. Requisites
3. Vices of consent
f. Objects of contracts
g. Considerations of contracts
h. Formalities of contracts
i. Interpretation and reformation of contract
j. Defective contracts
1. Rescissible
2. Voidable
3. Unenforceable
4. Void
2.0 Contract of Sales
2.1 Nature, forms and requisites
2.2 Distinguished from
a. Dacion en pago
b. Cession in payment
c. Contract for a piece of work
d. Barter
2.3 Earnest money as distinguished from option money
2.4 Rights/obligations of vendor and vendee
2.5 Remedies of unpaid seller
2.6 Warranties (in relation to consumer laws)
2.7 Sale with a right to repurchase or conventional redemption, legal redemption
2.8 Sale on credit
2.9 Installment sales
a. Personal property - Recto Law
b. Real property - Maceda Law
c. PD 957 / Condominium Act
3.0 Contract of Agency, Pledge and Mortgage
3.1 Contract of agency
a. Nature, forms and kinds of agency
b. Obligations of agents and principals
c. Guaranty of commission agents
d. Modes of extinguishing an agency
3.2 Pledge
a. Nature and binding effect on third persons
b. Obligations/rights of pledgor and pledge
c. Pactum commissorium
d. Modes of extinguishments
3.3 Mortgage
a. Real and chattel
1. Nature
2. Requisites
3. Rights and obligations of mortgagor and mortgagee
4. Requisites to have binding effect on third persons
5. Mode of extinguishment
II.LAW ON BUSINESS ASSOCIATIONS
4.0 Partnership
4.1 Nature and as distinguished from corporation
4.2 Elements and kinds
4.3 Formalities required
4.4 Rules of management
4.5 Distribution of profits and losses
4.6 Sharing of losses and liabilities
4.7 Modes of dissolution
4.8 Limited partnership
5.0 Corporations
5.1 Nature and classes of corporation
5.2 Requirements for organization
5.3 Powers of a corporation
a. Expressed
b. Implied
c. Incidental
5.4 Board of Directors/Corporate Officers
a. Qualifications
b. Election and removal
c. Powers and fiduciary duties
5.5 Classes of stocks
a. Concepts
b. Subscriptions
5.6 Powers, duties, rights and obligations of stockholders
5.7 Majority and minority control
5.8 Corporate reorganization
a. Mergers
b. Consolidations
c. Other business combinations
5.9 Modes of dissolution and liquidation
5.10 Foreign corporations
a. License to do business
1. Purpose of the license
2. Requirements for application/ issuance of license
3. Consequence of doing business without a license
b. Definition and rights of foreign corporation
c. Definition of doing business and its relation to foreign investments
d. Resident agent (purpose, qualifications)
e. Suits against foreign corporations
f. Suspension/revocation of license
g. Withdrawal from business
5.11 Kinds and availability of corporate books
III.LAW ON NEGOTIABLE INSTRUMENTS
6.0 Negotiable Instruments Law
6.1 Negotiability of instrument
6.2 Functions and kinds of negotiable instruments
TABLE OF CONTENTS
I. Obligations
..
End of Chapter Questions
True or False
.
Multiple Choice
.
Answers
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II. Contracts
..
End of Chapter Questions
True or False
.
Multiple Choice
.
Answers
.
III. Sales
...
End of Chapter Questions
True or False
..
Multiple Choice
..
Answers
IV. Agency
....
End of Chapter Questions
True or False
.
Multiple Choice
.
Answers
.
V. Pledge, Mortgage and Antichresis .
End of Chapter Questions
True or False
Multiple Choice
Answers
.
VI. Partnership
.
End of Chapter Questions
True or False
Multiple Choice
Answers
..
VI. Corporations
Multiple Choice
Answers
Multiple Choice
Answers
OBLIGATIONS
Obligation, defined
An obligation is a juridical necessity to give, to do or not to do. (Article 1156, New Civil
Code). Obligation is used in reference to anything that an individual is required to do because of
a promise, vow, oath, contract, or law. It refers to a legal or moral duty that an individual can be
forced to perform or penalized for neglecting to perform. Juridical necessity means that the court
can be asked to order the obligor to perform the obligation.
Elements of Obligation
1. Active Subject (creditor/obligee) - one who has the right to demand performance of the
obligation
2. Passive Subject (debtor/obligor) - one who is obliged to perform the obligation.
3. Prestation the subject matter of the obligation. It may consist of giving, doing or not
doing. Prestations in real obligation is the thing, whether determinate or generic and the
services or acts in personal obligations.
4. Efficient cause - the vinculum or the legal or juridical tie that binds the parties to an
obligation. It may consist of any of the five sources of obligation (law, contract, quasicontract, delict and quasi-delict).
Requisites of a valid obligation
1. It must be licit
2. It must be possible, physically and judicially
3. It must be determinate or determinable
4. It must have pecuniary value
Vinculum juris the legal/juridical tie that binds the parties to the obligation
Causa (causa debendi/causa obligationes) why obligation exist
Examples:
1. Obligation to give X promise to give A P2,000 monthly allowance until the latter
finishes college. Here, A is the active subject; X is the passive subject; the P2,000
monthly allowance is the prestation; and the right to support is the efficient cause.
2. Obligation to do M obliged himself to pay N the amount of P100,000, as full payment
of land he purchased from the latter. N is the active subject; M is the passive subject;
the amount of P100,000 as payment is the prestation; and the contract of sale is the
efficient cause.
3. Obligation not to do P bound himself not to construct a fence in his land so as to
obstruct the free passage of rainwater from the land of Q. Here, Q is the active subject;
P is the passive subject; the non-construction of fence is the prestation; and the right of
easement is the efficient cause.
Civil obligation
Natural obligation
1. Based on law
1. Real obligation (obligation to give) the subject matter is the thing which the obligor
must deliver to the obligee
Example. A bounds himself to deliver to B 10 sacks of rice
2. Personal obligation (obligation to do or not to do) the subject matter is the act to be
done or not to be done
o Positive personal obligation obligation to do or to render service
Example: A bounds himself to paint the house of B
o Negative personal obligation obligation not to do ( which naturally includes
not to give)
Example: X binds himself not to construct a fence on a portion of his lot in
favor of W who is entitled to right of way.
Sources of Obligation
1. Law - Obligations arising from law are not presumed. Those expressly determined in the
code or in special laws, etc., are the only demandable ones. We cannot presume existence
of an obligation if no express provision is stated in our laws.
Examples: obligation to pay taxes under the National Internal Revenue Code; obligation to render
personal military or civil service in the fulfillment of this duty all citizens may be required
by law under Section 2, Article II of the Constitution of the Philippines; obligation to give
mutual support between husband and wife.
2. Contracts meeting of minds between two persons/parties whereby one binds himself,
with respect to the other, to give something or to render some service. Obligations arising
from contracts have legal force between the contracting parties and must be fulfilled in
accordance with their stipulations. (Arts. 1090 and 1091.)
Examples: contract of sale, contract of lease, contract for piece of work, simple loan,
deposits, mortgages, etc.
3. Quasi-contracts Certain lawful, voluntary and unilateral acts done by a person giving rise to
a juridical relation to the end that no one shall be unjustly enriched by another
(Art.2142).
Kinds of Quasi-contracts:
1. Negotiorum Gestio voluntary administration of the property, business, or affairs
of another without the latters consent or authority. It is a type of spontaneous
agency or interference by a person, called a negotiorum gestor, in the affairs of
another, in his absence. The gestor is only entitled to reimbursement for
expenses and not to remuneration.
For example, while X is traveling abroad, a typhoon hits his home town
and the roofing of his house is in danger. To avoid the catastrophic situation, his
neighbor A does something urgently necessary. X is the 'principal' and A here is
the 'gestor". The act of which saved Xs house is the 'negotiorum gestio. X must
reimburse A for such expense.
2. Solutio Indebiti refers to the juridical relation which arises whenever a person
unduly delivers a thing through mistake to another who has no right to demand
it.
If something is received when there is no right to demand it, and it was unduly
delivered through mistake, the obligation to return it arises. (Art. 2154, NCC)
Example: C, a Filipino resident of the US sent to his father D in
Manila $500 through ABC Bank. Due to mistake of the employees of the Bank, D
was paid $5,000 instead. Upon discovery of the mistake, the Bank demanded
from D the return of $4,500. D refused and the Bank sued him. Is the Bank
entitled to recover from D?
Answer: YES, the Bank is entitled to recover the $4,500 from D. We have in this
case an example of a quasi-contract of solutio indebiti which arises whenever a
person unduly delivers a thing through mistake to another who has no right to
demand
4. Delicts also known as crimes or felonies. These are act or omissions punishable by
law. According to the Revised Penal Code, the commission of a crime makes the
offender also civilly liable.
Article 100 of the Revised Penal code provides, Every person criminally liable
for a felony is also civilly liable. Article 104. The civil liability of this Code includes:
1. Restitution;
2. Reparation of the damage caused;
3. Indemnification for consequential damages.
Example: The obligation of the thief to return the stolen car. The obligation of the killer to
indemnify the heirs of the victim.
5. Quasi-delicts also known as tort or culpa aquiliana. These are acts or omissions
that cause damage to another, there being no contractual relation between the parties
(Art.2176). It refers to a negligent act or omission which causes harm or damage to the
person or property of another, and thus exposes a person to civil liability as if the act or
omission was intentional
Requisites of Quasi-Delict:
a. There must be an act or omission
Quasi-Delict
There is negligence
Purpose is indemnification of parties
Affects private interest
Only civil liability
Liability can be the subject of compromise
Negligence need to be proved only by
preponderance of evidence
and attention that is expected from and is ordinarily exercised by a reasonable and
prudent person under the circumstances.
Extra-ordinary diligence represents that extreme measure of care and caution
which persons of unusual prudence and circumspection use for securing and preserving
their own property or rights.
2. To deliver the thing. Delivery involves the transfer of possession and/or control of
property, real or personal, from the obligor to the oblige, either actual or constructive.
3. To deliver the fruits of the thing. The fruits may be (Art. 442) a. Natural fruits refers to the spontaneous products of the soil and the young
and other products of animals. There must be no human intervention in the
production of the said fruits. Examples are the trees and shrubs that grow
without intervention of human labor, the calf of the cow, and the young of farm
animals are natural fruits.
b. Industrial fruits refers to those produced by land of any king through
cultivation of labor. Examples are the grapes that are harvested from
vineyards, rice, corn and other crops produced through human cultivation are
industrial fruits.
c. Civil fruits are those which are the result of a juridical relation such as the
rent of a building, price of lease of land and other property and the amount of
perpetual life annuities.
When creditor has a right to the fruits of determinate thing
Under Art. 1164, the creditor has a right to the fruits of the thing from the time the
obligation to deliver it arises. However, he shall acquire no real right over it until the same has
been delivered to him.
When obligation to deliver the thing arises
1. Without period or condition upon perfection of the obligation
2. With period or condition upon arrival of the term or upon perfection of the condition
Example: D promise to deliver to E a red Honda car after E passes the CPA
board exams. The obligation to deliver the thing arises only upon passing of CPA exams
by E.
Rights of the creditor
1. Personal right the right of a legal subject specified in an agreement or contract. This
refers to the right that may be enforced by one person on another, such as the right of
the creditor to demand delivery of the things, together with all its fruits from the debtor.
2. Real right refers to the right of the owner over the specific thing, such as possession
and ownership. This right is enforceable against the whole world. Real right over the
thing is acquired by the creditor when it is delivered to him by the debtor
4. To deliver its accessions and accessories even if they have not been mentioned (Art. 1166)
Accessions include everything that is produced by a thing or is incorporated or
attached thereto, either naturally or artificially. (Art. 440), such as
alluvium, the soil gradually deposited by current of a river on a river
bank, or whatever planted or sown on a parcel of land.
For example, a person who owns property along a river also takes
ownership of any additional land that builds up along the riverbank. This
right may extend to additions that result from the work or skill of another
person. The buyer of a car who fails to make scheduled payments
cannot get back his new spark plugs after the car is repossessed
because they have become a part of the whole car
Accessories are those joined to or included with the principal thing for the latters
better use, perfection or enjoyment. Examples are the keys to the
house, the bracelet of a wristwatch, the stereo in a car).
Remedies of the creditor
1. If the debtor fails to perform his obligation to deliver a determinate thing
a. The creditor may compel delivery from the debtor (Art. 1165)
b. Demand for damages from the debtor
Example: D obliged himself to deliver to E a 2012 model Honda City white car
with Plate No. LUV 143 on June 31, 2013. On due date, D can only compel E to
deliver the said specific car. If E still fails to deliver despite demand, D can ask for
damages from E.
2. If the debtor fails to perform his obligation to deliver an indeterminate thing
a. Ask that the obligation be complied with at the expense of the debtor
b. To demand for damages from the debtor
Example: A promises to deliver to B 10 bags of cement. On due date, A failed
to deliver the thing. Here, B can ask another person to deliver the 10 bags of
cement at the expense of A. B can likewise demand damages from A.
3. If the debtor fails to perform his obligation in obligation to do
If the debtor fails to perform the obligations or perform it in contravention of the
tenor thereof
a. The creditor may have the obligation executed at the expense of the
debtor
b. He may also demand damages from the debtor
a.
b.
Damages refer to the harm done. This requires compensation for causing loss or injury
through negligence or a deliberate act, or a court's estimate or award of a sum as a fine for
breach of a contract or of a statutory duty.
Injury refers to the wrongful, unlawful and tortuous act. It is the legal wrong to be
redressed.
Kinds of damages ( M-E-N-T-A-L)
1. Moral damages include physical suffering, mental anguish, fright, serious anxiety,
besmirched reputation, wounded feelings, moral shock, social humiliation, and similar
injury. Though incapable of pecuniary computation, moral damages may be recovered if
they are the proximate result of the defendant's wrongful act for omission (Art. 2217)
2. Exemplary damages or corrective damages - are imposed, by way of example or
correction for the public good, in addition to the moral, temperate, liquidated or
compensatory damages (Art. 2229)
3. Nominal damages - are adjudicated in order that a right of the plaintiff, which has been
violated or invaded by the defendant, may be vindicated or recognized, and not for the
purpose of indemnifying the plaintiff for any loss suffered by him (Art.2221)
4. Temperate damages or moderate damages - are more than nominal but less than
compensatory damages, may be recovered when the court finds that some pecuniary
loss has been suffered but its amount cannot, from the nature of the case, be provided
with certainty (Art. 2224)
Temperate damages must be reasonable under the circumstances (Art.2225)
5. Actual damages these refers to pecuniary loss (such as loss in business or profession)
that may be recovered. It includes loss of possible earnings. Indemnification for
damages shall comprehend not only the value of the loss suffered, but also that of the
profits which the obligee failed to obtain (Art. 2200)
Note: proof of pecuniary loss is required unless provided by law or stipulation
6. Liquidated damages - are those agreed upon by the parties to a contract, to be paid in
case of breach thereof (Art.2226)
Important: proof is NOT required in order that moral, nominal, temperate or liquidated or
exemplary damages may be adjudicated. The assessment of such damages, except liquidated
ones, is left to the discretion of the court, according to the circumstances of each case.
Fraud, defined
Fraud is the deliberate or intentional evasion by the debtor/obligor of the fulfillment of his
obligation in a normal manner. The commission of fraud gives rise to liability to pay damages to
the aggrieved party.
Kinds of fraud
a. Causal fraud and incidental fraud
1. Causal fraud (dolo causante) - is the fraud committed to obtain the consent of
another party, without which consent would not have been given. This type of
fraud renders the contract voidable.
Example: A bought a pair of diamond earrings to B, who told him that
the diamonds are genuine. A is a long time jeweler and B honestly accept the
representation of A that it is indeed a true diamond, when A knew all along that it
was fake. Here, Bs consent was obtained through fraudulent representation
made by A. The contract is thus voidable.
2. Incidental fraud (dolo incidente) refers to fraud where consent would still be
given but the person giving it would have agreed on a different terms. The
resulting contract is valid but the party employing the fraud shall be liable for
damages.
Example: A agreed to buy from to B sacks of well-milled rice at P1,500
per sack. However, the rice B is selling is actually regular-milled rice at P1,200
per sack. Had A known the said fact, A would still agree to buy from B anyway but
for a reduced price. The fraud here is incidental and B only liable for damages.
b. Past fraud and future fraud
1. Past fraud fraud already committed by one of the parties. A waiver of an action
for past fraud may be made, since the commission of fraud can no longer be
encouraged. Such waiver is an act of liberality on the part of the creditor.
2. Future fraud fraud which a party intends to commit in the future. A waiver of an
action for future fraud cannot be made. Agreement made for waiver of future
fraud is void. It is thus held that the debtor/obligor will still be liable for damages if
he commits fraud in the performance of his obligation despite of waiver
previously agreed upon by both parties.
Negligence, defined
Negligence is the omission of that diligence required by the nature of the obligation and
corresponds with the circumstances of the person, time and place. (Art. 1173)
The required degree of diligence to be observed by the debtor is provided by law or
stipulation of parties.
If the law or contract does not state the diligence which is o be observed in the
performance of the obligation, the debtor must exercise the diligence of a good father of a
family.
Examples:
1. Required by law the owner of a public utility transport is required by law to observe
extra-ordinary diligence in transporting its passengers from point of embarkation until
disembarkation. Thus, when passengers are injured because of vehicular accident,
regardless of which vehicles is/are at fault, the owner is guilty of negligence.
2. Required by circumstance if the obligation is to deliver highly flammable materials, the
obligor shall observe extra-ordinary diligence of care. Any slightest fault that results to
damage to the product or to any third person will held the obligor guilty of negligence
3. If a driver drives without or with expired drivers license, drives at night without
headlight, or driving while texting in his cellular phone, will be considered guilty of
negligence under the circumstances
Kinds of negligence
1. Contractual negligence (culpa contractual) refers to the negligence in the performance
of a contract. A common example is the contract of carriage between the owner of
public utility jeepneys and its passenger. Thus, when negligence is committed by the
driver, causing death or injury to its passenger, the owner of the said PUJ is liable for
damages.
In contractual negligence, the master-servant rule applies. The master (owner) is
liable for the negligent acts of his servant (driver). The defense of diligence of good
father of family (as when the owner employed strict procedures in selection and
supervision of drivers) is not a valid defense of the owner to escape liability, but this can
mitigate the liability min some instances.
2. Civil negligence (culpa aquiliana, tort, quasi-delict or culpa ex-contractual) these are
acts or omission that cause damage to another, there being no contractual relation
between the parties.
Civil negligence arise from acts which a prudent man expected to observe, has
failed to do so resulting to damage to another person, such as when a person is
throwing a stone in a busy street, resulting to damaging the window or causing physical
injury to a passenger in a passing vehicle, is liable for culpa aquiliana.
The master-servant rule does not apply here. Thus, when a pedestrian is hit by a
bus because of his reckless driver, the negligence of the servant (driver) is not the
negligence of the master (owner). The defense of ordinary diligence in the careful
selection and supervision of its driver is a valid defense by the owner to escape liability.
General rule: (NO DEMAND, NO DELAY) The debtor incurs delay from the time the
creditor demands fulfillment of the obligation but the debtor fails to comply with such demand.
Thus, the requisites of delay are:
a. The debtor does not perform his obligation on the date it is due
b. The creditor demands the performance of the obligation
c. The debtor does not comply with the creditors demand
Example: D promised to pay E the amount of P100,000 on June 31, 2013. On due date,
D failed to comply his obligation. E was a busy businessman and he only noticed that the
obligation has already matured on July 15, 2013, and immediately demand payment from D on
the said date. If despite the demand made, D still fails to perform his obligation, he is considered
in delay only after the demand made on July 15, 2013.
Exceptions: the debtor is considered in delay even without demand from creditor in the
following cases:
1. When the law so provides
Thus, demand from the government is not necessary for the taxpayer (debtor) be
considered in delay for non-payment of income tax due on or before April 15 of the year
following the close of the taxable period.
2. When the obligation expressly stipulates that demand in not necessary to put the obligor
in delay.
Example: A promises to pay B the amount of P10,000 on December 31, 2013.
Notice of demand waived. Here, the parties expressly stipulate that no demand is
necessary on maturity date to put the debtor in delay.
3. When time is of the essence of the contract
Example: X obliged himself to deliver a wedding cake for Ys wedding reception
on September 8, 2013 at Casablanca Hotel in Legazpi City. If on the said date, X failed
to deliver the wedding cake, demand is not necessary to put X on delay since time is the
controlling motive of the obligation.
4. When demand would be useless
A debtor is considered in delay even without demand from the creditor if the thing
he is obliged to deliver has been destroyed through his fault or he has delivered it to
another person.
5. In reciprocal obligations, here the obligations arise out of the same cause and must be
fulfilled at the same time. From the moment one of the parties fulfills his obligation, the
other party becomes in delay notwithstanding the absence of a demand.
Fortuitous event, defined
Events that cannot be foreseen, or which though foreseen, are inevitable (Art.1174)
Examples of fortuitous event
Examples: the right to scholarship grant is not transmissible. Personal rights such
as the right to vote, right to run for public office, marital and parental rights, and
hereditary rights are not transmissible.
DIFFERENT KINDS OF OBLIGATIONS
Classification of obligations
1. Pure obligation
2. Conditional obligation
3. Obligation with a period
4. Alternative obligation
5. Facultative obligation
6. Joint obligation
7. Solidary obligation
8. Divisible obligation
9. Indivisible obligation
10. Obligation with a penal clause
Pure and conditional obligations
Pure obligation, defined
A pure obligation is a debt which is not subject to any conditions and no specific date is
mentioned for its fulfillment. A pure obligation is immediately demandable.
Example: D obliges himself to pay C P 1,000,000. The obligation is immediately
demandable because there is no condition & no date is mentioned for its fulfillment.
Conditional obligation, defined
A conditional obligation is one whose demandability or extinguishment depends upon the
happening of a condition. The execution of which is suspended by a condition which has not
been accomplished and subject to which it has been contracted.
Example: I will support your studies in college if Mr. A dies. The obligation becomes
demandable only after Mr. A dies. When the condition happens, it gives rise to an obligation.
This condition is referred to as suspensive condition.
I will support your studies in college until Mr. A dies. Here, the obligation is demandable
at once. When the condition happens, it extinguishes the obligation. This condition is referred to
as resolutory condition.
Condition, defined
Condition is a future event, which may or may not happen. It is a future and uncertain
event, fact, or circumstance whose existence or occurrence is necessary for the existence or
determining the extent of an obligation or liability
Classification of condition
1. Suspensive and resolutory
a. Suspensive condition a future event, the happening of which will give rise to
the obligation. This is also known as condition antecedent or precedent.
(example: I oblige myself to deliver a red car to A if she passes the CPA
board exam)
b. Resolutory condition a future event, the happening of which extinguishes
the obligation. It is demandable at once but upon happening of the condition,
it shall be extinguished. This is also referred to as condition subsequent.
(example: I oblige myself to give P2,000 monthly to B until he passes the
CPA board exams)
2. Potestative, casual and mixed
a. Potestative depends upon the will of one of the contracting parties
a.1. Potestative on the part of the debtor
If suspensive - the obligation is void. Even if the condition is fulfilled, it
will not cure the defect. (example: M promise to pay X the sum of
P10,000 if M will marry this year)
If resolutory the obligation is valid. (example: M promise to pay X
P10,000 as monthly allowance until M marries this year)
a.2. Potestative on the part of the creditor the obligation is valid whether the
condition is suspensive or resolutory. (examples: M promise to pay X the
sum of P10,000 if X marries this year, M promise to pay X P10,000 as
monthly allowance until X marries this year)
b. Casual depends upon chance or upon the will of a third person. (example:
X will deliver a Honda car to B, if Ms. Philippines will be crowned as Ms.
Universe 2013)
c. Mixed depends upon the will of one of the contracting parties and partly
upon the chance of the will of a third person. (example: X will give P100,000
to A, if A marries B this year)
3. Possible and impossible
a. Possible capable of fulfillment by its nature and by law
b. Impossible not capable of fulfillment because of its nature or due to
operation of law. In this case, the obligation and the conditions are void.
(example: I will give you my condo unit if you can bring to me the Eiffel
Tower, I will pay you P100,000 if you will deliver to X 10 grams of shabu)
B passes the CPA exams. B passes the CPA exam on May 2014. Upon fulfillment of the
condition, B is considered the owner of the car since June 1, 2013.
Exceptions: there shall be no retroactive effect with respect to the fruits and interests as
follows:
1. In reciprocal obligations, the fruits and interests shall be deemed to have mutually
compensated, i.e., each party shall keep the fruits and interests received by him prior to
the fulfillment of the condition.
Example: On June 1, 2010, A agreed to sell his land to B, and B likewise agreed to pay
the price of P500,000 to A, on the condition that B would marry X. it was only on June 1,
2012, or two years later, that B marries X. From June 1, 2010 to May 31, 2012, A is
entitled to keep the fruits and/or produce of the land, while B is likewise entitled to keep
the interests on the price.
2. In unilateral obligation, the debtor keeps the fruits and interests received before the
fulfillment of the condition. Thus, if on June 1, 2010, A promise to give B a parcel of land
if B would marry X. it was only on July 1, 2012 that the condition was fulfilled. Duringthe
pendency of the condition, A can keep the fruits and produce of the said land.
Rights of the parties before the fulfillment of the condition (Art. 1188)
1. Creditor he may bring the appropriate actions for the preservation of his right. A creditor
may register his claim with the Registry of Deeds (in case of land), if appropriate, or notify
third persons of his claim.
2. Debtor - he may recover what during the same time he has paid by mistake in case of a
suspensive condition.
Condition
As to fulfillment
As to time
Future
event
that
must
necessarily come, at a date
known beforehand, or at a time
that cannot be determined
Always refer to the future
Thus, it has been held that when a debtor borrow money from a creditor, with a
stipulations that the loan shall bear interest of 12% per annum, and both the principal and
interest payable at maturity two years from the execution of the Promissory Note, the debtor
cannot be compelled to pay, and the creditor cannot be compelled to receive payment prior to
the maturity date of the Promissory Note. The debtor will be deprive by the use of money until
maturity, and the creditor, likewise, will e deprive to earn interest for the remaining term.
When period is for the benefit of one of the parties
1. For the benefit of the debtor he cannot be compelled to pay or perform his obligation
before the expiration of the term. However, he may choose to perform his obligation
before such expiration at his option.
Example: W promises to pay Z the amount of P100,000 on or before December
31, 2014. W cannot be compelled to pay the amount before December 31, 2014. W,
however, has the option to pay his obligation on maturity date or at any time before
December 31, 2014.
2. For the benefit of the creditor he cannot be compelled to accept payment or
performance before the expiration of the term. He can, however, choose to demand
performance before such expiration at his option.
Example: W promises to pay Z the amount of P100,000 on or before December
31, 2014, at the option of Z, or W borrowed from Z the amount of P100,000 collectible
on or before December 31, 2014. Z may demand payment on December 31, 2014 or at
any time before the said date. Z, however, cannot be compelled to accept payment
before the maturity date.
When debtor losses his right to make use of the period
When debtor loses the right to make use of the period, the obligation becomes
demandable at once, and the creditor may demand performance even before the arrival of the
period or the expiration of the term. The following rules shall apply under Art. 1198:
1. When after the obligation has been contracted, he becomes insolvent, unless he gives a
guaranty or security for the debt;
Insolvency refers to the incapacity to pay debts upon the date when they become
due in the ordinary course of business. It is the condition of an individual whose property
and assets are inadequate to discharge the person's debts.
Thus, if A oblige himself to pay to B the amount of P20,000 on December 31,
2014. On June 30, 2013, total assets of A is P500,000 while his total liabilities was
P800,000, the obligation becomes demandable at once. B may compel payment on
June 20, 2013, unless A gives guaranty or security for the debt.
2. When he does not furnish to the creditor the guaranties or securities which he has
promised;
Example: X borrowed money from Y the amount of P50,000 payable on
November 10, 2013. To secure the payment of the said loan, X promised to pledge his
diamond ring to Y five days after the receipt of amount. X, however, failed to deliver the
thing pledged to Y within the period agreed upon. Here, Y can demand immediate
payment even before the maturity date of the obligation.
3. When by his own acts he has impaired said guaranties or securities after their
establishment, and when through a fortuitous event they disappear, unless he
immediately gives new ones equally satisfactory;
Example: A obtained a loan from B in the amount of P500,000, payable on
December 31, 2014, secured with a real estate mortgage over their residential house
and lot. On December 1, 2013, the house was burned after B stored inflammable
materials in his house. B may demand payment immediately even without waiting for the
expiration of term. This is true even if the cause of loss, damage or impairment was not
due to the fault of B.
4. When the debtor violates any undertaking, in consideration of which the creditor agreed
to the period;
Example: M obtained a loan of P100,000 from P for purpose of starting up a
small business. The loan maturity date is December 31, 2014. However, M spent the
money for their family travel in Hongkong. Here, P can demand immediate payment from
M for violation of the undertaking in consideration of the loan granted.
5. When the debtor attempts to abscond.
Example: X obtained a loan of P100,000 from A payable 60 days thereafter. After
the receipt of the loaned amount, X started to dispose his properties with the intention of
leaving his residence or place of business to escape creditors. A can demand payment
from X immediately even though the obligation has not yet mature.
Alternative and Facultative Obligations
Kinds of obligation according to the number of prestation
1. Simple where there is only one prestation
2. Compound when there are several prestation. This may be
a. Conjunctive several prestation are due, and ALL must be performed.
(example: D obliged himself to deliver a car, a
b. Distributive or disjunctive maybe either horse and 5 sacks of rice to E. D
must deliver all of them) alternative or facultative
a. If the specific race horse is lost, with or without the fault of D, or lost through a fortuitous
event, D may deliver any of the prestation left - a 2008 Toyota corolla model with Plate
No. ABA 106, or a specific diamond ring. D cannot be held liable for damages since he
can still perform his obligation by delivering any of the two prestations left.
b. If both the specific race horse lost and the specific diamond is lost, with or without the
fault of D, or lost through a fortuitous event, D may deliver the prestation left - a 2008
Toyota corolla model with Plate No. ABA 106. D cannot be held liable for damages since
he can still perform his obligation by delivering the prestations left. The obligation is
converted into a simple obligation.
c. If all the prestations are lost through fortuitous event, Ds obligation is extinguished
d. If all the prestations are lost through the fault of D, D is liable for damages equivalent to
the value of the last prestation lost, plus damages.
e. If both the specific race horse lost and the specific diamond are lost through the fault of
D, D may still deliver the prestation left - a 2008 Toyota corolla model with Plate No.
ABA 106. The obligation is converted into a simple obligation. If later the said car was
lost through fortuitous event, the obligation of D is extinguished.
When right of choice is expressly granted to the creditor
Under Article 1205. When the choice has been expressly given to the creditor, the
obligation shall cease to be alternative from the day when the selection has been communicated
to the debtor.
Until then the responsibility of the debtor shall be governed by the following rules:
(1) If one of the things is lost through a fortuitous event, he shall perform the obligation by
delivering that which the creditor should choose from among the remainder, or that
which remains if only one subsists;
(2) If the loss of one of the things occurs through the fault of the debtor, the creditor may
claim any of those subsisting, or the price of that which, through the fault of the former,
has disappeared, with a right to damages;
(3) If all the things are lost through the fault of the debtor, the choice by the creditor shall fall
upon the price of any one of them, also with indemnity for damages.
The same rules shall be applied to obligations to do or not to do in case one, some or all
of the prestations should become impossible.
Example: D obliged himself to deliver to E a specific race horse, a 2008 Toyota corolla
model with Plate No. ABA 106, or a specific diamond ring. The obligation specifically stipulates
that the right to choose belongs to E.
a. If the specific race horse is lost through a fortuitous event, D may deliver any of the
prestation left - a 2008 Toyota corolla model with Plate No. ABA 106, or a specific
diamond ring at the choice of D.
b. If both the specific race horse lost and the specific diamond is lost through a
fortuitous event, D may deliver the prestation left - a 2008 Toyota corolla model with
Plate No. ABA 106. The obligation is converted into a simple obligation. If later the
car was lost though the fault of D, he shall be liable for damages.
c. If all the prestations are lost through fortuitous event, Ds obligation is extinguished
d. If all the prestations are lost through the fault of D, E may claim the price of any of
the prestation, plus damages.
e. If both the specific race horse lost and the specific diamond are lost through the fault
of D, the obligation is converted NOT into a simple obligation. E may choose
between delivery of the thing left - a 2008 Toyota corolla model with Plate No. ABA
106, OR payment of price of the horse or the ring, plus damages.
Facultative obligation, defined
An obligation where only one prestation is due, but the debtor may deliver another in
substitution.
Rules in case of loss of the principal thing and substitute
1. Before substitution ( before the debtor informed the creditor his intention to deliver the
substitute )
a. Loss of principal thing
If through fortuitous event the obligation is extinguished
If through the fault of the debtor the debtor shall pay damages
b. Loss of the substitute no effect. Whether the loss of the substitute is
through fortuitous event or though the fault of the debtor, the debtor is not
liable. He must still deliver the principal thing.
2. After substitution ( after the debtor informed the creditor his intention to deliver the
substitute )
a. Loss of the principal thing - no effect. After the substitution, the obligation is
converted into a simple obligation. The thing now due is the substitute.
Whether the loss of the principal thing is through fortuitous event or though
the fault of the debtor, the debtor is not liable. He must now deliver the
substitute.
As to number of prestation/s
As to void
prestation
or
impossible
Alternative obligation
Several prestations are due, but
the
performance
of
one
extinguishes the obligation.
If there are one or more void
prestation, the other/s may still be
valid, hence, the obligation
remains
Belongs to the debtor, unless
expressly given to the creditor
Facultative obligation
Only one prestation is due the
principal.
If the principal thing is void, the
obligation is not valid. The debtor
is not required to deliver the
substitute
Always belong to the debtor
Solidary obligation arises when the parties agreed that each debtor is liable for
the whole obligation, and each creditor is entitled to demand payment of the whole
obligation. In short, its an obligation under which any of two or more obligors can be
held liable for the entire performance like payment of a debt
Other terms for solidary obligation are:
1. jointly and severally
2. individually and collectively
3. in solidum
4. mancomunada solidaria
5. juntos o separademente
Kinds of Solidary obligations
1. Passive solidarity ( solidarity on the part of the debtors )
Example: A and B jointly and severally borrowed money amounting to
P80,000 from C. Here, C can demand payment of full amount from either A or B.
if A pays the P80,000, he can demand reimbursement from B of the latters share
of P40,000.
2. Active solidarity ( solidarity on the part of the creditors )
Example: A borrowed money from X and Y, solidary creditors, the amount
of P50,000. On due date, either X or Y can demand full payment from A. If A
pays X the whole amount, the obligation is extinguished and X must deliver to Y
the latters share in the credit amounting to P25,000.
3. Mixed solidarity ( solidarity on both part of the debtors and creditors )
Example: A and B, in solidum, borrowed P300,000 from X, Y, and Z,
solidary creditors. On due date, either X, Y or Z can demand full payment from
either A or B.
Assuming A paid to X the P300,000 the obligation is extinguished. B
must reimbursed A the amount of P150,000 for the latters share in
the obligation. X must likewise deliver to Y the P100,000 and Z for
P100,000, their respective share in the credits.
Rules is case there is concurrence of two or more debtors and/or two or more creditors
in one and the same obligation
General rule: the obligation is presumed joint.
Exceptions: there is solidary liability only in the following cases:
2. Each one of the solidary creditors may do whatever may be useful to the others, but not
anything which may be prejudicial to the latter (Article 1212).
Thus, it was held that a solidary creditor can demand payment in behalf of
the other creditors should he has knowledge of the circumstances where the
debtor/s loses the right to make use of the period. But a solidary creditor cannot
renounce the debt in favor of the debtor/s without the latters consent as this will
cause prejudice to the other creditors.
3. A solidary creditor cannot assign his rights without the consent of the others (Art.1213)
Assignment is the act by which one person transfers to another, or causes to vest
in that other, the whole of the right, interest, or property which he has in any realty
or personalty, in possession or in action, or any share, interest, or subsidiary estate
therein.
4. The debtor may pay any one of the solidary creditors; but if any demand, judicial or
extrajudicial, has been made by one of them, payment should be made to him (Art.
1214)
5. Novation, compensation, confusion or remission of the debt, made by any of the solidary
creditors or with any of the solidary debtors, shall extinguish the obligation, without
prejudice to the provisions of article 1219.
The creditor who may have executed any of these acts, as well as he who
collects the debt, shall be liable to the others for the share in the obligation
corresponding to them.
Examples:
a. A, B and C, solidary debtors, executed a negotiable promissory note in favor
of E for P10,000. E endorsed the note to F, F endorsed the note to G, G then
endorsed the note to C. The confusion in C extinguishes the whole
obligation, subject to the right of reimbursement from A and B for their
respective shares.
b. A, B, and C, solidary debtors, are indebted to X, Y and Z, solidary creditors,
for P300,000. Because of personal family ties, Y renounced the debt. The
whole obligation is thus extinguished. The solidary debtors are benefitted
from the renunciation obtained by one of them. But the creditor who
renounced the obligation without the consent of other creditors shall be liable
to pay for the share of other creditors who did not give their consent to such
act.
6. The creditor may proceed against any one of the solidary debtors or some or all of them
simultaneously. The demand made against one of them shall not be an obstacle to those
which may subsequently be directed against the others, so long as the debt has not
been fully collected ( Article 1216 )
7. Payment made by one of the solidary debtors extinguishes the obligation. If two or more
solidary debtors offer to pay, the creditor may choose which offer to accept.
He who made the payment may claim from his co-debtors only the share which
corresponds to each, with the interest for the payment already made. If the payment is
made before the debt is due, no interest for the intervening period may be demanded.
When one of the solidary debtors cannot, because of his insolvency, reimburse
his share to the debtor paying the obligation, such share shall be borne by all his codebtors, in proportion to the debt of each (Article 1217)
8. Payment by a solidary debtor shall not entitle him to reimbursement from his co-debtors
if such payment is made after the obligation has prescribed or become illegal (Article
1218)
By prescription, the obligation loses its validity through passage of time.
Under the Philippine law, obligation becomes prescribed after the lapse of ten
(10) years from the last demand was made.
9. The remission made by the creditor of the share which affects one of the solidary
debtors does not release the latter from his responsibility towards the co-debtors, in case
the debt had been totally paid by anyone of them before the remission was effected
(Article 1219)
10. If the thing has been lost or if the prestation has become impossible without the fault of
the solidary debtors, the obligation shall be extinguished.
If there was fault on the part of any one of them, all shall be responsible to the
creditor, for the price and the payment of damages and interest, without prejudice to their
action against the guilty or negligent debtor.
If through a fortuitous event, the thing is lost or the performance has become
impossible after one of the solidary debtors has incurred in delay through the judicial or
extrajudicial demand upon him by the creditor, the provisions of the preceding paragraph
shall apply. (Article 1221)
11. A solidary debtor may, in actions filed by the creditor, avail himself of all defenses which
are derived from the nature of the obligation and of those which are personal to him, or
pertain to his own share. With respect to those which personally belong to the others, he
may avail himself thereof only as regards that part of the debt for which the latter are
responsible ( Article 1222)
Divisible and Indivisible Obligations
Divisible and indivisible obligation, defined
Example: D promises to deliver to E a specific car on September 30, 2013. The parties
agreed that should D fails to deliver on the specified date, D shall pay E the penalty of
P300,000.
Kinds of penal clause
1. Legal and conventional
a. Legal imposed by law, such as a penalty of 25% p.a. interest and 25%-50%
surcharge imposed on the basic assessed tax for everyday of delay in payment.
b.
5. The nullity of the penal clause does not carry with it that of the principal obligation. The
nullity of the principal obligation carries with it that of the penal clause (Article 1230)
EXTINGUISHMENT OF OBLIGATIONS
Modes of extinguishment of obligations (Pa-Lo-Re-Me-Co-No)
1. By payment or performance;
2. By the loss of the thing due;
3. By the condonation or remission of the debt;
4. By the confusion or merger of the rights of creditor and debtor;
5. By compensation;
6. By novation.
7. Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment
of a resolutory condition, and prescription
Payment or Performance
Payment (or performance) defined
Payment means not only the delivery of money but also the performance, in any other
manner, of an obligation. A debt shall not be understood to have been paid unless the thing or
service in which the obligation consists has been completely delivered or rendered, as the case
may be.
Rules on payment or performance
1. Obligation to give a specific thing the debtor must deliver the thing agreed by parties.
Thus, the debtor cannot compel the creditor to accept a different one, although the latter
may be of the same value, or more valuable than which is due.
Example: A promises to deliver B a specific gold ring. On due date, B,
however, deliver a diamond ring instead. Here, B can refuse to accept the
diamond ring even it is more valuable than the gold ring. If B, however, accept
the delivery, then the obligation is extinguish because the deficiency in consent
was cured.
2. Obligation to give a generic thing the debtor cannot deliver inferior quality, nor the
creditor cannot demand delivery of superior quality. The purpose of the circumstances
shall be taken into consideration.
Example: X is obliged to deliver to Y a horse. Y is engaged in horseracing activities and all his horses are used for horse-racing events. X is fully
aware of this fact. Under this circumstance, X must deliver a horse for horse-race
and cannot deliver a horse used for calesa.
3. Obligation to do or not to do an act or forbearance cannot be substituted by another
act or forbearance against the will of the obligee.
Examples:
prohibiting the sale of good lumber. Hence, E can no longer comply with
is obligation. Here, S can demand payment for 100 pcs. of lumber from B,
less damages suffered by B in the circumstance.
b. Article 1235 - When the obligee accepts the performance, knowing its
incompleteness or irregularity, and without expressing any protest or objection,
the obligation is deemed fully complied with
Example: A obliged himself to construct a concrete fence for Bs land. The
fence shall enclose the whole land of B and it shall be 5 feet tall. If A
constructed a fence with a height of only 4 12 feet, and B accepted the
latters performance without any objections, Bs obligation is deemed to
fully complied with his obligation.
2. When payment made to the creditor by the debtor after the debtor has been judicially
ordered to retain the debt shall not be valid.
Partial payment or performance not allowed
The creditor cannot be compelled to receive, and the debtor cannot be compelled to
make, partial payments.
Exceptions:
1. When there is an agreement to that effect
2. When the debt is in part liquidated and in part unliquidated, the creditor may demand
and the debtor may effect the payment of the liquidated portion without waiting for
the liquidation of the latter.
The unliquidated part, once it is finally determined, must also be paid, to
extinguish the obligation.
Examples: S is indebted to T the amount of P500,000 payable 3 months
thereafter. On maturity date, S does not have enough cash in the meantime
but has enough property to settle his obligations. S sold his several parcels of
land worth P800,000, and the proceeds to be used to settle his obligations to
T. Buyer 1 immediately pays P300,000 for the price of 1 lot. Buyer 2 will pay
the price of P500,000 one month after the sale. Upon payment of Buyer 1, S
may demand payment for the liquidated portion of P300,000 without awaiting
of the payment from Buyer 2. Of course, when Buyer 2 pays the price, S may
demand the payment of the balance.
Who must make payment?
Payment shall be made by the debtor who must have the following:
1. The free disposal of the thing due
Free disposal of the thing due means that the property delivered should not be
subject to any claim by, or encumbrances in favor of, third persons
The following does not have free disposal of the thing due
The mortgaged property of the mortgagor cannot be used as payment
to the creditor other than the mortgagee. The property can be made
answer for the debt secured in case of foreclosure of mortgage
Deposits garnished by court cannot be used to pay an obligation
contracted by the debtor
The property under the custody of law (custodial legis), such as those
confiscated vehicles due to traffic violations or vehicular accidents,
cannot be uses as payment to the creditor.
2. The capacity to alienate thing the debtor must not be incapable of giving consent.
Effect of payment of debtor who does not have the free disposal of the thing due and/or
has no capacity to alienate thing
If payment is made the debtor who does not have the free disposal of the thing due.
the payment shall not be valid except in cases provided by the law
The injured party may seek to recover the payment.
2. When the third person has an interest in the fulfillment of the obligation such as
guarantor or a co-debtor
2. When payment was made without the knowledge or against the will of the debtor.
He can recover what he has paid only insofar as it is beneficial to the debtor.
3. When payment was made by a third person who dont want to be reimbursed
The payment shall be deemed as donation which requires the debtors consent
If the debtor does not consent, the payment shall have the same effect of
payment made without the knowledge or against the will of the debtor
person. Then A went to the office of B to inform him that he has already
paid the note to X. Upon knowledge of payment to X, B keep silent, and
neither confirmed nor denied the authority of X o receive payment in his
behalf. The conduct of B constitutes estoppels thus, he cannot set up the
defense of want of authority of X to accept payment in his behalf.
2. Art. 1242 If payment is made in good faith to any person in possession of the credit. In
this case. The person possess both the credit and the instrument of credit.
Example: A makes a negotiable promissory note payable to the order of
bearer in the amount of P100,000. He then gave the note to B as proof of his
indebtedness. On maturity date, the promissory note is in the possession of F,
who demanded payment from A for the amount of the note. Payment of A in good
faith to F is a valid payment.
Where payment must be made?
1. In the place stipulated by the parties
2. If no place of payment was stipulated,
a. In obligation to give a determinate thing, wherever the thing might be at the
time the obligation was constituted
b. In obligation to give a generic thing, or an obligation to do, then at the
domicile of the debtor
What are the special forms of payment?
1. Dation in payment or decion en pago
2. Application of payment
3. Payment by cession
4. Tender of payment and consignation
Dation in Payment
Dation in payment, defined
Dation in payment ( dacion en pago, adjudicacion en pago, datio en solutum, or
payment in kind ), is mode of extinguishing an obligation whereby the debtor alienates in favor
of the creditor property for the satisfaction of monetary debt. The obligation is extinguish up to
amount of property unless there is a contrary stipulation.
Conditions for a valid dacion
1. If creditor consents, for a sale presupposes the consent of both parties
2. If dacion will not prejudice the other creditors
3. If debtor is not judicially declared insolvent is a special form of payment whereby
property is alienated by debtor in favor of the creditor as payment of the formers debt.
cannot be inferred from the circumstances, payment shall be applied by operation of law
as follows:
1. Payment shall be applied to debt, among those due, which is the most
onerous to the debtor
2. If the debt are of the same kind and nature, payment shall be applied to all
debts due proportionately
Note: a debt is onerous if it is more burdensome to the debtor. Thus, it has been held that
obligations bearing interest, those secured with pledge and mortgages, those contracted with
guaranty and surety, are considered onerous debts.
Examples:
A is indebted to B for the following: (a) P10,000 due on August 31, 2013; (b)
P20,000 due on August 31, 2013; and (c) P20,000 with 15% per annum on September
30, 2013.
assuming on August 31, 2013, B has only P15,000 cash on hand, the rules on
application of payment will be as follows:
- the application shall be made in accordance with the agreement of the
parties. If both parties agreed that the P15,000 will be applied first to the
obligation with 15% interest rate, then the agreement shall be followed even
though the debt does not yet mature
-
if the creditor does not choose, the creditor shall have the right of choice.
Thus, if the creditor specified that the P15,000 shall be applied as full
payment of P10,000 debt and partial payment of P5,000 for the other debt,
the creditor cannot complain on the same application unless there is a just
cause to invalidate the application of payments.
Note: the debt not yet due on August 31 cannot be included in the application of
payment
Payment by Cession
Payment be cession, defined
Payment by cession is the assignment or abandonment by the debtor of all his propertie
in favor of his creditors so that the latter may sell them and e\recover claims out of the
proceeds.
Under Article 1255, the debtor may cede or assign his property to his creditors in
payment of his debts. This cession, unless there is stipulation to the contrary, shall only release
the debtor from responsibility for the net proceeds of the thing assigned. The agreements which,
on the effect of the cession, are made between the debtor and his creditors shall be governed
by special laws
Requisites of payment be cession
1. There must be two or more creditors
2. The debtor in insolvent
3. The debtor abandons or assigns ALL his properties except those exempt from execution,
in favor of his creditors
4. The creditors accept the abandonment or assignment
Kinds of payment by cession
1. Voluntary or conventional agreed upon by parties
2. Legal cession by operation of law
How the payment by cession made?
1. The insolvent debtor assigns his rights over the property to the creditors, with the
agreement of all the creditors. The court, upon petition of parties; or creditor may appoint
from among themselves the administrator/s to sell the said properties
2. The properties are sold at public auction.
3. The proceeds are applied to the respective claims of the creditors. The debtor is release
only of his accountabilities to the extent of the proceeds of the properties sold, unless
the creditors agreed to release him completely of his debts.
As to number of creditors
Properties involved
Transfer of ownership
Payment by cession
There must be 2 or more
creditors
Affects
ALL
the
debtors
properties, except those exempt
from execution
No transfer of ownership. The
creditors are only authorized to
sell the debtors properties
The debtor must be insolvent
Dation in payment
No requirement for the number of
creditors
Doe not affect all the debtors
properties
The creditor becomes the owner
of the property given as payment
The debtor need not be insolvent
Extinguishment of obligation
Obligation is extinguished as a
rule
3. It disappears that its existence is unknown a certain cellular phone lost and the owner
did not know whether it was stolen of left somewhere, which despite diligent efforts,
cannot be located anymore.
4. Cannot be recovered a specific ring thrown at the Pacific Ocean
Physical vs. Legal impossibility
a. Physical impossibility refers to impossibility due to the fact that act cannot be physically
achieved, like the obligation to paint a mansion house for 7 days using a watercolor paint
only.
b. Legal impossibility refers to an impossibility arising due to the fact that what the obligors
intended to give or to do illegal, such as obligation to appear as counsel for the accused
when the lawyer was now appointed as trial court judge, or the obligation to deliver narra
lumber when the government has declared the total ban for the sale and distribution of
narra lumber.
Effects of loss in the obligation
1. Loss of a determinate thing
General Rule: the loss of a determinate thing shall extinguish the obligation.
Exceptions:
a. When the loss id due to the fault of the debtor (Art. 1262). the loss is
presumed to be due to the fault of the debtor, unless prove otherwise. This
presumption does not apply in cases of earthquake, flood, storm or other
natural calamity.
b. When the debtor has incurred a delay
c. When the law so provides as when the debtor has promised to deliver the
same thing to two or more persons who do not have the same interests
(Art.1165)
d. When it is stipulated by the parties
e. When the nature of the obligation requires the assumption of risk
f.
When the debt proceeds from a criminal offense, unless the person who
should receive it refuses to accept it without just cause (Art. 1268)
b. Implied when it can be inferred from the conduct of the parties, such as when
the creditor voluntarily delivers the private document evidencing the credit to the
debtor, or when the holder of the promissory note intentionally burned or tear
down the said document.
Legal presumptions in the condonation or remission of debt
1. Art. 1272 Whenever the private document in which the debt appears is found in the
possession of the debtor, it shall be presumed that the creditor delivered it voluntarily,
unless the contrary is proved.
2. Article 1273 - The renunciation of the principal debt shall extinguish the accessory
obligations; but the waiver of the latter shall leave the former in force.
This is in accordance with the general rule that accessory follows the
principal. Thus, in a loan secured with mortgage on real property, if the loan was
condoned by the creditor, the mortgage shall also be considered condoned.
However, the condonation of the mortgage does not carry with it the
extinguishment of the principal loan contract.
3. Art. 1274 - It is presumed that the accessory obligation of pledge has been remitted
when the thing pledged, after its delivery to the creditor, is found in the possession of the
debtor, or of a third person who owns the thing
Confusion or merger
Confusion or merger, defined
Confusion or merger is the meeting in one person of the qualities or characters of
creditor and debtor. Simply put, the debtor becomes a creditor of himself.
For example: S delivers a negotiable promissory note payable to A for P100,000 payable
on December 31, 2014. A then indorse the promissory note to B, B to C, C to D and D to S. in
this case, S is a debtor (maker of promissory note) and likewise a creditor (holder of the
promissory note). The obligation is extinguished by reason of confusion or merger of rights.
Effects of confusion merger
1. Effects to guarantor - Merger which takes place in the person of the principal debtor or
creditor benefits the guarantors (Art. 1276). This is in consonance with the rule that
accessory follows the principal
However, when the confusion takes place in the person of guarantor, only
the guaranty is extinguished. Such as when, S delivers a promissory note to A,
with X as a guarantor. Then A indorse the note to B, B to C, then C to X
(guarantor). X as the holder of the note is subrogated with the rights of the
creditor, hence can demand payment from A. The principal contract remains
following the rule that extinguishment of the subsidiary does not carry with it the
extinguishment of the principal.
2. Effect in joint obligation - Confusion does not extinguish a joint obligation except as
regards the share corresponding to the creditor or debtor in whom the two characters
concur (Art. 1277).
Thus, if X, Y and Z, joint debtors, delivers a promissory note to W for
P60,000. Then W indorse the note to A, A to B, and B to Y. The confusion shall
only affect the share of Y. Therefore, Y can collect from both X and Z their
respective shares in the obligation, with Y being now the new creditor.
3. Effect in solidary obligation - Confusion or merger in one of the solidary debtors or
solidary creditors extinguishes the whole obligation. The solidary debtor in whom merger
takes place may demand reimbursement from his co-debtors. Similarly, the solidary
creditor whom merger occurs is liable for the share of co-creditors corresponding to
them.
Effects to solidary debtors: Thus, if X, Y and Z, solidary debtors, delivers a
promissory note to W for P60,000. Then W indorse the note to A, A to B, and
B to Y. The confusion shall extinguish the obligation. However, Y can
demand reimbursement from both X and Z their respective shares in the
obligation.
Compensation
Compensation, defined
Compensation shall take place when two persons, in their own right, are creditors and
debtors of each other (Art. 1278). In laymans term, its the setting off of the obligations when
parties are both debtors and creditors of each other.
That both debts consist in a sum of money, or if the things due are consumable,
they be of the same kind, and also of the same quality if the latter has been stated;
3.
4.
5.
When one party is oblige to do an act, and the other to deliver a sum of money
When one of the obligation is subject to right of third person, such as property is
under garnishment.
Kinds of compensation
1. As to amount or extent
a. Total when the debts are of the same amount
b. Partial when the debts are of different amounts
2. As to cause or origin
a. Legal compensation this takes place by operation of law. The obligation is
extinguished to the extent of the debts of parties (may be total or partial).
Legal compensation takes place even though the debts are payable at
different places and the debtor and the creditor is not aware of the
compensation. The follow are requisites for legal compensation.
That the obligor be bound principally, and that he at the same time a
principal creditor of the other
That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also the same quality if
the latter has been stipulated
Thus, if A obliged himself to deliver to B 10 sacks of
sinadomeng rice, and likewise, B also promises ro deliver the
same kind and quantity of rice, legal compensation will extinguish
both obligations.
1) Can Y demand the return of the jeep previously lent to X for free?
YES. The bailor in commodatum shall return the thing deposited upon
demand by the depositor after the lapse of the term.
When one of the debts consists in civil liability arising from a penal
offense. Here, only the offended party may set up compensation.
Example: X broke into the house of Y and was able to stole
cash and other properties estimated at P300,000. A case was filed
against for robbery and X was held guilty. The court ordered the
imprisonment of X as well as reparation of actual and moral damages
totaling to P500,000. Previously, however, Y borrowed money for
P500,000 from X supported by a promissory note payable on
demand.
2. When the debtor was notified of the assignment but he did not give his consent the
debtor may set up compensation of debts maturing before the assignment but not for the
subsequent ones.
If the assignment was made without the knowledge of the debtor, he can set up
compensation of all debts maturing before the time he obtains knowledge of the
assignment.
Example: S is indebted to T for P100,000 payable on December 31,2013.
Likewise, T issued promissory notes to S for the following:
P 10,000 payable on August 31, 2013
P 20,000 payable on September 30, 2013
P 10,000 payable on October 31, 2013
P 50,000 payable on December 31, 2013
On September 5, 2013, T assigned his credit to X without the knowledge of S. It
was only on November 10, 2013 that S obtains knowledge of the said
assignment. In this case, S can set up compensation for the obligations that
matured prior to his knowledge of the assignment - ( P10,000 due on 8/31/2013),
(P20,000 due on 9/30/2013) and (P10,000 due on 10/31/2013).
Novation, defined
Novation is the extinguishment of obligation by creating another obligation either by:
1. Changing their object or principal conditions
2. Substituting the person of the debtor
3. Subrogating a third person in the rights of the creditor
In order that an obligation may be extinguished by another which substitute the same, it
is imperative that it be so declared in unequivocal terms, or that the old and the new obligations
be on every point incompatible with each other (Article 1292).
Requisites of a valid novation
1. There must be a valid obligation
2. There must be an agreement between the parties to modify or extinguish the obligation,
except in the following:
a. When a creditor pays another creditor who is preferred, even without the
debtor's knowledge
b. When a third person, not interested in the obligation, pays with the express or
tacit approval of the debtor
c. When, even without the knowledge of the debtor, a person interested in the
fulfillment of the obligation pays, without prejudice to the effects of confusion
as to the latter's share.
3. The original/old obligation is extinguished
4.
Kinds of novation
1. According to purpose
a. Real or objective - novation by changing the object or principal condition
Example: A obliged himself to deliver to B white race horse. Due
to difficulty in obtaining the said horse, the parties agreed that A now
deliver to B an ordinary white horse instead of the original one.
b. Novation buy change of the parties (debtor or creditor)
Substituting the person of the debtor always requires the consent of the
creditor
b.1. Expromission the third person initiates the substitution and assumes
the obligation even without the knowledge or against the will of the debtor.
- The new debtor can only recover insofar as the payment has been
beneficial to the debtor
- The new debtors insolvency or non-fulfillment of the obligation shall
not give rise to any liability on the part of the original debtor. The
original debtor is released from liability.
b.2. Delegacion debtor initiates the substitution. This requires the consent
of all parties (original debtor, creditor, and new debtor)
- if the new debtor makes payment, he can recover what he has paid
and is entitled to subrogation
- if the new debtor is insolvent, the creditor cannot proceed against the
original debtor, except:
When the insolvency of the new debtor was already existing
and of public knowledge when the original debtor delegated
the debt
When the insolvency of the new debtor was already existing
and known to the original debtor at the time he delegated the
debt
Subrogating a third person in the rights of the creditor. Article 1303 defines
subrogation as the transfers to the persons subrogated the credit with all the
rights thereto appertaining, either against the debtor or against third person,
be they guarantors or possessors of mortgages, subject to stipulation in a
conventional subrogation
Kinds of subrogation
a. Conventional subrogation change of creditor by the agreement of the
parties (old debtor, creditor, new creditor)
b. Legal subrogation subrogation by operation of law. It is presumed that there
is legal subrogation:
(1) When a creditor pays another creditor who is preferred, even without
the debtor's knowledge
Example: A owes B P100,000 secured by a mortgage. A
also owes X another P50,000 secured by a 2nd mortgage on the
same property. If X pays B the P100,000, X is subrogated of the
right of B for the 1st mortgage. On due date and A fails to pay the
obligation, X can foreclose both mortgages.
(2) When a third person, not interested in the obligation, pays with the
express or tacit approval of the debtor
(3) When, even without the knowledge of the debtor, a person interested
in the fulfillment of the obligation pays, without prejudice to the effects
of confusion as to the latter's share.
Example: A owes B P100,000 with G as the guarantor. If G
pays B, then G is subrogated of the rights of B. The guaranty is
extinguished because of confusion or merger of rights of G as
both the creditor and guarantor at the same time.
2. According to form
a. Express novation declared in unequivocal terms
Example: A obliged himself to deliver to X a specific Honda Civic car. If
on later date, the parties agreed that As obligation will now be to deliver a
specific public utility jeepney instead of the car, there is an express novation.
b. Implied when the old and new obligation are on every point incompatible with each
other.
Example: D entered into a contract with E to construct Es residential
house on the latters 300 sq.m. parcel of land. A new contract was then again
entered into by parties whereby D will construct a 4-storey commercial building to
the same parcel of land. The parties, however, failed to stipulate whether they will
not proceed with the construction of the residential house. Since the area can
only hold either a residential house or a 4-storey building, but not both, the
original contract was impliedly novated because the construction of 2 structures
on the same lot is not possible.
3. According to extent
a. Total or extinctive the whole obligation is extinguished
b. Partial or modificatory the old obligation remains in force, except that it has been
modified such as change in the place of payment, change of maturity date, etc.
Effects of novation
1. Effects to accessory obligation - When the principal obligation is extinguished in
consequence of a novation, accessory obligations may subsist only insofar as they may
benefit third persons who did not give their consent (Article 1296)
Example: D delivers a promissory note to E for P 100,000, payable on
maturity and bearing an interest rate of 16% per annum. The parties stipulate
that the monthly interests on the note shall be paid to X. On a later date, D and E
agreed to novate the contract that D now would just paint the house of E instead
of payment of the sum of money. The principal obligation here is extinguished
because of novation, but the accessory obligation of interest payment to X shall
subsists, unless X gave his consent to the said novation.
2. Effect if the new obligation is void - If the new obligation is void, the original one shall
subsist, unless the parties intended that the former relation should be extinguished in
any event (Article 1297)
3. Effect if the original obligation is void - The novation is void if the original obligation was
void. A void obligation cannot be novated.
4. Effect if the original obligation is voidable the novation is valid provided that annulment
may be claimed only by the debtor or when ratification extinguishes acts which are
voidable. The novation cures whatever defects resent in the original obligation.
5. Effect if the original obligation is subject to suspensive or resolutory condition - If the
original obligation was subject to a suspensive or resolutory condition, the new obligation
shall be under the same condition, unless it is otherwise stipulated (Article 1299)
6. Preference to creditor in case of partial payment - A creditor, to whom partial payment
has been made, may exercise his right for the remainder, and he shall be preferred to
the person who has been subrogated in his place in virtue of the partial payment of the
same credit (Article 1304)
CONTRACTS
Contract, defined
Article 1305 defines 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
Elements of a contract
1. Essential elements those without which, there is no contract ( C-O-C)
a. Consent of the contracting parties
b. Object certain which is the subject matter of the contract
c. Cause of the obligation which must be established
2. Natural elements those found in certain contracts unless set aside or suppressed by
parties (such as warranty against eviction and warranty against hidden defects in a
contract of sale)
3. Accidental elements those that refer to particular stipulations by parties such as the
time and place of payment, interest rate, currency to be used, and other stipulations that
the parties agreed.
Stages of a Contract
1. Preparatory or conception process of formation such as bargaining, negotiation to
arrive at a define contract
2.
3.
Classification of contracts
1. According to form
a. Oral - by word of mouth of the parties
b. Written - the agreement which is reduced in writing which may be public or
private or private document
c. Partly oral and partly written
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 (Art. 1306)
2.
3.
Relativity it is binding only upon the parties and their successors. Contracts take
effect only between the parties, their assigns and heirs, except:
a. in case where the rights and obligations arising from the contract are not
transmissible by their nature; or
b. by stipulation; or
c. by provision of law
4.
Obligatory force it constitutes the law as between the parties and compliance in good
faith is expected from them. Upon perfection of the contract, the parties are bound to
the following:
a. The fulfillment of what has been expressly stipulated
b. All the consequence which, according to their nature, maybe in keeping with
good faith, usage and law
5.
Mutuality the contract must bind the parties. Its validity and performance cannot be
left to the will of only one of the parties.
Rules on consent
1. To give a valid consent, the parties must have the capacity to enter into a contract. The
following cannot give consent to a contract (Art. 1327):
a. Unemancipated minors refers to a person who is 17 years old and below.
The age of majority in the Philippines is 18 years old.
c. Deaf-mutes who do not know how to write. The deaf-mute who knows sign
language and can communicate his thoughts and action to other persons is
capable of giving an intelligent consent.
When one of the contracting parties is incapacitated person the contract is voidable
The incapacitated person must pay reasonable price for food and other necessaries
sold to him
Kinds of incapacity to give consent
a. Absolute incapacity where the incapacity pertains to all transactions such as
those referred to above ( minor, insane, deaf-mute who do not know how to right)
Article 1490 - The husband and the wife cannot sell property to each
other, except:
(1)
When a separation of property was agreed upon in the
marriage settlements; or
(2)
a. Offer is uncertain Example: A offered for sale a parcel of land to B for P200,000.
However, A owns several parcels of land, and it was unclear which land is being
offered for sale. The offer here is uncertain, hence, it is an invalid offer.
b. Offer is certain Example: S offers his motorcycle for sale to T for P50,000. Now, S
has only motorcycle, and this is known by T. In this case, it is clear that the parties
both know the specific motorcycle subject of the offer. The offer her is certain,
hence, it is a valid offer.
Note: Business advertisements are not definite offers. Under Article 1325, unless it
appears otherwise, business advertisements of things for sale are not definite offers, but
mere invitations to make an offer.
Examples:
An advertisement posted on the car which read For sale: Toyota Corolla 2004
Model, Price: P250,000, please contact 01979112110. This is not an offer but
mere invitation to make offer.
An advertisement in the newspaper which read as follows: For sale: Blue Toyota
Corolla GXi Model 2004, Chassis No. 1254-MNL-00123, Motor No. RTY1256489,
with Plate Number XXX 199. Price: P250,000. This is a definite offer because it
contains all the matters required in the contract.
2. An offer becomes ineffective upon the death, civil interdiction, insanity, or insolvency of
either party before acceptance is conveyed (Article 1323).
3. When the offerer has allowed the offeree a certain period to accept, the offer may be
withdrawn at any time before acceptance by communicating such withdrawal, except
when the option is founded upon a consideration, as something paid or promised
(Art.1324)
Option is a contract whereby the offerer gives the offeree the privilege to
purchase or not a certain object for a fixed price at any time within an agreed
period for a fixed price. Option may or may not be for a valuable consideration.
If there is no consideration for the option, the offerer may withdraw the
offer at anytime within the option period provided here has not been
any acceptance.
Note: Offer is extinguished upon the lapse of the option period, unless in the
meantime, the offeree has accepted the offer. This is true in both cases whether
the offer has a consideration or not.
4. The person making the offer may fix the time, place, and manner of acceptance, all of
which must be complied with (Art. 1321). Failure to comply with the stipulations agreed,
there will be no meeting of minds between the parties.
5. Acceptance made by letter or telegram does not bind the offerer except from the time it
came to his knowledge. The contract, in such a case, is presumed to have been entered
into in the place where the offer was made (Art. 1319).
Thus, if on June 1, 2013, A offered to sell his specific watch to B for
P10,000 and the offer was sent through regular mail and was received by B five
(5) days later. On June 8, 2013, B sent his acceptance of the offer also by mail.
However, B withdraws the offer on the same day and sold the same to X. B here
is not liable to A since he is not bound by the acceptance prior to his actual
knowledge of the acceptance.
6. An acceptance may be express or implied acceptance is express if made orally or in
writing. It is implied if it can be inferred from the conduct of parties.
Thus, if X offers to sell to Y a canned softdrinks, and Y opened the said
canned softdrinks and begin to drink one and also opened the rest for his coemployees, it is deemed an implied acceptance of the offer.
7. An offer made through an agent is accepted from the time acceptance is communicated
to him. The agent is authorized to accept offer in behalf of his principal.
Vices of consent
A contract where consent is given through mistake, violence, intimidation, undue
influence, or fraud is voidable (Art.1330). These are referred to as vices of consent, or that
causes which vitiate the consent.
Mistake of Fact - occurs when a person believes that a condition or event exists
when it does not. (ex. A delivered to B a pair of pigs for breeding purposes. However,
the boar (male pig) has found to be sterile and thus cannot breed. The sterility of the
pig is unknown to the parties. B can ask for the annulment of the contract.
Mistake of Law - is made by a person who has knowledge of the correct facts but is
wrong about the legal consequences of an act or event. Generally, a mistaken belief
about a law is no defense to a violation of that law. All persons are presumed to know
and understand the law, except minors, persons who lack mental capacity to contract
with others, and, in criminal cases, persons who are insane.
Mutual mistake - arises when two or more parties have a shared intention that has
been induced by a common misbelief.
b. If the mistake refers to those conditions which have principally move one or both
parties to enter into a contract.
Example: X is in urgent need of money for the medical operation of his
child. X then sold his land to Y. However, the Deed of Sale signed by parties
showed that the price would be paid in 4 equal monthly installments. Y can
c. If the mistake refers to the identity or qualifications of one of the parties if such
identity or qualification have been the principal cause of the contract.
Example: F sold to S a parcel of residential land for only 50% of the
actual price, believing that S is his half-brother. It turns out that S is a total
stranger. The identity of S was material to the contract; hence, F can have the
contract annulled for mistake as to the identity of the vendee.
d. If the mistake refers to the legal effect of an agreement when the real purpose of the
parties is frustrated and the same is mutual (Art. 1334). This refers to mistake of law.
Mistake of law is a ground for invalidating a contract.
b. If the party alleging it knew the doubt, contingency or risk affecting the object of the
contract (Art. 1333).
Example: X sold to Y a brand new iphone 5 cell phone for only P2,000.
The usual price for original iphone 5 cell phone range from P30,000 P50,000. Y
cannit allege mistake if the said cell phone turns to be a fake. The fact that it was
offered to him at very low price should have put him on guard that it might be an
imitation or even come from illegal source.
2. Violence this refers to physical coercion. There is violence when in order to wrest
consent, serious or irresistible force is employed. Violence shall annul the obligation,
although it may have been employed by a third person who did not take part in the
contract.
Example: A signed a Deed of Donation in favor of B, while B was twisting
the hand of A and threatening to break his arms if A will not sign the document.
3. Intimidation this refers to moral coercion. There is intimidation when one of the
contracting parties is compelled by a reasonable and well-grounded fear of an imminent
and grave evil upon his person or property, or upon the person or property of his spouse,
descendants or ascendants, to give his consent.
Example: A signed Deed of Donation in favor of B, while B holding a pistol
pointed on As forehead, threatening to shoot him if he will not sign the said
document.
To determine the degree of intimidation, the age, sex and condition of the
person shall be borne in mind.
There must be a well-grounded belief that the person making the threat or
intimidation can carry out his threat or intimidation.
Intimidation shall annul the obligation, although it may have been employed
by a third person who did not take part in the contract.
A threat to enforce one's claim through competent authority, if the claim is just
or legal, does not vitiate consent. (Art. 1335). Thus, if a creditor threatens to
file a case against the debtor to collect the amount due, plus interests and
damages, knowing that the debtor is afraid of going to courts, this will not be
considered intimidation to invalidate a contract
4. Undue influence there is undue influence when a person takes improper advantage of
his power over the will of another, depriving the latter of a reasonable freedom of choice.
Example: A is in dire financial need for the operation of his youngest child
scheduled the next day. The doctor advised him to produce P500,000 for the
operation. A then find a buyer, X, for his residential house and lot, who knows
the situation of A. the actual market value of the said property is appraised at
P2,000,000. Taking advantage of the situation, X offered to buy the property for
P500,000, to which A agreed. The sale here can be invalidated since the buyers
consent was vitiated of the undue influence.
b. Failure to disclose facts, when there is a duty to reveal them, as when the parties
are bound by confidential relations, constitutes fraud (Art. 1339).
Example: X and Y are partners in a manufacturing business. X
met A, a wholesaler and is looking for a manufacturer who can supply him
with goods on a regular basis. X then buy-out the share of Y in the
partnership, which the latter acceded. Thereafter, X, now a sole
proprietor, entered into a contract with A as the supplier for As wholesale
business for a huge profit. The sale of interest in partnership of Y in favor
of X is voidable on the ground of fraud. X was duty bound to disclose to Y
the proposal of A, being bound by trust and confidence as partners.
c. To make the contract voidable by reason of fraud, it must be (a) serious, and (b)
the fraud must not have been employed by both parties.
If both parties employed fraud, the contract is valid. The law will
consider them both in good faith. He who comes to court must come
with clean hands.
2. In case of a mere expression of an opinion, unless made by an expert and the other
party has relied on the formers special knowledge (Art. 1341).
Example: X, a farmer, found a ring in his farm. X then sold the ring to his
neighbor Y, honestly believing that it was a gold ring. It turns out that the ring is
just made up of from melted P5 coin. There is no misrepresentation here since X
is not an expert in gems. However, if X is a known jeweler, Y can annul the sale
on the ground of fraud committed by X.
However, if the third person connived with a party in the contract in making
misrepresentation, the consent is vitiated, and thus the aggrieved party may demand
annulment of the contract.
Examples:
a. X offered for sale a parcel of agricultural land to Y, to be planted with coconut
trees. However, both parties do not know if the condition of the land is
suitable for coconut planting, so they decided to consult a M, a third person,
who told them that it is suitable for that purpose. It was found out, however,
that 20% of the said land is not suitable for coconut planting. Here, the
mistake in the representation of third person will not invalidate a contract.
b. Suppose in the same example, it was found out that 60% of the land is not
suitable for coconut planting. The contract here can be annulled, since the
misrepresentation has created substantial mistake and the same was mutual.
4. Misrepresentation made in good faith is not fraudulent but may constitute error
(Art.1343).
Example: A offered to B a pair of earrings which he believes to have adorned by
diamond. B buys the said earrings also believing it to be such. Later it was found
out that it was another gemstone but of lesser value. There exist no fraud but this
only constitutes merely an error. B may, however, annul the contract on the
ground of mistake of fact.
Kinds of fraud
1. Fraud in obtaining consent - this kind of fraud has an effect on the validity of the contract
as this occurs before and during the formulation of contract. The remedies available to
the offended party would depend if the fraud is causal or incidental.
a. Causal Fraud or Dolo Causante fraud done that without it, consent wouldve
not been given. This renders the contract voidable.
Example: X applied for a part-time teaching work at Divine Word
College of Legazpi. His resume would show that he is a Certified Public
Accountant. The school then hired X and was given teaching loads for
accounting major subjects. Later, it was known, however, that X is only an
accountancy graduate and not a CPA. Had the school knew this fact, X
would not been hired. The fraud here committed is a causal fraud which
the aggrieved party may seek annulment of contract.
b. Incidental Fraud or Dolo Incidente fraud done that without it, the creditor
wouldve agreed in different terms. The contract remains valid but the party
offended is entitled to damages.
In the same example above, the resume of X would show that he
is a CPA, and been teaching accounting subject for the last 10 years.
In reality, however, X has been teaching accounting subjects for only
2 years. Had the school knew that fact, it would still hire X and allows
him to teach accounting subjects, however, his hourly rate would be
lesser than what has agreed by parties. The fraud here is only
incidental. This would only gives right to recover damages from A fro
the overpayments of hourly rates made.
2. Fraud in the performance of the obligation the deliberate or intentional evasion by the
debtor of the fulfillment of his obligation in a normal manner. This type of fraud does not
affect the validity of the contract.
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. 1170)
Simulated contracts, defined
Simulated contract is a contract that, by mutual agreement, does not express the true
intent of the parties. It does not have legal effect and does not create juridical tie between the
parties. The following are types of simulated contracts:
1. Absolutely simulated contracts - when the parties intend that the contract will impose no
obligations. Such a contract cannot enforce any obligations on the parties. Being
fictitious, it is void.
Example: A and B are friends. A wishes to obtain a loan from XXX
Lending Corporation, but the said corporation require a proof that A has enough
assets under his name. A however, has limited assets under his name so he seek
for Bs help. B then executed a Deed of Donation in favor of A for a parcel of land
for purposes of showing the Deed of Donation and the title of land to the lending
corporation. The Deed of Donation between B and A is absolutely simulated.
2. Relative simulation refers to the contract where the parties intend a simulated contract
to impose obligations which are different from the ones stated in the contract. The
intended obligations are enforceable if all relevant conditions are met. . A relative
simulation, when it does not prejudice a third person and is not intended for any purpose
contrary to law, morals, good customs, public order or public policy binds the parties to
their real agreement.
Example:
1. X donated to Y a specific car worth P100,000. However, the parties agreed to
execute a Deed of Sale instead of Deed of Donation for purpose of
expediency. The sale is relatively simulated. Here, the contract is valid and
the parties are bound by their true intentions.
2.
X sold to Y a parcel of land for P1,000,000. To minimize the tax payments for
capital gains and other transfer tax, the parties agreed that the consideration
to appear in the Deed of Sale is only P500,000. The relative simulation is
contrary to law, as this constitutes tax evasion. Hence, the contract here is
void.
Objects of the Contract
All things which are not outside the commerce of men, including future things, may
be the object of a contract.
Examples of future things:
o The crops that the specific land may produced
o The egg that may be produced by the poultry farm
o The wine that may be produces from grapes vineyards
The following may not be the object of contracts:
a. Outside the commerce of men - public plaza, sidewalks, seashores, bridge
and other similar public infrastructures
b. Contrary to law illegal drugs, human body parts (such as kidney, eyes, and
other internal organ) prohibited by law for commercial transactions.
c. Impossible objects the Excalibur sword of King Arthur, rock from planet
Uranus, the legendary fountain of youth chalice.
d. Indeterminate object such as a watch, a ring, a horse, a cow, etc. Article
1349 provides that The object of every contract must be determinate as to its
kind. The fact that the quantity is not determinate shall not be an obstacle to
the existence of the contract, provided it is possible to determine the same,
without the need of a new contract between the parties
2.
All rights which are not intransmissible may also be the object of contracts.
a. Transmissible right rights that may be transferred from one person to another.
These rights can be sold, conveyed or transferred from one person to another.
This include leasehold rights, usufructuary rights and credit rights
b. Intransmissible right rights that belong to a person that cannot be transferred to
another. This includes strictly personal rights such as parental right, marital
rights, right to run for public office and right of suffrage.
3.
All services which are not contrary to law, morals, good customs, public order or
public policy may likewise be the object of a contract.
Cause of Contracts
Cause, defined
Cause is the essential reason or the driving force why a party enters into a contract.
Cause of Contracts
1. Onerous contract - the cause is understood to be, for each contracting party, the
prestation or promise of a thing or service by the other.
In a reciprocal contract like of sale, the cause for the seller is the payment
or the promise to pay, while the cause for the buyer is the delivery or the promise
to deliver the thing. Thus, if S sold to B a specific car for P200,000, the cause for
S is the payment of P200,000, while the cause for B is the delivery of the specific
car.
2. Remuneratory contract - the service or benefit which is remunerated.
Example: X painted the house of Y for 3 days. Y then paid P1,500. The
act of painting of X here is the service remunerated.
Form of Contracts
Required forms of contract
Contracts shall be obligatory, in whatever form they may have been entered into,
provided all the essential requisites for their validity are present. Thus, a contract is valid, even if
it is orally entered into, was put in writing or contracted partly oral and partly in writing.
Exceptions: When the law requires that a contract be in some form in order that
it may be valid or enforceable or that a contract be proved in a certain way, that
requirement is absolute and indispensable.
1. When the contract required by law to be in a certain form provided by law for
its validity, otherwise, the contract is void.
Example: donation of real property must be in writing and must be
made in public instrument. The acceptance of the donation be made on
the same public instrument.
2. If the law requires a document or other special form, the contracting parties
may compel each other to observe that form, once the contract has been
perfected. This right may be exercised simultaneously with the action upon
the contract.
Example: sale of personal properties when the amount is more
than P500 must be in writing, otherwise, the contract is unenforceable.
Contracts that must be in writing for validity and enforceability
1. The following contracts must be appear in public instrument, otherwise, it shall be void
(Art. 1358)
a. Acts and contracts which have for their object the creation, transmission,
modification or extinguishment of real rights over immovable property.
(Examples: Contract for easement of right-of-way, donation of real
property, real estate mortgage)
b. Sales of real property or of an interest therein
An agreement for the leasing for a longer period than one year, or for
the sale of real property or of an interest therein
REFORMATION OF INSTRUMENTS
Reformation is a remedy that is granted at the discretion of the court only where the
facts and circumstances of a particular case warrant it. It will not be granted where
an entirely new agreement would result between the parties or where unwarranted
hardships would be imposed upon them.
Only an individual who has acted in good faith can apply to the court to have an
instrument reformed.
The mistake must have been in existence at the time the instrument was drawn up. A
mistake in the description of land and its boundaries ordinarily justifies reformation of
an agreement where the purchaser and seller intended that all the seller's property
be sold to the purchaser.
In addition, a Mistake of Law by which both parties to the instrument have incorrectly
comprehended the legal effect of the facts and the document might also result in
reformation.
4. When one of the parties has brought an action to enforce the instrument, he cannot
subsequently ask for its reformation.
Reason: when parties sought to enforce the instrument, it cleanses the
defect in it. This will be equivalent to ratification, waiver and estoppel.
INTERPRETATION OF CONTRACTS
Rules in Interpretation of Contracts
1. If the terms of a contract are clear and leave no doubt upon the intention of the
contracting parties, the literal meaning of its stipulations shall control.
2. If the words appear to be contrary to the evident intention of the parties, the latter shall
prevail over the former. In order to judge the intention of the contracting parties, their
contemporaneous and subsequent acts shall be principally considered (Article 1371)
Example: A and B executed a Deed of Sale with Right of Repurchase
over a parcel of land for P500,000, giving A the right to repurchase the land from
B within 5 years from the date of sale. However, the parties intended that the said
land will only be considered as collateral for the P500,000 owed by A. A continue
to possess and cultivate the land, while B safekeep the title of the land in his
safety deposit box at XXX branch. From the intention and the subsequent actions
of A and B, the contract they actually entered into was a real estate mortgage
and not a sale with right of repurchase. The parties rights mst be governed by the
provisions of law on mortgages.
3. However general the terms of a contract may be, they shall not be understood to
comprehend things that are distinct and cases that are different from those upon which
the parties intended to agree.
Example: X sold to Y all the sacks of rice in Xs warehouse. However,
also stored in Xs warehouse was 100 sacks of rice belonging to M. The sale
between X and Y should be interpreted not to include those sacks of rice owned
by M.
4. If some stipulation of any contract should admit of several meanings, it shall be
understood as bearing that import which is most adequate to render it effectual.
Example: S sold to B a parcel of land for B to construct the proposed 4storey commercial building. Now, S has 2 parcels of land an irrigated Riceland
and a commercial lot. Despite the failure to stipulate which lot was the subject
matter of the sale, the commercial lot is deemed to have been sold since such
will render the contract effectual.
5. The various stipulations of a contract shall be interpreted together, attributing to the
doubtful ones that sense which may result from all of them taken jointly.
6. Words which may have different significations shall be understood in that which is most
in keeping with the nature and object of the contract.
Example: X gave authority to his agent A to exact payment by legal
means all his loans and advances to different borrowers. A then sent letters to
borrowers and give the latter 10 days from receipt of letter to pay the amount. M,
a borrower, failed to pay on the specified period. A then filed a civil case for
collection of sum of money against M. M questioned the authority of A in filing the
case, claiming that As authority to exact payment does not include filing of case.
The court ruled that filing of case is necessarily included in the term to exact
payment by legal means.
7. The usage or custom of the place shall be borne in mind in the interpretation of the
ambiguities of a contract, and shall fill the omission of stipulations which are ordinarily
established.
In a contract for service of work, A hired B to harvest the palays in As
farmland. There was no stipulation on the compensation for Bs services. In this
case, the rate thereof shall be the rate that is customarily paid in the place where
the services was rendered
8. The interpretation of obscure words or stipulations in a contract shall not favor the party
who caused the obscurity.
Thus, in a contract of adhesion such as insurance contracts and contract
for common carriage, or loan contracts with banks and financial institutions, any
ambiguity shall be interpreted against the party who prepared the contract.
Adhesion contracts do not result from mutual negotiation between the parties.
Only one party prepare the contract while the other simply adhere
if he choose to be bound but cannot change any stipulations or agreement.
9. When it is absolutely impossible to settle doubts by the rules established in the
preceding articles, the following shall apply:
a. If the doubts refer to incidental circumstances of a gratuitous contract, the least
transmission of rights and interests shall prevail
Example: X delivered to Y a specific car for personal use of the
latter. It was not, however, clear whether the car was donated or only
given in commodatum. The contract shall be interpreted as commodatum
as this will transmit lesser rights than donation.
b. If the contract is onerous, the doubt shall be settled in favor of the greatest
reciprocity of interests.
Example: A borrowed P100,000 from B covered by a promissory
note, which bears an interest of 12% per annum. The parties fail to
stipulate the maturity date whether the loan is payable on demand or oneyear after the date of the PN. The repayment period shall be interpreted
for one year because A will have more time to use the money, while C will
earn the full 1-year interest.
c.
If the doubts are cast upon the principal object of the contract in such a way that
it cannot be known what may have been the intention or will of the parties, the
contract shall be null and void.
Example: A sold to B a parcel of agricultural land. The parties fail
to stipulate the particular description and boundaries of the aforesaid lot.
Now, A has 3 parcels of agricultural lots, and the parties fail to agree
which lot has been the object of sale. The contract is thus declared null
and void.
DEFECTIVE CONTRACTS
Defective contracts, defined
Defective contracts are valid contracts which lacks legal sufficiency due, for example, to
incorrect or incomplete following of a required or statutory procedure, and may not be
enforceable by the courts. These may either be (a) rescissible contracts; (b) voidable contracts;
and (c) unenforceable contracts.
Rescissible contract, defined
Rescissible contracts are those which have caused a particular economic damage either
to one of the parties or to a 3rd person and which may be set aside even if valid. It may be set
aside in whole or in part, to the extent of the damage caused.
Rescission is the remedy allowed by law to the contracting parties and to third person\s
to repair the damage cause them by a contract.
What are rescissible contracts? ( Art. 1381)
(1) Those which are entered into by guardians whenever the wards whom they represent
suffer lesion by more than one-fourth of the value of the things which are the object
thereof;
Example: G, a guardian of minor, entered into a Lease Contract
Agreement with X over one of the commercial building owned by the minor. The
annual lease was P120,000, when the commercial rate for lease on other
building occupants was P200,000 per annum. The contract is rescissible since
the lesion is more than of P200,000 (P50,000).
(2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated
in the preceding number;
Under Art. 381 of the Civil Code, an absentee is a person who disappears
from his domicile, his whereabouts being unknown, and without leaving an agent
to administer his property. Thus, if the representative of an absentee sold the
formers property at a price where the absentee would suffer lesion of more than
of the actual value of the thing, the sale is rescissible.
(3) Those undertaken in fraud of creditors when the latter cannot in any other manner
collect the claims due them;
Example: A has only 1 property left a parcel of land worth P500,000. He
has a creditor B, which he owes P400,000. To escape payment, A donated his
land to his cousin M, thus rendering A insolvent. The donation made was for
fraudulent purpose and thus may be rescinded.
(4) Those which refer to things under litigation if they have been entered into by the
defendant without the knowledge and approval of the litigants or of competent judicial
authority;
Example: A parcel of land was the subject of litigation between parties. A,
B and C are co-heirs, however, the land was registered under the name of B
only, as trustee for his other co-heirs. B sold the entire lot to X, who has
knowledge of the pending claims of other co-heirs. The sale between B and X is
rescissible.
(5) All other contracts specially declared by law to be subject to rescission.
Under Article 1382, Payments made in a state of insolvency for
obligations to whose fulfillment the debtor could not be compelled at the time
they were effected, are also rescissible. Thus, if X owes the following creditors:
A-100,000; B-50,000 and C-200,000. X was in state of insolvency where he has
only P120,000 worth of asset left. X then paid the whole P120,000 to C. The
payment made by X to C is prejudicial to the rights of other creditors, thus
rescissible.
Requisites before there can be a valid rescission
1. The action for rescission is subsidiary; it cannot be instituted except when the party
suffering damage has no other legal means to obtain reparation for the same.
Rescission shall be the last recourse (Art. 1383)
2. Rescission shall be only to the extent necessary to cover the damages caused (Art.
1384).
Example: A has only 2 properties left a parcel of land worth P200,000
and a bank deposit of P400,000. He has a creditor B, which he owes P400,000.
To escape payment, A donated the land to his cousin M, and the bank deposit
was also donated to his friend Y, thus rendering A insolvent. The donation made
was for fraudulent purpose and thus may be rescinded. However, rescission can
only be made to the donation to Y, since rescission shall only be to the extent
necessary to cover the damages.
3. In rescission, there must be mutual restitution. Rescission creates the obligation to
return the things which were the object of the contract, together with their fruits, and the
price with its interest; consequently, it can be carried out only when he who demands
rescission can return whatever he may be obliged to restore (Art. 1385)
For absentee within 4 years from the time the absentees domicile is known
provides that attachment need not refer to the property alienated, and need not
have been obtained by the party seeking the rescission.
Attachment is the legal process of seizing property to ensure satisfaction of a
judgment. Real and personal properties, stocks or shares, debts and credits, can
be the subject of attachment.
Liability of person acquiring things in alienation in fraud of creditors
1. If the purchase was made in good faith he shall not be liable notwithstanding the
fraudulent intention of the debtor in disposing the property. Rescission will not be a
remedy in this case. If there are subsequent transfers, the transferees shall not be liable
for damages even they were in bad faith.
2. If the purchaser is in bad faith (as he knows the intention of the seller to defraud the
creditors at the time of sale), he shall indemnify the creditors for damages suffered by
them on account of the alienation, whenever, due to any cause, it should be impossible
for him to return them (Art. 1388). This rule applies even if the loss be due to fortutios
event.
If there are two or more alienations, the first acquirer shall be liable first, and so
on successively.
Example: A has only 1 property left a parcel of land worth P500,000. He has a creditor
B, which he owes P400,000. To escape payment, A donated his land to his cousin M, thus
rendering A insolvent. The donation made was for fraudulent purpose and thus may be
rescinded. However, before the contract was rescinded, M was able to secure a new title over
the property by virtue of such donation and was registered under his name. M then sold the
same land to X.
If X acted in good faith, the sale between M and X is not rescissible. This is true even
if M had previous knowledge of the fraudulent purpose why A donated the property to
him.
If X acted in bad faith, as when knew beforehand that the property was originally
transferred to M to defraud creditor B, the sale between M and X can be rescinded.
Voidable Contracts
A contract that is based on one of these grounds is not automatically void but is voidable
at the option of the party entitled to avoid it.
influence may result from family affiliations, religious affiliations and similar group
influence.
In case of mistake or fraud, from the time of the discovery of the same
other hand, shall return to M the parcel of land plus the fruits of the land
for the last 5 years while B is in the possession of it.
b. In obligation to render service, the value thereof shall be the basis of
damage.
c. When the defect of the contract consists in the incapacity of one of the
parties, the incapacitated person is not obliged to make any restitution except
insofar as he has been benefited by the thing or price received by him.
Example: M, a minor, sold his Samsung Galaxy Notepad to X for
P1,000. M then spent the P1,000 for internet video games. Upon
knowledge of the sale, the guardian of M immediately asked for
annulment of contract. X must return the notepad to the minor, but M has
no obligation to make restitution ( return the P1,000). If, however, he
minor spent P500 to buy materials for his school projects, and spent the
rest for internet computer games, then the minor is obliged to return the
P300 he benefited from the transaction.
d. Whenever the person obliged by the decree of annulment to return the thing
cannot do so because it has been lost through his fault, he shall return the
fruits received and the value of the thing at the time of the loss, with interest
from the same (Art. 1400).
e. As long as one of the contracting parties does not restore what in virtue of the
decree of annulment he is bound to return, the other cannot be compelled to
comply with what is incumbent upon him.
Example: M, minor, sold a parcel of land to B for P300,000. M
then placed the amount in a time deposit with XXX Bank, for a maturity
term of 5 years. After 5 years and M attained the age of majority, he
brought an action to annul the sale with B. XXX Bank however was
closed, and the deposit of M was frozen and cannot be withdrawn. B
cannot be compelled to return the land and its fruits, unless M delivers the
price plus interests to B. Mutual restitution is required in annulment of
contracts between parties.
Effects of loss of the thing while in the possession of the party
1. If lost by the party who can bring the action for annulment ( incapacitated, those consent
was vitiated )
If lost through his fault, the action for annulment is extinguished, whether such
party is incapacitated or his consent is vitiated.
If lost without his fault and the party is incapacitated, he cans still bring an action
for annulment. However, he will be required to return the value of the thing and
its fruits, and only up to the extent he has benefited.
2. If lost by party who employ force, intimidation, undue influence etc., he is still oblige to
pay the value of damages in case the contract is annulled.
Ratification, meaning
Ratification is the adoption, confirmation or affirmation of the previous act. Ratification
cleanses the defects in consent and the effect retroacts on the date the contract was originally
constituted.
Rules governing ratification
1. How ratification is made?
a. Express ratification when made orally or in writing
b. Implied or tacit ratification - It is understood that there is a tacit ratification if, with
knowledge of the reason which renders the contract voidable and such reason
having ceased, the person who has a right to invoke it should execute an act which
necessarily implies an intention to waive his right (Art. 1393).
Example: X threatens Y to kill the latter if Y will not execute a Deed of
Sale a parcel of land in favor of X payable 3 months later. Meanwhile, X and Y
fixed their personal differences and become good acquaintances. After 3 months,
Y delivers to X the title of the land and other documents needed for the transfer
of title from Y to X. The act of X constitutes ratification of the preivous sale
transaction executed between parties.
2. Who may ratify?
a. The guardian of the incapacitated person during the latters incapacity
b. The incapacitated person after he has attained capacity
c. The party whose consent is vitiated by mistake, violence, intimidation, undue
influence or fraud.
Notes:
Person who can ratify are also those person who can bring action for
annulment.
Ratification does not require the conformity of the person who has no
right to bring the action for annulment.
3. Effects of ratification
a. It extinguishes the action to annul a voidable contract
b. It cleanses the contract from its all defect from the moment it was constituted.
Thus, the contract is considered not defective from the very beginning.
Unenforceable contracts
Unenforceable contracts, defined
e. An agreement for the leasing for a longer period than one year,
f.
Ratification cleanses the defect in the contract, and thus ratification makes the contract
enforceable against parties
Ratification, how made?
1. By execution of the contract of either or both parties either partial of oral
Examples:
X sold a parcel of land to Y for P500,000. The registered owner of the said land is M.
Y cannot enforce the contract to M as X has given no authority to sell the land in Ms
behalf. Upon knowledge of the sale, M demanded payment from Y, to which Y readily
paid the amount. The acts of M show ratification of the sale. Y can now demand
execution of Deed of Absolute Sale and the delivery of the land he purchased.
2. Contracts infringing the Statute of Frauds, referred to in No. 2 of article 1403, are ratified
by the failure to object to the presentation of oral evidence to prove the same, or by the
acceptance of benefit under them (Art. 1405).
3. Ratification of contracts entered into by incapacitated persons can be made by their
parents or guardians.
When only the parent or guardian of one of the contracting parties ratifies, the
contract becomes voidable
When the parents or guardian of both contracting parties ratify, the contract shall
be considered valid and enforceable from its inception.
1. Those whose cause, object or purpose is contrary to law, morals, good customs, public
order or public policy. (ex. Sale of illegal drugs, contract of forced labor to pay-off the
loan, sale of animals with contagious disease, etc.)
2. Those which are absolutely simulated or fictitious. (ex. Marriage solemnize in theatrical
plays)
3. Those whose cause or object did not exist at the time of the transaction. (ex. Sale of the
black pearl which existence is still unknown)
4. Those whose object is outside the commerce of men. (ex. Sale of public plaza, lease of
San Juanico Bridge, etc)
5. Those which contemplate an impossible service. (ex. Contract to appear as counsel for
the accused when the lawyer was already appointed as Justice of the Supreme Court)
6. Those where the intention of the parties relative to the principal object of the contract
cannot be ascertained. (ex. Sale of parcel of land where the seller has 3 parcels of land
and the parties fails to agree and ascertain which parcel of land is the subject matter of
the sale)
7. Those expressly prohibited or declared void by law (ex. Sale and distribution of pirated
CDs and VCDs, camcording taking video camera in the movie house is declared illegal
by law).
Characteristics of void contract
1. It cannot be ratified
Example: A orally sold to B 10 grams of shabu for P1,000. B then paid the
price and demanded the delivery of shabu from A. A cannot be compelled to
deliver the thing since the contract is void ab initio. The payment made by B
cannot cleanse the defect in the contract.
2. The right to set up illegality cannot be waived.
The illegality of contract can be raised at any stage of proceedings, even
on appeal.
3. The action or defense for the declaration of the inexistence of a contract does not
prescribe. Thus, passage of time does not make the void contract valid.
4. The defense of illegality of contract is not available to third persons whose interests are
not directly affected.
Example: Husband sells his land to his wife. The sale shall be void, as the
law prohibits sale between spouses during the validity of their marriage. A third
person cannot assail the nullity of sale unless the third persons interest in
affected by such sale. Such as when the third person is the creditor of the
husband and the sale was intended to defraud the creditor.
5. A contract which is the direct result of a previous illegal contract, is also void and
inexistent (Art. 1422)
What are illegal contracts?
Illegal contracts are those entered into by parties in violation of statute, regulation or
ordinance, which may be criminal or merely not in conformity. Thus, an armed robbery is illegal,
and so is an access road which is narrower than the county allows, but the violation is not
criminal. The following are illegal contracts:
1. When contract constitute criminal offense
a. If both parties are guilty ( in pari delicto ), the following shall apply:
They shall have no right of action against each other
Neither one may compel the other to comply with his undertaking
The innocent party may demand the return of what he has given
without any obligation to comply with his promise.
amend the Usury Law but simply suspended the latter's effectivity. Usury has been
legally non-existent in our jurisdiction. Interest can now be charged as lender and
borrower may agree upon.
2. When money is paid or property delivered for an illegal purpose, the contract may be
repudiated by one of the parties before the purpose has been accomplished, or before
any damage has been caused to a third person. In such case, the courts may, if the
public interest will thus be subserved, allow the party repudiating the contract to recover
the money or property (Art. 1414).
Example: X hired Y to hack the server of COMELEC to manipulate the
data regarding the forthcoming elections. X made a down payment of P200,000
and the balance of P800,000 payable after the election. Later, however, X
changes his mind and informed Y not to proceed with the hacking activities
anymore. X may be allowed to recover the downpayment he gave to Y.
3. Where one of the parties to an illegal contract is incapable of giving consent, the courts
may, if the interest of justice so demands allow recovery of money or property delivered
by the incapacitated person (Art. 1415).
Example: S sold to M, a minor, a prohibited drug. The court may allow M
to recover the amount he paid to S if the interest of justice demands.
4. When the agreement is not illegal per se but is merely prohibited, and the prohibition by
the law is designed for the protection of the plaintiff, he may, if public policy is thereby
enhanced, recover what he has paid or delivered (Art. 1416).
Example: T, tenant, was awarded a parcel of land by the Department of
Agrarian Reform through its implementation of CARP law. T then sold the said
land to B, a third person. Here, T is allowed to recover the land he sold to a third
person. The law provides that tenant-beneficiaries who acquires the land by
virtue of CARP cannot alienate, sell or convey the said land to other person for a
certain period of time.
5. When the price of any article or commodity is determined by statute, or by authority of
law, any person paying any amount in excess of the maximum price allowed may
recover such excess (Art. 1417).
Example: After calamity, the Department of Trade and Industry issued a
circular prohibiting any increase of price of basic commodities from its original
price prior to the calamity. S sold to B 2 sacks of rice for P5,000, when its original
price is only P1,500 per sack. The contract is deemed void, since it is contrary to
law. However, B may be allowed to recover the excess payment made to S.
6. When the law fixes, or authorizes the fixing of the maximum number of hours of labor,
and a contract is entered into whereby a laborer undertakes to work longer than the
maximum thus fixed, he may demand additional compensation for service rendered
beyond the time limit.