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Obligations and Contracts Reviewer De la Salle University – College of Law

Guevarra | Tolentino Atty. Gallo

BOOK IV
Obligations and Contracts
TITLE I
Obligations
CHAPTER 1
General Provisions

Article 1156. An obligation is a juridical necessity to give, to do or not to do. (n)

Concept of Obligations
• “The juridical necessity to comply with a prestation”
• “Legal relation established between one person and another, whereby the latter is bound
to the fulfillment of a prestation which the former may demand of him”
• Civil Obligation – one which has binding force in law, and which gives to the obligee or
creditor the right of enforcing it against the obligor or debtor in a court of justice.
• Natural Obligation – one which cannot be enforced by action, but which is binding on the
party who makes it in conscience and according to the natural law.
– When an action has prescribed in accordance with the statue of limitations, a
natural obligation still subsists, although the civil obligation is extinguished.

• A civil obligation is based on positive law, while a natural obligation is based on equity
and natural law;
• The former is enforceable in courts of justice, the latter is not.

Requisites of Obligations
1. Juridical or Legal Tie;
2. Active Subject (Obligee or Creditor);
3. Passive Subject (Obligor or Debtor);
4. Prestation – the object of the obligation.
• As a general rule, form cannot be considered as an essential requisite.

Classification of Obligations
1. Pure and Conditional
2. With a period
3. Alternative and facultative
4. Joint and solidary
5. Divisible and indivisible
6. With a penal clause

(check Q&A & reviewer cause there are a gazillion)

Article 1157. Obligations arise from: (Sources of Obligations)


(1) Law;
(2) Contracts;
(3) Quasi-contracts;
(4) Acts or omissions punished by law; and
(5) Quasi-delicts. (1089a)

Article 1158. Obligations derived from law are not presumed. Only those expressly determined in
this Code or in special laws are demandable, and shall be regulated by the precepts of the law
which establishes them; and as to what has not been foreseen, by the provisions of this Book.
(1090)
Obligations and Contracts Reviewer De la Salle University – College of Law
Guevarra | Tolentino Atty. Gallo

Obligations Arising from Law


• Those derived from law can never be presumed
• Only those expressly determined in the Civil Code or in special laws are demandable.
• When the law established the obligation and the act or condition upon which it is based is
nothing more than a factor for determining the moment when it becomes demandable,
then the law itself is the source of the obligation;
• However, when the law merely recognizes or acknowledges the existence of an
obligation generated by an act which may constitute a contract, quasi-contract, criminal
offence or quasi-delict and its only purpose is to regulate such obligation, then the act
itself is the source of the obligation and not the law.

Article 1159. Obligations arising from contracts have the force of law between the contracting
parties and should be complied with in good faith. (1091a)

Obligations Arising from Contracts


• 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.
• As a rule, contracts are perfected by mere consent, and from that moment the parties are
bound not only to the fulfillment of what has been expressly stipulated but also to all of
the consequences which according to their nature may be in keeping with good faith,
usage and law.
• “Compliance in good faith” – performance in accordance with the stipulations, clauses,
terms and conditions of the contract.

Article 1160. Obligations derived from quasi-contracts shall be subject to the provisions of
Chapter 1, Title XVII, of this Book. (n)

Obligations Arising from Quasi-Contracts


• Quasi-contracts – those juridical relations arising from lawful, voluntary and unilateral
acts, by virtue of which the parties become bound to each other, based on the principle
that no one shall be unjustly enriched or benefited at the expense of another.
• Negoiorum gestio – juridical relation which arises whenever a person voluntarily takes
charge of the agency or management of business or property of another without any
power or authority from the latter.
• Solutio indebti – juridical relation which arises whenever a person unduly delivers a thing
through mistake to another who has no right to demand it.
• Perez v. Palomar – in a quasi contract where no express consent is given by the other
party, the consent needed in a contract is provided by law through presumption
(presumptive consent).

Article 1161. Civil obligations arising from criminal offenses shall be governed by the penal laws,
subject to the provisions of article 2177, and of the pertinent provisions of Chapter 2, Preliminary
Title, on Human Relations, and of Title XVIII of this Book, regulating damages. (1092a)

Obligations Arising From Criminal Offenses


• As a rule, every person liable for a felony is also civilly liable.
• Generally, a crime has dual aspect – the criminal and civil aspect.
• The first is to punish or correct the offender, second is to repair the damages suffered by
the aggrieved party.
• However, there are offenses and special crimes without civil liability – treason, rebellion,
illegal possession of firearm and gambling.
• But a person who is not criminally liable may still be civilly liable.
Obligations and Contracts Reviewer De la Salle University – College of Law
Guevarra | Tolentino Atty. Gallo

Effect of Acquittal
• If the acquittal of the accused is based on the ground that his guilt has not been proved
beyond reasonable doubt, a civil action to recover damages based on the same act or
omission may still be instituted.
• If the acquittal is based on the ground that he did not commit the offense charged, the
subsequent institution of a civil action to recover damages is, as a general rule, no longer
possible.

Article 1162. Obligations derived from quasi-delicts shall be governed by the provisions of
Chapter 2, Title XVII of this Book, and by special laws. (1093a)

Obligations Arising from Quasi Delicts


• Refers to all of those obligations which do not arise from law, contracts, quasi-contracts,
or criminal offenses.

Persons Liable
• Not only from the person directly responsible for the damage incurred, but also against
the following:
1. The father, in case of his death or incapacity, the mother, with respect to damages
caused by the minor children who live in their company;
2. Guardians, with respect to damages caused by minors or incapacitated persons who are
under their authority and who live in their company;
3. Owners and managers of an establishment or enterprise, with respect to damages
caused by their employees in the service of the branches in which the latter are employed
or on the occasion of their functions;
4. Employers with respect to damages caused by their employees and household helpers
acting within the scope of the assigned tasks;
5. The State when it acts through a special agent; but not when the damage has been
caused by the official to whom the task done properly pertains; and
6. Teachers or heads of establishments of arts and trades, with respect to damages caused
by the pupils and students or apprentices, so long as they remain in their custody.
• Responsibilities of the above persons or entities shall cease if they can prove that they
have observed all the diligence of a good father of a family to prevent damage.

Requisites of Liability
1. Fault or negligence of the defendant;
2. Damage suffered or incurred by the plaintiff; and
3. Relation of cause and effect between the fault or negligence of the defendant and the
damage incurred by the plaintiff.

Quasi-delicts and crimes


• Crimes affect the public interest, while quasi delicts are only of private concern;
• The Penal Code punishes or corrects the criminal act, while the Civil Code, by means of
indemnification, merely repairs the damages incurred;
• In quasi-delict, there is only civil liability;
• Crimes are only punished if there is a law clearly covering them, while the latter include
all acts in which any kind of fault or negligence intervenes.

CHAPTER 2
Nature and Effect of Obligations
Obligations and Contracts Reviewer De la Salle University – College of Law
Guevarra | Tolentino Atty. Gallo

Article 1163. Every person obliged to give something is also obliged to take care of it with the
proper diligence of a good father of a family, unless the law or the stipulation of the parties
requires another standard of care. (1094a)

Article 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. (1095)

Article 1165. When what is to be delivered is a determinate thing, the creditor, in addition to the
right granted him by article 1170, may compel the debtor to make the delivery.

If the thing is indeterminate or generic, he may ask that the obligation be complied with at the
expense of the debtor.

If the obligor delays, or has promised to deliver the same thing to two or more persons who do not
have the same interest, he shall be responsible for any fortuitous event until he has effected the
delivery. (1096)

Article 1166. The obligation to give a determinate thing includes that of delivering all its
accessions and accessories, even though they may not have been mentioned. (1097a)

Obligations to Give
• An obligation to give a thing may be either determinate or generic.
• Determinate – when the object is particularly designated or physically segregated from all
others of the same class. Object is a concrete, particularized thing, indicated by its own
individuality.
• Generic/indeterminate – when the object is designated merely by its class or genus
without any particular designation or physical segregation from all others of the same
class.

Nature of right of creditor


• In obligations to give – the oblige or creditor has a right to the thing which is the object of
the obligation as well as the fruits thereof from the time the obligation as well as the fruits
thereof from the time the obligation to deliver it arises.
• In case of obligations arising from the law, quasi-contracts, criminal offenses, and quasi-
delicts, the obligation to deliver arises from the time designated by the provisions of the
Civil Code or of special laws creating or regulating them.
• In case of obligations arising from contracts, the obligation to deliver arises, as a general
rule, from the moment of the perfection of the contract.
• Personal right – a right pertaining to a person to demand from another, as a definite
passive subject, the fulfillment of a prestation to give, to do or not to do.
• Real right – a right pertaining to a person over a specific thing, without a passive subject
individually determined against whom such right may be personally enforced.

Rights of creditor in determinate obligations


1. To compel specific performance; and
2. To recover damages for breach of the obligation.

Rights of creditor in generic obligations


1. To ask for performance of the obligation
– He can only ask for the delivery of a thing or object belonging to the class or
genus stipulated which must be neither of superior nor inferior quality.
Obligations and Contracts Reviewer De la Salle University – College of Law
Guevarra | Tolentino Atty. Gallo

2. To ask that the obligation be complied with at the expense of the debtor.
3. To recover damages for breach of the obligation.

Obligations of debtor in determinate obligations


1. To perform the obligation specifically
2. To take care of the thing with the proper due diligence of a good father of a family
– Exceptions: (a) the law require another standard of care; (b) if the parties
stipulate another standard of care.
3. To deliver all accessions and accessories of the thing, even though they may not have
been mentioned.
– Accessions: all of those things which are produced by the thing which is the
object of the obligation as well as all of those which are naturally or artificially
attached thereto.
– Accessories: all of those things which have for their object the embellishment,
use or preservation of another thing which I more important and to which they are
not incorporated or attached. It includes all of those things which are necessary
or convenient for the perfection of another thing.
4. To be liable for damages in case of breach of the obligation by reason of delay, fraud,
negligence or contravention of the tenor thereof.
– However, this liability does not arise if the breach is due to a fortuitous event.
– Such liability extends only to a breach which is voluntary in character.
– This rule is applicable only to obligations to give a determinate thing.
– An indeterminate or generic thing can never perish.

Obligations of debtor in generic obligations


1. To deliver a thing which is neither superior nor inferior quality
1. To be liable for damages in case of breach of the obligation by reason of delay, fraud,
negligence or contravention of the tenor thereof.
– Art. 1263: an obligation to deliver a generic thing, the loss or destruction of
anything of the same class or genus as that which constitutes the object thereof
shall not extinguish the obligation.

Article 1167. If a person obliged to do something fails to do it, the same shall be executed at his
cost.
This same rule shall be observed if he does it in contravention of the tenor of the obligation.
Furthermore, it may be decreed that what has been poorly done be undone. (1098)

Obligations to do; Effects of Breach


– If the obligor fails to do that which he has obliged himself to do, the oblige can have the
obligation performed or executed at the expense of the former, and, at the same time,
demand for damages by reason of the breach.
– The law recognizes the individual’s freedom or liberty to choose between doing that
which he has promised to do and not doing it.
– The right of the oblige to have the prestation executed at the expense of the obligor
cannot be availed of when such prestation consists of an act where the personal and
special qualification of the obligor is the principal motive for the establishment of the
obligation, as for instance, the talent and prestige of an artist. In such a case there is no
other remedy of the obligee except to proceed against the obligor for damages under Art.
1170.
– If there has been a performance of the obligation, but in contravention of the tenor
thereof, the following rights are available to the oblige:
1. To have the obligation performed or executed at the expense of the obligor
2. To ask that what has been poorly done be undone
Obligations and Contracts Reviewer De la Salle University – College of Law
Guevarra | Tolentino Atty. Gallo

3. To recover damages because of breach of the obligation.

Article 1168. When the obligation consists in not doing, and the obligor does what has been
forbidden him, it shall also be undone at his expense. (1099a)

Obligations Not To Do; Effects of Breach


– The object of the obligation is fulfilled or realized so long as that which is forbidden is not
done by the obligor.
– If the obligor does what has been forbidden him, two remedies are available to the oblige:
1. To have it undone at the expense of the obligor in accordance with Art. 1168
and to ask for damages in accordance with Art. 1170.

Article 1169. Those obliged to deliver or to do something incur in delay from the time the obligee
judicially or extrajudicially demands from them the fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in order that delay may exist:
(1) When the obligation or the law expressly so declare; or
(2) When from the nature and the circumstances of the obligation it appears that the
designation of the time when the thing is to be delivered or the service is to be rendered
was a controlling motive for the establishment of the contract; or
(3) When demand would be useless, as when the obligor has rendered it beyond his
power to perform.
In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready
to comply in a proper manner with what is incumbent upon him. From the moment one of the
parties fulfills his obligation, delay by the other begins. (1100a)

Article 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or
delay, and those who in any manner contravene the tenor thereof, are liable for damages. (1101)

Article 1171. Responsibility arising from fraud is demandable in all obligations. Any waiver of an
action for future fraud is void. (1102a)

Article 1172. Responsibility arising from negligence in the performance of every kind of obligation
is also demandable, but such liability may be regulated by the courts, according to the
circumstances. (1103)

Article 1173. The fault or negligence of the obligor consists in the omission of that diligence
which is required by the nature of the obligation and corresponds with the circumstances of the
persons, of the time and of the place. When negligence shows bad faith, the provisions of articles
1171 and 2201, paragraph 2, shall apply.

If the law or contract does not state the diligence which is to be observed in the performance, that
which is expected of a good father of a family shall be required. (1104a)

Breach of Obligations
– It is voluntary if the debtor or obligor in the performance of this obligation is guilty of
default, or fraud, or negligence, or in an manner contravenes the tenor thereof.
– It is involuntary if he is unable to comply with his obligation because of an even which
cannot be foreseen, or which, though foreseen was inevitable.
– In the first, he is liable for damages, in the second he is not.

Voluntary Breach Through Default or Mora


1. Mora solvendi: the delay of the obligor or debtor to perform his obligation.
Obligations and Contracts Reviewer De la Salle University – College of Law
Guevarra | Tolentino Atty. Gallo

2. Mora accipiendi: the delay of the obligee or creditor to accept the delivery of the thing
which is the object of the obligation.
3. Compensatio morae: the delay of the parties or obligors in reciprocal obligations

3 Requisites in order that the obligor or debtor be considered in default:


1. The obligation is demandable and already liquidated;
2. The obligor or debtor delays performance; and
3. The creditor requires the performance judicially or extra-judicially.

Default in positive obligations


– The obligor or debtor incurs in delay from the time the obligee or creditor demands from
him the fulfillment of the obligation.
– It is judicial if the creditor files a complaint
– It is extrajudicial if the creditor demands from the debtor the fulfillment of the obligation
either orally or in writing.

When demand is not necessary


1. When the obligation or the law expressly so declares.
2. When from the nature and circumstances of the obligation it appears that the designation
of the time when the thing is to be delivered or the service is to be rendered was a
controlling motive for the establishment of the contract.
3. When demand would be useless, as when the obligor has rendered it beyond his power
to perform. (destruction of the object)

Default in negative obligations


– The obligor can not possibly incur in delay in negative obligations (not to do).

Default in reciprocal obligations


– Reciprocal obligations are those which are created or established at the same time, out of
the same cause, and which result in mutual relationships of creditor and debtor between
the parties.
– General rule: fulfillment by both parties should be simultaneous or at the same time.
– The rule then is that in reciprocal obligations, one party incurs in delay from the moment
the other party fulfills his obligation

Effect of Default
– Once the obligor or debtor has incurred in delay, he can be held liable by the oblige or
creditor for damages.
– This liability subsists even if the thing which constituted the object of the obligation may
have been lost or destroyed through a fortuitous event.

Voluntary Breach through Fraud or Dolo


– Fraud or dolo consists in the conscious and intentional proposition to evade the normal
fulfillment of an obligation. (present during the performance of an obligation)
– Causal/incidental fraud: present at the time of the birth of an obligation.
– Two classes of fraud in general: civil and criminal
– Civil fraud: (1) fraud in the performance of an obligation; (2) fraud in the constitution or
establishment of an obligation.

Fraud in performance Fraud in constitution


Present only during the performance of a Present only at the time of the birth of the
pre-existing obligation obligation
Employed for the purpose of evading the Employed for the purpose of securing the
Obligations and Contracts Reviewer De la Salle University – College of Law
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normal fulfillment of an obligation consent of the other party to enter into the
contract
Results in the nonfulfillment or breach of If it is the reason for the other party upon
the obligation whom it is employed for entering into the
contract, results in the vitiation of his
consent.
Gives rise to a right of the creditor or oblige Gives rise to a right of the innocent party to
to recover damages from the debtor or ask for the annulment of the contract if the
obligor fraud is causal or to recover damages if it
is incidental.

Effect of fraud
– He can be held liable for damages
– As a ground for damages, malice or dishonesty is implied.
– It cannot cover cases of mistake and errors of judgment made in good faith. Fraud or dolo
is synonymous to bad faith.
– Waiver of future fraud is contrary to law and public policy, thus void.
– But waiver for a past fraud is valid since such waiver can be deemed an act of generosity.
– Damages shall comprehend all which may be reasonably attributed to the breach or
nonfulfillment of the obligation, regardless of whether such consequences are natural or
unnatural, probable or improbable, foreseeable or unforeseeable. In addition, oblige can
also recover moral and exemplary damages.

Voluntary Breach Through Negligence or Culpa


– Negligence is simply the absence of due care required by the nature of the obligation.
– If the law or contract does not state the diligence which is to be observed in the
performance of the obligation, that which is expected of a good father of a family shall be
required.

Kinds of Negligence
– Civil / Criminal
– Civil: Culpa Contractual or Culpa Aquiliana
– Culpa Contractual: the fault or negligence of the obligor by virtue of which he is unable to
perform his obligation arising from a pre-existing contract, because of the omission of the
diligence which is required by the nature of the obligation and corresponds with the
circumstances of the persons, of the time and of the place.
– Culpa Aquiliana: the fault or negligence of a person who, because of the omission of the
diligence which is required by the nature of the obligation and which must correspond
with the circumstances of the persons, of the time and of the place, causes damage to
another.

With regard to: Culpa Contractual Culpa Aquiliana


Character of the Negligence Merely an incident in the Substantive and independent
performance of an obligation
Relationship of the Parties Pre-existing contractual May or may not be a pre-
relation existing contractual relation
Source of the Obligation Breach or nonfulfillment of the Negligent act or omission itself
contract
Proof required for recovery Existence of the contract and The negligence of the
of its breach or nonfulfillment defendant must be proved
is sufficient prima facie to
warrant a recovery
Availability of due diligence as Proof of diligence in the It is.
Obligations and Contracts Reviewer De la Salle University – College of Law
Guevarra | Tolentino Atty. Gallo

a defense selection and supervision of


employees is not available as
a defense

Negligence distinguished from fraud


– Negligence or culpa: an act or omission which is voluntary in character by virtue of which
another person suffers damage or injury due to a failure to observe the diligence which is
required by the nature of the obligation and which must correspond with the
circumstances of persons, time and place.
– Fraud or dolo: conscious and intentional proposition to evade the normal fulfillment of the
obligation.
– If there is intent to cause damage or injury, there is dolo; if there is merely abandonment,
inattention, carelessness, or lack of diligence, there is culpa.

Test of Negligence
– Did the defendant in doing the alleged negligent act use the reasonable care and caution
which an ordinarily prudent person would have used in the same situation?

Effect of Negligence
– Creditor or oblige can hold him liable for damages.
– This liability subsists even if he has been acquitted in a criminal action charging him with
a criminal offense based on his negligent act or omission.
– Can future negligence be waived? It can, unless the nature of the obligation and public
policy should require extraordinary diligence as in the case of common carriers.

Regulatory power of the courts


– The court may increase or decrease the liability of the party at fault depending upon the
circumstances of each case. Good or bad faith of the defendant may be considered.

Effect of good faith


– He shall be liable only for natural and probable consequences of the breach of the
obligation and which the parties have foreseen or could have reasonably foreseen at the
time the obligation was constituted.

Effect of bad faith


– Obligor can be held responsible for all damages which may be reasonably attributed to
the nonperformance of the obligation.

Effect of contributory negligence of the obligee or creditor


– Reduces or mitigates the damages which he can recover from the obligor or debtor.
– However, if the negligent act or omission of the oblige was a proximate cause of the even
which led to the damage or injury complained of, he cannot recover.

The courts may also equitably mitigate the damages in the ff. instances:
– Plaintiff himself has contravened the terms of the contract;
– Plaintiff has derived some benefit as a result of the contract;
– In cases where exemplary damages are to be awarded, where the defendant acted upon
the advice of counsel;
– The loss would have resulted in any event; and
– Upon filing of the action, the defendant has done his best to lessen the plaintiff’s loss or
injury.

Voluntary Breach Through Contravention of Tenor of Obligation


Obligations and Contracts Reviewer De la Salle University – College of Law
Guevarra | Tolentino Atty. Gallo

– Every debtor who fails in the performance of his obligations is bound to indemnify the
creditor for the damages caused thereby.

Article 1174. Except in cases expressly specified by the law, or when it is otherwise declared by
stipulation, or when the nature of the obligation requires the assumption of risk, no person shall
be responsible for those events which could not be foreseen, or which, though foreseen, were
inevitable. (1105a)

Concept of Fortuitous Event

– An even which could not be foreseen, or which, though foreseen, was inevitable.
– Fortuitous events may be produced by two general causes:
1. By nature, such as earthquakes, storms, floods, epidemics, fires, etc. and
2. By the act of man, such as an armed invasion, attack by bandits,
governmental prohibitions, robbery, etc.

Classification
– Fortuitous event proper: Act of God – event absolutely independent of human
intervention.
– Fore majeure (fuerza mayor): an event which arises from legitimate or illegitimate acts of
persons other than the obligor.
– Ordinary fortuitous event: even which usually happens or which could have been
reasonably foreseen.
– Extraordinary fortuitous event: an event which does not usually happen and which could
not have been reasonably foreseen, such as fire, war, pestilence, unusual flood, locust,
earthquake, and other of a similar nature.

Effect upon Obligation


– If the obligor is unable to comply with his obligation by reason of a fortuitous event,
general rule is that he is exempted from any liability whatsoever. The obligation is
extinguished.

Essential Conditions
1. Event must be independent of the will of the obligor;
2. Event must be either unforeseeable or inevitable
3. Event must be of such a character as to render it impossible for the obligor to fulfill his
obligation in a normal manner;
4. Obligor must be free from any participation in the aggravation of the injury resulting to the
obligee or creditor.

– There must be an entire exclusion of human agency from the cause of injury or loss.
– If the negligence of the obligor or debtor concurred with the fortuitous event in bringing
about the injury complained of, the obligation is not extinguished.
– In order to relieve such obligor or debtor of any liability, the act of God or fortuitous event
must not only be the proximate cause of the loss or destruction, but the better opinion is
that it must be the sole cause.

Exceptions
1. Such liability is expressly specified by law;
2. Where it is declared by stipulation of the parties; and
3. Where the nature of the obligation requires the assumption of risk.

Article 1175. Usurious transactions shall be governed by special laws. (n)


Obligations and Contracts Reviewer De la Salle University – College of Law
Guevarra | Tolentino Atty. Gallo

Usurious Transactions
– May be defined as contracting for or receiving something in excess of the amount allowed
by law for the loan or forbearance of money, goods or chattels.
– It is the taking of more interest for the use of money, goods or chattels or credit than the
law allows.

Article 1176. The receipt of the principal by the creditor without reservation with respect to the
interest, shall give rise to the presumption that said interest has been paid.

The receipt of a later installment of a debt without reservation as to prior installments, shall
likewise raise the presumption that such installments have been paid. (1110a)

Extinguishment of Interests and Prior Installments


– If the debtor is issued a receipt by the creditor and on the face of the receipt it is shown
that the principal has been paid without any reservation with respect to the interest, there
arises a disputable presumption that the interest has also been paid.
– If the debtor is issued a receipt by the creditor acknowledging payment of a latter
installment of a specified debt without any reservation with respect to prior installments,
there also arises a disputable presumption that such prior installments have already been
paid.

Article 1177. The creditors, after having pursued the property in possession of the debtor to
satisfy their claims, may exercise all the rights and bring all the actions of the latter for the same
purpose, save those which are inherent in his person; they may also impugn the acts which the
debtor may have done to defraud them. (1111)

Remedies of Creditor To Protect Credit


1. To exhaust the property in possession of the debtor
2. To be subrogated to all of the rights and actions of the debtor save those which are
inherent in his person; and
3. To impugn all of the acts which the debtor may have done to defraud him.
nd rd st
– The 2 and 3 are subsidiary to the 1 .

Exhaustion of debtor’s property


– The principal remedy of the creditor to protect and enforce his credit is to exhaust all
properties in the possession of the debtor.

Accion subrogatoria
– The law expressly grants to the creditor the right to exercise all of the rights and bring all
of the actions which the debtor may have against third persons.
– Requisites:
1. The debtor to whom the right or action properly pertains must be indebted to
the creditor;
2. The latter must be prejudiced by the inaction or failure of the debtor to
proceed against the third person; and
3. Creditor must have first pursued or exhausted all of the properties of the
debtor which are not exempted from execution.

Accion pauliana
– The right available to the creditor by virtue of which he can secure the rescission of any
act of the debtor which is in fraud and to the prejudice of this rights as a creditor.
Obligations and Contracts Reviewer De la Salle University – College of Law
Guevarra | Tolentino Atty. Gallo

Article 1178. Subject to the laws, all rights acquired in virtue of an obligation are transmissible, if
there has been no stipulation to the contrary. (1112)

Transmissibility of Rights
– Rights of obligations or those rights which are acquired by virtue of an obligation are as a
general rule transmissible in character. Consequently, the may be alienated or assigned
to third persons.
– Exceptions:
1. Where they are not transmissible by their very nature, such as in the case of
a purely personal right;
2. Where there is a stipulation of the parties that they are not transmissible
3. Where they are not transmissible by operation of law.

CHAPTER 3
Different Kinds of Obligations

SECTION 1
Pure and Conditional Obligations

Article 1179. Every obligation whose performance does not depend upon a future or uncertain
event, or upon a past event unknown to the parties, is demandable at once.

Every obligation which contains a resolutory condition shall also be demandable, without
prejudice to the effects of the happening of the event. (1113)

Article 1180. When the debtor binds himself to pay when his means permit him to do so, the
obligation shall be deemed to be one with a period, subject to the provisions of article 1197. (n)

Pure Obligations
– One whose effectivity or extinguishment does not depend upon the fulfillment or
nonfulfillment of a condition or upon the expiration of a term or period, and which, as a
consequence, is characterized by the quality of immediate demandability.
– Immediately demandable.
– Although the oblige or creditor can demand the performance of the obligation
immediately, the quality of immediate demandability is not infringed or violated when a
reasonable period is granted for performance.

Conditional Obligations
– One whose effectivity is subordinated to the fulfillment or nonfulfillment of a future and
uncertain fact or event.
– The event must not only be future, but it must also be uncertain.
– If the proof or ascertainment of the fact or event will surely come to pass, although it may
not be known when, it is clear that it constituted a term or period.
– If the past event is unknown to the parties as well as to the whole world, so that the proof
or ascertainment thereof may or may not happen or come to pass, it is also clear that it
constitutes a condition.

Classification of conditions

Suspensive – when the fulfillment of the condition results in the acquisition of rights arising out of
the obligation.
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Resolutory – when the fulfillment of the condition results in the extinguishment of rights arising out
of the obligation.

Potestative – when the fulfillment of the condition depends upon the will of a party to the
obligation.

Casual – when the fulfillment of the condition depends upon chance and/or upon the will of a third
person.

Mixed – when the fulfillment of the condition depends partly upon the will of a party to the
obligation and partly upon chance and/or the will of a third person.

Possible – when the condition is capable of realization according to nature, law, public policy or
good customs.

Impossible – when the condition is not capable of realization according to nature, law, public
policy or good customs.

Positive – when the condition involves the performance of an act.

Negative – when the condition involves the omission of an act.

Divisible – when the condition is susceptible of partial realization.

Indivisible – when the condition is not susceptible of partial realization.

Conjunctive – when there are several conditions, all of which must be realized.

Alternative – when there are several conditions, but only one must be realized.

Express – when the condition is stated expressly.

Implied – when the condition is tacit.

Article 1181. In conditional obligations, the acquisition of rights, as well as the extinguishment or
loss of those already acquired, shall depend upon the happening of the event which constitutes
the condition. (1114)

Suspensive Condition
– A future and uncertain event upon the happening or fulfillment of which rights arising out
of the obligation are acquired.
– It signifies a future and uncertain event upon the fulfillment of which the obligation
becomes effective.
– The birth or effectivity of the obligation is suspended until the happening or fulfillment of
the event which constitutes the condition.
– If the suspensive condition does not take place, the parties would stand as if the
conditional obligation had never existed.

Resolutory Condition
– Is a future and uncertain event upon the happening or fulfillment of which rights which are
already acquired by virtue of the obligation are extinguished or lost.
– The juridical relation which is established as a result of the obligation is subject to the
threat of extinction.
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Effects
– Suspensive condition: the acquisition of rights shall depend upon the happening or
fulfillment of the fact or event which constitutes the condition. The obligation shall become
effective only upon the fulfillment of the condition.
– Resolutory condition: it becomes demandable immediately after its establishment or
constitution.

Article 1182. When the fulfillment of the condition depends upon the sole will of the debtor, the
conditional obligation shall be void. If it depends upon chance or upon the will of a third person,
the obligation shall take effect in conformity with the provisions of this Code. (1115)

Potestative Condition
– One whose fulfillment depends exclusively upon the will of either one of the parties to the
obligation.

Casual Condition
– One whose fulfillment depends exclusively upon chance and/or upon the will of a third
person.

Mixed Condition
– Fulfillment depends jointly upon the will of either of the parties to the obligation and upon
chance and/or the will of a third person.

Effect of Potestative Condition


– Fulfillment depends exclusively upon the will of the creditor – valid
– Fulfillment depends exclusively upon the will of the debtor – void
– It must be noted that the rule that the conditional obligation shall be void is applicable
only to an obligation which depends for its perfection upon a condition which is
potestative to the debtor and not to a pre-existing obligation.

Effect of Casual Conditions


– When the fulfillment of the condition depends upon chance and/or the will of a third
person, the obligation including such condition shall take effect.

Effect of Mixed Conditions


– When the fulfillment of the condition depends partly upon the will of a party to the
obligation and partly upon chance and/or the will of a third person, the obligation including
such condition shall take effect.

Article 1183. Impossible conditions, those contrary to good customs or public policy and those
prohibited by law shall annul the obligation which depends upon them. If the obligation is divisible,
that part thereof which is not affected by the impossible or unlawful condition shall be valid.

The condition not to do an impossible thing shall be considered as not having been agreed upon.
(1116a)

Possible and Impossible Conditions


– Possible: when it is capable of realization not only according to its nature, but also
according to the law, good customs and public policy.
– Impossible: when it is not capable of realization either according to its nature or according
to law, good customs or public policy.
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Effects
– Impossible: annul the obligation which depends upon them
– If the obligation, however, is a pre-existing obligation, and therefore, does not depend
upon the fulfillment of the condition for its perfection, it is quite clear that only the
condition is void, but not the obligation.
– It must be observed that if the obligation is divisible, that part which is not affected by the
impossible or unlawful condition shall be valid.
– If the condition is not to do an impossible thing, it shall be considered as not having been
agreed upon.

Article 1184. The condition that some event happen at a determinate time shall extinguish the
obligation as soon as the time expires or if it has become indubitable that the event will not take
place. (1117)

Article 1185. The condition that some event will not happen at a determinate time shall render
the obligation effective from the moment the time indicated has elapsed, or if it has become
evident that the event cannot occur.

If no time has been fixed, the condition shall be deemed fulfilled at such time as may have
probably been contemplated, bearing in mind the nature of the obligation. (1118)

Positive and Negative Conditions


– Positive: if it involves the performance of an act or the fulfillment of an event
– Negative: if it involves the nonperformance of an act or the nonfulfillment of an event

Effects
– The condition that some even happen at a determinate time shall extinguish the
obligation as soon as the time expires or if it becomes indubitable that the event will not
take place.

Article 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents its
fulfillment. (1119)

Constructive Fulfillment of Suspensive Conditions


– Necessary that the obligor must have actually prevented the oblige from complying with
the condition, and that such prevention must have been voluntary or willful in character.
– Doctrine can be applied only to suspensive and not to resolutory conditions.

Article 1187. The effects of a conditional obligation to give, once the condition has been fulfilled,
shall retroact to the day of the constitution of the obligation. Nevertheless, when the obligation
imposes reciprocal prestations upon the parties, the fruits and interests during the pendency of
the condition shall be deemed to have been mutually compensated. If the obligation is unilateral,
the debtor shall appropriate the fruits and interests received, unless from the nature and
circumstances of the obligation it should be inferred that the intention of the person constituting
the same was different.

In obligations to do and not to do, the courts shall determine, in each case, the retroactive effect
of the condition that has been complied with. (1120)

Article 1188. The creditor may, before the fulfillment of the condition, bring the appropriate
actions for the preservation of his right.
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The debtor may recover what during the same time he has paid by mistake in case of a
suspensive condition. (1121a)

Effect of Suspensive Conditions Before Fulfillment


– During the pendency of the condition. The oblige or creditor has only a mere hope or
expectancy, this is however protected by law.
– Thus, if the obligor has promised in writing to sell a parcel of land to the oblige upon the
happening of a certain condition, and subsequently, before the fulfillment of the condition,
he changes his mind and finally decides to sell the land to another person, the obligee
can bring an appropriate action, such as a petition for the issuance of a writ of injunction,
to prevent the sale in order to preserve the right.

Effect of Suspensive Conditions After Fulfillment


– Once the event which constitutes the condition is fulfilled, the obligation arises or
becomes effective.
– The right of the creditor, which, before the fulfillment of the condition, was a mere hope or
expectancy, is perfected. It becomes effective and demandable.

Retroactivity Effect
– Once the event which constitutes the condition is fulfilled thus resulting in the effectivity of
the obligation, its effects must logically retroact to the moment when the essential
elements which gave birth to the obligation have taken place and not to the moment
when the accidental element was fulfilled.
– The principle of retroactivity can only apply to consensual contracts.

In obligations to give
– When the obligation imposes reciprocal prestations upon the parties, the fruits and
interests during the pendency of the condition shall be deemed to have been mutually
compensated.

In obligations to do or not to do
– In case of personal obligations, the courts will have to determine in each case the
retroactive effect of the condition that has been complied with.

Article 1189. When the conditions have been imposed with the intention of suspending the
efficacy of an obligation to give, the following rules shall be observed in case of the improvement,
loss or deterioration of the thing during the pendency of the condition:

(1) If the thing is lost without the fault of the debtor, the obligation shall be extinguished;

(2) If the thing is lost through the fault of the debtor, he shall be obliged to pay damages;
it is understood that the thing is lost when it perishes, or goes out of commerce, or
disappears in such a way that its existence is unknown or it cannot be recovered;

(3) When the thing deteriorates without the fault of the debtor, the impairment is to be
borne by the creditor;

(4) If it deteriorates through the fault of the debtor, the creditor may choose between the
rescission of the obligation and its fulfillment, with indemnity for damages in either
case;

(5) If the thing is improved by its nature, or by time, the improvement shall inure to the
benefit of the creditor;
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(6) If it is improved at the expense of the debtor, he shall have no other right than that
granted to the usufructuary. (1122)

Effect of Loss, Deterioration or Improvement


– The rules refer only to conditional obligations to give a determinate thing. Although the
loss, deterioration or improvement occurs during the pendency of the condition, such
rules are predicated on the fulfillment of such conditions.

Losses
– Loss of the thing due must be understood in its technical, not vulgar, sense.
– It is understood that the thing is lost:
1. When it perishes;
2. When it goes out of commerce;
3. When it disappears in such a way that its existence is unknown or it cannot be
recovered.
– If the thing is lost without any fault of the debtor, the obligation is extinguished.
– However, if it is lost through his fault, the obligation is converted into one of indemnity for
damages.

Deteriorations
– If the thing deteriorates without the fault of the debtor, the impairment is to be borne by
the creditor.
– However, if it deteriorates through the fault of the debtor, the creditor may choose
between bringing an action for rescission of the obligation with damages and bringing an
action for specific performance with damages.

Improvements
– If the thing is improved by its nature or by time, the improvement shall inure to the benefit
of the creditor.
– However, if the thing is improved at the expense of the debtor, he shall have no other
right than that granted to a usufructuary. Consequently, the debtor cannot ask
reimbursement for the expenses incurred for useful improvements or for improvements
for mere pleasure; he can, however, ask reimbursement for necessary expenses.
– Although he cannot ask the creditor to reimburse his expenses for useful improvements
and improvements for mere pleasure, he has the right to remove such improvements,
provided it is possible to do so without damage to the thing or property.

Article 1190. When the conditions have for their purpose the extinguishment of an obligation to
give, the parties, upon the fulfillment of said conditions, shall return to each other what they have
received.

In case of the loss, deterioration or improvement of the thing, the provisions which, with respect to
the debtor, are laid down in the preceding article shall be applied to the party who is bound to
return.

As for the obligations to do and not to do, the provisions of the second paragraph of article 1187
shall be observed as regards the effect of the extinguishment of the obligation. (1123)

Effect of Resolutory Conditions Before Fulfillment


– The right which is explicitly recognized in the first paragraph of Art.1188 is also available
to the debtor in obligations with a resolutory condition.

Effect of Resolutory Conditions After Fulfillment


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– If the resolutory condition is not fulfilled, such rights are consolidated; in other words, they
become absolute in character.
– If it is fulfilled, such rights are extinguished altogether, in other words, whatever may have
been paid or delivered by one or both of the parties upon the constitution of the
obligation shall have to be returned upon the fulfillment of the condition.

Retroactivity of effect
– In obligations to give, upon the fulfillment of the resolutory condition, the parties shall
return to each other what they have received.
– There are no exceptions or limitations similar to those provided for in suspensive
conditions.

Article 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation, with the
payment of damages in either case. He may also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of
a period.

This is understood to be without prejudice to the rights of third persons who have acquired the
thing, in accordance with articles 1385 and 1388 and the Mortgage Law. (1124)

Reciprocal Obligation
– Those which are created or established at the same time, out of the same cause, and
which result in mutual relationship[s of creditor and debtor between the parties.

Tacit Resolutory Condition


– If one of the parties fails to comply with what is incumbent upon him, there is a right on
the part of the other to rescind (or “resolve” in accordance with accepted translations of
the Spanish Civil Code) the obligation. This condition is implied as a general rule in all
reciprocal obligations.

Necessity of judicial action


– The right to rescind or resolve the obligation is a right which belongs to the injured party
alone. However, it is essential that it must be invoked judicially.
– The party entitled to rescind must invoke judicial aid by filing the proper action for
rescission.
– Art. 1191 cannot be applied to contracts of partnership where one of the partners fails to
pay the whole amount which he has bound himself to contribute to the common fund.
– Above article cannot be applied to sales of real property of personal property by
installments.

Nature of Breach
– The general rule is that rescission will not be permitted for a slight or casual breach of the
contract, but only for such breaches as are substantial and fundamental as to defeat the
object of the parties in making the agreement.

Alternative remedies of injured party


– The injured party may choose between the fulfillment and the rescission of the obligation,
with the payment of damages in either case.
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– These remedies are alternative, not cumulative; in other words, the injured party cannot
seek both.
– It must, however, be observed that even after the injured party has chosen fulfillment and
such fulfillment should become impossible, he can still seek the rescission or resolution of
the obligation.
– It must also be observed that the right to choose between fulfillment and rescission is not
incompatible with an alternative prayer for fulfillment or rescission in the complaint.
– Even if the plaintiff apparently seeks to avail of both remedies, the presumption is that he
is leaving the matter to the sound discretion of the court.

Damages to be awarded
– Whether the injured party chooses specific fulfillment or rescission, the rule is that he can
recover damages.

Judicial discretion to decree rescission


– It is clear from this provision that the right of the injured party in reciprocal obligations to
rescind in case of failure of the other to comply with what is incumbent upon him is not
absolute in character. This is so because the court is given the discretionary power to fix
a period within which the obligor in default may be permitted to comply with what is
incumbent upon him.

Effect of rescission
– When an obligation has been rescinded or resolved, it is the duty of the court to require
the parties to surrender whatever they may have received from the other, in other words,
the parties must be placed as far as practicable in their original situation.

Effect upon third persons


– The decree of rescission shall be understood to be without prejudice to the rights of third
persons who have acquired the thing.
– In such case, the only remedy of the injured part is to proceed against the party
responsible for the transfer or conveyance for damages.
– However, if the third person had acquired the thing in bad faith, the injured party can still
go after the property.

Article 1192. In case both parties have committed a breach of the obligation, the liability of the
first infractor shall be equitably tempered by the courts. If it cannot be determined which of the
parties first violated the contract, the same shall be deemed extinguished, and each shall bear his
own damages. (n)

SECTION 2
Obligations with a Period

Article 1193. Obligations for whose fulfillment a day certain has been fixed, shall be demandable
only when that day comes.

Obligations with a resolutory period take effect at once, but terminate upon arrival of the day
certain.

A day certain is understood to be that which must necessarily come, although it may not be
known when.

If the uncertainty consists in whether the day will come or not, the obligation is conditional, and it
shall be regulated by the rules of the preceding Section. (1125a)
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Concept of Term or Period


– A term or period is an interval of time, which, exerting an influence on an obligation as a
consequence of a juridical act, either suspends its demandability or produces its
extinguishment.
– Hence obligations with a period may be defined as those whose demandability or
extinguishment is subject to the expiration of a term or period.

Distinguished from condition

As to: Term/Period Condition


Requisites Interval of time which is future and certain A fact or event which is future and
uncertain
Fulfillment Interval of time which must necessarily come, Future and uncertain fact or event which
although may be unknown when may happen or not
Influence on Exerts an influence upon the time of the Exerts an influence upon the very
obligation demandability or extinguishment of an existence of the obligation itself
obligation
Retroactivity of Does not have any retroactive effect unless Has retroactive effects
effects there is an agreement to the contrary
Effect of will of When left exclusively to the will of the debtor, When left exclusively to the will of the
debtor the existence of the obligation is not affected debtor, the very existence of the
obligation is affected.

Classification of Term or Period


1. Suspensive – when the obligation becomes demandable only upon the arrival of a day
certain
2. Resolutory – when the obligation is demandable at once, although it is terminated upon
the arrival of a day certain
3. Legal – when it is granted by law
4. Conventional – when it is stipulated by the parties
5. Judicial – when it is fixed by the courts
6. Definite – when the date or time is known beforehand
7. Indefinite – when it can only be determined by an event which must necessarily come to
pass, although it may not be known when

Effect of Term or Period


– If the term or period is suspensive: the fulfillment or performance of the obligation is
demandable only upon the arrival of the day certain or the expiration of the term. What is
therefore suspended by the term is not the acquisition of the right or the effectivity of the
obligation but merely its demandability.
– If the term or period is resolutory: the fulfillment or performance of the obligation is
demandable at once, but is extinguished or terminated upon the arrival of the day certain
or the expiration of the term.

Effect of fortuitous event


– In obligations with a term or period, any stipulation in the contract to the effect that in
case of a fortuitous event the contract shall be deemed suspended during the term or
period does not mean that the happening of the fortuitous event shall stop the running of
the term or period agreed upon.
– Its only effect is to relieve the contracting parties from the fulfillment of their respective
obligations during the term or period.
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Article 1194. In case of loss, deterioration or improvement of the thing before the arrival of the
day certain, the rules in article 1189 shall be observed. (n)

Article 1195. Anything paid or delivered before the arrival of the period, the obligor being
unaware of the period or believing that the obligation has become due and demandable, may be
recovered, with the fruits and interests. (1126a)

Effect of Advanced Payment or Delivery


– If the obligor, being unaware of the period or believing that the obligation has become
due and demandable, paid or delivered anything before the arrival or expiration of the
period, he may recover what he has paid or delivered with fruits and interests.
– Only applies to obligations to give.
– Consequently, if the payment or delivery was made voluntarily or with knowledge of the
period or of the fact that the obligation as not yet become due and demandable, there can
be no right of recovery whatsoever.

Article 1196. Whenever in an obligation a period is designated, it is presumed to have been


established for the benefit of both the creditor and the debtor, unless from the tenor of the same
or other circumstances it should appear that the period has been established in favor of one or of
the other. (1127)

Benefit of Term or Period


– General rule: when a period is designated for the performance or fulfillment of an
obligation, it is presumed to have been established for the benefit of both the creditor and
the debtor.
– Consequently, as a general rule: the creditor cannot demand the performance of the
obligation before the expiration of the designated period; neither can the debtor perform
the obligation before the expiration of such period.

Exception
– If it should appear that such period has been established for the benefit of the creditor, he
may demand the fulfillment or performance of the obligation at any time, but the obligor or
debtor, on the other hand, cannot compel him to accept payment before the expiration of
the period.

Article 1197. If the obligation does not fix a period, but from its nature and the circumstances it
can be inferred that a period was intended, the courts may fix the duration thereof.

The courts shall also fix the duration of the period when it depends upon the will of the debtor.

In every case, the courts shall determine such period as may under the circumstances have been
probably contemplated by the parties. Once fixed by the courts, the period cannot be changed by
them. (1128a)

Judicial Term of Period


– A term or period fixed by a competent court in accordance with the law
– Once fixed by a competent court, the period can no longer be judicially changed

When court may fix term


1. If the obligation does not fix a period, but from its nature and the circumstances it can be
inferred that a period was intended by the parties;
2. If the duration of the period depends upon the will of the debtor; and
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3. If the debtor binds himself to pay when his means permit him to do so.

Nature of action
– The only action that can be maintained under Art. 1197 is an action to ask the court to fix
the duration of the term or period.
– It is only after the duration has been fixed by a proper court that any other action involving
the fulfillment or performance of the obligation can be maintained.
– Consequently, so long as such period has not yet been fixed by the court, legally, there
can be no possibility of any breach of contract or of failure to perform the obligation, and if
it so happens that this point was never raised before the trial court, the creditor cannot be
allowed to raise it for the first time on appeal.

Effect of judicial period


– Once fixed by courts, the period can no longer be judicially changed
– It becomes a law governing their contract

Article 1198. The debtor shall lose every right to make use of the period:

(1) When after the obligation has been contracted, he becomes insolvent, unless he
gives a guaranty or security for the debt;

(2) When he does not furnish to the creditor the guaranties or securities which he has
promised;

(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;

(4) When the debtor violates any undertaking, in consideration of which the creditor
agreed to the period;

(5) When the debtor attempts to abscond. (1129a)

Extinguishment of Debtor’s Right to Period


– “Insolvent”: understood in its ordinary or popular sense – when it would not be possible
financially for the debtor to comply with his obligation
– However, if there is a guaranty or security for the debt, the debtor, in spite of his
insolvency, does not lose his right to the period.
– If the guaranty or security is impaired through the fault of the debtor, he shall lose his
right to the benefit of the period; however if it is impaired without his fault, he shall retain
his right.
– If the guaranty or security disappears through any cause, even without any fault of the
debtor, he shall lose his right to the benefit of the period.
– In either case however, the debtor shall not lose his right to the benefit of the period if he
gives a new guaranty or security which is equally satisfactory.

SECTION 3
Alternative Obligations

Concept
– When an obligation comprehends several objects or prestations it may be either
conjunction or distributive.
– Conjunctive: when all of the objects or prestations are demandable at the same time
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– Distributive: when only one is demandable


– Distributive, in turn, may be either alternative or facultative
– Alternative: when it comprehends several objects or prestations which are due, but is
may be complied with by the delivery of another object or the performance of another
prestation in substitution.
– Facultative: only one object or prestation is due, but the obligor or debtor may deliver
another object or perform another prestation in substitution.

ARTICLE 1199. A person alternatively bound by different prestations shall completely perform
one of them.

The creditor cannot be compelled to receive part of one and part of the other undertaking. (1131)

Article 1200. The right of choice belongs to the debtor, unless it has been expressly granted to
the creditor.

The debtor shall have no right to choose those prestations which are impossible, unlawful or
which could not have been the object of the obligation. (1132)

Right of Choice in Alternative Obligations


– General rule: belongs or pertains to the debtor
– Exceptions:
1. When the right of choice has been expressly granted to the creditor
2. When it has been expressly granted to a third person

Limitation upon right of choice


– The debtor cannot choose those prestations or undertakings which are impossible,
unlawful or which could not have been the object of the obligation.
– “Prestations which could not have been the object of the obligation”: those undertakings
which are not included among those from which the obligor may select, or to those which
are not yet due and demandable a the time of the selection is made, or to those which, by
reason of accident or some other chase, have acquired a new character distinct or
different from that contemplated by the parties when the obligation was constituted.

Article 1201. The choice shall produce no effect except from the time it has been communicated.
(1133)

When Choice Takes Effect


– No special form is required for the communication or notification
– Any form may be employed provided that the other party is properly notified of the
selection.
– Consent or concurrence of the creditor to the choice or selection made by the debtor is
not necessary before the choice or selection can produce effect

Effect upon obligation


– Once the choice is made, the obligation ceases to be alternative from the moment the
selection has been communicated to the other party.
– An election once made is binding on the person who makes it, and he will not therefore
be permitted to renounce his choice and take an alternative which was at first opened to
him.

Article 1202. The debtor shall lose the right of choice when among the prestations whereby he is
alternatively bound, only one is practicable. (1134)
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When Only One Prestation is Practicable


– The obligation loses its alternative character; it becomes a simple obligation

Article 1203. If through the creditor's acts the debtor cannot make a choice according to the
terms of the obligation, the latter may rescind the contract with damages. (n)

When Choice is Rendered Impossible


– Since the debtor’s right of choice is rendered ineffective through the creditor’s fault, his
only possible recourse will be to bring an action to rescind the contract with damages.

Article 1204. The creditor shall have a right to indemnity for damages when, through the fault of
the debtor, all the things which are alternatively the object of the obligation have been lost, or the
compliance of the obligation has become impossible.

The indemnity shall be fixed taking as a basis the value of the last thing which disappeared, or
that of the service which last became impossible.

Damages other than the value of the last thing or service may also be awarded. (1135a)

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. (1136a)

If right of choice belongs to the debtor


– If the right of choice belongs to the debtor and the loss or impossibility is due to a
fortuitous event, then the debtor cannot be held liable for damages.
– Consequently, if one of the things is lost or one of the prestations cannot be performed by
reason of a fortuitous event, the debtor must still comply with the obligation by delivering
or performing that which he shall choose from among the remainder;
– if all of the things, except one, are lost, or all of the prestations, exception one, cannot be
performed by reason of a fortuitous event, the debtor must still comply with his obligation
by delivering or performing that which remains;
– and if all of the things are lost or all of the prestations cannot be performed by reason of a
fortuitous event, the debtor is released from the obligation.
– Consequently, if all of the things are lost or all of the prestations cannot be performed due
to the fault of the debtor, the creditor shall have a right to indemnity for damages.

If right of choice belongs to creditor


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– If the right of choice belongs to the creditor and the loss or impossibility is due to a
fortuitous event, the debtor cannot be held liable.
– But if the loss or impossibility is due to the fault of the debtor, Nos. 2 and 4 of the second
paragraph of Art. 1205 are applicable.
– Consequently, if all of the things are lost or all of the prestations cannot be performed due
to the fault of the debtor, the creditor may claim the price or value of any one of them with
indemnity and damages.
– However, if one or some, but not all, of the things are lost, or one or some, but not all, of
the prestations cannot be performed due to the fault of the debtor, the creditor may claim
any of those subsisting without any liability on the part of the debtor for damages or the
price or value of that, which through the fault of the former, was lost or could not be
performed, with indemnity for damages.

Article 1206. When only one prestation has been agreed upon, but the obligor may render
another in substitution, the obligation is called facultative.

The loss or deterioration of the thing intended as a substitute, through the negligence of the
obligor, does not render him liable. But once the substitution has been made, the obligor is liable
for the loss of the substitute on account of his delay, negligence or fraud. (n)

Nature of Facultative Obligations


– An obligation wherein only one object or prestation has been agreed upon by the parties
to the obligation, but which may be complied with by the delivery of another object or the
performance of another prestation in substitution.

Distinguished from alternative obligations

As to: Facultative Alternative


Objects Only one object is due Several objects are due
due
Compliance By the delivery of another object or By the delivery of one of the objects or by
by performance of another prestation the performance of one of the prestations
in substitution of that which is due which are alternatively due
Choice Right of choice pertains only to the Right of choice may pertain even to the
debtor creditor or to a third person
Effect of Provided that the debtor is not at Loss or impossibility of all of the objects
fortuitous fault, sufficient to extinguish the which are due without any fault of the
loss obligation debtor is necessary to extinguish the
obligation
Effect of The culpable loss of the object which The culpable loss of any of the object
culpable the debtor may deliver in substitution which are alternatively due before the
loss before the substitution is effected choice is made may give rise to a liability
does not give rise to any liability on on the part of the debtor.
the part of such debtor

When substitution takes effect


– It is necessary that the debtor must communicate such fact to the said creditor
– Once the creditor will be bound by the substitution, then the obligation ceases to be
facultative, it is finally converted into a simple obligation to deliver the thing or to perform
the prestation which has been substituted.

Effect of loss of substitute


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– Before the substitution is made by the obligor, the loss or deterioration of the ting
intended as a substitute, through the negligence of the said obligor, does not render him
liable.
– Hence, there seems to be an implication that if the loss or deterioration is through the bad
faith or fraud of the obligor, then he is liable.

Section 4. – Joint and Solidary Obligations

Concept
⎯ Concurrence of two or more creditors or debtors in the same obligation
⎯ Two types:
• Joint Obligation (obligacion mancomunada)
o each of the debtors is liable for a proportionate part of the credit.
o each of the creditors may demand for only a proportionate part of the
credit.
• Solidary Obligation (obligacion solidaria)
o each of creditor is entitled to demand the payment of the entire credit
o each debtor is liable for the payment of the entire debt.

Art. 1207. The concurrence of two or more creditors or of two or more debtors in one and the
same obligation does not imply that each one of the former has a right to demand, or that each
one of the latter is bound to render, entire compliance with the prestation. There is a solidary
liability only when the obligation expressly so states, or when the law or the nature of the
obligation requires solidarity.

Nature of Collective Obligations in General


⎯ There is the presumption that the obligation is joint and not solidary when there is a
concurrence of several creditors and/or debtors
⎯ Each of the creditors are entitled to demand only a proportionate amount of their share of
the credit as can the debtors only be compelled to pay for their proportionate share of the
debt.

Solidarity
⎯ Any one of the creditors can proceed against one, or some, or all of the debtors for the
payment of the entire credit.
⎯ Exception to the presumption of a joint obligation
o Obligation expressly states its solidary (CONTRACT)
§ Jointly and severally
§ Individually and collectively
o When the law requires solidarity (LAW)
§ Liability of principals, accomplices, and accessories.
o Nature of the obligation requires solidarity (NATURE)
§ Obligations from criminal offense and torts

*Note: Joint – each can only be made to pay/receive according to his share.
Solidary – one can be made to pay for the whole obligation subject to reimbursement

Art. 1208. If from the law, or the nature of the wording of the obligations to which the preceding
article refers the contrary does not appear, the credit or debt shall be presumed to be divided into
as many equal shares as there are creditors or debtors, the credits or debts being considered
distinct from one another, subject to the Rules of Court governing the multiplicity of suits.
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Joint Divisible Obligations


⎯ Fundamental Effect: each creditor can only demand for the payment of his proportionate
share as each debtor can only be compelled to pay his proportionate share.
⎯ Corollary – debt is to be divided into as many shares as there are creditors.
⎯ Joint creditor cannot act in representation of the others.
⎯ Joint debtor cannot be compelled to answer for the liability of the others.
⎯ Any breach by one of the joint debtors shall be borne by him alone.
⎯ Any pure personal defense to the breach can only be availed of by the same person.

Art. 1209. If the division is impossible, the right of the creditors may be prejudiced only by their
collective acts, and the debt can be enforced only by proceeding against all the debtors. If one of
the latter should be insolvent, the others shall not be liable for his share.

Joint and Indivisible Obligations


⎯ Two fundamental characteristics:
o No creditor can act in representation of the others
o No debtor can be compelled to answer for the liability of the others
⎯ Joint with respect to the parties
⎯ Indivisible with respect to the fulfillment of the obligation
⎯ Characteristics:
o Two or more Debtors
§ Compliance with the obligation requires concurrence of all the debtors for
each of his own share
§ Obligation can be enforced only be enforced by proceeding against all of
the debtors
o Two or more Creditors
§ Concurrence of all the creditors for each of his own share is necessary
for the enforcement of the obligation.
§ Obligation is joint – one cannot act in representation of the other
§ Obligation is indivisible – not susceptible to partial fulfillment
§ Creditors may be prejudiced by their collective acts

Effect of Breach
⎯ If one debtors fails to comply, the entire obligation can no longer be fulfilled
⎯ Obligation is converted into indemnity for damages
⎯ However, debtors who may have been ready to fulfill their part of the obligation at the
time of the breach shall not contribute to the indemnity beyond their portion of the price of
the thing or service due.

Effect of Insolvency of Debtor


⎯ One debtor becomes insolvent, others shall not be liable for his insolvency

Interruption of Period of Prescription


⎯ The act of one joint creditor in extending the prescription period of an obligation without
the collective action of the other creditors is invalid. (goes against the joint nature of the
obligation)

Art. 1210. The indivisibility of an obligation does not necessarily give rise to solidarity. Nor does
solidarity of itself imply indivisibility.

Indivisibility and Solidarity


⎯ Not identical
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⎯ Distinguishable according to:


o Nature
§ Indivisible – refers to the prestation
§ Solidarity – refers to legal tie and to the subjects or parties
o Requisites
§ Indivisible – plurality of subjects is not required
§ Solidarity – plurality of subjects is indispensable
o Effect of Breach
§ Indivisible – when the obligation is converted into indemnity for damages,
indivisibility is terminated
§ Solidarity – when there is liability on the part of the debtors, solidarity
remains.

Art. 1211. Solidarity may exist although the creditors and the debtors may not be bound in the
same manner and by the same periods and conditions.

Kinds of Solidarity
⎯ Active
o Creditors – each has a right to claim the whole of the obligation for the other
creditors
o Tie or vinculum existing among several creditors of one and the same obligation
o Mutual representation – Each creditors represents the other in the act of
receiving the 
payment and in all other acts which tend to secure the credit
o Death of solidary creditor does not transmit the solidarity to each of his heirs but
all of them 
taken together
o The credit and its benefit are divided equally among the creditors UNLESS there
is an 
agreement among them to divide differently

⎯ Passive
o Debtors – each is liable to pay the entire obligation
o Mutual surety
⎯ Mixed

Effect of Active Solidarity


⎯ Creation of a relationship of mutual agency among the solidary creditors
⎯ Equal representation from which none can be excluded without destroying the solidary
character of the obligation

Effect of Passive Solidarity in General


⎯ With respect to creditors: each solidary debtor is the debtor of the entire amount
⎯ With respect to co-debtors: debtor only to the extent of his share
⎯ Fundamental Effect:
o Liability of each debtor for the payment of the entire obligation with the right to
demand for reimbursement after payment has been made

Distinguished from Suretyship


⎯ Solidary Guarantor or Surety (fiador in solidum)
o Person who binds himself solidarily with the principal debtor
⎯ Both are solidarily liable to the creditor for the payment of the whole obligation
⎯ Distinguishable by:
Solidary Debtor Surety
Liable for his part of the debt and the debt Liable only for his own debt
of another
Pays the entire amount subject to When pays for the entire amount, can
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reimbursement from co-debtors demand reimbursement from the principal


debtor
Rights are limited. Any grant of extension An extension of time in the payment of the
in the payment of the obligation given to debt granted to the principal debtor shall
any of the co-debtors will not release the release the surety from the obligation
others from the obligation
Effect of Varied Conditions or Periods
⎯ The bond which binds the parties in solidary obligations may be uniform or varied
⎯ Relationship of solidarity is not destroyed if the debtors have different types of
obligations. Neither is it destroyed if the debtors have different conditions or terms.
⎯ The creditor/s may only collect from the debtor who’s obligation has become demandable
and leave in suspense his right to recover the shares of the other debtors whose
obligations may not have yet matured.

Art. 1212. 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.

Effect of Beneficial and Prejudicial Acts


⎯ Beneficial Act
o Solidary creditor may demand for payment or performance of the entire
obligation from the debtors
o Each creditor has the right to demand for his corresponding share from the
creditor who made the collection.
⎯ Prejudicial Act
o The creditor who performed the act shall incur the obligation of indemnifying the
others for damages
o Any prejudicial act done by a solidary creditor is valid and binding to the debtors
concerned.

Art. 1213. A solidary creditor cannot assign his rights without the consent of the others.

Effect of Assignment of Rights


⎯ Based on mutual agency and mutual confidence which are implications on the personal
qualifications of each creditor before the constitution of the obligation
⎯ If assignment is made without the consent of the other creditors to any person, it is a
violation of the precept and the other solidary creditors and debtors are not bound to
recognize the validity or the efficacy of the assignment without prejudice to the liability of
the creditor-assignor.

Art. 1214. The debtor may pay any one of solidary creditors; but if any demand, judicial or
extrajudicial, has ben made by one of them, payment should be made to him.

Effect of Demand by a Creditor


⎯ Any solidary creditor has the right to demand performance or payment of the obligation
from any or all debtors.
⎯ Payment shall be made to the one who made the demand.
⎯ In the absence of a demand, the payment could be made to anyone.

Art. 1215. 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.
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The creditor who may have executed nay 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.

Effect of Novation
⎯ Novation – change or substitution of an obligation by another to the extinguishment or
modification of the original obligation.
⎯ Changes either object or principal condition.
⎯ Liability of solidary creditor who effected the change shall depend upon the character of
the new obligation.
⎯ Prejudicial Novation – creditor who effected it is liable to the other creditors
⎯ Beneficial Novation – creditor is still able to secure performance of the new obligation
⎯ If the novation is the replacement of a debtor, the creditor who effected the change shall
be liable for the acts of the new debtor in case of any deficiencies or breaks.
⎯ General Rule – extension of the time of payment by the creditor to the debtor is not a
novation.

Effect of Compensation and Confusion


⎯ Compensation – weighing two obligations simultaneously to be able to cover the amount
of one by the other.
⎯ Confusion – merger of the qualities of the creditor and debtor in one and the same
person.
⎯ Partial confusion or compensation – apply rules of application of payment without
prejudice to the other creditors who did not cause the confusion or compensation.
⎯ In case of partial compensation or confusion resulting in the extinguishment of the
obligation, the creditor is liable for the reimbursement to the other creditors.

Effect of Remission
⎯ Remission – act of pure liberality by virtue of the creditor who renounces his right to
enforce the obligation without receiving any compensation thus extinguishing the
obligation
⎯ May be applied partially or entirely.
⎯ Liability on the part of the creditor who is responsible for the remission to reimburse the
others for the share in the obligation.
⎯ Effects of Remission on solidary debtor:
o If the remission covers the entire obligation:
§ Obligation is extinguished
§ Juridical relation among debtors is terminated
o Remission for the benefit of one of the debtors, it covers his entire share in the
obligation and is completely released from the obligation but is still bound to his
co-debtors
o If remission benefits only one of the debtors, it covers only part of his share and
his character as a solidary debtor is not affect.

Effect of Payment to a Creditor


⎯ One of the creditor is paid the entire amount by one or all of the debtors, the obligation is
entirely extinguished
⎯ There is still the obligation to reimburse the paying debtor

Art. 1216. 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.
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Effect of Demand upon a Debtor


⎯ Demand can be made against any debtor liable.
⎯ Partial payment by other debtors is not a bar against serving any demand to a different
debtor as the obligation is solidary and has not been totally extinguished by the partial
payment. (Creditor can still demand as long as there is a balance)
⎯ A creditor’s right to proceed against the surety exists independently of his right to proceed
against the principal.
⎯ Rule: if the obligation is joint and several, the creditor can go against the surety alone.
⎯ Surety is liable as much as the principal is liable
⎯ Death of the principal debtor will not work to convert, decrease, or nullify the substantive
right of the solidary creditor.

Art. 1217. 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 co-debtors, in proportion to the
debt of each.

Art. 1218. 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.

Effect of Payment by a Debtor


⎯ Total or partial extinguishment of the obligation.
⎯ Right to reimbursement ceases to exist if the co-debtor pays after the obligation has
prescribed or become illegal.
o Also applies to prior total remission in favor of one debtor.
⎯ Interest shall be computed from the time debt became due
⎯ In case of insolvency of other debtor, his share shall be borne by the other debtors

Nature of Right of Debtor


⎯ Before payment – right to reimburse from other debtors is contingent and conditional
⎯ After payment – right to reimburse becomes real and demandable and extinguishes the
obligation to the creditor

Art. 1219. 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.

Art. 1220. The remission of the whole obligation obtained by one of the solidary debtors, does not
entitle him to reimbursement form his co-debtors.

Art. 1221. 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 of the payment of damages and interest, without prejudice to their action against the guilty
or negligent debtor
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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 extra-judicial demand upon
him by the creditor, the provisions of the preceding paragraph shall apply.

Effect of Loss or Impossibility


⎯ If loss or impossibility is not due to the fault of the debtors, the obligation is extinguished.
⎯ If loss or impossibility is through the fault of the debtors, it is converted to indemnity for
damages and the solidary character of the debt remains.
⎯ If loss or impossibility is through a fortuitous event after one of the debtors have already
incurred delay, the obligation is converted into an obligation for indemnity for damages.

Art. 1222. 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.

Defenses Available to a Solidary Debtor


⎯ Derived from the nature of the obligation
y
o Connected with the obligation and derived from its nature

o Constitutes a total defense

o Example: non-existence of the obligation because of illicit cause, object or
absolute simulation, nullity due to defect in capacity or consent of all the debtors
(minority, fraud or violence), unenforceability because of lack of proper proof
under the Statute of Fraud, non-performance of suspensive condition or non-
arrival of period affecting the entire obligation, extinguishment of the obligation
such as by payment and remission, all other means of defense which may
invalidate the original contract
⎯ Things that give for total defense:
o Vices of consent
o Cause of action has prescribed
o Entire obligation is void
o Voidable at the instance of “all of them” BUT if just one is present, can be used
as defense as well
⎯ Personal defenses

o Total defense (e.g. minority, insanity, fraud, violence, intimidation à sufficient
causes to annul consent)
o Partial defense (e.g. special terms or conditions affecting his part of the
obligation)
⎯ Defenses pertaining to his share
o Partial defense
o Example: share is not yet due, cannot be compelled to give the share of the co-
debtors

⎯ Those personally belonging to the other co-debtors will allow him to avail himself thereof
only as regards that part of the debt for which the latter are responsible

o Partial defense only for the debtor-defendant

o Example: the co-debtor’s share is not yet due, so you can only compel me to give
my share

Effect of Defenses
⎯ If derived from the nature: all the solidary co-debtors are benefited
⎯ If personal one: only him benefited (exclusively)
⎯ If personally to the co-debtor: partial defense
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Section 5. – Divisible and Indivisible Obligations

Concept
⎯ Obligations may be divisible or indivisible.
⎯ Divisible
o Capable of partial performance without the essence of the obligation being
changed
⎯ Indivisible
o Those that are not susceptible of partial performance without changing the
essence of the obligation

Relation to Divisibility or Indivisibility of Things


Divisibility of an Obligation Divisibility of the Thing
Performance of the prestation Prestation itself

Kinds of Divisions
⎯ Quantitative
o Materially divided into parts and are homogenous to each other
⎯ Qualitative
o Can be materially divided by parts (e.g. partition in inheritance)
⎯ Intellectual
o Separated into ideal or undivided parts such as co-ownership

Art. 1223. The divisibility or indivisibility of the things that are the object of obligations in which
there is only on debtor and only one creditor does not alter or modify the provisions of Chapter 2
of this Title.

Art. 1224. A joint indivisible obligation gives rise to indemnity for damages from the time anyone
of the debtors does not comply with his undertaking. The debtors who may have been ready to
fulfill their promises shall not contribute to the indemnity beyond the corresponding portion of the
price of the thing or of the value of the service in which the obligation consists.

Effect of Divisible or Indivisible Obligations


⎯ General Rule: the creditor cannot be compelled to partially receive the prestation neither
may the debtor be required to make partial payments
⎯ Exceptions
o Obligation expressly stipulates
o Different prestations are subject to different terms and conditions
o Obligation is in part liquidated and in part unliquidated

Breach of Joint Indivisible Obligations


⎯ Can be enforced by proceeding against all of the debtors
⎯ Any breach by the debtors shall convert it into an obligation for the indemnification of
damages. (Art. 1209)

Art. 1225. For the purposes of the preceding articles, obligations to give definite things and those
which are not susceptible of partial performance shall be deemed to be indivisible.

When the obligation has for its object the execution of a certain number of days of work, the
accomplishment of work by metrical units, or analogous things which by their nature are
susceptible of partial performance, it shall be divisible.
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However, even though the object or service may be physically divisible, an obligation is indivisible
if so provided by law or intended by the parties.

In obligations not to do, divisibility or indivisibility shall be determined by the character of the
prestation in each particular case.

Determination of Divisibility or Indivisibility


⎯ Test of Divisibility – whether the obligation is susceptible of partial compliance or not.
⎯ Purpose of the obligation is the controlling circumstance.

In Obligations to Give
⎯ Obligation to give is definite à indivisible by nature and not susceptible to partial
compliance.
⎯ If nature of the obligation is divisible then the obligation is also divisible as it is
susceptible to partial compliance.
⎯ Obligation to give or to do several things at several times is divisible.

In Obligations to Do
⎯ By nature, the obligation is not susceptible to partial performance, it is indivisible by
nature.
⎯ If, by nature, the obligation is susceptible to partial performance, then it is divisible.
⎯ Always consider the object or purpose of the obligation.
⎯ Divisible when:
o Execution of a certain number of days of work
o Accomplishment of work by metrical units
o Accomplishment of analogous things, in their nature, are susceptible to partial
performance.

Obligations Not to Do
⎯ Depend upon the character of the prestation
⎯ Sound discretion of the court.

Section 6. – Obligations with a Penal Clause

Concept
⎯ An accessory undertaking to assume greater responsibility in case of breach. Attached to
an obligation to ensure performance.
⎯ Generally a sum of money, but can be any other thing stipulated by the parties, including
an act or abstention
⎯ Double function:
o provide for liquidated damages
o strengthen the coercive force of the obligation by 
the treat of greater
responsibility in the event of breach
⎯ Mere non-performance of the principal obligation gives rise to damages
⎯ Penal Clause – constitutes an exception to the general rules on the recovery of losses
and damages.

Purpose of Penalty
⎯ Funcion Coercitiva o de Garantia
o To insure performance of the obligation
⎯ Funcion Liquidatoria
o To liquidate the amount of damages to be awarded to the injured party in case of
breach
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⎯ Funcion Estrictamente Penal


o Exceptional cases, to punish obligor in case of beach of principal obligation

Kinds of Penalty
⎯ Origin
o Conventional
§ by express stipulation of the parties
o LEGAL
§ by law
⎯ Purpose
o Punitive
§ the right to damages and the penalty subsists
§ the question of indemnity for damage is not resolved, but remains
subsisting
§ Only occurs by express stipulation of the parties
y
§ value of the penal clause is much more than the value of the principal its
purpose is to coerce the debtor into performing the obligation.
§ The Courts are authorized to reduce the damages if:
§ They find that the breach was not one that is wanton or done in callous
disregard for the rights of the creditor
§ Treble damages
o Compensatory
§ Substitutes the damages suffered by creditor
§ The matter of damages is generally resolved, and it represents the
estimate of the damages that a party might suffer from non-performance
of the obligation, thereby avoiding the difficulties of proving such
damages
§ Presumption in Art 1226, Par 1:
• Shall substitute the indemnity for damages and the payment of
interests in case of non-compliance
§ Pre-agreed measure prior to the breach

§ Cases when damages and interest may be recovered in addition to the
penalty
• There is an express provision to that effect
• Debtor refuses to pay the penalty
• Debtor is guilty of fraud in the non-fulfillment of the obligation
⎯ Effect
o Subsidiary
§ Only the penalty may be enforced
y Presumed in Art 1227 – “Cannot
demand the fulfillment of the obligation and the satisfaction of the penalty
at the same time.”
o Joint
§ Both principal obligation and penalty may be enforced
§ Only occurs by express stipulation of the parties

Art. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for
damages and the payment of interests in case of noncompliance, if there is no stipulation to the
contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty
of fraud in the fulfillment of the obligation.

The penalty may be enforced only when it is demandable in accordance with provisions of this
Code.
Obligations and Contracts Reviewer De la Salle University – College of Law
Guevarra | Tolentino Atty. Gallo

Effect of Penalty, General Rule


⎯ Penal clause may be considered as reparation or substitute for damages or as a
punishment in case of breach of the obligation
⎯ Proof of actual damage is not necessary in order that the stipulated penalty may be
demanded.
⎯ Right to damages still subsists but must prove there is actual damage.
⎯ Penalty is fixed by contracting parties.
⎯ Penal clause does away with duty to prove the existence of damages cause by the
breach.
⎯ Not only to insure the performance of the obligation but to measure beforehand the
damages which would result form noncompliance.

Exceptions
⎯ Stipulations to the contrary
⎯ Obligor is sued for refusal to pay the agreed penalty
⎯ Obligor is guilty of fraud

Enforceability of Penalty
⎯ Penalty may be enforced only when it is demandable.
⎯ If both parties are unable to comply with their obligations, the penal clause cannot be
invoked by any of them.

Art. 1227. The debtor cannot exempt himself form the performance of the obligation by paying
the penalty, save in the case where this right has been expressly reserved for him. Neither can
the creditor demand the fulfillment of the obligation and the satisfaction of the penalty at the same
time, unless this right has been clearly granted him. However, if after the creditor has decided to
require the fulfillment of the obligation, the performance thereof should become impossible
without his fault, the penalty may be enforced.

Limitation upon Right of Debtor


⎯ Debtor cannot exempt himself from the performance of the obligation by paying the
penalty
⎯ Exception: when the right has been reserved for him expressly

Limitation upon Right of Creditor


⎯ Creditor cannot demand the fulfillment of the obligation and satisfaction of the penalty at
the same time unless such right has been granted to him.
⎯ If obligation is not complied with, the creditor can choose between demanding the
fulfillment of the obligation or the satisfaction of the penalty.
⎯ If the obligation becomes impossible without his fault then he can still demand
satisfaction of the penalty.
⎯ If he chooses fulfillment of penalty, he cannot demand fulfillment of the obligation.

Art. 1228. Proof of actual damages suffered by the creditor is not necessary in order that the
penalty may be demanded.

Proof of Actual Damages


⎯ Applicable only to general rule of Art. 1226 and not its exceptions.
⎯ Non-performance gives rise to the presumption of fault
⎯ Creditor does not need to prove the fault of the 
debtor. Burden of proof for the excuse lies
on the debtor.
⎯ However, if there is a stipulation to the contrary or if the obligor is guilty of fraud, then the
creditor can demand for both the satisfaction for the penalty and even damages.
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Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has been
partly or irregularly complied with by the debtor. Even if there has been no performance, the
penalty may also be reduced by the courts if it is iniquitous or unconscionable.

When the Penalty May Be Reduced


⎯ When the principal obligation has been partly complied with
o Prestations have been complied with
o Quality or Quantity
⎯ The principal obligation has been irregularly complied with
o All prestations have been complied with but not in accordance with the
agreement
o Form
⎯ Penalty is iniquitous or unconscionable even if there has been no performance.

Art. 1230. 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.

Nullity of Obligation or Penalty; Effect


⎯ Principal obligation is void à penal clause shall be void
⎯ If penal clause is void, validity of principal obligation does not follow. The efficacy of the
obligation is not dependent on the penal clause.

CHAPTER 4

EXTINGUISHMENT OF OBLIGATIONS

General Provisions

Art. 1231. Obligations are extinguished:

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 rights of the creditor and debtor;
5) By compensation;
6) By novation.

Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of a


resolutory condition, and prescription, are governed elsewhere in this Code.

Modes of Extinguishing Obligations


⎯ Other forms of extinguishing obligations
o Renunciation or waiver
o Compromise
o Expiration of the resolutory term
o Death (in purely personal obligations)
o Will of one of the contracting parties in certain contracts
o Agreement of both contracting parties (mutual assent or dissent)

Section 1. – Payment or Performance


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Art. 1232. Payment means not only the delivery of money but also the performance, in any other
manner, of an obligation.

Concept of Payment or Performance


⎯ Fulfillment of the obligation is either voluntary or involuntary
⎯ Not only the delivery of money but also the performance of an obligation.

Art. 1233. 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.

Art. 1234. If the obligation has been substantially performed in good faith, the obligor may
recover as though there had been a strict and complete fulfillment, less damages suffered by the
obligee.

Art. 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.

When the Obligation is Understood Paid or Performed


⎯ When the object has been completely delivered
⎯ When obligation of service has been completely rendered
⎯ When the obligor completely refrained form doing which he had obliged himself not to
do.
⎯ Exceptions
o Obligation has been substantially performed in good faith. Obligor may recover
as though there has been strict fulfillment, less damages suffered by the obligee.
o Obligee accepts the performance, knowing its incompleteness or irregularity à
based on the principle of estoppel

Art. 1236. The creditor is not bound to accept payment or performance by a third person who
ahs no interest in the fulfillment of the obligation, unless there is stipulation to the contrary.

Whoever pays for another may demand from the debtor what he has paid, except that if he paid
without the knowledge or against the will of the debtor, he can recover only insofar as the
payment has been beneficial to the debtor.

Art. 1237. Whoever pays on behalf of the debtor without the knowledge or against the will of the
latter, cannot compel the creditor to subrogate him in this rights, such as those arising from a
mortgage, guaranty, or penalty.

Art. 1238. Payment made by a third person who does not intend to be reimbursed by the debtor
is deemed to be a donation, which requires the debtor’s consent. But the payment is in any case
valid as to the creditor who has accepted it.

Persons Who May Pay Obligation


⎯ Debtor or his legal representative
⎯ Any third person
⎯ Effect – fulfillment of the obligation resulting to extinguishment

Payment by a Third Person


⎯ A third person may pay the obligation whether or not he has an interest in the obligation
or has done so with the knowledge and consent of the debtor.
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⎯ Cannot be applied to a third person paying the redemption price in sales with right to
repurchase (pacto de retro). Vendor is not a debtor within the meaning of the law.

Right of Creditor
⎯ General Rule: Creditor is not bound to accept payment or performance by a third person
⎯ Exceptions
o Made by a third person who has an interest in the fulfillment of the obligation
§ Joint debtor, guarantor, or surety
o There is stipulation to the contrary
§ Creditor is deemed to have waived his right to refuse to deal with
strangers to the obligation.

Rights of Third Persons


⎯ He can recover from the debtor the entire amount
⎯ He is subrogated to all the rights of the creditor
⎯ If the payment is made without the knowledge or consent of the debtor, he can only
recover insofar as the payment has been beneficial to the debtor.
⎯ If the payment is with the knowledge and consent of the debtor, then he can recover for
the entire amount in which he paid
⎯ Third person would be ale to recover only the part of the amount which he has paid which
corresponded to the part of the obligation which has not been extinguished, because it
would only be to that extent that the payment has been beneficial to the debtor.
o Remedy – proceed against the creditor who was unduly paid under the principle
that no person can unjustly enrich himself.

Right of Subrogation
⎯ Subrogation
o right available to the third person or payor, whereby he is entitled to exercise all
of the rights which the creditor could have exercised against the debtor.
o Must have the express or tacit approval of the debtor that the creditor shall be
legally subrogated to all of the rights of the creditor.
⎯ Reimbursement – merely a simple personal action available to the third person or payor
against the debtor to recover from the latter.

Gratuitous Payment
⎯ Payment is made by a third person who does not intend to be reimbursed by the debtor.
⎯ Payment is considered a donation
⎯ Debtor’s consent is necessary

Art. 1239. In obligations to give, payment made by one who does not have the free disposal of
the thing due and capacity to alienate it shall not be valid, without prejudice to the provisions of
Article 1427 under the Title on “Natural Obligations.”

Capacity to Make Payment


⎯ Necessary legal capacity to effect such payment is essential for the validity of the
payment and should have the free disposal of the thing due and the capacity to alienate
it.
⎯ If the payment was made by a person who does not have the capacity to do so, even if
the creditor has already accepted it, it may still be annulled by a proper action in court.
⎯ Creditor cannot be compelled to accept the payment, as a result, consignation of the
thing due is not possible.
Obligations and Contracts Reviewer De la Salle University – College of Law
Guevarra | Tolentino Atty. Gallo

Art. 1240. Payment shall be made to the person in whose favor the obligation has been
constituted, or his successor in interest, or any person authorized to receive it.

To whom Payment Must be Made


⎯ Person whose favor the obligation has been constituted
⎯ His successor in interest
o Obligation may have been constituted to his benefit
⎯ Any person authorized to receive it.
Persons Authorized to Receive Payment
⎯ Persons authorized by the creditor
⎯ Persons authorized by law
⎯ Payment made to a person authorized by law to receive it is valid.

Payment to Unauthorized Persons


⎯ Shall not be considered valid
⎯ In agency, an assumption of authority to ac as agent for another of itself challenges
inquiry.

Exceptions
⎯ Payment made to a third person provided that it has redounded to the benefit of the
creditor
⎯ Payment made to the possessor of the credit provided that it was made in good faith.

Art. 1241. Payment to a person who is incapacitated to administer his property shall be valid if he
has kept the thing delivered, or insofar s the payment has been beneficial to him.

Payment made to a third person shall also be valid insofar as it has redounded to the benefit of
the creditor. Such benefit to the creditor need not be proved in the following cases:

1) If after the payment, the third person acquires the creditor’s rights;
2) If the creditor ratifies the payment to the third person;
3) If by the creditor’s conduct, the debtor has been led to believe that the third person had
authority to receive the payment.

Payment to Incapacitated Persons


⎯ If payment is made to an incapacitated person to administer his property, such payment
is valid if:
o He has kept the amount paid or thing delivered
o Payment has been beneficial to him
⎯ If the payment is not beneficial to the creditor then the payment is not valid and debtor
may be compelled to pay again
⎯ Rule is applicable only to obligations to give.

Payment to Third Persons


⎯ If the payment did not redound to the benefit of the creditor then it is invalid.
⎯ Rule cannot be invoked without conclusive proof of the benefit to the creditor.
⎯ Even if payment was made through a mistake and in good faith, he can still be compelled
to pay again.
⎯ If the debtor cannot pay again and it is impossible to recover what was unduly paid, any
loss resulting from such shall be borne against him. Unless there is a stipulation to the
contrary or the creditor himself was responsible.
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Art. 1242. Payment made in good faith to any person in possession of the credit shall release the
debtor.

Payment to Possessors of Credit


⎯ Possession of credit and not possession of the document evidencing it.
⎯ May applied to payment made to the original creditor by a debtor who is not aware of the
fact that the credit has already been assigned to another person.
⎯ Indispensible requisite – payment should have been made in good faith and thus
releases the debtor from the obligation
⎯ Remedy of the creditor would be to proceed against the possessor of the credit to whom
payment was improperly made.
⎯ Applicable only to obligations to give.

Art. 1243. Payment made to the creditor by the debtor after the latter has been judicially ordered
to retain the debt shall not be valid.

Payment After Judicial Order of Retention


⎯ Payment shall not be valid after the debt has been judicially ordered to be retained.
⎯ After the debtor receives the notice of attachment or garnishment, payment can no longer
be made to the creditor whose credit has been attached to satisfy a judgment in favor of
another person.
⎯ Payment must be made to the proper officer of the court issuing the writ of attachment.

Art. 1244. The debtor of a thing cannot compel the creditor to receive a different one, although
the latter may be of the same value as, or more valuable than that which is due.

In obligations to do or not to do, an act or forbearance cannot be substituted by another act or


forbearance against the obligee’s will.

Art. 1245. Dation in payment, wherein property is alienated to the creditor in satisfaction of a debt
in money shall be governed by the law of sales.

Art. 1246. When the obligation consists in the delivery of an indeterminate or generic thing,
whose quality and circumstances have not been stated, the creditor cannot demand a thing of
superior quality. Neither can the debtor deliver a thing of inferior quality. The purpose of the
obligation and other circumstances shall be taken into consideration.

What Must Be Paid


⎯ Logical consequences of the nature of specific or determinate obligations
⎯ Obligation to give a specific or determinative object – the debtor cannot fulfill his
obligation by delivering a thing which is different form that which is due.
⎯ Obligation to do or not to do – act is specific or determinate, the obligor cannot fulfill his
obligation by substituting another act or forbearance.
⎯ Creditor cannot be compelled to accept the delivery of the thing or the substitution of the
act or forbearance.

Effect of Dation in Payment


⎯ If the creditor and debtor enter into an agreement by virtue of which a certain property is
given by the debtor to the creditor as equivalent of performance of the obligation then the
law on sales shall govern.
⎯ Dation in Payment (dacion en pago)
o Transmission of the ownership a thing by the debtor to the creditor as an
accepted equivalent of the performance of the obligation.
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o Objective novation of the previous obligation effected by a change of the object


thereof.

Dation in Payment Payment by Cession


Only the possession and administration (not
Transfers the ownership over the thing the ownership) are transferred to the creditors,
alienated to the creditor with an authorization to convert the property
into cash with which the debts shall be paid
Only extinguishes the credits to the extent of
May totally extinguish the obligation and
the amount realized from the properties
release the debtor
assigned, unless otherwise agreed upon
Cession of only some specific thing Involves ALL the property of the debtor
Transfer is only in favor of one creditor to
There are various, plurality of creditors
satisfy a debt
Both are substituted performances of
obligations

Effect if Object is Generic


⎯ If there is no precise declaration in the obligation with regard to the quality and
circumstances of the indeterminate thing which constitutes its object, the creditor cannot
demand a thing of the best quality neither can the debtor deliver a thing of the worse
quality.

Art. 1247. Unless it is otherwise stipulated, the extrajudicial expenses required by the payment
shall be for the account of the debtor. With regard to judicial costs, the Rules of Court shall
govern.

Expenses of Payment
⎯ Supplementary Rule – if the debtor changes his domicile in bad faith or after he has
incurred in delay, the additional expenses shall be borne by him.

Art. 1248. Unless there is an express stipulation to that effect, the creditor cannot be compelled
partially to receive the prestations in which the obligation consists. Neither may the debtor be
required to make partial payments.

However, when the debt is in part liquidated and in part unliquidated, the creditor may demand
and the debtor may effect he payment of the former without waiting for the liquidation of the latter.

Character of Payment
⎯ Conditions for completion of payment
o Identity
§ Only the prestation agreed upon and no other must be complied with
o Completeness
§ Thing or service in which the obligation consists must be completely
delivered or rendered
o Indivisibility
§ Payment or performance must be indivisible
⎯ Applicable only to an obligation where there is only one debtor and one creditor
⎯ Not applicable to plurality of debtors and creditors
⎯ Exceptions:
o Obligation expressly stipulates the contrary
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o Different prestations which constitute the objects of the obligation are subject to
different terms and conditions
o Obligation is in part liquidated and in part unliquidated

Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not
possible to deliver such currency, then in the currency which is legal tender in the Philippines.

The delivery of promissory notes payable to order, or bills of exchange or other mercantile
documents shall produce the effect of payment only when they have been cashed, or when
through the fault of the creditor they have been impaired.

In the meantime, the action derived from the original obligation shall be held in abeyance.

Rule in Monetary Obligations


⎯ If there is no stipulation regarding the currency in which the payment shall be made, the
payment shall still be made in legal tender of the Philippines.

Effect of Rep. Act Nos. 529 and 4100


⎯ An Act To Assure the Uniform Value of Philippine Coins and Currency (Rep. Act No. 529)
o Payment of debts in money shall be made in the currency stipulated
⎯ Rep. Act No. 4100
o Done to encourage foreign investments to cope with the requirements of
international trade and banking transactions
o Exceptions to payments to be done in Philippine Currency
§ Transactions where the funds involved are the proceeds of loans and
investments made directly or indirectly through intermediaries or agents
by foreign governments, agencies, and instrumentalities.
§ Transactions affecting high-priority economic projects for agricultural,
industrial and power development as finance through foreign funds
§ Foreign exchange transactions entered into between banks or between
banks and individuals or juridical persons
§ Import-export and international banking, financial investment and
industrial transactions.

Meaning of Legal Tender


⎯ Currency which may be used for payment of all debts, public or private.
⎯ All notes and coins issued by the Central Bank.

Payments with Emergency Notes


⎯ Emergency notes must be considered as legal tender but only in those in places under
the control of either the Commonwealth or of the guerilla movement.

Payment with Negotiable Paper


⎯ Negotiable papers are mercantile documents and are not legal tender
⎯ Delivery of such papers and documents by the debtor to the creditor shall not produce the
effect of payment.

Exceptions
⎯ When delivery produces the effect of a valid payment
o When the document has been cashed
§ Applicable to a negotiable paper or document executed by either a third
person or the debtor and is delivered to the creditor
§ Example: Depositing of a manager’s check to the account of the creditor
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o When it had been impaired through the fault of the creditor


§ Applicable through a paper document executed by a third person and
delivered by the debtor to the creditor.

Art. 1250. In case an extraordinary inflation or deflation of the currency stipulated should
supervene, the value of the currency at the time of the establishment of the obligation shall be the
basis of payment, unless there is an agreement to the contrary.

Effect of Extraordinary Inflation or Deflation


⎯ Article was formulated in consideration of the last war.
⎯ The juridical relation of creditor and debtor should be equitably adjusted.
⎯ Basis of payment: value of the currency a the time of the establishment of the obligation.
⎯ Extraordinary inflation or deflation – unusual or beyond the common fluctuation in value
of the currency which the parties could not have reasonably foreseen.
⎯ Requisites for Extraordinary Inflation or Deflation
o An increase or decrease of purchasing power of the currency which is unusual or
beyond the common fluctuation of value
o Decrease or increase could not have been reasonably foreseen.

Art. 1251. Payment shall be made in the place designated in the obligation.

There being no express stipulation and if the undertaking is to deliver a determinate thing, the
payment shall be made wherever the thing might be at the moment the obligation was
constituted.

In any other case, the place of payment shall be the domicile of the debtor.

If the debtor changes his domicile in bad faith or after he has incurred in delay, the additional
expenses shall be borne by him.

These provisions are without prejudice to venue under the Rules of Court.

Place of Payment
⎯ In the designated place in the obligation
⎯ If no place is expressly designated 

o There being no express stipulation and if the undertaking is to deliver a
determinate thing the payment shall be made wherever the thing might be at the
moment the obligation was constituted. 

o In any other case (not to deliver a determinate thing), the place of payment shall
be at the domicile of the debtor. 

o If the debtor changes his domicile in bad faith, or after he has incurred in delay,
the additional expenses shall be borne by him. (Absent such circumstances, it
will be borne by the creditor)

Subsection 1. –Application of Payment

Art. 1252. He who has various debts of the same kind in favor of one and the same creditor, may
declare at the time of making the payment to which of them the same must be applied. Unless the
parties so stipulate, or when the application of payment is made by the party for whose benefit
the term has been constituted, application shall not be made as to debts which are not yet due.

If the debtor accepts from the creditor a receipt in which an application of the payment is made,
the former cannot complain of the same, unless there is a cause for invalidating the contract.
Obligations and Contracts Reviewer De la Salle University – College of Law
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Concept
⎯ Application of payment – the designation of the debt to which the payment must be
applied when the debtor of several obligations of the same kind in favor of the same
creditor.

Requisites
⎯ Only one debtor and one creditor
o Does not prevent the possibility of extending the rules to solidary obligations –
solidary debtor who paid may have obligations other than the solidary obligation
in favor of the creditor.
o Essential that there is only one creditor
⎯ Various debts are of same kind, generally monetary character
o Cannot apply to a guarantor or surety whose liability is extended or confined only
to a particular obligation
o Essential that each of the debt must be of a identical or homogenous specie
o Cannot apply to prestation to give specific thing
o Can apply to prestation to give generic thing
⎯ All obligations must be due 

o EXCEPTIONS:
§ Mutual agreement of parties
§ Upon consent of the party in whose favor the term was established
⎯ Payment is not enough to extinguish all debts otherwise, there is no need to designate
the debts

Right of Debtor to Make Application


⎯ Right to designate debt to which payment shall be applied
⎯ Available only at the time when payment is made
⎯ Does not exercise his right, the right is extinguished.
⎯ Creditor can make the application for the debtor should the latter fail to do so

Exception
⎯ Debtor fails to make the application, the creditor shall issue a receipt purposing the
payment to any debt the debtor has with him and the debtor may either accept or reject
such purposing.
⎯ Once the receipt is accepted the application of payment in such receipt can no longer be
impugned unless there is a cause such as mistake, force, intimidation, undue influence or
fraud which will invalidate the application.

Time When Right is Exercised


⎯ Right to make the application is when the time payment is made (debtor)
⎯ The creditor only purposes the payment given by the debtor who fails to make an
application

Art. 1253. If the debt produces interests, payment of the principal shall not be deemed to have
been made until the interests have been covered.

Limitation Upon the Right to Apply Payment


⎯ Applies only in the absence of a verbal or written agreement to the contrary.
⎯ Directory and not mandatory
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Art. 1254. When the payment cannot be applied in accordance with the preceding rules, or if
application cannot be inferred from the other circumstances, the debt which is most onerous to
the debtor, among those due, shall be deemed to have been satisfied.

If the debts due are of the same nature and burden, the payment shall be applied to all of them
proportionately.

Legal Application of Payment


⎯ Applicable only when payment cannot be applied in accordance with Art. 1253.
⎯ If payment of debt has been demanded or a different place for payment has been
designated in the contract and payment has been made in one of those places, the
application is not applicable.

When Debts are not of the Same Burden


⎯ General Rule: the debt which is most onerous to the debtor shall be deemed to have
been satisfied.
⎯ Application of the Rule
o Various debts are due and incurred at different dates
§ Oldest one is more onerous
o One debt bears interest and the other does not
§ Interest bearing debt is more onerous
o One debt is secured and the other is not
§ Secured debt is onerous.
o Debtor is bound as a principal in one obligation and guarantor or surety in
another
§ Debtor bound as principal is onerous.
o When debtor is bound as a solidary debtor in one obligation and sole debtor in
another
§ Debtor bound as solidary debtor is more onerous.
o Within a solidary obligation
§ Share which corresponds to a solidary debtor
o One obligation is for indemnity and other is way of penalty
§ Obligation for indemnity is more onerous
o One debt is liquidated and the other is not
§ Liquidated debt is more onerous

When dents are of the Same Burden


⎯ When debts due are of the same nature and burden,
⎯ Rule: payment shall be applied to all of them pro rata or proportionately
⎯ Applied to debts which are fairly impossible to determine which obligation is more
onerous or burdensome

Subsection 2. – Payment by Cession

Art. 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 the
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 law.

Concept
⎯ Special form of payment where the debtor abandons his property for the benefit of his
creditors to obtain payment from the proceeds thereof.
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Requisites
⎯ Plurality of debts
⎯ Plurality of creditors
⎯ Complete or partial insolvency of the debtor
⎯ Abandonment of all debtor’s property not subject to execution
⎯ Acceptance or consent on the part of the creditors

Kinds
⎯ Contractual
o Cession referred to Art. 1255
⎯ Judicial
o Cession regulated by the Insolvency law, voluntary or involuntary

Distinguished from Dation in Payment


Dation in Payment Cession
Number of Parties May only be one creditor Plurality of creditors is
essential
Financial Condition of Parties Not necessary to be in a state State of partial or relative
of financial difficulty insolvency
Object What is delivered is merely a Thing ceded by the debtor is
thing to be considered as the universality of all his
equivalent of the performance properties
of the obligation
Effect Payment extinguishes the Merely releases the debtor for
obligation to the extent of the the net proceeds of the things
value of the thing delivered ceded or assigned.

Effect
⎯ In the absence of contrary stipulation, the assignment of the debtor of all his property
shall only release him responsibility for the net proceeds of the property assigned.
⎯ Extinguishment of obligation is only partial
⎯ Assignment does not transfer ownership but only the possession of such things or
objects including administration of such property in order to be able to sell them.

Subsection 3. – Tender of Payment and Consignation

Art. 1256. If the creditor to whom tender of payment has been made refuses without just cause to
accept it, the debtor shall be released form responsibility by the consignation of the thing or sum
due.

Consignation alone shall produce the same effect in the following cases:
1) When the creditor is absent or unknown, or does not appear at the place of payment;
2) When he is incapacitated to receive the payment at the time it is due;
3) When, without just cause, he refuses to give a receipt;
4) When two or more persons claims the same right to collect;
5) When the title of the obligation has been lost.

Art. 1257. In order that the consignation of the thing due may release the obligor, it must first be
announced to the persons interested in the fulfillment of the obligation.

The consignation shall be ineffectual if it is not made strictly in consonance with the provisions
which regulate payment.
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Art. 1258. Consignation shall be made by depositing the things due at the disposal of judicial
authority, before whom the tender of payment shall be approved, in a proper case, and the
announcement of the consignation in other cases.

The consignation having been made, the interested parties shall also be notified thereof.

Concept
⎯ Tender of Payment – act of offering the creditor what is due him together with a demand
that the creditor accept the same
⎯ Consignation – act of depositing the thing due with the court or judicial authorities
whenever the creditor cannot accept or refuses to accept payment.

Distinctions
Tender of Payment Consignation
Preparatory act Principal act which will produce the effects of
payment of the obligation
Extrajudicial in character judicial

General Requisites of Consignation


⎯ All requisites for payment applies
o Who pays
o To whom payment should be made
o Object of the obligation
o Time of payment

Special Requisites of Consignation


⎯ There is a debt due
⎯ The consignation of the obligation was made because of some legal cause
o Tender of payment must have been made prior to the consignation
§ Exceptions:
• Creditor is absent or unknown or does not appear in the
place of payment
• Creditor is incapacitated to received the payment at the time
it is due
• Refuses to give receipt without just cause
• Tow or more persons claim the right to collect
• Title of the obligation has been lost
o Must have been unconditional
o Creditor must have refused the payment without just case
⎯ Prior notice of consignation had been given to the person interested in the obligation
o Prior notice – a formal act manifested no only to the creditor but also to those
who are interested in the fulfillment of the obligation.
o Made in case of an unjust refusal done by the creditor
o Necessary that notice shall be made to the other parties such as surety or
guarantor or solidary co-debtor.
⎯ Actual deposit/consignation with proper judicial authority
o Requirement is complied with if the debtor deposits the thing or amount due
to the Clerk of Court if the creditor is incapacitated or shall have refused to
accept.
o Normally accompanied y filing of the complaint itself which is sometimes
denominated as an action for consignation.
o Reality, an action for specific performance of the obligation or cancellation of
the obligation.
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⎯ Subsequent notice of consignation


o Given to all interested in the performance of obligations: passive (co-debtors,
guarantors, sureties) or active (solidary co-creditors, possible litigants)
§ Reason: enable the creditor to withdraw the goods or money
deposited
§ Unjust to make him suffer depreciation, deterioration, or loss of such
goods or money by reason of lack of knowledge.
o May be complied with by the service of summons upon the defendant
creditor together with a copy of the complaint thus automatically complying
with the requirement.

Effect of valid tender of payment


⎯ When a valid tender of payment is made, the obligation is not extinguished
unless it is completed by consignation.
⎯ Effect of exempting the debtor from payment of interest and/or damages

Subject Matter of Consignation


⎯ Moveable and immovable
⎯ Unjust to task debtor indefinitely with preservation of the immovable property which
constitute the object of the obligation

Art. 1259. The expenses of consignation, when properly made, shall be charged against the
creditor.

Expenses of Consignation
⎯ Consignation must be properly made before the creditor can be charge with its expenses.
⎯ Proper consignation:
o Creditor accepts the thing or amount deposited as payment of the obligation
without contests
o Creditor contests the efficacy or validity of the consignation and the court finally
decides that is has been properly made or cancels the obligation at the instance
of the debtor.

Art. 1260. Once the consignation has been duly made, the debtor may ask the judge to order the
cancellation of the obligation

Before the creditor has accepted the consignation, or before a judicial declaration that the
consignation has been properly made, the debtor may withdraw the thing or the sum deposited,
allowing the obligation to remain in force.

Art. 1261. If the consignation having been made, the creditor should authorize the debtor to
withdraw the same, he shall lose every preference which he may have over the thing. The co-
debtors, guarantors and sureties shall be released.

Effects of Consignation
⎯ If the creditor accepts the thing or amount deposited without contesting the validity of the
consignation à the obligation is extinguished.
⎯ If the creditor contests the validity of the consignation, the result is litigation.
o Same is true if the creditor is not interested, not known, or is absent.
o During trial: plaintiff-debtor establishes that all requisites of a valid consignation
had been complied with à obligation is extinguished or cancelled.

Effect of Withdrawal
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⎯ Withdrawal made by the debtor before the creditor accepts or judicial declaration that the
consignation has been properly made
o Obligation remains in force
⎯ Withdrawal made with the consent of the creditor
o Creditor loses every preference which he may have over the thing
o Solidary co-debtors, guarantors and sureties shall be released

Subsection 2. – Loss of the Thing Due

Concept
⎯ Loss of the thing due – object of the obligation perishes or goes out of the commerce of
man, or disappears and cannot be recovered.
⎯ Impossibility of compliance with the obligation

Art. 1262. An obligation which consists in the delivery of a determinate thing shall be
extinguished if it should be lost or destroyed without the fault of the debtor, and before he incurred
in delay.

When by law or stipulation, the obligor is liable even for fortuitous events, the loss of the thing
does not extinguish the obligation, and he shall be responsible for damages. The same rule
applies when the nature of the obligation requires the assumption of risk.

Effect of Loss in Determinate Obligations to Give


⎯ The obligation will be extinguished if the thing is lost or destroyed without the fault of the
debtor and before he has incurred in delay.
⎯ Requisites:
o Thing must be determinate
o Thing lost is without any fault of the debtor.
§ If lost through fault of the debtor, the obligations is not extinguished
à converted into an obligation to indemnify damages.
§ The things is lost before incurring delay, debtor can still be liable for
damages.
o Thing is lost before the debtor has incurred delay
o Thing is lost after debtor has incurred delay, debtor is still liable for indemnity for
damages.

Effect of Fortuitous Event


⎯ If the thing is lost through fortuitous event, the debtor cannot be held liable
⎯ Obligation is extinguished

Exceptions
⎯ By law, the debtor is made liable even for fortuitous events;
⎯ By stipulation of the parties;
⎯ Nature of the obligation requires assumption of risk;
⎯ Loss of the thing due is party the fault of the debtor;
⎯ Loss of the thing occurs after the debtor has incurred in delay;
⎯ Debtor promised to deliver the same thing to two or more persons who do not have the
same interests;
⎯ Obligation to deliver arises from criminal offense; and
⎯ Obligation is generic

Art. 1263. In an obligation to deliver a generic thing, the loss or destruction of anything of the
same kind does not extinguish the obligation.
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Effect of Loss in Generic Obligations to Give


⎯ Loss without the fault of the debtor before he incurs in delay will not extinguish the
obligation
⎯ Genus nunquam peruit – genus of a thing can never perish.
⎯ Debtor can still be compelled to deliver a thing that is neither superior nor inferior of
quality
⎯ Exception: when such generic obligation is a particular class or group with specific or
determinate qualities
o Example: Horses coming from a particular ranch

Art. 1264. The Courts shall determine whether, under the circumstances, the partial loss of the
object of the obligation is so important as to extinguish the obligation.

Effect of Partial Loss


⎯ Whether the partial loss would be tantamount to a complete loss or destruction shall
depend on the sound discretion of the court.

Art. 1265. Whenever the thing is lost in the possession of the debtor, it shall be presumed that
the loss was due to his fault, unless there is proof to the contrary, and without prejudice to the
provisions of Article 1165. This presumption does not apply in case of earthquake, flood, storm or
other natural calamity.

Rule if Thing is in Debtor’s Possession


⎯ Determinate thing is lost in possession of the debtor, the assumption is that the loss was
the fault of the debtor.
⎯ Obligation is not extinguished
⎯ Responsible for fortuitous event until he has effected delivery.
⎯ Not applicable in times of earthquake, flood, storm, or other natural calamity

Art. 1266. The debtor in obligations to do shall be released the when the prestation becomes
legally or physically impossible without the fault of the obligor.

Effect of Impossibility of Performance in Obligations to Do


⎯ Applicable only in obligations to do
⎯ Obligation used to be possible at the constitution of obligation
⎯ Subsequent impossibility
⎯ Without the fault of the debtor
⎯ Causes of Impossibility
o Legal
§ Direct – law prohibits performance or execution of the work agreed upon
and is immoral or dangerous
§ Indirect – law imposes duties of a superior character upon the obligor
with are incompatible with the work agreed upon although the latter may
be perfectly legal.
o Physical
§ Death of the obligor when the act requires his personal qualifications
§ Death of the obligee when the act can be of possible benefit only to him.
§ Note: Both the obligation and the right are intransmissible and are
extinguished by the mere fact of death.
§ May also arise from mere accident through no fault of the debtor.

Effect
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⎯ In obligations to do

o Releases debtor from obligation if prestations has become legally or physically
impossible
⎯ In case of partial performance by the debtor
o Creditor must pay the part done so long as he benefits from such partial
compliance.
⎯ If debtor received anything from creditor prior to loss or impossibility
o Return anything in excess of what corresponds to the part already performed
when the impossibility supervened.
⎯ In obligations not to do
o Obligations are extinguished

Art. 1267. When the service has become so difficult as to be so manifestly beyond the
contemplation of the parties, the obligor may also be released therefrom, in whole or in part.

Effect of Relative Impossibility


⎯ General Rule: Impossibility of performance of an obligation to do shall release the obligor.
⎯ Difficulty in performing the obligation, the courts may authorize the release of the obligor
in part or in whole.
⎯ Manifest disequilibrium in the prestations, such that one party would be placed at a
disadvantage by the unforeseen event.

Art. 1268. When the debt of a thing certain and determinate proceeds from a criminal offense, the
debtor shall not be exempted from the payment of its price whatever may be the cause of the
loss, unless the thing having been offered by him to the person who should received it, the latter
refused without justification to accept it.

Rule if Obligation Arises from Criminal Offense


⎯ Applicable to an obligation of restitution of a certain and determinate thing on the part of a
person criminally liable as provided in the Penal Code
⎯ Applicable to obligations arising from virtue of reparation or indemnification
⎯ Debt proceeds from criminal acts.
⎯ Applicable to those subsidiarity liable and principally liable
⎯ If the thing is lost, the debtor shall not be exempt from payment of the thing.
⎯ Only exception is when the debtor offered the thing to the creditor and the creditor
refused to accept it.
o Two remedies:
§ Continue and make a consignation of the thing thereby relieving him of
his obligation
§ Keep the thing due and the obligation subsists but if the thing is lost Arts.
1262 and 1265 shall govern.
§ Offer to pay is an essential requisite

Art. 1269. The obligation having been extinguished by the loss of the thing, the creditor shall
have all the rights of the action which the debtor may have against the third persons by reason of
the loss.

Extinguishment of Obligation
⎯ If obligation is extinguished by the loss of the thing, all rights of action with the creditor
may have against third persons are transmitted by operation law to the creditor.
⎯ Refers not only to the rights and actions which the debtor may have against third persons
but also to any indemnity which the debtor may have already received.

o Example: money paid to the debtor upon expropriation of the property which is
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the object of obligation; insurance received by owner of company with respect to


victims of sunk vessel

Section 3. – Condonation or Remission of the Debt

Concept
⎯ Act of liberality by virtue of which the obligee renouncement the enforcement of the
obligation without receiving any price or equivalent
⎯ Extinguishes in part or full.
⎯ Gratuitous abandonment by the creditor of his right.

Requisites
⎯ It must gratuitous
⎯ Accepted by the obligor
⎯ Obligation must be demandable

Kinds
⎯ As to extent
o Refer to the amount of indebtedness, or to an accessory obligation (such as
pledge or interest) or to some other aspect of the obligation (such as solidarity)
o Total
§ Entire is extinguished
o Partial
§ Only the principal or to the accessory obligation or to any aspect thereof
⎯ As to form

o Condonation or remission is essentially gratuitous, and requires the acceptance
by the obligor. It 
may be expressly or impliedly.

o Express
§ When made formally, accordance with the forms of ordinary donations 

o Implied
§ Inferred from the acts of parties
⎯ Constitution
o Inter vivos
§ Agreement of the parties to the nature of the donation inter vivos
o Mortis causa
§ Constituted in the last will and testament
§ Donation mortis cuasa

Art. 1270. Condonation or remission is essentially gratuitous, and requires the acceptance by the
obligor. It may be made expressly or impliedly.

One and the other kinds shall be subject to the rules which govern inofficious donations. Express
condonation shall, furthermore, comply with the forms of donations.

Gratuitous Character of Remission


⎯ Essential character – gratuitous
⎯ No receipt of payment or any price must be given to the creditor before condonation.

Necessity of Acceptance by the Debtor


⎯ Remission is, in essence, a donation thus requires the acceptance of the debtor
⎯ Governed by rules of inofficious donations
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⎯ Bilateral act

Applicability of Rules on Donations


⎯ Applicable Rules:
o Forms of donations if the remission is express
o Extent or amount of the donation
o Governing the revocation of donations
Extent of Remission
⎯ Governed by rules on inofficious donations.
⎯ Art. 750. The donations may comprehend all the present property of the donor, or part
thereof, provided he reserves, in full ownership or in usufruct, sufficient means for the
support of himself, and of all relatives who, at the time of the acceptance of the donation,
are by law entitled to be supported by the donor. Without such reservation, the donation
shall be reduced in petition of any person affected.
⎯ Art. 751. Donations cannot comprehend future property.
By future property is understood anything which the donor cannot dispose of at the time
of the donation.
⎯ Art. 752. The provisions of Article 750 notwithstanding, no person may give or receive,
by way of donation, more than he may give or receive by will.
The donation shall be inofficious in all that it may exceed this limitation.
⎯ Art. 771. Donations which in accordance with the provisions of Article 752, are
inofficious, bearing in mind the estimated net value of the donor's property at the time of
his death, shall be reduced with regard to the excess; but this reduction shall not prevent
the donations from taking effect during the life of the donor, nor shall it bar the donee
from appropriating the fruits.
For the reduction of donations the provisions of this Chapter and of Articles 911 and 912
of this Code shall govern.
⎯ If the estate of the creditor consists of credits and there is a remission or condonation of
all such credits, it is a violation of Art. 750
⎯ Remission of future debts is void because there is no demandability and cannot
comprehend future property.
⎯ Remedy – compulsory heirs can proceed against the debtor-donee for the reduction or
suppression of the remission

Form of Express Remission


⎯ Must comply with forms of donation.
⎯ Following rules apply:
o Art. 748. The donation of a movable may be made orally or in writing.
An oral donation requires the simultaneous delivery of the thing or of the
document representing the right donated.
If the value of the personal property donated exceeds five thousand pesos, the
donation and the acceptance shall be made in writing, otherwise, the donation
shall be void
o Art. 749. In order that the donation of an immovable may be valid, it must be
made in a public document, specifying therein the property donated and the
value of the charges which the donee must satisfy.
The acceptance may be made in the same deed of donation or in a separate
public document, but it shall not take effect unless it is done during the lifetime of
the donor.
If the acceptance is made in a separate instrument, the donor shall be notified
thereof in an authentic form, and this step shall be noted in both instruments.
⎯ Obligation to give
o Expressly condones personal property
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o Delivery of the personal property, if the remission is verbal, shall not be required
since there is no transfer of property
o Acceptance of the debtor maybe implied or tacit provided that the value is not
more than 5,000php.
⎯ Obligation to give
o Express condonation involves immovable property
⎯ Obligations to do or not to do
o Form of the express remission must be in accordance with the less solemn
formalities established in Art. 748.

Form of Implied Remission


⎯ Code is silent with respect to the form of an implied remission
⎯ A formal remission that is defective cannot affect the obligee or creditor unless new or
other acts form a valid remission.

Art. 1271. The delivery of a private document evidencing a credit, made voluntarily by the creditor
to the debtor, implies the renunciation of the action which the former had against the latter.

If in order to nullify this waiver it should be claimed to be inofficious, the debtor and his heirs may
uphold it by proving that the delivery of the document was made in virtue of payment of the debt.

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.

Effect of Delivery of Evidence of Credit to Debtor


⎯ If the creditor voluntary delivers the private document evidencing the credit to the debtor,
there is a presumption of remission of the obligation
⎯ Requisites:
o Document evidencing credit was delivered to the debtor
o Document must be a private document
o Delivery must be voluntary
⎯ Presumption – when the debtor has in his possession the document evidencing the
credit, it is assumed that is was delivered to him by the creditor
⎯ In case of heirs of creditor trying to nullify the condonation, the debtor or his heirs must
prove that such document was delivered to them by the creditor because of fulfillment of
obligation.

Art. 1273. The renunciation of the principal debt shall extinguish the accessory obligations; but
the waiver of the latter shall leave the former in force.

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.

Effect of Remission in General


⎯ Extinguish the obligation in its entirety or part or aspect
⎯ If obligation is joint, the remission can only affect the share of the debtor in whose favor
the remission has been made.

Effect Upon Accessory Obligations


⎯ Remission refers to principal obligation – all accessory obligations are extinguished
⎯ Remission is to accessory obligations – principal obligation subsists.
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Rule in Pledge
⎯ Presumption that the accessory obligation of pledge has been remitted when the thing
pledged in possession of the debtor or of a third person.

Section 4. – Confusion or Merger of Rights

Art. 1275. The obligation is extinguished from the time the characters of creditor or debtor are
merged in the same person.

Concept of Confusion
⎯ Merger of the characteristics of creditor and debtor in the same person and thus
extinguishes the obligation because of the impossibility of performing it.
⎯ Erases the plurality of subjects of the obligation and extinguishes the obligation because
it is absurd that a person should enforce an obligation against himself.
⎯ May be revoked, as a result of which the obligation is recreated in the same condition that
it had when merger took place
⎯ CAUSE OF MERGER: Anything that brings about succession to the credit e.g. debtor
inherits credit from the creditor. However, can

Requisites
⎯ Merger of characters of debtor and creditor in the same person
⎯ Takes place in the person of either the principal creditor or principal debtor
⎯ Must be complete and definite.

Kinds
⎯ Cause or Constitution
o Inter vivos – Agreement of the parties
o Mortis causa – Succession
⎯ Extent or Effect
o Total – results in extinguishment of the entire obligation
o Partial – extinguishes only a part of the obligation
§ Confusion or merger only to a part of the obligation
§ Obligation is joint

Art. 1276. Merger which takes place in the person of the principal debtor or creditor benefits the
guarantors. Confusion which takes place in the person of any of the latter does not extinguish the
obligation.

Effect Upon Accessory Obligations


⎯ Merger results in the extinguishment of both accessory and principal obligations
⎯ Guarantors are benefitted by the confusion of rights.
⎯ If confusion or merger takes place in the person of a subsidiary creditor or subsidiary
debtor, no extinguishment of the principal obligation can happen; only substitution of
creditor or debtor.
⎯ If there are several guarantors and the character of guarantor and creditor are merged,
the guarantor-creditor can demand from the debtor
⎯ If the debtor and guarantor are merged, the creditor can demand from the guarantor-
debtor.

Art. 1277. Confusion does not extinguish a joint obligation except as regards the share
corresponding to the creditor or debtor in whom the two characters concur. (1194)
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Effect upon Collective Obligations


⎯ Nature of a joint obligation
⎯ Does not extinguish a joint obligation except as regard to the share corresponding to the
creditor or debtor in whom the two characters concur.

Effect of Revocation of Confusion


⎯ Confusion may be revoked by the presence of any of the causes for the rescission,
annulment, nullity, or inexistence of contracts by some special cause such as redemption.
⎯ Inheritance may be revoked by nullity of will
⎯ Original obligation is recreated in the same form under the same condition which it was
found before the merger happened.

Section 5. – Compensation

Art. 1278. Compensation shall take place when two persons, in their own right, are creditors and
debtors of each other.

Concept
⎯ Mode of extinguishing the obligation to the concurrent amount
⎯ the obligations of those persons who in their own right are reciprocally debtors and
creditors of each other.
⎯ Extinguished because their economic object or purpose is realized.
⎯ Pago abreviado – simplified payment
⎯ Advantages:
o Facility of payment because it takes effect by operation of law
o Guaranty for the effectivity of the credit

Distinguished form Payment


PAYMENT COMPENSATION
Capacity to dispose of the thing paid and Such capacity is not necessary, because it
capacity to receive are required for debtor and takes place by operation of law and not by the
creditor acts of parties
Performance must be complete May be partial extinguishment of an obligation

Takes effect by act of parties Compensation takes effect by operation of law


Requisites are different Requisites are different

Distinguished from Confusion


CONFUSION COMPENSATION
Involves only one obligation There must always be two obligations
There is only one person in whom the Two persons who are mutually debtors and
characters of creditor and debtor meet creditors of each other in two separate
obligations, each arising from a different cause

Distinguished from Counterclaim


CONTERCLAIM COMPENSATION
Not necessary that two debts must consist of Necessary that two debts must consist of
money, fungibles, or that they must be of the money, fungibles, or that they must be of the
same kind of quality same kind of quality
Liquidation is not necessary Requires that debts be liquidated
Must be pleaded in order to be effectual Need not be pleaded
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Kind of Compensation
⎯ Legal
o Takes effect by operation of law from the moment all requisites are present
⎯ Voluntary
o When the parties who are mutually creditors and debtors agree to compensate
their respective obligations even though all of the requisites for compensation
may not then be present.
⎯ Judicial
o When it takes effect by judicial decree
o When one of the parties to a suit over an obligation has a claim
⎯ Total
o Debts to be compensated are equal in amount
⎯ Partial
o Debts to be compensated are not equal in amount

Art. 1279. In order that compensation may be proper, it is necessary:


1) That each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;
2) 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) That the two debts be due;
4) That they be liquidated and demandable;
5) That over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor.

Requisites of Compensation
⎯ Each one of the obligors be bound principally and that at the same time a principal
creditor of the other
y
o Principals not applicable if only a guarantor
y
o Solidary debtor cannot set up the obligation of the creditor in favor of a co-debtor,
except as regard to the share of the latter
⎯ That both debts consists 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
⎯ That the two debts are due
⎯ That they be liquidated and demandable
o Liquidated debts – when its existence and amount are determined
o Demandable – enforceable in court
o What are not subject to compensation
§ Period which has not yet arrived

§ Suspensive condition has not yet happened

§ Obligation cannot be sued upon (e.g. natural obligation)
⎯ That over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor
o Not applicable to facultative obligations, but applicable to those with penal clause

As to Parties
⎯ Parties be mutually creditors and debtors in their own right
⎯ They must be bound as principals
⎯ No compensation between the obligations of a legal representative, guardian or
administrator incurred in his personal capacity and the obligations of a third person to the
person represented.

Bound as Principals
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⎯ Necessary that the parties be bound as principals to one another


⎯ When a corporation is indebted to a stockholder for a certain amount and the stockholder
on the other hands is indebted to the corporation for a certain amount, compensation is
proper
As to Objects
⎯ Both debts must consists of a sum of money
⎯ Obligations to give
⎯ Consumable à fungible (able to replace or be replaced by another identical item;
mutually interchangeable)

As to Maturity
⎯ Debts must be due
⎯ No demand before the expiration of the debt

As to Liquidation
⎯ Liquidated debts are those whose amounts are determinable by simple arithmetical
operation.
⎯ If one of the debts or both of them are not liquidated then there can be no compensation.
⎯ If both are partially liquidated then compensation can be applied to such parts but not all.
⎯ Demandable debts must be due and liquidated.

As to Claims of Third Persons


⎯ Retention
o Consists in the application of the credit of one of the parties to the satisfaction of
the claims of a third person.
o No compensation if retention is present
o However, if there is excess balance remaining after the application of the credit,
then compensation can and will still take place
⎯ Controversy
o A third person claims to be the creditor
o Provisional suspension of the compensation
o Adjudicated to the latter, compensation cannot take place

Art. 1280. Notwithstanding the provisions of the preceding article, the guarantor may set up
compensation as regards what the creditor may owe the principal debtor.

Right of the Guarantor to Set Up Compensation


⎯ Only a principal debtor can set up compensation against the creditor for what the latter
owes him.
⎯ Guarantor can, in case the payment of the debt is demanded from him, may set up
compensation, not only for what the creditor owes him but also for what such creditor
owes the principal debtor.
⎯ Liability of the guarantor is only subsidiary; it is accessory to the principal obligation of the
debtor
⎯ If debtor’s obligation is compensated, it would mean the extinguishment of the
guaranteed debt and benefits the 
guarantor

Art. 1281. Compensation may be total or partial. When the two debts are of the same amount,
there is a total compensation.

Art. 1282. The parties may agree upon the compensation of debts which are not yet due.

Voluntary Compensation
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⎯ Payment cannot be demanded if the obligation is not yet due.


⎯ The parties have to agree upon the compensation of the two obligations

Art. 1283. If one of the parties to a suit over an obligation has a claim for damages against the
other, the former may set it off by proving his right to said damages and the amount thereof.

Judicial Compensation
⎯ What is set-off against the other party is a counterclaim
⎯ When the defendant who has an unliquidated claim for damages against the plaintiff sets
it off by proving his right to said damages and the amount thereof, it is converted into a
liquidated claim by court decree.
⎯ Compensation shall take effect from the moment the judgment liquidating the claim has
become final.

Art. 1284. When one or both debts are rescissible or voidable, they may be compensated against
each other before they are judicially rescinded or avoided.

Rules in Case of Rescissible or Voidable Debts


⎯ Exception to the rule of demandability
⎯ Exception is justified by the fact that rescissible or voidable obligations are considered
demandable while the vices with which they are tainted are not yet judicially declared.

Art. 1285. The debtor who has consented to the assignment of rights made by a creditor in favor
of a third person, cannot set up against the assignee the compensation which would pertain to
him against the assignor, unless the assignor was notified by the debtor at the time he gave his
consent, that he reserved his right to the compensation.

If the creditor communicated the cession to him but the debtor did not consent thereto, the latter
may set up the compensation of debts previous to the cession, but not of subsequent ones.

If the assignment is made without the knowledge of the debtor, he may set up the compensation
of all credits prior to the same and also later ones until he had knowledge of the assignment.

Effect of Assignment of Rights


⎯ With consent of debtor
o Cannot set up against assignee UNLESS debtor reserved his right to
compensation when he gave his consent
⎯ With knowledge but without consent of debtor
o Only debts prior to assignment, not subsequent
o Prevent fraud
o If notification preceded the assignment, effects of the assignment are produced
from the time it is made and not from the time of notification
o If notification and assignment is made simultaneously, no question about the time
of the efficacy of the assignment. Debtor can set-up defense of compensation of
debts contracted prior to assignment
o Notification is given after assignment; the assignment must have been effected
without the knowledge and consent of the debtor.
⎯ Without the knowledge of debtor
o The assignee demands the payment of the credit which was assigned, the debtor
may have the defense of compensation of all credits which he may have against
the assignor and which may have become demandable before he was notified of
the assignment.
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o If the debtor is not aware of the assignment, the assignor subsequently contracts
new debts from him, such obligations which become due and demandable before
he was notified of the assignment can be set off.

When Compensation Takes Place


⎯ Subsequent assignment of rights by a creditor, after compensation, to a third person
cannot in any way affect the debtor with respect to the compensation which has already
taken place.
⎯ Assignee can only demand indemnity for damages from the assignor on the ground of
fraud.

When Compensation has not Taken Place


⎯ Compensation has not taken place because of the absence of any or some of the
requisites, the effects of such assignment once all of the requisites for compensation are
present shall depend on whether the compensation was made with consent or knowledge
but without consent.

Art. 1286. Compensation takes place by operation of law, even though the debts may be payable
at different places, but there shall be an indemnity for expenses of exchange or transportation to
the place of payment.

Art. 1287. Compensation shall not be proper when one of the debts arises from a depositum or
from the obligations of a depositary or of a bailee in commodatum.

Neither can compensation be set up against a creditor who has a claim for support due by
gratuitous title, without prejudice to the provisions of paragraph 2 of Article 301.

Art. 1288. Neither shall there be compensation if one of the debts consists in civil liability arising
from a penal offense.

Debts Which Cannot Be Compensated


⎯ Debts arising from contracts of depositum
⎯ Debts arising from contracts of commodatum
⎯ Claims for support due by gratuitous title
⎯ Obligations arising from criminal offenses
⎯ Certain obligations in favor of the government
⎯ Note: All prohibitions are based on justice. Justice and humanity demand that they be
performed.

Art. 1289. If a person should have against him several debts which are susceptible of
compensation, the rules on the application of payments shall apply to the order of the
compensation.

Art. 1290. When all the requisites mentioned in Article 1279 are present, compensation takes
effect by operation of law, and extinguishes both debts to the concurrent amount, even though the
creditors and debtors are not aware of the compensation.

Effect of Compensation
⎯ Extinguishes both debts to the extent that the amount of one is covered by the amount of
the other
⎯ Accessory obligations are also extinguished – may be total or partial depending on the
compensation of the principal obligation.
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When Compensation Takes Effect


⎯ Compensation takes effect by operation of law.
⎯ Takes effect from the moment of all the essential requisites prescribed by law are present
even though the parties are not aware.
⎯ Legal compensation operations against the will of the interested parties without their
consent.
⎯ When used as a defense, it retroacts to the duty when its requisites are fulfilled.
⎯ Applicable only to legal compensation

Section 6. – Novation

Art. 1291. Obligations may be modified by:


1) Changing their object or principal obligations;
2) Substituting the person or the debtor;
3) Subrogating a third person in the rights of the creditor.

Concept of Novation
⎯ The extinguishment of an obligation by the substitution or change of the obligation by a
subsequent one which extinguishes or modifies the first either by:
o Changing the object or principal conditions
o Substituting the person of the debtor
o Subrogating a third person in the rights of the creditor
o Unlike other acts of extinguishing obligation, novation is a juridical act of dual
function in that at the time it extinguishes an obligation, it creates a new one in
lieu of the old.
o Does not operate as absolute but only as a relative extinction.
⎯ Two-fold Purpose:
o Extinguishment of the old obligation
o Give birth to a new one

Requisites (PAVE)
⎯ Previous valid obligation
⎯ Agreement of the parties to the new obligation
⎯ Validity of the new obligation
⎯ Extinguishment of the old obligation
⎯ Extinctive – terminated by the creation of a new obligation
⎯ Modificatory – obligation subsists to the extent it remains compatible with the amendatory
agreement

Kinds
⎯ As to essence
o 
Objective or Real
§ change in the cause, object or principal
o Subjective or Personal
§ modification of obligation by the change of the subject
§ passive - substitution of debtor
§ active - subrogation of a third person in the rights of the creditor
o Mixed
§ both objective and subjective novation
⎯ As to form 
or constitution
o Express
§ Parties declare that the old obligation is extinguished and substituted by
the new obligation
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o Tacit
§ Incompatibility between the old and the new obligations that they cannot
stand together
⎯ As to extent or effect
o Partial
§ Only a modification or change in some principal conditions of the
obligation
o Total
§ Obligation is completely extinguished
⎯ As to origin

o Conventional
§ by express stipulation of the parties 

o Legal
§ by operation of law

Objective Novation
⎯ May be effected by
o Changing the cause of the obligation;
o Changing the object of the obligation;
o Changing the principal or essential conditions of the obligation

Change of Cause
⎯ Contract of sale to a contract of lease where the price has not yet been paid to the vendor
or lessor. If the contract is changed to a loan instead of sale, then the result is a real or
objective novation

Change of Object
⎯ Any modification in the amount due or any change whereby the obligation to pay is
converted into an obligation to render a personal service would constitute a novation

Change of Principal Conditions


⎯ Change or modification of the conditions of a previous obligation
⎯ Change must be principal and not merely incidental to result in the modification
⎯ Essential and not accidental change.
⎯ Debtor merely executes another instrument reiterating or ratifying his obligation to the
creditor without changing its object or principal conditions; there is no novation of the
obligation.
⎯ If it is agreed upon that changes may be made to the contract during the performance of
the obligation, it stands to reason that any changes done is not an effective novation.
⎯ If the alteration is with regard to providing another mode for payment or for additional
security, such change is not a novation.

Art. 1292. 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.

Form of Extinguishment
⎯ In order that obligation may be extinguished by another which substitutes the same, it is
imperative that
o It be so declared in unequivocal terms (express)
o Old and the new obligations be on every point incompatible with each other
(implied)
⎯ Novation is never presumed. It must be established.
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⎯ Express novation – expressly disclose that their object in making the new contract is to
extinguish the old contract
⎯ Implied novation – no specific form is required, all that is needed is incompatibility
between original and 
subsequent contracts
⎯ Test of incompatibility – If the two contracts can stand together and each one having
independent existence
⎯ The change must refer to the object, the cause or the principal conditions of the
obligations. Accidental changes 
do not produce novation.

Express Novation
⎯ For an obligation to be extinguished, it is imperative that the novation be so declared in
unequivocal terms.
⎯ Can take place only when the intention to effect a novation clearly results from the terms
of the agreement or is shown by a full discharge of the debt
⎯ Signing of a second promissory note does not necessarily mean the extinguishment of
the first where the terms of payment were expressly stipulated. The same terms shall still
govern the manner of liquidation of said balance.

Implied Novation
⎯ In order for the novation to be validly implied, the old and new agreement must be
incompatible with one another on every point.
⎯ If there are two contracts that have a change in the amount due and date of maturity, it is
clear that there is a novation. Only the second contract can stand to exist.
⎯ The act of the creditor in accepting the third person as an additional debtor is not a
novation.
⎯ In obligations with a term or period
o Distinction must be made with regard to the effect of the change
o Increase of term, postponement or extension à no novation as there are no
incompatibilities
o Reduction of term, decrease of duration of the term or period à there is a
novation as there are clear incompatibilities. Also, there is a changed of the
principal condition.

Art. 1293. Novation which consists in substituting a new debtor in the place of the original one,
may be made even without the knowledge or against the will of the latter, but not without the
consent of the creditor. Payment by the new debtor gives him the rights mentioned in Articles
1236 and 1237.

Novation by Substitution of Debtor


⎯ Subjective or personal novation
o Change of debtor in place of the original one with the consent of the creditor
o Expromision
§ Substitution of the debtors is with the consent of the creditor with the
knowledge and consent old debtor
• New debtor can demand reimbursement from the original debtor
the entire amount which he paid
• Subrogated in all rights of the creditor
§ Substitution was effected without the knowledge and consent of the
original debtor
• New debtor can demand reimbursement from the original debtor
only insofar as the payment has been beneficial to the old debtor
but cannot be subrogated the rights of the creditor.
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§ Change does not come from the debtor and may be made without his
knowledge
§ Requisites:
• Initiative for the substitution must emanate from the new debtor
• Consent of the creditor to the substitution
§ Two kinds of Expromision:
• Substitution with the knowledge and consent of the old debtor
• Substitution without the knowledge or against the will of the old
debtor
o Delegacion
§ Debtor offers and the creditor accepts a third person who consents to the
substitution so that the consent of the three is necessary
• Delegante (old debtor)
• delegatario (creditor)
• delegado (third person new debtor)
§ New debtor can demand reimbursement from the original debtor of the
entire amount he has paid and compel the creditor to subrogate him in all
of his rights.
§ Requisites:
• Initiative for the substitution must emanate from the old debtor
• Consent of the ne debtor
• Acceptance by the creditor

Necessity of the Creditor’s Consent


⎯ Consent must ALWAYS be secured
⎯ Substitution of a debtor for another may delay or prevent the fulfillment or performance of
the obligation by the temporary inability of the new debtor.
⎯ No specific form or time of consent
o May be given simultaneously or afterwards
o May be express or implied.

Effect of Payment of New Debtor


⎯ Original debtor shall reimburse to the new debtor whatever benefits he may have derived
therefrom.
⎯ Expromision
o Debtor pays the debt or obligation
o Relationship shall be regulated by the rules regarding payment of debt by a third
person
o Rules to be applied depends on whether or not the substitution was made with or
without the consent of the debtor.
⎯ Delegacion
o There would be a special agreement of all parties and thus the relationship
among such parties shall be regulated by such agreement
o In the absence of an agreement, relationship is regulated by rules regarding
payment of a debt by a third person.

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

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

Effect of Nonpayment of New Debtor


⎯ General Rule – novation by substitution of the debtor has the effect of releasing the
original debtor from his obligation
⎯ If new debtor is insolvent:
o Delegacion:
§ General Rule – Old debtor is not liable for the insolvency or non-
fulfillment of the new debtor (Art 1295) 

§ Exception:
• He is aware of the insolvency at the time he delegated his debt
(Art 1295)
• At the time of the delegation, the new debtor’s insolvency is
already existing and of public knowledge
o Expromision
§ New debtor’s insolvency or nonfulfillment of the obligation can never
result in the revival of the original debtor’s liability to the creditor
§ Premise: substitution can be made without the consent or against the will
of the old debtor.

Art. 1296. 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.

Effect Upon Accessory Obligations


⎯ An accessory obligation is dependent on a principal obligation.
⎯ Cannot apply to novations effected by subrogating a third person in the rights of the
creditor because such novations are regulated by Art. 1303 and 1304 of NCC.
⎯ Exception
o Refers to a case where there is a stipulation constituted in favor of a third person
which may be demanded separately from the principal obligation.

Art. 1297. 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.

Art. 1298. The novation is void if the original obligation was void, except when annulment may be
claimed only by the debtor or when ratification validates acts which are voidable.

Effect of New and/or Old Obligations Are Void


⎯ Essential requisite of novation is the validity of the new obligation from the valid previous
obligation
⎯ If the old obligation is void, then there is nothing to novate. The new obligation cannot
produce any effect.
⎯ Old obligation has already been extinguished
⎯ New obligation is void, then there is no new obligation. The old obligation still subsists.

Rule if the Old Obligation is Voidable


⎯ Annulment of the obligation may be claimed only by the debtor or when there is
ratification the rule is that the novation is void is not applicable
⎯ Voidable obligations are binding until annulled by a competent court therefore they are
susceptible to ratification.
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⎯ If debtor concurs, he impliedly renounces his right to ask for annulment, and validates the
obligation

Art. 1299. 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.

Effect if Old Obligation is Conditional


⎯ If the old obligation was subject to a suspensive or resolutory condition, the new
obligation is subject to the same conditions.
⎯ Efficacy shall depend whether the condition which affects the first is complied with or not.
⎯ Subsequent obligations are contracted in the consideration of the first thus stands as its
equivalent.

Art. 1300. Subrogation of a third person in the rights of the creditor is either legal or conventional.
The former is not presumed, except in cases expressly mentioned in this Code; the latter must be
clearly established in order that it may take effect.

Novation by Subrogation
⎯ Subrogating a third person in the rights of the creditor substitutes him of all his rights.
⎯ Consent of the original creditor, of the third person who is subrogated to the rights of the
original creditor, and of the debtor is required.
⎯ Cases wherein the creditor may transmit his rights to a third person without consent of
the debtor. No novation of obligation but merely assignment of rights.

Conventional Subrogation Assignment of Rights


Rules which govern Art. 1300 Art. 1624 to 1627
Necessity of debtor’s consent Required Not required
Effect upon obligation Effect of extinguishing the Transmitting the rights of the
obligation, giving rise to a new creditor to another person
one without modifying or
extinguishing the obligation
Effect upon vices Defects or vices in the original Not cured
obligation are cured
Time of effectivity Arises from the moment of Moment of notification
novation or subrogation

Art. 1302. It is presumed that there is legal subrogation:


1) When a creditor pays another creditor who is preferred, even without the debtor's
knowledge;
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.

Legal Subrogation
⎯ Takes place without agreement but by operation of law because of certain acts
⎯ General Rule: Not presumed
o Exceptions
§ When a creditor pays another creditor who is preferred, even without the
debtor’s knowledge
• Refers to hierarchy of credits
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• Debtor can still use any defenses he may have against the
original creditor such as compensation
§ When a 3rd person, not interested in the obligation, pays with the
express/tacit approval of the debtor
§ 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
• Solidary co-debtor may reimburse to the extent of the debtor’s
share
• Guarantors, mortgagors and sureties
⎯ The third person is called “legal subrogee”
⎯ “Preferred” – broadest sense in connection with the rules on preference of credits. May
be effected without the debtor’s knowledge

Art. 1303. Subrogation 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.

Art. 1304. 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.

Effect of Total Subrogation


⎯ Subrogation transfers to the third person who is subrogated the credit with all of the rights
which the original creditor had against the debtor or against the third persons.
⎯ Accessory obligations are not extinguished because the person subrogated acquires all
the rights which the original creditor had against third persons.
⎯ Absolute in application to legal subrogation.
⎯ Accessory obligations may be increased or reduced depending on the agreement of the
parties in conventional subrogation.

Effect of Partial Subrogation


⎯ Both rights shall co-exist.
⎯ No subrogation of partial rights of the creditor if such remains unpaid.
⎯ In case of conflict, the original creditor’s rights shall be preferred.
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TITLE II
CONTRACTS

CHAPTER 1
General Provisions

Article 1305. 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. (1254a)

Concept of Contracts
- Simply means an agreement or convention
- Juridical convention manifested in legal form, by virtue of which one or more persons bind
themselves in favor of another or others, or reciprocally, to the fulfillment of a prestation
to give, to do or not to do.

Distinguished from other terms

Ordinary Contract Marriage


- Parties may be 2 or more persons of - It is necessary that the parties must be
the same or different sexes one man and one woman
- The nature, consequences and - Governed by law
incidents of the contract are governed
primarily by the agreement of the
parties
- Once the contract is executed, the - Once marriage is celebrated, the result
result is a contract is a status
- Can be terminated or dissolved by the - Cannot
mere agreement of the parties
- In case of breach, the usual remedy is - The usual remedy is for the injured
for the injured party to institute an party to institute a civil action against
action against the other party for the other party for legal separation or a
damages criminal action for adultery or
concubinage

The Basic Duties of Persons when entering into Contracts


- All men are presumed to be sane and normal and subject to be moved by substantially
the same motives.
- Men must depend upon themselves – upon their own abilities, talents, training, senses,
acumen, judgment.
- The fact that one may be worsted by another, of itself, furnishes no cause of complain.
- There must be, in addition, a violation of law, the commission of what the law knows as
an actionable wrong, before the courts are authorized to lay hold of the situation and
remedy it.

The duty of the Courts in interpreting Contracts


- It is not the province of the court to alter a contract by construction or to make a new
contract for the parties.
- Duty is confined to the interpretation of the one which they have made for themselves
without regard to its wisdom or folly as the court cannot supply material stipulations or
read into the contract words which it does not contain.

Elements of Contracts
(1) Essential – those without which there can be no contract
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a. Common – present in all contracts, such as the CONSENT of the contracting


parties; OBJECT certain which is the subject of the contract; and CAUSE of the
obligation which is established.
b. Special – present only in certain contracts, such as delivery in real contracts or
form in solemn ones.
c. Extraordinary – peculiar to a specific contract, such as price in a contract of sale.
(2) Natural – those which are derived from the nature of the contract and ordinarily
accompany the same. They are presumed by the law, although they can be excluded by
the contracting parties if they so desire.
(3) Accidental – those which exist only when the parties expressly provide for them for the
purpose of limiting or modifying the normal effects of the contract. Ex. Conditions, terms,
modes.

Parties to a contract
- A person cannot enter into a contract with himself.
- However, auto-contract may be created wherein said party merely acts on the name and
for the account of two distinct contracting parties.

Characteristics of Contracts
1. Obligatory force or character of contracts
- Once the contract is perfected, it shall be of obligatory force upon both of the
contracting parties
- Such contracting parties are bound, not only to the fulfillment of what has been
expressly stipulated, but also to all of the consequences thereof.
2. Autonomy of contracts
3. Mutuality of contracts
- Contract must be binding upon both parties.
- Its validity or compliance cannot be left to the will of one of them.
4. Relativity of contracts
- Contracts take effect only between the parties, their assigns and heirs.
- They cannot, as a general rule, produce any effect upon third persons, in
conformity with the principle of res inter alios acta aliss nege noced prodest.

Breach of Contract Defined


- The failure, without legal reason, to comply with the terms of the contract.
- The failure, without legal excuse, to perform any promise which forms the whole
or part of the contract.

Life of Contracts
- Generation
1. The preliminary or preparation, conception or generation, which is the period of
negotiation, bargaining, ending at the moment of agreement of the parties.
- Perfection
1. The moment when the parties come to agree on the terms of the contract
- Consummation
1. The fulfillment or performance of the terms agreed upon in the contract.

Classification of Contracts
1. According to their relation to other contracts:
a. Preparatory – a necessary preliminary step towards the celebration of another
subsequent contract (partnership, agency)
b. Principal – those which can subsist independently from other contracts and
whose purpose can be fulfilled by themselves (sale, lease)
Obligations and Contracts Reviewer De la Salle University – College of Law
Guevarra | Tolentino Atty. Gallo

c. Accessory – those which can exist only as a consequence of, or in relation with,
another prior contract (pledge, mortgage)

2. According to their perfection:


a. Consensual – those which are perfected by the mere agreement of the parties
(sale, lease)
b. Real – those which require not only the consent of the parties for their perfection,
but also the delivery of the object by one party to the other (commodatum,
deposit, pledge)

3. According to their form:


a. Common or informal – those which require no particular form (loan)
b. Special or formal – those which require some particular form (donations, chattel
mortgage)

4. According to their purpose:


a. Transfer of ownership (sale)
b. Conveyance of use (commodatum)
c. Rendition of services (agency)

5. According to their subject matter:


a. Things (sale, deposit, pledge)
b. Services (agency, lease of services)

6. According to the nature of the vinculum which they produce:


a. Unilateral – those which give rise to an obligation for only one of the parties
(commodatum, gratuitous deposit)
b. Bilateral – those which give rise to reciprocal obligations for both parties (sale,
lease)

7. According to their cause:


a. Onerous – those in which each of the parties aspires to procure for himself a
benefit through the giving of an equivalent or compensation (sale)
b. Gratuitous – those in which one of the parties propose to give to the other a
benefit without any equivalent compensation (commodatum)

8. According to risks involved:


a. Commutative – those where each of the parties acquires an equivalent of his
prestation and such equivalent is pecuniarily appreciable and already determined
from the moment of the celebration of the contract (lease)
b. Aleatory – those where each of the parties has to his account the acquisition of
an equivalent of his prestation, but his equivalent, although pecuniarily
appreciable, is not yet determined at the moment of the celebration of the
contract, since it depends upon the happening of an uncertain event, thus
charging the parties with the risk of loss or gain (insurance)

9. According to their names or norms regulating them:


a. Nominate – those which have their own individuality and are regulated by special
provisions of law (sale, lease)
b. Innominate – those which lack individuality and are not regulated by special
provisions of law.
Obligations and Contracts Reviewer De la Salle University – College of Law
Guevarra | Tolentino Atty. Gallo

Article 1306. The contracting parties may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are not contrary to law, morals, good
customs, public order, or public policy. (1255a)

Right to Contract
- Freedom to contract is both constitutional and a statutory right; therefore, to uphold this
right, courts should move with all the necessary caution and prudence in holding
contracts void.

Limitations
- Stipulation, clause, term or condition established by the contracting parties must not be
contrary to
1. Law
2. Morals
3. Good customs
4. Public order
5. Public policy

Compromise Agreements
- A contract whereby the parties, by making reciprocal concessions, avoid litigation or put
an end to one already commenced.
- An agreement between 2 or more persons, who, for preventing or putting an end to a law
suit, adjust their difficulties by mutual consent in the manner which they agree on, and
which everyone of them prefers in the hope of gaining, balanced by the danger of losing.

Article 1307. Innominate contracts shall be regulated by the stipulations of the parties, by the
provisions of Titles I and II of this Book, by the rules governing the most analogous nominate
contracts, and by the customs of the place. (n)

Nominate Contracts
- Those which have their own distinctive individuality and are regulated by special
provisions of law.

Innominate Contracts
- Those which lack individuality and are not regulated by special provisions of law

Article 1308. The contract must bind both contracting parties; its validity or compliance cannot be
left to the will of one of them. (1256a)

Article 1309. The determination of the performance may be left to a third person, whose decision
shall not be binding until it has been made known to both contracting parties. (n)

Article 1310. The determination shall not be obligatory if it is evidently inequitable. In such case,
the courts shall decide what is equitable under the circumstances. (n)

Mutuality of Contracts
– The validity or fulfillment of a contract cannot be left to the will of one of the contracting
parties.
– Prohibited by the law from being delegated to one of the contracting parties:
1. The power to determine whether or not the contract shall be valid
2. The power to determine whether or not the contract shall be fulfilled
– Validity or fulfillment may be left to the will of a third person
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– However, an indispensable requisite that the determination made by the third person
should not be evidently inequitable.
– If it is evidently inequitable, it shall not have any obligatory effect upon the contracting
parties.
– The validity or fulfillment can be left to chance.

Article 1311. Contracts take effect only between the parties, their assigns and heirs, except in
case where the rights and obligations arising from the contract are not transmissible by their
nature, or by stipulation or by provision of law. The heir is not liable beyond the value of the
property he received from the decedent.

If a contract should contain some stipulation in favor of a third person, he may demand its
fulfillment provided he communicated his acceptance to the obligor before its revocation. A mere
incidental benefit or interest of a person is not sufficient. The contracting parties must have clearly
and deliberately conferred a favor upon a third person. (1257a)

Relativity of Contracts
– General principle of the civil law that a contract can only bind the parties who had entered
into it or their successors who have assumed their personality or their juridical position.
– Such contract can neither favor nor prejudice a third person.

Persons bound by contract


– General rule: contracts can take effect only between the parties, their assigns and heirs.
– Even though the contract may have been executed ostensibly in the name of another
person or entity, it shall produce effect only insofar as the real contracting party is
concerned, provided that such fact was known to the other party.
– An assignment or transfer by a contracting party has the effect of subrogating the
assignee to all of the rights and obligations of the assignor.
– Heirs cannot be charged directly with the payment of such obligations, such obligations
must be liquidated in the testate or intestate proceeding for the settlement of the estate of
the decedent.
– It is the estate, rather than the heir, which must be considered as the continuation of the
decedent’s personality.
– There are other obligations which are not monetary in character and which will, therefor,
constitute a part of the inheritance.
– Such obligations are still chargeable against the heirs, but only to the extent of the value
of the property which they may have received from the decedent.

Exceptions
– Rule that an assignee or a heir shall be bound by the terms of a contract is not absolute
in character.
– Rule does not apply if the rights and obligations arising from the contract are not
transmissible:
1. By their nature, when special or personal qualification of the obligor constitutes
the establishment of the contract;
2. By stipulation of the parties, obligor shall perform an act by himself and not
through another;
3. By provision of law, as in the case of those arising from a contract of partnership
or of agency.

Effect of contract on third persons


– General rule: it cannot produce an effect whatsoever as far as third persons are
concerned.
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Guevarra | Tolentino Atty. Gallo

– Contract’s voidable character cannot be asserted by one who is not a party to the
transaction or his representative.

4 exceptions where a contract may produce effect either directly or indirectly on third persons:
1. Stipulation in favor of a third person;
2. Third person comes into possession of the object of a contract creating a real right;
3. Contract is entered into in order to defraud a third person;
4. Third person induces a contracting party to violate his contract.

Stipulations in favor of third persons


– If a contract should contain some stipulation in favor of a third person, he may demand its
fulfillment provided he communicated his acceptance to the obligor before its revocation.
– Beneficial stipulation: a stipulation in a contract, clearly and deliberately conferred by the
contracting parties as a favor upon a third person, who must have accepted it before it
could be revoked.

Kinds of beneficial stipulations


1. Stipulation is intended for the sole benefit of the third person
2. Where an obligation is due from the promise to the third person which the former seeks to
discharge by means of such stipulation.

Requisites for enforcement


1. There must be a stipulation in favor of a third person;
2. Stipulation must be a part, no the whole of the contract;
3. Contracting parties must have clearly and deliberately conferred a favor upon a third
person, not a mere incidental benefit or interest;
4. Third person must have communicated his acceptance to the obligor before its
revocation;
5. Neither of the contracting parties bears the legal representative or authorization of the
third party.

– Acceptance by the third person or beneficiary does not have to be done in any particular
form. It may be done expressly or impliedly.

Test of beneficial stipulation


– Rely upon the intention of the parties as disclosed by their contract.

Article 1312. In contracts creating real rights, third persons who come into possession of the
object of the contract are bound thereby, subject to the provisions of the Mortgage Law and the
Land Registration Laws. (n)

Contracts Creating Real Rights


– When mortgage is registered in the Registry of Property, the effect of such registration is
to create a real right which will be binding against the whole world.

Article 1313. Creditors are protected in cases of contracts intended to defraud them. (n)

Contracts in fraud of creditors


– If he is a creditor of one of the contracting parties, and it can be established that the
contract was entered into with the intention of defrauding him, he ma ask for its
rescission.
Obligations and Contracts Reviewer De la Salle University – College of Law
Guevarra | Tolentino Atty. Gallo

Article 1314. Any third person who induces another to violate his contract shall be liable for
damages to the other contracting party. (n)

Requisites:
1. Existence of a valid contract
2. Knowledge on the part of the third person of the existence of the contract
3. Interference by the third person without legal justification or excuse.
– malice, in some form, is generally implied from the act of interference with contractual
relations, and is declared to be an essential ingredient in such cases.

Tests WON an agreement constitutes an undue restraint of trade, and therefore, is contrary to
public policy
1. Is there a limitation as to time or place?
2. Is the prohibition or restraint reasonably necessary for the protection of the contracting
parties?

Article 1315. Contracts are perfected by mere consent, and from that moment the parties are
bound not only to the fulfillment of what has been expressly stipulated but also to all the
consequences which, according to their nature, may be in keeping with good faith, usage and
law. (1258)
Article 1316. Real contracts, such as deposit, pledge and commodatum, are not perfected until
the delivery of the object of the obligation. (n)

Perfection of Contracts
– That moment in the life of a contract when there is finally a concurrence of the wills of the
contracting parties with respect to the object and the cause of the contract.
– General rule: the perfection of a contract is produced by mere consent.

Article 1317. No one may contract in the name of another without being authorized by the latter,
or unless he has by law a right to represent him.

A contract entered into in the name of another by one who has no authority or legal
representation, or who has acted beyond his powers, shall be unenforceable, unless it is ratified,
expressly or impliedly, by the person on whose behalf it has been executed, before it is revoked
by the other contracting party. (1259a)

– Unenforceable contract: cannot be sued upon or enforced, unless they are ratified.
– Although the contract is unenforceable, it is, however, susceptible of either express or
implied ratification by the person in whose behalf it has been executed before it is
revoked by the other contracting party.

CHAPTER 2
Essential Requisites of Contracts
General Provisions

Article 1318. There is no contract unless the following requisites concur:


(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of the contract;
(3) Cause of the obligation which is established. (1261)

Requisites of Contracts in General


– Essential elements are those without which there can be no contract
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– Natural elements are those which are derived from the very nature of the contract
– Accidental elements exist only when the contracting parties expressly provide form them

Essential Elements
– Common
o Present in all contracts (consent, object and cause)
– Special
o Present only in certain contracts (delivery in real contracts, or form in solemn
ones)
– Extraordinary
o Those which are peculiar to a specific contract
o Price in a contract of sale.
– Law imposes the essential elements, presumes the natural and authorizes the accidental;
conversely, the will of the contracting parties conforms to the first, accepts or repudiates
the second and establishes the third.

SECTION 1
Consent

Article 1319. Consent is manifested by the meeting of the offer and the acceptance upon the
thing and the cause which are to constitute the contract. The offer must be certain and the
acceptance absolute. A qualified acceptance constitutes a counter-offer.

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. (1262a)

Concept of Consent
– Most important element
– The very heart and soul of contracts
– The concurrence of the wills of the contracting parties with respect to the object and the
cause which shall constitute the contract.

Requisites of Consent
1. Consent must be manifested by the concurrence of the offer and the acceptance
2. The contracting parties must posses the necessary legal capacity
3. Consent must be intelligent, free, spontaneous, and real

When Contracts are Perfected


– The moment that there is a manifestation of the concurrence between the offer and the
acceptance
– If acceptance is made by letter or telegram:
o Contract is perfected from the moment that the offeror has knowledge of such
acceptance
§ Exception: contract is perfected from the moment an answer is made
accepting the offer (applies to purely commercial contracts such as joint
accounts, maritime contracts, etc.)

Manifestation of Consent
– It must be manifested by the meeting of the offer and the acceptance upon the thing and
the cause which are to constitute the contract.
– Once there is such a manifestation of the concurrence of the wills of the contracting
parties, the period or stage of negotiation is terminated.
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Character of Offer and Acceptance


– Offer: a proposal to make a contract
– In order to constitute a binding proposal, the offer must be certain or definite.
– In order that there will be a perfected contract, the acceptance must also be certain or
definite.
– Acceptance must be absolute in character, it must be plain and unconditional.
– If it involves any new proposal or if it is qualified, it constitutes a counter-offer – in which
chase it is essential before there can be a perfected contract that there must be a definite
and absolute acceptance by the original offeror of such counter-offer.
– Contracts that are consensual in nature are perfected upon mere meeting of the minds.
Once there is concurrence between the offeror and the acceptance upon the subject
matter, consideration and terms of payment a contract is produced.
– The offer must be certain.
– To convert the offer into a contract, the acceptance must be absolute and must not
qualify the terms of the offer; it must be plain, unequivocal, unconditional and without
variance of any sort from the proposal.

Acceptance of complex offers


– If the offeror proposes to lease one part and to sell another part, acceptance of one by
the offeree would ordinarily result in a perfected contract, unless of course, the offeror
should have made one offer dependent upon the other.
– In an offer involving a prospective contract of loan and the mortgage which will secure it,
acceptance by the future debtor of the proposed loan alone would not give rise to a
perfected contract.

Effect of constructive knowledge


– General rule: what is required by the law is actual knowledge of the acceptance.
– Mere receipt of the letter or telegram is not sufficient.

Withdrawal of offer
– Rule in jurisdiction is that he may still withdraw his offer or proposal so long as he still has
knowledge of the acceptance by the offeree.

Withdrawal of acceptance
– The acceptance may be revoked before it comes to the knowledge of the offeror because
in such case there is still no meeting of the minds, since the revocation has cancelled or
nullified the acceptance which thereby cease to have any legal effect.

Article 1320. An acceptance may be express or implied. (n)

Form of Acceptance
– Acceptance may be express or implied.

Article 1321. The person making the offer may fix the time, place, and manner of acceptance, all
of which must be complied with. (n)

Article 1322. An offer made through an agent is accepted from the time acceptance is
communicated to him. (n)

Article 1323. An offer becomes ineffective upon the death, civil interdiction, insanity, or
insolvency of either party before acceptance is conveyed. (n)
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Guevarra | Tolentino Atty. Gallo

Effect of Death, Civil Interdiction, Insanity, or Insolvency


– Offer becomes ineffective upon the death, civil interdiction, insanity, or insolvency of
either party before acceptance is conveyed.
– “Conveyed” refers to that moment when the offeror has knowledge of the acceptance by
the offeree.

Article 1324. 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. (n)

Period of Acceptance: Options


– If the option is without consideration, the offeror may withdraw his offer by communicating
such withdrawal to the offeree at anytime before acceptance; if it is founded upon a
consideration, the offeror cannot withdraw his offer.
– If the option is without a consideration, it is a mere offer to sell which is not binding until
accepted.
– If, however, acceptance is made before a withdrawal, it constitutes a binding contract of
sale. There is already a concurrence of both offer and acceptance.

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

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

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


(1) Unemancipated minors;
(2) Insane or demented persons, and deaf-mutes who do not know how to write. (1263a)

Legal Capacity of Contracting Parties


– Indispensable requisite of consent = essential element of a contract

Incapacitated Persons
1. Unemancipated minors;
2. Insane or demented persons;
3. Deaf-mutes who do not know how to write.

– Second is broad enough to cover state of drunkenness or under a hypnotic spell or who
are suffering from any kind of mental incapacity whatsoever.
– The only way one of those enumerated can enter into a contract is to act through a parent
or guardian.
– If this requirement is not complied with, the result is a defective contract.
– If only one of the contracting parties is incapacitated to give his consent, the contract is
voidable.
– If both of them are incapacitated to give their consent, the contract is unenforceable.

Unemancipated minors
– Unemancipated minors cannot give their consent to a contract.
– However, if minor is emancipated by marriage or by voluntary concession, he shall have
the power to administer his property, but he cannot borrow money or alienate or
encumber real property without the consent of his father or mother, or guardian.

Exceptions – Unemancipated minors:


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Guevarra | Tolentino Atty. Gallo

1. When it is entered into by a minor who misrepresents his age;


2. When it involves the sale and deliver of necessaries to the minor;
3. When it involves a natural obligation and such obligation is fulfilled voluntarily by the
minor, provided that such minor is between 18 and 21 years of age;
4. When it is a marriage settlement or donation propter nuptias, provided the minor is
between 20 and 21 years of age, if male or between 18 and 21 years of age if female;
5. When it is a life, health or accident insurance taken on the life of the minor, provided that
the minor is 18 years old or more and the beneficiary appointed is the minor’s estate, or
the minor’s father, mother, husband wife, child, brother, or sister.

Effect of misrepresentation
– Based on the principle of estoppel.
– Where the minors who entered into the contract have already passed the age of puberty
and adolescence in such a way that they could misrepresent and actually did
misrepresent themselves as having reached the age of majority, they cannot, upon
reaching the age of majority, annul the contract on the ground of minority inasmuch as
they are already in estoppel.
– Well settled principle that misrepresentation by unemancipated minors with regard to their
age when entering into a contract shall bind them in the sense that they are estopped
subsequently from impugning the validity of the contract on the ground of minority. It is,
however, necessary that the misrepresentation must be active , not merely constructive.

Insane or demented persons


– Include any person, who, at the time of the celebration of the contract, cannot understand
the nature and consequences of the act or transaction by reason of any cause affecting
his intellectual or sensitive faculties, whether permanent or temporary.
– Art. 1328, however, provides that a contract entered into during a lucid interval is valid.

Deaf-mutes
– Deaf-mute who knows how to write = valid
– Deaf-mute who does not know how to write = voidable or unenforceable – depending
upon whether one or both of the parties are incapacitated

Other incapacitated persons


– Married women of age in cases specified by law;
– Persons suffering from civil interdiction;
– Incompetents who are under guardianship.
1. Persons suffering from civil interdiction;
2. Hospitalized lepers;
3. Prodigals;
4. Deaf and dumb who are unable to read and write;
5. Those who are of unsound mind, even though they have lucid intervals; and
6. Those who by reason of age, weak mind, and other similar causes, cannot, without
outside aid, take care of themselves and manage their property becoming thereby an
easy prey for deceit and exploitation.

Article 1328. Contracts entered into during a lucid interval are valid. Contracts agreed to in a
state of drunkenness or during a hypnotic spell are voidable. (n)
Article 1329. The incapacity declared in article 1327 is subject to the modifications determined by
law, and is understood to be without prejudice to special disqualifications established in the laws.
(1264)

Disqualifications to Contract
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– Sec. 145 of the Administrative Code: no contract relating to real property shall be made
with any non-Christian inhabitant of Mindanao and Sulu, unless such contract shall bear
the approval of the provincial governor of the province wherein the contract was executed
or his representative duly authorized for such purpose in writing endorsed upon it.
– Insolvency Law: a person who is declared insolvent before he is discharged is prohibited
from entering into a contract.
– Art. 133 of CC: every donation between the spouses during the marriage shall be void.
This prohibition does not apply when the donation takes effect after the death of the
donor. Neither does this prohibition apply to moderate gifts which the spouses may give
each other on the occasion of any family rejoicing.
– Art. 1490: husband and wife cannot sell property to each other, except:
1. When a separation of property was agreed upon in the marriage settlement; or
2. When there has been a judicial separation of property.
– Art. 1491: the following persons cannot acquire by purchase, even at a public or judicial
auction, either in person or through the mediation of another:
1. The guardian, the property of the person or persons who may be under his
guardianship;
2. Agents, the property whose administration or sale may have been entrusted to them,
unless the consent of the principal has been given;
3. Executors and administrators, the property of the estate under administration;
4. Public officers and employees, the property of the State or any subdivision thereof, or
of any GOCC, or institution, the administration of which has been entrusted to them;
this provision shall apply to judges and government experts who, in any manner
whatsoever, take part in the sale;
5. Justices, judges, prosecuting attorneys, clerks of superior and inferior courts, and
other officers and employees connected with the administration of justice, the
property and rights in litigation or levied upon on execution before the court within
whose jurisdiction or territory they exercise their respective functions; this prohibition
includes the act of acquiring by assignment and shall apply to lawyers, with respect
to the property and rights which may be the object of any litigation in which they may
take part by virtue of their profession;
6. Any others specially disqualified by law.
– Art. 1782: persons who are prohibited from giving each other any donation or advantage
cannot enter into universal partnership.

Distinguished from incapacity to contract


– A person who is incapacitated can still enter into a contract, but he must do so through
his parent or guardian, while one who is prohibited from entering into a particular contract
is absolutely disqualified from entering into that contract;
– Incapacity is based upon subjective circumstances of certain persons which compel the
law to suspend for a definite or indefinite period their right to contract, while prohibition to
contract, is based upon public policy and morality;
– A contract entered into by an incapacitated person is merely voidable
– A contract entered by one against whom a prohibition is direct is void.

Article 1330. A contract where consent is given through mistake, violence, intimidation, undue
influence, or fraud is voidable. (1265a)

Vices of Consent
– Vices of the will: mistake, violence, intimidation, undue influence, and fraud
– Vices of declaration: all forms of simulated contracts

Requisites of consent
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– Intelligent, free, spontaneous, and real.


– Absence of the first 3 = voidable
th
– Absence of the 4 = void ab initio or valid depending upon whether the simulation is
absolute or relative.

Article 1331. In order that mistake may invalidate consent, it should refer to the substance of the
thing which is the object of the contract, or to those conditions which have principally moved one
or both parties to enter into the contract.

Mistake as to the identity or qualifications of one of the parties will vitiate consent only when such
identity or qualifications have been the principal cause of the contract.

A simple mistake of account shall give rise to its correction. (1266a)

Mistake
– Not only as the wrong conception of a thing, but also as the lack of knowledge with
respect to a thing.

Mistakes which vitiate consent


– 2 general kinds: mistake of fact and mistake of law
– General rule: it is only a mistake of fact which will vitiate consent thus rendering the
contract voidable.
– A mistake of law, on the other hand, does not render the contract voidable because of the
well-known principle that ignorance of the law does note excuse anyone from compliance
therewith.
– Mistake of law is voidable when there is a mistake on the legal effect of law.

Mistake of fact
1. Mistake as to object
a. Mistake as to the identify of the thing, as when the thing which constitutes the
object of the contract is confused with another thing;
b. Mistake as to the substance of the thing;
c. Mistake as to the conditions of the thing, provided such conditions have
principally moved one or both parties to enter into the contract; and
d. Mistake as to the quantity of the thing, provided that the extent or dimension
of the thing was one of the principal reasons of one or both of the parties for
entering into the contract.
– It is necessary that such mistake should refer not only to the material
out of which the thing is made, but also to the nature which
distinguishes it, generically or specifically, from all others, such as
when a person purchases a thing made of silver believing that it is
made of gold. If the mistake refers only to accidental or secondary
qualities, the contract is not rendered voidable.
– It is important that this class of mistake should be distinguished from
a mistake of account or calculation. On the first, there is real mistake
as to the extent of the object, on the second, there is only apparent
mistake, a mere mistake in mathematical computation.
– The first is voidable, the second is not.

2. Mistake as to person
– Mistake with regard to the name of one or both of the contracting parties will not
invalidate the contract.
– Requisites in order that the mistake as to persons shall vitiate consent:
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a. The mistake must be either with regard to the identity or with regard to the
qualification of one of the contracting parties;
b. Such identity or qualification must have been the principal consideration for
the celebration of the contract.

Article 1332. When one of the parties is unable to read, or if the contract is in a language not
understood by him, and mistake or fraud is alleged, the person enforcing the contract must show
that the terms thereof have been fully explained to the former. (n)

Rule Where a Party is Illiterate


– Article contemplate a situation wherein a contract has been entered into, but the consent
of one of the parties is vitiated by mistake or fraud committed by the other contracting
party.
– Art. 1330 – A contract where consent is given through mistake, violence, intimidation,
undue influence, or fraud is voidable.
– Article assumes that the consent of the contracting party imputing the mistake or fraud
was given, although vitiated, and does not cover a situation where there is a complete
absence of consent.

Article 1333. There is no mistake if the party alleging it knew the doubt, contingency or risk
affecting the object of the contract. (n)

Article 1334. Mutual error as to the legal effect of an agreement when the real purpose of the
parties is frustrated, may vitiate consent. (n)

Mistake of Law – 3 requisites


1. Mistake must be with respect to the legal effect of an agreement
2. Mistake must be mutual
3. Real purpose of the parties must have been frustrated

Article 1335. There is violence when in order to wrest consent, serious or irresistible force is
employed.

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.

To determine the degree of intimidation, the age, sex and condition of the person shall be borne
in mind.

A threat to enforce one's claim through competent authority, if the claim is just or legal, does not
vitiate consent. (1267a)

Article 1336. Violence or intimidation shall annul the obligation, although it may have been
employed by a third person who did not take part in the contract. (1268)

Violence Intimidation
– External – Internal
– Prevents expression of the will – Influences the operation of will,
substituting it with a material act inhibiting it in such a way that the
dictated by another expression thereof is apparently that of
a person who has freely given his
consent
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– Physical compulsion – Moral compulsion

Requisites of Violence
1. Force employed to wrest consent must be serious or irresistible
2. It must be the determining cause for the party upon whom it is employed in entering into
the contract

Requisites of Intimidation
1. One of the contracting parties is compelled to give his consent by a reasonable and well-
grounded fear of an evil;
2. Evil must be imminent and grave;
3. Evil must be unjust;
4. Evil must be the determining cause for the party upon whom it is employed in entering
into the contract.

Character of Intimidation
– One of the contracting parties should be 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.
– Presupposes that the threat or intimidation must be actual, serious and possible of
realization.
– Mere knowledge of the severe penalties without any proof of direct acts showing the
imminence and gravity of any injury, does not in itself establish intimidation.

Distinguished from reluctant consent


– One acts as voluntarily and independently in the eyes of the law when he acts as
reluctantly and with hesitation as when he acts spontaneously and joyously.
– Legally, he acts voluntarily and freely when he acts wholly against his better sense and
judgment as when he acts in conformity with them.

Determination of degree of intimidation


– Age, sex and condition of the person shall be borne in mind

Effect of just or legal threat


– Even if it can be established that the reason or motive of a party in entering into a
contract was the threat of the other to proceed against him through the courts, the
contract would still be perfectly valid and not voidable.

Article 1337. 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. The following
circumstances shall be considered: the confidential, family, spiritual and other relations between
the parties, or the fact that the person alleged to have been unduly influenced was suffering from
mental weakness, or was ignorant or in financial distress. (n)

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.

Undue Influence which vitiates consent


– Even if it can be established that a person entered into a contract through the importunity
or persuasion of another against his better judgment, if the deprivation of his free agency
is not proved, there is no undue influence which will invalidate the contract.
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Test of Undue Influence


– WON influence exerted has so overpowered or subjugated the mind of a contracting
party as to destroy his free agency, making him express the will of another rather than his
own.

Article 1338. There is fraud when, through insidious words or machinations of one of the
contracting parties, the other is induced to enter into a contract which, without them, he would not
have agreed to. (1269)

Fraud
– Those insidious words or machinations employed by one of the contracting parties in
order to induce the other to enter into a contract, which, without them, he would not have
agreed to.

Kinds of Frauds
Fraud in Perfection of a Contract Fraud in Performance of an Obligation
– Employed by a party to the contract in – Employed by the obligor in the
securing the consent of the other party performance of a pre-existing
obligation

Dolo Causante / Causal Fraud (1338) Dolo Incidente / Incidental Fraud (1344)
– Deceptions or misrepresentations of a – Deceptions or misrepresentations
serious character employed by one which are not serious in character and
party and without which the other party without which the other party would still
would not have entered into the have entered into the contract.
contract.
– Fraud which is serious in character – Not serious in character
– Cause which induces the party upon – It is not the cause
whom it is employed in entering into
the contract
– Effect is to render the contract voidable – Render the party who employed it
liable for damages

Requisites
1. Fraud or insidious words or machinations must have been employed by one of the
contracting parties;
2. Fraud or insidious words or machinations must have been serious;
3. Fraud or insidious words or machinations must have induced the other party to enter into
the contract;
4. Fraud should not have been employed by both of the contracting parties or by third
persons.

Nature of Fraud
– All the thousand and one forms of deception which may delude a contracting party to give
his consent, without necessarily constituting estafa or some other offense under our
penal laws.
– Essential that there must be proof of concrete facts constituting the fraud or insidious
words or machinations employed
– It is also essential that such insidious words or machinations must be prior to or
contemporaneous with the birth or perfection of the contract.
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Article 1339. Failure to disclose facts, when there is a duty to reveal them, as when the parties
are bound by confidential relations, constitutes fraud. (n)

– However, the innocent nondisclosure of a fact, when there is no duty to reveal it, does not
constitute fraud; consequently, such nondisclosure does not affect the formation of the
contract or operate to discharge the parties their agreement.

Article 1340. The usual exaggerations in trade, when the other party had an opportunity to know
the facts, are not in themselves fraudulent. (n)

Effect of Exaggerations in Trade


– When the purchases proceeds to make investigations by himself, and the vendor does
nothing to prevent such investigations from being as complete as the former might wish,
the purchases cannot later allege that the vendor made false representations to him.
– One who contracts for the purchase of real estate in reliance on the representations and
statements of the vendor as to its character and value, but after he has visited and
examined it for himself, and has had the means and opportunity of verifying such
statements, cannot avoid the contract on the ground that such statements were false or
exaggerated.

Article 1341. A mere expression of an opinion does not signify fraud, unless made by an expert
and the other party has relied on the former's special knowledge. (n)

– It is of course elementary that a misrepresentation upon a mere matter of opinion is not


an actionable deceit, nor is it a sufficient ground for avoiding a contract as fraudulent.

Article 1342. Misrepresentation by a third person does not vitiate consent, unless such
misrepresentation has created substantial mistake and the same is mutual. (n)

Article 1343. Misrepresentation made in good faith is not fraudulent but may constitute error. (n)

Article 1344. In order that fraud may make a contract voidable, it should be serious and should
not have been employed by both contracting parties.

Incidental fraud only obliges the person employing it to pay damages. (1270)

Magnitude of Fraud
– It should be serious in character
– Annulment of a contract cannot be invoked just because of the presence of minor or
common acts of fraud whose veracity could easily have been investigated.
– Annulment cannot be invoked because of the presence of ordinary deviations from the
truth, deviations, which are almost inseparable from ordinary commercial transactions,
particularly those taking place in fairs or markets.

Relation Between Fraud and Consent


– It should have induced the other party to enter into the contract.

Article 1345. Simulation of a contract may be absolute or relative. The former takes place when
the parties do not intend to be bound at all; the latter, when the parties conceal their true
agreement. (n)
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Article 1346. An absolutely simulated or fictitious contract is void. 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. (n)

Simulation of Contracts
Absolute Relative
– Colorable contract but it has no – Parties state a false cause in the
substance as the contracting parties do contract to conceal their true
not intend to be bound by the contract agreement, as when a person
at all, as when a debtor simulate the conceals a donation by simulating a
sale of his properties to a friend in sale of the property to the beneficiary
order to prevent their possible for a fictitious consideration.
attachment by creditors.
– The apparent contract is not really
desired or intended to produce legal
effects.

– Intention is determined from the express terms of their agreement as well as from their
contemporaneous and subsequent acts.

Effects
– Absolutely simulated contract = void
– Relatively simulated contract binds the parties and the parties may recover from each
other what they may have given under the contract.
– Relatively simulated contract is binding and enforceable between the parties and their
successors in interest to their real agreement, 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.
– The legal presumption is in favor of the validity of contracts.

Contracts of Adhesion
– Terms are prepared by only one party while the other merely affixes his signature
signifying his adhesion thereto.
– Just as binding as ordinary contracts.
– SC held that while the stipulation proved to be onerous to the petitioners, neither the law
nor the courts will extricate a party from an unwise or undesirable contract entered into
with all the required formalities and with full awareness of it consequences.

SECTION 2
Object of Contracts

Concept of Object
– if not the most fundamental, the most indispensable among the requisites of a contract in
order to have at least the shadow of a contact.
– Without a cause an agreement is possible, although inexplicable
– Without consent it is possible at least to have the appearance of a contract
– Without an object, there is nothing.

Article 1347. All things which are not outside the commerce of men, including future things, may
be the object of a contract. All rights which are not intransmissible may also be the object of
contracts.
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No contract may be entered into upon future inheritance except in cases expressly authorized by
law.

All services which are not contrary to law, morals, good customs, public order or public policy
may likewise be the object of a contract. (1271a)

Article 1348. Impossible things or services cannot be the object of contracts. (1272)
Article 1349. 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. (1273)

What May Be the Object of Contracts


– General Rule: all tings or services may be the object of contracts, with the following
requisites:
1. Object should be within the commerce of men;
2. Object should be real or possible;
3. Object should be licit;
4. Object should be determinate or at least possible of determination

The following cannot be object of contracts:


1. Things which are outside the commerce of men;
2. Intransmissible rights;
3. Future inheritance, except in cases expressly authorized by law;
4. Services which are contrary to law, morals, good customs, public order or public policy;
5. Impossible things or services;
6. Objects which are not possible of determination as to their kind.

Appropriability and Transmissibility


– The thing, right or service should be susceptible of appropriation
– It should be transmissible from one person to another

Existence of object
– It should be in existence at the moment of the celebration of the contract, or at least it can
exist subsequently or in the future.

Things which have perished


– These things cannot be the object of contracts because they are inexistent.

Rule with respect to future inheritance


– No contract may be entered into with respect to future inheritance.
– Exceptions:
1. Art. 130: allows the future spouses to give or donate to each other in their marriage
settlement their future property to take effect upon the death of the donor and to the
extent laid down by the provisions of the civil code relating to testamentary
succession.
2. Art. 1080: allows a person to make a partition of his estate by an act inter vivos,
provided that the legitime of compulsory heirs is not prejudiced.

Impossible things or services


– If the parties enter into a contract with respect to an impossible thing like a mythical bird
or animal or with respect to an impossible thing like a mythical bird or animal or with
respect to an impossible service like a trip to some distant planet or galaxy, the contract
is void or inexistent.
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Licitness of object
– All services which are not contrary to law, morals, good customs, public order and public
policy may be the object of a contract.

Determinability of object
– Genus of the object should be expressed although there might be no determination of the
individual specie.

SECTION 3
Cause of Contracts

Article 1350. In onerous contracts the cause is understood to be, for each contracting party, the
prestation or promise of a thing or service by the other; in remuneratory ones, the service or
benefit which is remunerated; and in contracts of pure beneficence, the mere liberality of the
benefactor. (1274)

Article 1351. The particular motives of the parties in entering into a contract are different from the
cause thereof. (n)

Concept of Cause
– Cause is the why of the contract or the essential reason which moves the contracting
parties to enter into the contract.
– It is the immediate, direct, or most proximate reason which explains and justifies the
creation of an obligation.

Distinguished from object


– Cause for each contracting party, is the prestation or promise of a thing or service by the
other.
– Object of the contract is the thing or service itself.

Distinguished from motives

Cause Motives
– Direct or most proximate reason of a – The indirect or remote reasons
contract
– Objective or juridical reason of a – The psychological or purely personal
contract reasons
– Is always the same – Differ from each contracting party
– Legality or illegality of the cause will – Legality or illegality of the motives will
affect the existence or validity of the not affect the existence of the contract
contract
– Becomes the cause when it
predetermines the purposes of the
contract

Cause in Onerous Contracts


– Cause is the prestation or promise of a thing or service by the other.
– A promise made by one party may be a sufficient cause for a promise made by another
party.
– It is not, therefore, necessary that the cause or consideration should pass from one party
to the other at the time of the execution of the contract.
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Accessory Contracts
– Cause of the accessory contract is identical with that of the principal contract. (mortgage)

Moral Obligations
– Where the moral obligation arises wholly from ethical considerations, unconnected with
any civil obligation and, as such, is not demandable in law but only in conscience, it can
not constituted a sufficient cause or consideration to support an onerous contract, but
where such moral obligation is based upon a previous civil obligation which has already
been barred by the statute of limitations at the time when the contract is entered into, it
constitutes a sufficient cause or consideration to support the said contract.

Cause in Remuneratory Contracts


– Is the service or benefit which is remunerated.
– A remuneratory contract then is one in which one of the contracting parties remunerates
or compensates the service or benefit rendered or given by the other party, although such
service or benefit does not constitute a demandable debt. (legal services)

Cause in Contracts of Pure Beneficence


– Is the mere liberality of the benefactor (pure donation)

Article 1352. Contracts without cause, or with unlawful cause, produce no effect whatever. The
cause is unlawful if it is contrary to law, morals, good customs, public order or public policy.
(1275a)

Article 1353. The statement of a false cause in contracts shall render them void, if it should not
be proved that they were founded upon another cause which is true and lawful. (1276)

Article 1354. Although the cause is not stated in the contract, it is presumed that it exists and is
lawful, unless the debtor proves the contrary. (1277)

Article 1355. Except in cases specified by law, lesion or inadequacy of cause shall not invalidate
a contract, unless there has been fraud, mistake or undue influence. (n)

Essential Requisites of Cause


1. Should be in existence at the time of the celebration of the contract;
2. Should be licit or lawful; and
3. Should be true.

– If there is no cause, it shall not produce any effect whatsoever, it is inexistent or void from
the beginning.
– The same is true if the cause stated in the contract is false.

Effect of lack of cause


– It shall not produce any effect whatsoever
– It has been held that if the purchase price in a contract of sale was never in fact paid by
the purchaser or vendee to the vendor, the contract is inexistent for all purposes for lack
of a cause or consideration.
– As a matter of fact, even where the contract itself expressly states that the consideration
for the sale of a piece of land is only one Peso, it does not follow that the contract or sale
is void or inexistent for lack of a cause or consideration. There reason is obvious. There
is consideration. The contract may be voidable because of inadequacy of the cause or
consideration, but certainly, it is not void or inexistent.
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Effect of unlawful cause


– It shall not produce any effect whatsoever; it is void from the beginning

Effect of false cause


– Statement of a false cause in contracts shall render them void, if it should not be proved
that they were founded upon another cause which is true and unlawful.

CHAPTER 3
Form of Contracts

Article 1356. Contracts shall be obligatory, in whatever form they may have been entered into,
provided all the essential requisites for their validity are present. However, 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. In such cases, the right
of the parties stated in the following article cannot be exercised. (1278a)

Forms of Contracts; General Rule


– Whatever may the form be, it shall be obligatory, provided all of the essential requisites
for its validity are present.

Exceptions
1. When the law requires that the contract must be in a certain form in order to be valid; and
2. When the law requires that the contract must be in a certain form in order to be
enforceable.

Formalities for validity


– There are certain contracts which the law prescribes forms for their validity: (1) those
which must appear in writing; (2) those which must appear in a public document; and (3)
those which must be registered.

Contracts which must appear in writing, otherwise void


1. Donations of real property whose value exceeds P5,000
2. Sale of a piece of land or any interest therein through an agent;
3. Agreements regarding payment of interest in contracts of loan; no interest shall be due
unless it has been expressly stipulated in writing. The validity of the contract of loan,
however, is not affected.
4. Antichresis – the amount of the principal and of the interest shall be specified in writing.

Contracts which must appear in a public document


1. Donations of immovable property: the acceptance, may be made in the same deed of
donation or in a separate public document. If the acceptance is made in a separate public
document, the donor shall be notified thereof in an authentic form.
2. Partnerships where immovable property or real rights are contributed to the common
fund.

Contracts which must be registered


1. Chattel mortgages.
2. Sales or transfers of large cattle.

Formalities of enforceability
– Contracts which are governed by the Statute of Frauds (Art. 1403)

Form of Contracts Required by Law


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1. Those which are necessary for the convenience of the contracting parties or for the
efficacy of the contract
2. Those which are necessary for the validity of the contract
3. Those which are necessary for the enforceability of the contract

Article 1357. If the law requires a document or other special form, as in the acts and contracts
enumerated in the following article, 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. (1279a)

Article 1358. The following must appear in a public document:

(1) Acts and contracts which have for their object the creation, transmission, modification
or extinguishment of real rights over immovable property; sales of real property or of
an interest therein are governed by articles 1403, No. 2, and 1405;

(2) The cession, repudiation or renunciation of hereditary rights or of those of the conjugal
partnership of gains;

(3) The power to administer property, or any other power which has for its object an act
appearing or which should appear in a public document, or should prejudice a third
person;

(4) The cession of actions or rights proceeding from an act appearing in a public
document.

All other contracts where the amount involved exceeds P500 must appear in writing, even
a private one. But sales of goods, chattels or things in action are governed by articles,
1403, No. 2 and 1405. (1280a)

Formalities for Efficacy


– Arts. 1357 and 1358 do not require the execution of the contract either in a public or in a
private document in order to validate or enforce it but only to insure its efficacy, so that
after its existence has been admitted, the party bound may be compelled to execute the
necessary document.
– Even where the contract has not been reduced to the required form, it is still valid and
binding as far as the contracting parties are concerned.
– From the moment one of the contracting parties invokes the provisions of Arts. 1357 and
1358 by means of a proper action, the effect is to place the existence of the contract in
issue, which must be resolved by the ordinary rules of evidence.
– Art. 1357 does not require that the action to compel the execution of the necessary
document must precede the action upon the contract. As a matter of fact, both actions
may be exercised simultaneously.

CHAPTER 4
Reformation of Instruments (n)

Article 1359. When, there having been a meeting of the minds of the parties to a contract, their
true intention is not expressed in the instrument purporting to embody the agreement, by reason
of mistake, fraud, inequitable conduct or accident, one of the parties may ask for the reformation
of the instrument to the end that such true intention may be expressed.
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If mistake, fraud, inequitable conduct, or accident has prevented a meeting of the minds of the
parties, the proper remedy is not reformation of the instrument but annulment of the contract.

Doctrine of Reformation of Instruments


– When the true intention of the parties to a perfected and valid contact are not expressed
in the instrument purporting to embody their agreement by mistake, fraud, inequitable
conduct or accident, one of the parties may ask for the reformation of the instrument so
that such true intention may be expressed.
– Requisites:
1. There must be a meeting of the minds of the contracting parties;
2. Their true intention is not expressed in the instrument;
3. Such failure to express their true intention is due to mistake, fraud, inequitable
conduct or accident.

Rationale of doctrine
– Based on justice and equity
– Equity orders the reformation of an instrument in order that the true intention of the
contracting parties may be expressed.
– The Courts do not attempt to make another contract for the parties. The rationale of the
doctrine is that it would be unjust and inequitable to allow the enforcement of a written
instrument which does not reflect or disclose the real meeting of the minds of the parties.

Distinguished from annulment of contracts


– Action for reformation of an instrument: presupposes a perfectly valid contract in which
there has already been a meeting of the minds of the contracting parties.
– Action for annulment of a contract: based on a defective contract in which there has been
no meeting of the minds because the consent of one or both of the contracting parties
has been vitiated.

Article 1360. The principles of the general law on the reformation of instruments are hereby
adopted insofar as they are not in conflict with the provisions of this Code.

Article 1361. When a mutual mistake of the parties causes the failure of the instrument to
disclose their real agreement, said instrument may be reformed.

Article 1362. If one party was mistaken and the other acted fraudulently or inequitably in such a
way that the instrument does not show their true intention, the former may ask for the reformation
of the instrument.

Article 1363. When one party was mistaken and the other knew or believed that the instrument
did not state their real agreement, but concealed that fact from the former, the instrument may be
reformed.

Article 1364. When through the ignorance, lack of skill, negligence or bad faith on the part of the
person drafting the instrument or of the clerk or typist, the instrument does not express the true
intention of the parties, the courts may order that the instrument be reformed.

Article 1365. If two parties agree upon the mortgage or pledge of real or personal property, but
the instrument states that the property is sold absolutely or with a right of repurchase, reformation
of the instrument is proper.

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


(1) Simple donations inter vivos wherein no condition is imposed;
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(2) Wills;
(3) When the real agreement is void.

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

Article 1368. Reformation may be ordered at the instance of either party or his successors in
interest, if the mistake was mutual; otherwise, upon petition of the injured party, or his heirs and
assigns.

Article 1369. The procedure for the reformation of instrument shall be governed by rules of court
to be promulgated by the Supreme Court.

Contracts of Adhesion
– One in which one of the parties imposes a ready-made form of contract, which the other
party may accept or reject, but which the latter cannot modify.
– It is accorded inordinate vigilance and scrutiny by the courts in order to shield the unwary
from deceptive schemes contained in ready-made covenants.

Contracts of Credit Cards


– Contract of adhesion
– Court will not hesitate to rule out blind adherence to such contracts if they prove to be too
one-sided under the attendant facts and circumstances.

CHAPTER 5
Interpretation of Contracts

Article 1370. 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.

If the words appear to be contrary to the evident intention of the parties, the latter shall prevail
over the former. (1281)

Article 1371. In order to judge the intention of the contracting parties, their contemporaneous and
subsequent acts shall be principally considered. (1282)

Primacy of Intention of Parties


– To the effect that the intention of the contracting parties should always prevail because
their will has the force of law between them.
– If the terms of the contract are clear and leave no doubt as to the intention of the
contracting parties, the literal sense of its stipulations shall be followed.
– If the words appear to be contrary to the evident intention of the contracting parties, the
intention shall prevail.
– As a rule, in the construction and interpretation of a document the intention of the parties
must be sought.
– This is the basic rule in the interpretation of contracts because all other rules are but
ancillary to the ascertainment of the meaning intended by the parties.
– When the terms of an agreement have been reduced to writing, it is considered as
containing all the terms agreed upon and there can be, between the parties and their
successors in interest, no evidence of such terms other than the contents of the written
agreement.
– It is a rule that if the terms of a contract are clear and leave no doubt as to the intention of
the contracting parties, the literal meaning of its stipulation shall control.
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Guevarra | Tolentino Atty. Gallo

– When the words of the contract are clear and can easily be understood, there is no room
for construction.

How to judge intention


– Their contemporaneous and subsequent acts shall be principally considered.
– General rule: documents are interpreted in the precise terms in which they are
expressed, but the courts, in the exercise of their sound discretion, are called upon to
admit direct and simultaneous circumstantial evidence necessary for their interpretation
with the purpose of making the true intention of the parties prevail.

Article 1372. 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. (1283)

Article 1373. 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. (1284)

Article 1374. 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. (1285)

Article 1375. Words which may have different significations shall be understood in that which is
most in keeping with the nature and object of the contract. (1286)

Article 1376. 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. (1287)

Article 1377. The interpretation of obscure words or stipulations in a contract shall not favor the
party who caused the obscurity. (1288)

Article 1378. When it is absolutely impossible to settle doubts by the rules established in the
preceding articles, and the doubts refer to incidental circumstances of a gratuitous contract, the
least transmission of rights and interests shall prevail. If the contract is onerous, the doubt shall
be settled in favor of the greatest reciprocity of interests.

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.
(1289)

Article 1379. The principles of interpretation stated in Rule 123 of the Rules of Court shall
likewise be observed in the construction of contracts. (n)
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CHAPTER 6
Rescissible Contracts

Classes of Defective Contracts (RVUI)


1. Rescissible Contracts
2. Voidable Contracts
3. Unenforceable Contracts
4. Void or Inexistent Contracts

Essential Features
Void or
Feature Rescissible Voidable Unenforceable
Inexistent
Defect Damage or injury to Vitiation of consent or Entered in excess of Essential requisites of
one of the parties or legal incapacity of authority, does not a valid contract are
third persons one of the parties comply with Statute lacking
of Frauds, or both
contracting parties
are legally
incapacitated
Effect Valid and enforceable Valid and enforceable Cannot be enforced Do not produce any
until rescinded until annulled by a proper action legal effect
Prescriptibility of Action for rescission Action for annulment Corresponding action Action for declaration
Action or Defense may prescribe may prescribe for recovery may of nullity or defense
prescribe of nullity or
inexistence does not
prescribe
Susceptibility of Not susceptible Susceptible Susceptible Not susceptible
Ratification
Who may Assail Contracting parties Contracting parties Contracting parties Contracting parties
and third persons only only and third person who
who are prejudiced is directly affected
How to Assail Directly only Directly or collaterally Directly or collaterally Directly or collaterally

Art. 1380. Contracts validly agreed upon may be rescinded in the cases established by law.

Rescissible Contracts in General


− All of the essential requisites of a contract exist and the contract is valid
− By reason of injury or damage to either contracting parties or third persons, the contract
may be rescinded
− Rescinded by proper action for rescission
− Direct action for rescission and cannot be attacked collaterally

Characteristics
1. Defects consists in injury or damage
2. Valid before rescinded and are legally effective
3. Attacked directly
4. Attacked only by either contracting parties or third persons who have been injured or
defrauded
5. Susceptible of convalidation only be prescription and ratification.

Concept of Rescission
− Remedy granted by law
− Securing the reparation of damages
− Restoration of things to their condition prior to the contract

Distinguished from Resolution


Rescission Resolution
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Who may institute action contracting parties and affected Only by the parties to the
third persons contract
Causes Several causes: lesion, fraud, Only ground: failure of the
and others expressly specified parties to comply with what was
by law incumbent upon him
Power of the Courts No power of the courts to grant Courts have directionary power
an extension of time for to grant an extension as long as
performance as long as there is there is just cause
a ground for rescission
Contracts which may be Any contract whether unilateral Only reciprocal contracts
rescinded or resolved or reciprocal

Distinguished from Rescission by Mutual Consent


− Causes of rescission
− Laws applicable
− Effects
− Aquino vs. Tanedo
o Aquino purchased some lands from Tanedo. After some time, the parties decided
to rescind the contract and return the land and the amount paid for respectively.
Question now is whether or not plaintiff is obliged to return to the defendant the
products of the land which is he has collected. No. The rescission done by the
parties here is of mutual consent which serves only to dissolve a previous
agreement and not by rescission as a remedy to damages and injury.

Art. 1381. The following contracts are rescissible:

1) Those which are entered into by the 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;
2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in
the preceding number;
3) Those undertaken in fraud of creditors when the latter cannot in any manner collect the
claims due them;
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;
5) All other contracts specially declared by law to be subject or rescission.

Art. 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.

Contracts in Behalf of Ward


− Entered into by guardians whose wards they represent suffer legion or damage more
than one-fourth of the value of the things which are the object of the contract
− Guardian entering into a contract with respect to the property of his ward must secure the
approval of a competent court
− Property is worth more than Two Thousand pesos (P2000)
− Judicial approval is indispensible à without judicial approval, the contract is
unenforceable and not rescissible
− However, if the guardian acts within his powers or as an administrator of such properties,
express judicial approval is not necessary and the contract is rescissible
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Contract in Behalf of Absentees


− Entered into by absentees if the latter suffer the lesion or damage more than one-fourth
of the value of the thing which is the object of the contract
− Not rescissible if they have been approved by the courts.
− Powers of a legal representative and guardian are the same thus same principles apply
− Before a contract entered into by a guardian or legal representative can be rescinded,
the following requisites apply:
1. Entered into by a guardian or legal representative
2. Suffered lesion of more than one-fourth of the value of the property
3. Entered into without judicial approval
4. No other legal means for reparation for lesion
5. Person bringing the action must be able to return whatever he may be obliged to
restore
6. Object of the contract must not be legally in the possession of a third person who
did not act in bad faith

Note: If the object is in the possession of a third person who did not act in bad faith,
the remedy available to the person suffering the lesion is indemnification for damages
and not rescission.

Contracts in Fraud of Creditors


− Personal Right
− Fraud of creditors
o When the creditors cannot claim in any manner what is due to them
− Remedy afforded to a creditor after he has exhausted all efforts to claim what is rightfully
his
− Requisites before rescission:
1. Credit existing prior to the celebration of the contract
2. Fraud, or intent to commit fraud, to the prejudice of the creditor seeking
rescission
3. Creditor cannot, in any legal manner, collect his credit
4. Object of the contract must not be legally in the possession of a third person who
did not act in bad faith

Note: If object is legally in the possession of a third person who did not act in bad
faith, the remedy available to the creditor is to proceed against the person who
caused the loss for damages.

Accion Pauliana
− Action to rescind those contracts undertaken in fraud of creditors
− Must exist prior to the fraudulent alienation à date of judgment of enforcing is immaterial
− Judgment is merely declaratory with retroactive effect to the date when the credit was
constituted
− General Rule: Rescission requires existence of creditors at the time of fraudulent
alienation. Without prior existing debt, there can be no injury or fraud.
− Requisites:
1. Credit must exist prior to alienation
2. Debtor made subsequent contract conveying patrimonial benefit to a third person
3. Creditor has no other legal remedy to satisfy his claim
4. Act being impugned is fraudulent
5. Third person who received the property conveyed, if done by onerous title, is an
accomplice to the fraud
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Contract Referring to Things Under Litigation


− Real Right
− 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
− There must be an annotation at the back of the title of a property under litigation to inform
the parties or whoever is interested in the property that said property is under litigation
− Purpose is to secure the possible effectivity of a claim
− Remedy of rescission is made available to a stranger to the contract

Contracts by Insolvent
− Payments made in state of insolvency for obligations to whose fulfillment the debtor could
not be compelled at the time they were effected are rescissible
− Requisites:
1. Payment was made in state of insolvency
2. Obligation must have been one which the debtor could not be compelled to pay at the
time such payment was effected
− Basis: fraud
− Insolvency: financial situation of the debtor by virtue of which it is impossible for him to
fulfill his obligations.
− Judicial Declaration of Insolvency is not necessary
− Obligations include those with a term, a suspensive condition, and even void and natural
obligations as well as those condoned or have prescribed.
− Priority of dates between two debts:
o Obligation with a period became due before the obligation to the creditor seeking
rescission became due, the latter cannot rescind the payment even if such
payment was made before the expiration of the period.
o Obligation with a period became due after the obligation to the creditor seeking
the rescission became due, then the latter can rescind the payment.

Art. 1383. The action for rescission is subsidiary; it can not be instituted except when the party
suffering damage has no there legal means to obtain reparation for the same.

Subsidiary Character of Action


− Action of rescission is subsidiary à cannot be instituted except when the party suffering
damage has no other legal means to obtain reparation
− Party must have exhausted all other means before availing of this remedy

Parties Who May Institute Action


1. Person who is prejudiced
2. Representatives
3. Heirs
− May do so as a representative of the person who suffers from lesion or of the creditor
who is defrauded
− Right to the legitime may be defeated by fraudulent contracts, and are superior to the
will of those bound to respect them.
4. Creditors by virtue of subrogatory action defined in Article 1177 of the Code.

Art. 1384. Rescission shall be only to the extent necessary to cover the damage caused.

Extent of Rescission
− Primary purpose of rescission is reparation for the damage or injury which is suffered by
either parties or a third person
− Does not necessarily have to be total in character, may also be partial
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− Rescission is only to the extent necessary to cover the damages caused

Art. 1385. 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 the rescission can return whatever he may be obliged to restore.

Neither shall rescission take place when the things which are object of the contract are legally in
the possession of third persons who did not act in bad faith.

In this case, indemnity for damages may be demanded from the person causing the loss.

Effect of Rescission in Case of Lesion


− Applicable only to rescissory actions on the ground of lesion and not to actions on the
ground of fraud
− Fraud: No obligation on the part of the plaintiff-creditor to restore anything since he has
not received anything
− After rescission on the ground of lesion à obligation on the part of both contract parties
to return to the other the object of the contract, including fruits or interests
− Rescission is not possible unless he who demands it can return whatever he may be
obliged to restore à consideration received should be refunded
− If the plaintiff cannot refund the amount including interest, the action will certainly fail
because of positive statutory law
− Fruits of the Thing – natural, industrial, civil fruits, and other accessions obtained by the
thing
− Interest – legal interest
− Rules on possession is applied with regard to restoration of the fruits concerned.
− Good or bad faith is important to assess the fruits or the value thereof which must be
returned

Effect of Rescission Upon Third Persons


− Rescission shall not take place when the object of the contract is legally in the
possession of a third person who did not act in bad faith.
− Requisites:
o Thing must be in legal possession of a third person
o Third person did not act in bad faith
− Principle of possession of moveable property acquired in good faith is equivalent to a title
− For immovable properties, it is indispensible that the right of the third person be
registered or recorded in the proper registry before it can be legally said to be in his
possession or to its equivalent action producing the same effect before he can be
protected by the law
− If the realty that has been transferred has not been registered in the proper registry, he
cannot be protected against the effects of a judgment rendered in the action for
rescission
− Sikatuna vs. Guevara
o Jacinto and Palma y Hnos leased a parcel of land to Guevara, the lessee, with an
option to buy should they, the lessors, fail to exercise such right within a period of
one year. The lessors did not exercise their right to purchase after said period
which caused the lessee to offer to purchase the lot. The lessors declined the
offer causing Guevara to bring an action to court to compel them to sell. No
notice of commencement was filed with the office of the Register of Deeds.
During the case, the lessors sold the land to Sikatuna and the sale was recorded.
Subsequent judgment was rendered in favor of Guevara but not executed since
the land was already legally sold. Can the contract of sale be rescinded between
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Sikatuna and lessors since the land purchased was under litigation and was sold
without the approval of the litigants? No. The land was acquired in good faith thus
cannot be rescinded.

Note: Remedy for such a situation is to file an action for indemnity for damages
against the person who caused the loss. May be direct against the guardian,
representative of the absentee or litigant who transferred the thing. May
also be filed against a third person who acted in bad faith.

Art. 1386. Recission referred to Nos. 1 and 2 of Article 1381 shall not take place with respect to
contracts approved by the courts.

Art. 1387. All contracts by virtue of which the debtor alienates property by gratuitous title are
presumed to have been entered into in fraud of creditors, when the donor did not reserve
sufficient property to pay all debts contracted before the donation.

Alienations by onerous title are also presumed fraudulent when made by persons against whom
some judgment has been rendered in any instance or some writ of attachment has been issued.
The decision or attachment need not refer to the property alienated, and need not have ben
obtained by the party seeking the rescission.

In addition to these presumptions, the design to defraud creditors may be proved in any other
manner recognized by the law of evidence.

Art. 1388. Whoever acquires in bad faith the things alienated in fraud of creditors shall indemnify
the latter for damages suffered by them on account of the alienation, whenever, du to any case, it
should be impossible for him to return them.

If there are two or more alienations, the first acquirer shall be liable first, and so on successively.

Proof of Fraud
− Requisites need to be established for rescission of contract on the ground of fraud.
− Fraud may be presumed or proven.

Presumptions of Fraud
− Alienations of property by gratuitous title
o Debtor has not reserved sufficient property to pay of all debts contracted before
alienation
− Alienations of property by onerous title
o Made by any debtor with judgments against him or has some writ of attachment
issued
o Writ of attachment need not refer to the alienated property
o Presumptions
§ Intent to circumvent the law
§ Prevent the judgment creditor from seizing the property
Note: When no preliminary attachment exists against the debtor, the
presumption is not applicable.

Notes:
− Attachment à to put a defendant’s property under the jurisdiction of the court.
o Real Property à annotation at the back of the title
o Movable Property à put in the possession of the court pending the case
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− Mere pendency of the case, when a defendant sells his property, will not give rise
to the presumption of fraud
− Cabaliw vs. Sadorra

Badges of Fraud
− Design to defraud creditors may be proven in other manners.
− Test for Existence of Conveyance of Fraud (Badges of Fraud)
1. Cause or consideration is inadequate.
2. Transfer made by debtor after suit has begun and while it is pending against him
3. Sale on credit by an insolvent debtor
4. Evidence of large indebtedness or insolvency
5. Transfer of all or nearly all property by a debtor, especially when insolvent
6. Transfer is made between father and son, attended by the above circumstances
7. Failure of the vendee to take exclusive possession of all the property

Acquisition by Third Person in Good Faith


− If the property acquired by a purchaser is in good faith and for value, the acquisition is not
fraudulent
− Right of purchaser over property is legal and superior to any other person, even against
the creditor who is prejudiced in the conveyance.
− Not rescissible

Acquisition by Third Person in Bad Faith


− Contract is rescissible
− Creditor who is prejudiced can proceed after the property.
− If the acquirer in bad faith cannot return the property, he shall indemnify the creditor for
any damages incurred by him.
− In case of multiple acquisitions, the first acquirer in bad faith shall be liable first and so
on.

Art. 1389. The action to claim rescission must be commence within four years.

For persons under guardianship and for absentees, the period of four years shall not begin until
the termination of the former’s incapacity, or until the domicile of the latter is known.

Prescriptive Period
− General Rule: action for rescission of a contract must be done in within four years.
− Counted from:
o Ward – termination of the incapacity
o Absentee – knowledge of domicile

CHAPTER 7
Voidable Contracts

Voidable Contracts in General


− All essential elements are present but consent is vitiated by:
o Lack of legal capacity
o Mistake
o Violence
o Intimidation
o Undue Influence
o Fraud
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− Binding until annulled by a competent court


− Two alternatives to invoke voidable character:
o Attack its validity
o Convalidate it through ratification or prescription
− Validity may be attacked:
o Directly
§ Proper action
§ Annulment of a contract
o Indirectly
§ As a defense
§ Annulability or relative nullity

Characteristic
1. Defect: vitiation of consent of one of the contracting parties
2. Binding until annulled
3. Susceptible of convalidation by ratification or prescription

Distinguished from Rescissible Contracts (will be asked in the finals)


Voidable Rescissible
Defect is intrinsic à vitiation of consent Defect is external à damage or prejudice to
either one of the contracting parties or a third
person
Voidable even if there is no damage or Required that there be damage or prejudice
prejudice against either parties or third person
Annulability is based in law à not just a Rescissibility is based on equity à mere
remedy but a sanction à public interest remedy à private interest
Causes for annulment are different from the causes of rescission
Can be ratified Cannot be ratified
Annulment may be invoked only by a Rescission may be invoked by either
contracting party contracting party or prejudiced third person

Art. 1390. The following contracts are voidable or annullable, even though there may have been
no damage to the contracting parties:

1) Those where one of the parties is incapable of giving consent to a contract;


2) Those where the consent is vitiated by mistake, violence, intimidation, undue influence or
fraud.

These contracts are binding, unless they are annulled by a proper action in court. They are
susceptible of ratification.

Contracts which are Voidable


− Voidable Contracts affected by:
o Legal Incapacity
§ Unemancipated Minors
§ Insane or demented persons, and deaf-mutes who do not know how to
write (Art. 1327)
§ Entered into in a state of drunkenness or hypnotic spell (Art. 1328)
§ Those under Art. 1327 that are subject to modification as determined by
law and is to be seen as without prejudice to special disqualifications
(Art. 1329)
o Mistake
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o Violence
o Intimidation
o Undue Influence
o Fraud
− Even if there are no damages to either parties the contract is still voidable
− Even if contract has been consummated or is merely executory is immaterial; it can
always be annulled by proper action.

Art. 1391. The action for annulment shall be brought within four years

This period shall begin: In cases of intimidation, violence or undue influence, from the item the
defect of the consent ceases.

In case of mistake or fraud, from the time of the discovery of the same.

And when the action refers to contracts entered into by minors or incapacitated persons, from the
time the guardianship ceases.

Prescriptive Period
− Action must be commenced within a period of four years of contracting the agreement.
− Contracts by Incapacitated Persons
o Counted from when the guardianship ceases
− Contracts where there is vitiated consent by violence, intimidation, or undue influence
o Counted from the time such factors disappears
− Contracts where consent is vitiated by mistake or fraud
o Counted form the time of the discovery of the fraud
− If the action is not commenced within the prescriptive period, the right of the party to
institute the action shall have prescribed and have ratified the contract.

Art. 1392. Ratification extinguishes action to annul a voidable contract.

Art. 1393. Ratification may be effected expressly or tacitly. 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. 1394. Ratification may be effected by the guardian of the incapacitated person.

Art. 1395. Ratification does not require the conformity of the contracting party who has no right to
bring the action for annulment.

Art. 1396. Ratification cleanses the contract from all its defects from the moment it was
constituted.

Concept of Ratification
− Extinguishes action for annulment of a voidable contract.
− Also known as confirmation
− The act or means that gives efficacy to a contract that suffers a vice of curable nullity.

Requisites of Ratification (VEKD)


1. Contract must be tainted with a vice that is susceptible to being cured
− Confirmation presupposes the existence of a curable vice in the contract.
2. Person ratifying the contract must be entitled by law to do so
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− Arts. 1394 and 1395


o Incapacitated person à after attaining or regaining capacity or by his
guardian if capacity is not attained
o Mistake, violence, intimidation, undue influence, fraud à only by innocent
party.
3. Effected with knowledge of the vice or defect
− Confirmation is a free and intelligent act
o Same conditions as consent (freedom, knowledge, and clarity)
o May be invalidated by mistake, violence, intimidation, undue influence, or
fraud
− Note: If the contract has several vices like mistake and fraud, the innocent party may
ratify the contract if his knowledge is only to the extent of mistake, but it does not
extinguish his right to annul the contract if he finds out that there was also fraud.
4. Cause of nullity should have already disappeared.
− If the contract is confirmed while the cause of nullity still exists, it shall also suffer the
same defect as the contract.
− Not applicable to contracts entered into by incapacitated persons à while the
incapacity exists, the guardian can confirm the contract.

Forms of Ratification
− No special form
− May be effected in two ways:
o Expressly
§ Having knowledge of the vice, the person who has the right to invoke it
declares his desire to convalidate the contract
§ Renounces his right to an null the contract
o Tacit
§ After the cause of the nullity ceases, the person who has the right to
invoke it does an act which implies his intention to waive his right.

Effects of Ratification
− Extinguishes action to annul the contract
− Cleanses the contract from defect from the moment it was constituted

Art. 1397. The action for the annulment of contracts may be instituted by all who are thereby
obliged principally or subsidiarily. However, persons who are capable cannot allege the incapacity
of those with whom they contracted; nor can those who exerted intimidation, violence or undue
influence, or employed fraud, or caused mistake base their action upon these flaws of the
contract.

Who May Institute


− Requisites:
o There must be an interest in the contract
o Victim of the vice or defect must institute the action
§ Based on the principle of equity is afforded to those who come to court
with clean hands.
− Third person cannot institute the action for annulment.
o Exception: person who is not a party to the contract may institute an action for
annulment if:
§ He is prejudiced in his rights with respect to one of the contracting
parties; and
§ He can show proof of his supposed detriment from the contract in which
he is not a party of.
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Art. 1398. An obligation having been annulled, the contracting parties shall restore to each other
the things which have been the subject matter of the contract, with their fruits, and the price with
its interest, except in cases provided by law.

In obligations to render service, the value thereof shall be the basis for damages.

Art. 1399. 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.

Effects of Annulment
− If the contract has not been consummated à release the parties from the obligations
− If the contract has been consummated à rules in Arts. 1398 to 1402 shall govern.

Obligation of Mutual Restitution


− Upon annulment of the contract:
o Obligation to give
§ Restore to each other the things which have been the subject matter of
the contract with its fruits and the price with its interest except for cases
provided by law.
o Obligation to do or not to do
§ Apportionment of damages based on the value of the prestation with
interest
§ Should be restored to
§ their original position by mutual restitution

Rules in Case of Incapacity


− Applicable only to nullity effected by the incapacity of one of the parties
o Therefore, incapacitated person is not obliged to make any restitution except in
cases that he has benefited by the thing or price received by him.
− Benefit à sufficient that there was prudent and beneficial use of the thing by the
incapacitated person
o Important to know his necessities, social position and duties as a consequence to
others.
o There is benefit if the thing received is used for food, clothing, shelter, health and
other things that are similar in character.
o Proof of the benefit must be given by the capacitated person.
o In the absence of such proof, it will be presumed that there was no such benefit
accrued to the incapacitated person.
− Not applicable when the incapacitated person can still return the thing received
o Must return the portion that remains in his possession upon attaining capacity.
o After attaining capacity, fails to ask for annulment and tool part of the
consideration, it is an implied ratification or confirmation.

Art. 1400. Whenever the person obliged by the decree of annulment to return the thing can not
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 date.

Art. 1401. The action for annulment of contracts shall be extinguished when the thing which is the
object thereof is lost through the fraud or fault of the person who has a right to institute the
proceedings.
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If the right of action is based upon the incapacity of any one of the contracting parties, the loss of
the thing shall not be an obstacle to the success of the action, unless said loss took place through
the fraud or fault of the plaintiff.

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

Effect of Failure to Make Restitution


− Cannot return the thing due through his fault (lost)
o Return fruits received and the value of the thing at the time of the loss with
interest from the same date.
− Thing is lost through fraud or fault of the person who has the right to institute the action
o Right to institute action for annulment is extinguished.
o Exception:
§ If the right of action is based on incapacity, the loss is not an obstacle to
the success of the action unless the loss is due to fault or fraud of the
incapacitated person.
Where Loss is Due to Fault of the Defendant
− Art. 1400 is applicable when the los of the thing is due to the fault of the party whom the
action for annulment may be instituted against (defendant)
o Return fruits and the price of the thing with interest.
− Art. 1401 applies when the loss is on the part of the plaintiff or the person who has the
right to annul the contract (plaintiff)
− Note: Loss of the thing due by the defendant shall not extinguish the action for
annulment.
− Difference from ordinary annulment is that the defendant can only be compelled to pay
the value of the thing at the time of the loss.

Where the Loss is Due to Fault of Plaintiff


− If the thing due is lost due to fraud or fault of the plaintiff, the action for annulment shall be
extinguished.
− Modes where such action may be extinguished
o Prescription
o Ratification
o Loss of the thing due by the plaintiff through fraud or fault

Where the Loss is Due to a Fortuitous Event


− Articles 1400 to 1401 is silent on the effect of fortuitous events
− General principle regarding the effects of fortuitous events may apply.
− If the defendant loses the thing due through a fortuitous event:
o Contract may still be annulled
o Defendant is held liable only for the value of the thing at the time of the loss but
without interest.
o Principle: defendant was the one who suffered as he was the owner of the thing
when it was lost due to a fortuitous event so he is not made to pay the interest.
− If the plaintiff loses the thing due through a fortuitous event:
o Contract may still be annulled
o Plaintiff is held liable only for value of the thing at the time of the loss but without
interest.

CHAPTER 8
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Unenforceable Contracts

Unenforceable Contracts in General


− Those that cannot be enforced by a proper action in court unless ratified.
− Entered into without or in excess of authority
− Did not comply with the statute of frauds
− Both of contracting parties did not have required legal capacity
− Degree of effectiveness is between void and voidable contracts

Classes (ASL)
1. Entered into in the name of another person by one without or in excess of authority to do
so
− Absolutely no consent from the person whose name appears in the contract
2. Those that did not comply with the Statute of Frauds
− No writing, note, or memorandum to prove the contract
3. Both parties are legally incapacitated.
− Consent is vitiated by legal capacity of both the contracting parties
− First two are special types of void contracts
o Susceptible of ratification
Characteristics
− Cannot be enforced by a proper action in court
− Susceptible of ratification
− Cannot be assailed by a third person

Distinguished from a Rescissible Contract


Unenforceable Rescissible
Cannot be enforced by a proper action in court Can be enforced unless rescinded

Both have different causes for defect


Susceptible to ratification Not susceptible to ratification
Cannot be assailed by third persons May be assailed by third persons who are
prejudiced

Distinguished from Voidable Contracts


Unenforceable Voidable
Cannot be enforced by a proper action in court Can be enforced unless annulled
Both have different causes for defect

**Art. 1403. The following contracts are unenforceable, unless they are ratified:

1) Those entered into in the name of another person by one who has been given no
authority or legal representation, or who has acted beyond his powers;

2) Those that do not comply with the Statue of Frauds as set forth in this number. In the
following cases an agreement hereafter made shall be unenforceable by action, unless
the same, or some note or memorandum thereof, be in writing, and subscribed by the
party charged, or by his agent; evidence, therefore, of the agreement cannot be received
without the writing, or a secondary evidence of its contents:

a) An agreement that by its terms is not to be performed within a year from the
making thereof;
b) A special promise to answer for the debt, default, or miscarriage of another;
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c) An agreement made in consideration of marriage, other than a mutual promise to


marry;
d) An agreement for the sale of goods, chattels or things in action, at a price not
less than Five Hundred pesos, unless the buyer accept and receive part of such
goods and chattels, or the evidences, or some of them, of such things in action,
or pay at the time some part of the purchase money, but when a sale is made by
auction and entry is made by the auctioneer in his sales book, at the time of the
sale, of the amount and kind of property sold, terms of the sale, price, names of
the purchasers and person on whose account the sale is made, it is a sufficient
memorandum;
e) An agreement for the leasing for a longer period than one year, or the sale of real
property or of an interest therein;
f) A representation as to the credit of a third person.

3) Those where both parties are incapable of giving consent to a contract.

Contracts Without or In Excess of Authority


− Contracts entered into in the name of another person by:
o Those who have been given no authority or legal representation
o Those who acted beyond his powers
− Such contracts shall be governed by Art. 1317 and the principles of agency in Title X of
the Code.
− Following principles are applicable:
1. No one may enter a contract in the name of another without being authorized
by the latter or unless he has a right to represent him. If he is duly
authorized, he must act within the scope of his powers.
2. Contracts entered into without or in excess of authority given are
unenforceable.
3. Such contracts may be ratified, expressly or impliedly, by the person whose
name appears in the contract before the other party revokes it.
− Confirmation and ratification are not interchangeable
o Confirmation
§ Designate the act by which a voidable contract is cured of its vice or
defect
o Ratification
§ Act by which a contract entered into by a person in behalf of another who
has no authority or acted in excess of it is cured of its defect.
§ Act of validating any kind of defective contract.
o Under the old law: Recognition
§ Act where a defect is cured
• Oral agreement to a written one
• Private instrument is converted to a public instrument

Contracts Infringing Statute of Frauds


− Unenforceable due to noncompliance with the Statute of Frauds
− Essentially a rule of substantive law

Purpose of Statute
− Enacted for preventing frauds
− Should not be made instrument to further them.

Form Required by Statute


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− Only formality required is that the contract or agreement be in writing and subscribe by
the party charged or his agent.
− Note: Telegram advising a person about a verbal promise for the sale of a land is not a
sufficient memorandum.

Effect of Noncompliance with Statute


− Contract or agreement is unenforceable by action.
− Evidence of the agreement cannot be received without the writing or secondary evidence
of its contents
− Enforceability is affected by the defect of the contract or agreement
− Statute of Frauds provides the method by which the contracts enumerated therein may
be proved.
− Does not declare contracts invalid because they are not reduced to writing
− Contract exists and is valid even without necessary form
− Noncompliance with the requirement means that no action can be enforced unless the
requirement is complied with
− Form is required for evidential purposes
− If parties permit a contract to be proved without objection then it is as if the contract has
complied to the statute.

Contracts Covered by Statute


1. An agreement that by its terms is not to be performed within a year from the making
hereof.
− There must be no action from either side within a year
− Those acts which are to be fully performed by one side within a year are taken out of
the operation of the statute.
− Hence if one of the parties has complied with the agreement within the year of the
obligation, the other party cannot avoid the fulfillment of acts incumbent upon him by
invoking the Statute of Frauds
o Statute aims to prevent fraud and not to protect it
2. Special promise to answer for the debt, default or miscarriage of another.
− The promise mentioned in the above must be collateral, not independent or original.
− Test: promise must be merely a surety and not one that makes the other party
primarily liable.
− Promise must be in writing.
3. An agreement made in consideration of marriage other than a mutual promise to marry.
− Marriage settlements and donations by reason of marriage are regulated by the
Statue of Frauds.
4. An agreement for the sale of goods, chattels or things in action, at a price not less than
Five hundred pesos (500).
5. An agreement for the leasing of real property for a longer period than on year, or for the
sale of real property or an interest therein.
− An agreement for the leasing for a period longer than one year is unenforceable
unless the same, or some note or memorandum thereof, be in writing and subscribed
by the party charged, or by his agent.

Effect of Performance of Contract


− Rule: Statue of Fraud is applicable only to those contracts which are executor and not to
those which have been consummated either totally or partially.
− Basis: in such cases, there is already ratification by acceptance of benefits.

Ratification
− Contracts infringing the Statute of Frauds are susceptible of ratification.
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− May be ratified by:


o Failure to object to the prestation of oral evidence to prove the same
o By acceptance of benefits under then

Contracts where both Parties are Incapacitated


− Unenforceable
− If only one of the parties are incapacitated à voidable
− May be ratified expressly or impliedly
− Ratification may be effected by parents or guardians of the contracting parties
o Ratification by parent or guardian of one of the contracting parties or by the
incapacitated person himself upon attaining capacity à rules on voidable
contracts
o Ratification by parents or guardians of both parties or by both incapacitated
persons after attaining capacity à contract shall be validated from its
inception

Art. 1404. Unauthorized contracts are governed by Article 1317 and the principles of agency in
Title X of this Book.

Art. 1405. 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 benefits under them.

Art. 1406. When a contract is enforceable under the Statue of Frauds, and a public document is
necessary for its registration in the Registry of Deeds, the parties may avail themselves of the
right under Article 1357.

Art. 1407. In a contract where both parties are incapable of giving consent, express or implied
ratification by the parent, or guardian, as the case may be, of one of the contracting parties shall
give the same effect as if only one of them were incapacitated.

If ratification is made by the parents or guardians, as the case may be, of both contracting parties,
the contract shall be validated from inception.

Art. 1408. Unenforceable contracts cannot be assailed by third persons.

CHAPTER 9
Void or Inexistent Contracts

Void and Inexistent Contracts in General


− Those which lacks absolutely either in fact or law one or some of the essential elements
for validity
− Contrary to laws, public morals, good customs, public order, policy or declared by law to
be void or invalid

Void Inexistent
Requisites are present but are contrary to law, One or some of the essential requisites are
public morals, public order, or public policy absolutely lacking
In pari delicto* is applicable à neither party In pari delicto is not applicable à open to
may be heard to invoke its unlawful character attack even by the parties thereto
as a ground for relief
May produce legal effects Does not produce any legal effects
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*in equal fault

Distinguished form Rescissible Contracts


Void or Inexistent Rescissible
No effect even if it is not set aside by a direct Valid unless rescinded
action
Defect: absolute lack in fact or law of the Defect: in lesion or damage to one of the
essential requisites contracting parties
Nullity or inexistence is based on law Rescissibility is based on equity
Sanction Remedy
Public interest Private interest
Action is imprescriptible Action is prescriptible
Cannot be assailed by third persons May be assailed by third persons

Distinguished from Voidable Contracts


Void or Inexistent Voidable
No effect even if it is not set aside by direct Binding unless annulled
action
Causes for the inexistence or absolute nullity are different from
the causes of annulability or relative nullity
Not susceptible of ratification Susceptible of ratification
Action for declaration of nullity is imprescriptible Action for annulment of contract is prescriptible
Defense of inexistence or absolute nullity is Defense for annulability is not available to third
available to third persons persons

Distinguished from Unenforceable Contracts


Void or Inexistent Unenforceable
No contract Contract is unenforceable by a court action
unless ratified
Causes for inexistence or absolute nullity are different from
the causes of the unenforceability of contracts
Not susceptible to ratification Susceptible to ratification
Can be assailed by third persons who are Cannot be assailed by third persons
directly affected

Art. 1409. The following contracts are inexistent and void from the beginning:

1) Those whose cause, object or purpose is contrary to law, morals, good customs, public
order or public policy;
2) Those which are absolutely simulated or fictitious;
3) Those whose cause or object did not exist at the time of the transaction;
4) Those whose object is outside the commerce of men;
5) Those which contemplate an impossible service;
6) Those where the intention of the parties relative to the principal object of the contract
cannot be ascertained;
7) Those expressly prohibited or declared void by law.

These contracts cannot be ratified. Neither can the right to set up the defense of illegality be
waived.
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Contracts which are Void or Inexistent


− Void Contracts
o Cause, object or purpose is contrary to law, morals, good customs, public order
or public policy
o Object is outside the commerce of men
o Contemplates an impossible service
o Intention of the parties relative to the principal object of the contract cannot be
ascertained
o Expressly prohibited or declared void by law
− Inexistent Contracts
o Absolutely simulated or fictitious
o Cause or object did not exist at the time of the transaction
− Other similar contracts
o Direct results of previous illegal contracts
o No concurrence between the offer and accept with regard to the object and
cause
o Do not comply with the required form when such form is essential for its validity
o No. 7 in the enumeration of Article 1409 (those expressly prohibited or declared
void by law) is broad enough to include other contracts which are not included in
the enumeration

Characteristics
1. Produce no legal effects (quod nullum est nullum producit effectum)
2. Not susceptible to ratification
3. Right to set up the defense of inexistence or absolute nullity cannot be waived or
renounced.
4. Action or defense for the declaration of their inexistence or absolute nullity is
imprescriptible.
5. Inexistence or absolute nullity of a contract cannot be invoked by a third person whose
interests are not directly affected.

Effects
− Inexistent contracts have no effect
− When executed, nullity of contracts due to illegal cause or object will produce the effect of
barring any action by a guilty party to recover what he has already given under the
contract.

A Void Contract Cannot be Ratified


− Cannot validate an invalid act
− No ratification even through an amicable settlement

Art. 1410. The action or defense for the declaration of the inexistence of a contract does not
prescribe.

Imprescribility of Action or Defense


− Defect of void or inexistent contracts is more or less a permanent character
− Lapse of time cannot give efficacy to such contracts
− Nature of such defects cannot be cured by prescription
− Applicable to action for declaration of the inexistence or absolute nullity of the contract
and to the defense

Art. 1411. When the nullity proceeds from the illegality of the cause or object of the contract, and
the act constitutes a criminal offense, both parties being in pari delicto, they shall have no action
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against each other, and both shall be prosecuted. Moreover, the provisions of the Penal Code
relative to the disposal of effects or instruments of a crime shall be applicable to the things or the
price of the contract.

This rule shall be applicable when only one of the parties is guilty; but the innocent one may claim
what he has given, and shall not be bound to comply with his promise.

Art. 1412. If the act in which the unlawful or forbidden cause consists does not constitute a
criminal offense, the following rules shall be observed:

1) When the fault is on the part of both contracting parties, neither may recover what he has
given by virtue of the contract, or demand the performance of the other’s undertaking;
2) When only one of the contracting parties is at fault, he cannot recover what he has given
by reason of the contract, or ask for the fulfillment of what has been promised him. The
other, who is not at fault, may demand the return of what he has given without any
obligation to comply with his promise.

Principle of In Pari Delicto


− Both parties are at fault of the illegality of the cause or object
− Law refuses to give remedy and leaves them where they are
− Ex dolo malo non oritur actio
− In pari delicto potior conditio defendantis
− Presumption: fault of one party is more or less equal or equivalent to the fault of the other
party
− Applies only to cases of existing contracts with an illegal cause or object
− Does not apply to simulated or fictitious contracts
− Does not apply to inexistent contracts for lack of an essential requisite such as cause of
consideration

Effect if Only One Party is at Fault


− If contract has already been executed:
o Guilty party à barred from recovering what he has given
o Innocent party à may demand for the return of what he has given
− If contract is merely executory:
o Cannot produce any legal effect
o Neither party can demand for fulfillment of the obligation
o Neither party can be compelled to comply

Exceptions
1. Payment of usurious interest
− Debtor is allowed to recover the interest paid in excess of that allowed by usury laws
with interest from date of payment
2. Payment of money or delivery of property for an illegal purpose where…
− Party who paid or delivered repudiates the contract before the purpose is to be
accomplished
− Before any damage has been cause to a third person
− Effect: courts may allow parties to recover what has been paid or delivered, if public
interest is subserved.
3. Payment of money or delivery of property by an incapacitated person
− Courts may allow the recovery of what has been paid or delivered if the interest of
justice demands.
4. Agreement or contract which is not illegal per se but is merely prohibited by law and such
prohibition is for the plaintiff
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− Plaintiff may recover what has been paid or delivered


5. Payment of any amount in excess of the maximum price of any article or commodity as
fixed by law
− Buyer may recover the excess
6. Contract where laborer undertakes longer working hours than the maximum as fixed by
laws
− Laborer may demand for overtime pay
7. Contract where laborer accepts a wage lower than the minimum prescribed
− Laborer may demand for deficiency

Art. 1413. Interest paid in excess of the interest allowed by the usury laws may be recovered by
the debtor, which interest thereon from the date of the payment.

Recovery by Debtor of Usurious Interest


− Interest refers to the whole usurious interest
− Example:
o A contract of loan with usurious interest consists of a principal and accessory
stipulation; the principal one is to pay the debt while the accessory is to pay
the interest. The two stipulations are divisible thus the illegal terms can be
separated from the legal ones. In this case, only the accessory stipulation
should be considered void.

Art. 1414. 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. 1415. When 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. 1416. When the agreement is not illegal per se but it 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.

Article Applied
− General Statement of the Exception (Art. 1416): Agreement is not illegal per se, but
merely prohibited
o Prohibition is designed for the protection of the plaintiff
y
o Plaintiff may recover what he paid or delivered if public policy is enhanced
y
o ILLEGAL PER SE à one that by universally recognized standards is
inherently or by its very nature bad, improper, immoral or contrary to good
conscience.
− Angeles vs. Court of Appeals
o In pari delicto is not applicable to a homestead which has been illegally sold
in violation of the law. The policy of the law is to give land to the families and
allows the homesteader to reacquire the land even if it has been sold. The
right to reacquire may not be waived. Sale is null and void. Petitioner has the
right to recover the homestead and the action does not prescribe.
o The sale is contrary to public policy
o Plaintiffs must return the value of purchase
o Defendants will not be reimbursed of their improvements on the land
− Philippine Banking Corp. vs. Lui She
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o Old lady tries to go around the no land for aliens provision by giving Wong a
99 year lease and a 50 year option to purchase property. Former later
changes her mind and tells her lawyer to secure annulment of the contract.
Court says the contract is not illegal per se, but collectively it reveals a
pattern to subvert the Constitution. A lease to an alien is valid, so is an option
giving the right to buy if he gets Phil citizenship. However here, a lease and
an option to buy combined shows that a virtual transfer of ownership has
happened. Land is ordered to be return to Old lady Justina Santos.

Art. 1417. 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. 1418. 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.

Art. 1419. When the law sets, or authorizes the setting of a minimum wage for laborers, and a
contract is agreed upon by which a laborer accepts a lower wage, he shall be entitled to recover
the deficiency.

Art. 1420. In case of a divisible contract, if the illegal terms can be separated from the legal ones,
the latter may be enforced.
− When the contract is divisible à if illegal terms can be separated from legal ones, enforce
latter
o In case of doubt, contract is considered as divisible or separable.
o EXCEPTIONS:
§ Nature of contract requires indivisibility e.g. contract of compromise

§ Intention of the parties is that the contract be entire e.g. if what is
void be the essential part, void the entire contract.
§ Note: Divisibility will only be followed when the nullity affects only the
secondary or accessory obligations.

Art. 1421. The defense of illegality of contracts is not available to third persons whose interests
are not directly affected.

Art. 1422 A contract which is the direct result of a previous illegal contract, is also void and
inexistent.

TITLE III
Natural Obligations

Art. 1423. Obligations are civil or natural. Civil obligations give a right of action to compel their
performance. Natural obligations, not being based on positive law but on equity and natural law,
do not grant a right of action to enforce their performance, but after voluntary fulfillment by the
obligor, they authorize the retention of what has been delivered or rendered by reason thereof.
Some natural obligations are set forth in the following articles.

Concept of Natural Obligations


− Natural Obligations
o Those based on equity and natural law
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o Obligations without sanction, susceptible of voluntary performance, but not


through compulsion by legal means

Distinguished from Civil Obligations


Natural Obligations Civil Obligations
Based on equity and natural law Based on positive law
Not enforceable by court action Enforceable by court action

Distinguished from Moral Obligations


Natural Obligations Civil Obligations
There is juridical tie between parties but is non- There is no juridical tie
enforceable
Voluntary fulfillment by the obligor produces Voluntary fulfillment does not produce any legal
legal effects which courts will recognize and effect to be recognized and protected
protect

Reasons for Regulation of Natural Obligations


− Side of Payor à Why does the law permit a man, who fulfills his natural obligation, to
change his mind and recover what has been delivered?
o A broad policy justifies a legal principle that would encourage persons to fulfill
their moral obligations
o Equity, morality, and natural justice.
− Side of Payee
o Payee is obliged to return what was given to him since the payor was not legally
bound to deliver such payment

Art. 1424. When a right to sue upon a civil obligation has lapsed by extinctive prescription, the
obligor who voluntarily performs the contract cannot recover what he has delivered or the value of
the service he has rendered.

Article Applied
− A borrowed money from B and B failed to collect the money from A. After the debt
prescribed, A still paid the amount to B. Although, after a few months, A was in need of
money and demanded for his payment to B back. B refused. Will A’s succeed in
collecting if he sues B in court?
o No, as it is covered by Art. 1424 that after the lapse of the extinctive prescription,
the obligor who pays his debts voluntarily will not be able to recover what has
been delivered or value of service rendered.
o After voluntary fulfillment by the obligor, the obligee is authorized to retain what
has been paid by reason thereof.

Art. 1425. When without the knowledge or against the will of the debtor, a third person pays a
debt which the obligor is not legally bound to pay because the action thereon has prescribed but
the debtor later voluntarily reimburses the third person, he obligor cannot recover what he has
paid.

Art. 1426. When a minor between eighteen and twenty-one years of age who has entered into a
contract without the consent of the parent or guardian, after the annulment of the contract
voluntarily returns the whole thing or price received, notwithstanding the fact that he has not been
benefited thereby, there is no right to demand the thing or price thus returned.
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Art. 1427. When a minor between eighteen and twenty-one years of age, who has entered into a
contract without the consent of the parent or guardian, voluntarily pays a sum of money or
delivers a fungible thing in fulfillment of the obligation, there shall be no right to recover from the
obligee who has spent or consumed it in good faith.

Art. 1428. When, after an action to enforce a civil obligation has failed, the defendant voluntarily
performs the obligation, he cannot demand the return of what he has delivered or the payment of
the value of the service he has rendered.

Art. 1429. When a testate or intestate heir voluntarily pays a debt of the decedent exceeding the
value of the property which he received by will or by law of intestacy from the estate of the
deceased, the payment is valid and cannot be rescinded by the payer.

Art. 1430. When a will is declared void because it has not been executed in accordance with the
formalities required by law, but one of the intestate heirs, after the settlement of the debts of the
deceased, pays a legacy in compliance with a clause in the defective will, the payment is effective
and irrevocable.

TITLE IV
Estoppel

Art. 1431. Through estoppel an admission or representation is rendered conclusive upon the
person making it, and cannot be denied or disproved as against the person relying thereon.

Concept of Estoppel
− Estoppel à the principle that precludes a person from asserting something contrary to
what is implied by a previous action or statement of that person or by a previous pertinent
judicial determination.
− Affords a solution to questions unforeseen by our legislation à temporary remedy

Art. 1432. The principles of estoppel are hereby adopted insofar as they are not in conflict with
the provisions of this Code, the Code of Commerce, the Rules of Court and special laws.

Art. 1433. Estoppel may be in pais or by deed.

Kinds of Estoppel
− Based on common law classification of estoppels into equitable and technical estoppel

Estoppel In Pais (by conduct)


− Arises when a party who:
o Acts, representations, admissions or by silence when he should speak out
o Intentionally done or through culpable negligence
o Leads another party to believe a certain fact to exist.
o The party deceived must rely upon the belief, acts on it; and is then prejudiced by
the said act.
− Would not have been prejudiced if the truth were told

Estoppel by Silence
− Inaction
− Arises when a party who:
o Has a right or opportunity to speak or act
o Has a duty to do such act under the circumstances
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o Intentionally or through culpable negligence induces another to believe certain


facts exist
o Another party relies on the belief, acts on it, and is then prejudiced

Estoppel by Acceptance of Benefits


− Arises when a party:
o Accepts benefits from a certain act or transaction
o Intentionally or through culpable negligence
o Induces another to believe certain facts exist
o Another party relies, acts on it, and is then prejudiced

Estoppel by Deed or by Record


− Two distinct types of technical estoppel
o Estoppel by Deed
§ Bar which precludes on party to a deed and his privies from asserting as
against the other party and his privies any right or title in derogation of
the deed, or from denying the truth of any material facts asserted in it
§ Usually written documents
o Estoppel by Record
§ Preclusion to deny the truth of matters set forth in a record, whether
judicial or legislative, and also to deny the facts adjudicated by a court of
competent jurisdiction
.
§ Example: conclusiveness of judgment (estoppel by judgment) on the
parties to a case, which is broader than res judicata


Estoppel by Judgment
− A party to a case is prevented from denying facts that are adjudicated by a court of
competent jurisdiction
− Type of estoppel by record
− Bars parties from raising any question that might have been put in issue and decided in
the previous litigation
− Res judicata à makes a judgment conclusive between the same parties with regard to
the matter directly adjudged.

Estoppel by Laches
− Failure or neglect to do what is needed to be done, in exercise of due diligence, for an
unreasonable length of time
− Negligence or omission to assert a right within a reasonable amount of time
− Abandonment or declination to assert a right
− Type of equitable estoppel
− Declines to enforce a right against another until such time that, when an action is finally
taken, the other party is prejudiced or cannot be restored to his former state without injury

Basis
− Doctrine of laches or stale demands
o Based on grounds of public policy
o Not a mere question of time but a question of inequity or unfairness

Elements
1. Conduct on the part of the defendant which gave rise to the cause of complaint and for
which the complaint seeks a remedy
2. Delay in asserting the complainant’s rights given that the complainant had knowledge of
the defendant’s conduct
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3. Lack of knowledge or notice to the defendant that the complainant would assert his right
4. Injury or prejudice to the defendant in the event the relief is given to the complainant or
that the suit is not barred

Application
− More applied on actions based on void contracts
− Renders the doctrine of imprescriptibility of such actions useless

Laches Distinguished from Prescription


Laches Prescription
Effect of delay Fact of delay
Question of inequity permitting a claim to be Question or matter of time
enforced
Inequity is based on changes in the condition of
the property or relation of parties
Not statutory Statutory
Applies in Equity Applies at law
Not based on fixed time Based on fixed time

Art. 1434. When a person who is not the owner of a thing sells or alienates and delivers it, and
later the seller or grantor acquires title thereto, such title passes by operation of law to the buyer
or grantee.

Article Applied
− Bucton vs. Gabar
o “The action here although one for reconveyance is actually one for quieting of title
when the plaintiff is in possession is actually imprescriptible.” – J.B.L. Reyes

Art. 1435. If a person in representation of another sells or alienates a thing, the former cannot
subsequently set up his own title as against the buyer or grantee.

Art. 1436. A lessee or a bailee is estopped from asserting title to the thing leased or received, as
against the lessor or bailor.

Art. 1437. When in a contract between third persons concerning immovable property, one of
them is misled by a person with respect to the ownership of real right over the real estate, the
latter is precluded from asserting his legal title or interest therein, provided all these requisites are
present:

1) There must be fraudulent representation or wrongful concealment of facts known to the


party estopped;
2) The party precluded must intend that the other should act upon the facts as
misrepresented;
3) The party misled must have been unaware of the true facts; and
4) The party defrauded must have acted in accordance with the misrepresentation.

Art. 1438. One who has allowed another to assume apparent ownership of personal property for
the purpose of making any transfer of it, cannot, if he received the sum for which a pledge has
been constituted, set up his own title to defeat the pledge of the property, made by the other to a
pledgee who received the same in good faith and for value.

Art. 1439. Estoppel is effective only as between the parties thereto or their successors in interest.
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TITLE V.
Trust

CHAPTER 1
General Provisions

Art. 1440. A person who establishes a trust is called the trustor; one in whom confidence is
reposed as regards property for the benefit of another person is known as the trustee; and the
person for whose benefit the trust has been created is referred to as the beneficiary.

Concept of Trusts
− Legal relationship between a person having an equitable ownership in a property and
another person owning the legal title to such property
− Three parties in the creation of trust:
1. Trustor à person who establishes trust
2. Trustee à confidence is given with regard to the property in benefit of another person
3. Beneficiary à person whose benefit the trust has been created
− Trust res
o Object of trust
o Consist of property in actual existence
o Transferable interest or title
o Rule: any transferable property, either realty or personality, including undivided,
future, or contingent interest therein.

Art. 1441. Trusts are either express or implied. Express trusts are created by the intention of the
trustor or of the parties. Implied trusts come into being by operation of law.

Kinds of Trusts
− Express
o Created by the intention of the parties
− Implied
o Deducible from the nature of the transaction as matters of intent
o Superinduced on the transaction by operation of law as matters of equity
o Independent from the will of the parties
o Two kinds:
§ Resulting
• Raised or created by the act or construction of law
• Strict Sense: implication of law and presumed always to have
been contemplated by the arties
§ Constructive
• Raised by construction of law
• Operation of law
• Not created by any words, either expressly or implied, but by the
construction of equity in consideration of justice

Express and Implied Trusts Distinguished


Express Implied
By intention of the parties By operation of law
By direct and positive acts of the parties in Deducible from the nature of the transaction by
writing, deed, will, or words showing intent operation of law
Established clearly Taken from indicative circumstances
Action to enforce cannot be barred by laches or Action to enforce may be barred by laches.
extinctive prescription unless there is an
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express repudiation of the trust by the trustee


made known to the beneficiary

Art. 1442. The principle of the general law of trusts, insofar as they are not in conflict with the
Code, the code of Commerce, the Rules of Court and special laws are hereby adopted.

CHAPTER 2
Express Trusts

Art. 1443. No express trusts concerning an immovable or any interest therein may be proved by
parole evidence*.

**Parole Evidence refers to extraneous evidence such as an oral agreement (a parole contract), or even a written
agreement, that is not included in the relevant written document. The parole evidence rule is a principle that preserves the
integrity of written documents or agreements by prohibiting the parties from attempting to alter the meaning of the written
document through the use of prior and contemporaneous oral or written declarations that are not referenced in the
document.

Art. 1444. No particular words are required for the creation of an express rust, it being sufficient
that a trust is clearly intended.

Art. 1445. No trust shall fail because the trustee appointed declines the designation, unless the
contrary should appear in the instrument constituting the trust.

Art. 1446. Acceptance by the beneficiary is necessary nevertheless, if the trust imposes no
onerous condition upon the beneficiary, his acceptance shall be presumed, if there is no proof to
the contrary.

CHAPTER 3
Implied Trusts

Art. 1447. The enumeration of the following cases of implied trust does not exclude others
established by the general law of trust, but the limitation laid down in Article 1442 shall be
applicable.

Art. 1448. There is an implied trust when property is sold, and the legal estate is granted to one
party but the price is by another for the purpose of having the beneficial interest of the property.
The former is the trustee, while the latter is the beneficiary. However, if the person to whom the
title is conveyed is a child, legitimate or illegitimate, of the one paying the price of the sale, no
trust is implied by law, it being disputable presumed that there is a gift in favor of the child.

Art. 1449. There is also an implied trust when a donation is made to a person but it appears that
although the legal estate is transmitted to the done, he nevertheless is either to have no beneficial
interest or only a part thereof.

Art. 1450. If the price of a sale of property is loaned or paid by one person for the benefit of
another and the conveyance is made to the lender or payor to secure the payment of the debt, a
trust arises by operation of law in favor of the person to whom the money is loaned or for whom it
is paid. The latter may redeem the property and compel a conveyance thereof to him.
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Article Applied
− X transferred a Certificate of Title to Y as a security for his debt and the title did not have
an annotation. Y then later mortgaged the property to the bank without the knowledge of
X. The mortgage became due and the property was advertised for sale by the bank. What
are the actions available to X?
o The mortgage of the property by Y is valid since the bank did not know of the flaw
regarding the property since there was not annotation at the back of the title
o X can redeem the property from the bank and then institute an action to compel Y
to reconvey the property to him. X’s payment to the bank can be applied to his
debt to Y and any excess payment done is recoverable from Y.

Art. 1451. When the land passes by succession to any person and he causes the legal title to be
put in the name of another, a trust is established by implication of law for the benefit of the true
owner.

Art. 1452. If two or more persons agree to purchase property and by common consent the legal
title is taken in the name of one of them for the benefit of all, a trust is created by force of law in
favor of the others in proportion to the interest of each.

Art. 1453. When property is conveyed to a person in reliance upon his declared intention to hold
it for, or transfer it to another or the grantor, there is an implied trust in favor of the person whose
benefit is contemplated.

Art. 1454. If an absolute conveyance or property is made in order to secure the performance of
an obligation of the grantor toward the grantee, a trust by virtue of law is established. If the
fulfillment of the obligation is offered by the grantor when it becomes due, he may demand the
reconveyance of the property to him.

Art. 1455. When any trustee, guardian or other person holding a fiduciary relationship uses trust
funds for the purchase of property and causes the conveyance to be made to him or to a third
person

Art. 1456. If property is acquired through mistake or fraud, the person obtaining it is, by force of
law, considered a trustee of an implied trust for the benefit of the person from whom the property
comes.

Article Applied
− Co-heirs entering into an extrajudicial settlement or partition of the hereditary estate while
disregarding other co-heirs. The co-heirs who are part of the settlement are impliedly or
constructively trustees for the benefit of the heirs who were not part of the contract.

Prescriptibility of Actions to Enforce Trust


− Does not prescribe
− An action for reconveyance of real property based upon an implied trust resulting from
fraud, may not be barred by the statute of limitations.
− Action may be filed form the discovery of fraud
− Discovery of fraud à when the new certificates of title were issued exclusively in the
name of the person committing fraud.

Period of Prescription [for Action of Reconveyance]


1. Action involves annulment of the voidable contract which was the basis for the fraudulent
registration of the property à prescription period of four years (Art. 1391, par. 4 of the
Civil Code)
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2. Action involves declaration of nullity or inexistence of a void or inexistent contract which


was the basis for the fraudulent registration of property à imprescriptible (Art. 1410 of
the Civil Code)
3. Action does not involve annulment of a contract but there was fraud in the registration of
the subject property à ten years from discovery of the fraud (No. 2 of Art. 1144 of the
Civil code)
4. If the legitimate owner of the fraudulently registered property in the name of another had
always been in possession thereof, the constructive notice rule cannot apply. Action for
reconveyance is actually an action to quiet title à imprescriptible

Laches may Bar Action


− Laches may bar an action to enforce a constructive trust
− Repudiation is not required unless there is a concealment of facts giving rise to the trust

Acquisition of Property by Trustee Through Prescription


− In constructive trusts, trustee may acquire absolute ownership over the trust rest by
acquiring acquisitive prescription.
− Example:
o Where two out of four co-heirs of a parcel of land have had in their possession an
inherited property for a long period of time and declaring the property for taxation
purposes in their names and then subdivided the properties with transfer
certificates of title, it was held that their co-heirs, who were exempted from the
partition, are barred from bringing an action of reconveyance by extinctive
prescription, by laches, and by valid titles over the properties which vested the
defendants with the right of acquisitive prescription.
− Requisites for acquisition of property in Express Trusts
o Trustee repudiates the right of the beneficiary
o Act of repudiation must be known to the beneficiary
o Evidence must be clear and conclusive
o Expiration of the period is prescribed by law
− In implied trusts
o Express repudiation is not necessary
o He must only set up a title that is adverse to the beneficiary
o Normal requisites for extraordinary acquisitive prescription must be present.

Art. 1457. An implied trust may be proved by oral evidence.