Business Law Atty. Ong/Lopez BL.1301-Obligation and Contracts OCT 2012

Since 1977
BUSINESS LAW ATTY. ONG/LOPEZ

BL.1301-Obligation and Contracts OCT 2012
LECTURE NOTES
OBLIGATION failed the defendant voluntarily performs the obligation,

he cannot demand the return of what he has delivered or
OBLIGATION – originate from the latin word obligatio, means the payment of the value of the service he has rendered.
tying or binding. (1428)
 When a testate or intestate heir voluntarily pays a debt
Civil obligations - is a juridical necessity to give, to do or of the decedent exceeding the value of the property
not to do. It give a right of action to compel their which he received by will or by the law of intestacy from
performance the estate of the deceased, the payment is valid and
 Juridical necessity to give, to do or not to do (1156) cannot be rescinded by the payer. (1429)
 Right of action to compel their performance  When a will is declared void because it has not been
 Right to enforce the obligation against the obligor in a executed in accordance with the formalities required by
court of law in case of breach law, but one of the intestate heirs, after the settlement
of the debts of the deceased, pays a legacy in
ELEMENTS: compliance with a clause in the defective will, the
1. Active subject (obligee/creditor/lender/plaintiff/he who payment is effective and irrevocable. (1430)
has the right ) – the one in whose favor the obligation is
constituted Sources of obligation (1157)
2. Passive subject - obligor/debtor/borrower/defendant/he 1. Law (obligation ex lege)– Not presumed (1158)
who has the obligation) – the one who has the duty of a. Law
giving, doing or not doing - Taxes, duty of husband and wife to support family,
3. Object – prestation; the conduct which has to be minimum wage, workmen compensation act.
observed by the debtor/obligor b. Quasi contract (obligation ex quasi contractu)
4. Vinculum Juris/ juridical tie /legal tie/ causa/ causa (Chapter 1, Title XVII) – juridical relation resulting
debendi/ causa obligations – This arise form law, from lawful, voluntary and unilateral act to the
contract, quasi contract, delict and quasi delict. end that no one shall be unjustly enriched or
benefited at the expense of another.
Natural obligations - not being based on positive law but Rule: No meeting of the mind hence consent of the
on equity and natural law, do not grant a right of action to parties is not required. It is quasi contract not an
enforce their performance, but after voluntary fulfillment by implied contract.
the obligor, they authorize the retention of what has been 1. Nominate quasi contract
delivered or rendered by reason thereof. (Art. 1423) a. Solutio indebiti – Something is received
 Based on equity and natural law when there is no right to demand it, and it
 Duty not to recover what has voluntary been paid was unduly delivered thru mistake, the
although payment was no longer required. recipient has the duty to return it.
 Basic understanding of right and wrong based on an b. Negotiorum gestio – When a person
understanding of a right and wrong. voluntary takes charge of another’s
 Based on conscience abandoned business or property without the
owner’s authority where reimbursement
Illustration of Natural obligation must be made for necessary and useful
 When a right to sue upon a civil obligation has lapsed by expenses.
extinctive prescription, the obligor who voluntarily Requisites:
performs the contract cannot recover what he has a.) Property or business is abandoned or
delivered or the value of the service he has rendered. neglected
(1424) b.) The manager is unauthorized (express or
 When without the knowledge or against the will of the implied)
debtor, a third person pays a debt which the obligor is c.) The unauthorized manger voluntary take
not legally bound to pay because the action thereon has charge the abandoned property.
prescribed, but the debtor later voluntarily reimburses 2. Innominate quasi contract
the third person, the obligor cannot recover what he has Art. 2164. When, without the knowledge of the
paid. (1425) person obliged to give support, it is given by a
 When a minor between eighteen and twenty-one years stranger, the latter shall have a right to claim
of age who has entered into a contract without the the same from the former, unless it appears that
consent of the parent or guardian, after the annulment he gave it out of piety and without intention of
of the contract voluntarily returns the whole thing or being repaid.
price received, notwithstanding the fact the he has not Art. 2165. When funeral expenses are borne by
been benefited thereby, there is no right to demand the a third person, without the knowledge of those
thing or price thus returned. (1426) relatives who were obliged to give support to the
 When a minor between eighteen and twenty-one years deceased, said relatives shall reimburse the third
of age, who has entered into a contract without the person, should the latter claim reimbursement.
consent of the parent or guardian, voluntarily pays a Art. 2166. When the person obliged to support
sum of money or delivers a fungible thing in fulfillment of an orphan, or an insane or other indigent person
the obligation, there shall be no right to recover the unjustly refuses to give support to the latter, any
same from the obligee who has spent or consumed it in third person may furnish support to the needy
good faith. (1427) individual, with right of reimbursement from the
 When, after an action to enforce a civil obligation has person obliged to give support. The provisions of
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EXCEL PROFESSIONAL SERVICES, INC.
this article apply when the father or mother of a  when acquittal is due to exempting
child under eighteen years of age unjustly circumstances – there is civil liability
refuses to support him.  when there is preponderance of evidence – there
Art. 2167. When through an accident or other is civil liability
cause a person is injured or becomes seriously
ill, and he is treated or helped while he is not in d. Quasi delict (obligation ex quasi maleficio or quasi
a condition to give consent to a contract, he shall delicto) (Chapter 2, Title XVII and special law) – Act
be liable to pay for the services of the physician or omission causes damage to another, there being
or other person aiding him, unless the service fault or negligence, is obliged to pay for the damage
has been rendered out of pure generosity. done there being no pre existing contractual relation
Art. 2168. When during a fire, flood, storm, or between the parties.
other calamity, property is saved from Elements:
destruction by another person without the a) There must be fault or negligence attributable to
knowledge of the owner, the latter is bound to the person charged
pay the former just compensation. b) There must be damage or injury
Art. 2169. When the government, upon the c) There must be a direct relation of cause and
failure of any person to comply with health or effect between the fault or negligence on the one
safety regulations concerning property, hand and the damage or injury on the other
undertakes to do the necessary work, even over hand ( proximate cause )
his objection, he shall be liable to pay the
expenses.  Culpa aquiliana (not synonymous with tort)
Art. 2170. When by accident or other fortuitous Obligation expressly arising from Quasi delict
event, movables separately pertaining to two or 1. The father and, in case of his death or
more persons are commingled or confused, the incapacity, the mother, are responsible for the
rules on co-ownership shall be applicable. damages caused by the minor children who live
Art. 2171. The rights and obligations of the in their company.
finder of lost personal property shall be governed 2. Guardians are liable for damages caused by the
by articles 719 and 720. minors or incapacitated persons who are under
Art. 2172. The right of every possessor in good their authority and live in their company.
faith to reimbursement for necessary and useful 3. The owners and managers of an establishment or
expenses is governed by article 546. enterprise are likewise responsible for damages
Art. 2173. When a third person, without the caused by their employees in the service of the
knowledge of the debtor, pays the debt, the branches in which the latter are employed or on
rights of the former are governed by articles the occasion of their functions.
1236 and 1237. 4. Employers shall be liable for the damages caused
Art. 2174. When in a small community a by their employees and household helpers acting
nationality of the inhabitants of age decide upon within the scope of their assigned tasks, even
a measure for protection against lawlessness, though the former are not engaged in any
fire, flood, storm or other calamity, anyone who business or industry.
objects to the plan and refuses to contribute to 5. The State is responsible when it acts through a
the expenses but is benefited by the project as special agent; but not when the damage has
executed shall be liable to pay his share of said been caused by the official to whom the task
expenses. done properly pertains.
Art. 2175. Any person who is constrained to pay 6. Teachers or heads of establishments of arts and
the taxes of another shall be entitled to trades shall be liable for damages caused by
reimbursement from the latter. their pupils and students or apprentices, so long
as they remain in their custody.
c. Delict (obligation ex maleficio or delicto)  The possessor of an animal or whoever may
Governing rules: make use of the same is responsible for the
1. Pertinent provisions of the RPC and other penal damage which it may cause, although it may
laws subject to Art 2177 Civil Code. escape or be lost. This responsibility shall cease
 Art 100, RPC – Every person criminally liable only in case the damage should come from force
for a felony is also civilly liable majeure or from the fault of the person who has
2. Chapter 2, Preliminary title, on Human Relations suffered damage. (2183)
( Civil Code ) 
3. Title 18 of Book IV of the Civil Code – on 2. Contract (obligation ex contractus) – Meeting of mind
damages between two (2) person whereby one binds himself with
respect to another to give something or render some
Civil liability arising from crime includes: service. (1306) It has a force of law between the
1. Restitution – The thing itself must be returned or contracting party and must be complied with n good faith
restored. (1159)
2. Reparation - The court shall determine the
amount of damage, taking into consideration the Kinds of obligation according to subject matter
price of the thing, whenever possible, and its 1. Real obligation
special sentimental value to the injured party a. Specific or determinate object – particularly
3. Indemnification - Indemnification for designated or physically segregated from all
consequential damages shall include not only others of the same class.
those caused the injured party, but also those Loss of the object without fault of debtor –
suffered by his family or by a third person by obligation extinguish
reason of the crime. b. Generic or indeterminate – Thing refers to a
class, to a genus and cannot be pointed out with
Effect of acquittal in criminal case: particularity.
 when acquittal is due to reasonable doubt – no Loss of the object without fault of the debtor –
civil liability Obligation remain. Genus nunquam perit
(Generic never perishes)

2. Personal obligation time and place. (1173) It is also demandable in

a. Positive personal obligation (to do) every kind of obligation but such liability may be
b. Negative personal obligation (not to do) regulated by the courts according to the
circumstances. (1172)
Duty of debtor to deliver specific thing a. Culpa contractual – performance of the
1. Preserve the thing (1163) contract
Rule: Diligence of good father of a family (ordinary b. Culpa criminal – Result from criminal act
diligence) c. Culpa aquiliana – No pre existing contract
Except:
a. Law (ex: common carrier) Degree of Culpa under the Roman Law are as follows:
b. Stipulation 1.) Culpa lata – grave negligence
2. Deliver the fruits (1164) 2.) Culpa levis – ordinary negligence
 Natural fruit – Spontaneous product of the soil, and 3.) Culpa levissima – slight negligence
the young and other products of animals. (No human
intervention) FRAUD DISTINGUISHED FROM NEGLIGENCE
 Industrial fruit - Produce by lands of any kind
through cultivation or labor. FRAUD NEGLIGENCE
 Civil fruit – Rents of building, price of lease of lands
There is deliberate There is no deliberate intent to
and other property and the amount of perpetual or
intent to cause cause damage.
life annuities or other similar income.
damage.
Liability cannot be Liability may be mitigated.
Rule: The creditor has the right to the fruits of the thing
mitigated.
from the time the thing to deliver arises.
Waiver for future Waiver for future negligence may
Exception: Obligation to deliver the fruits arises from:
fraud is void. be allowed in certain cases:
a. Suspensive condition – fulfillment of the condition
a) gross – can never be excused
b. Suspensive period – arrival of the period
in advance; against public
c. Arise from law, quasi contract, delict, quasi delict –
policy
provision of law
b) simple – may be excused in
3. Deliver of accessions and accessories (1166)
certain cases
 Accessions - fruits of a thing/ addition/ improvement
upon a thing. (i.e. House/trees on a land)
 Accessories – thing joined with the principal for III. Delay (mora)
embellishment, better use or completion (i.e. Key of a. Ordinary delay – Failure to pay on the period
house, bracelet of a watch) fixed by the parties without demand judicial or
4. Deliver the thing itself extrajudicial
 Actual b. Legal delay – Failure to pay after demand by the
 Constructive creditor (judicial/extrajudicial)
a. Traditio symbolica – delivery of key 1. Mora solvendi - Delay of debtor
b. Traditio brevi manu – A possessor of a thing not 1.1 Mora solvendi ex re – Debtor delay/default
as an owner, becomes the possessor as owner in real obligation
(i.e. Lessor sells the thing leased to the lessee) 1.2 Mora solvendi ex persona – Debtor
c. Taditio longa manu – mere consent or delay/default in personal obligation
agreement of the parties. (pointing out the 2. Mora accipiendi – – default on part of creditor;
object) Creditor is guilty of default when he
d. Traditio constitutum possessorium – A possessor unjustifiably refuses to accept payment or
of a thing as an owner retains possession no performance at the time
longer as an owner, but in some other capacity. payment/performance can be done
This is the opposite of tradition brevi manu. (i.e. 3. Compensatio morae – both parties (debtor and
A possessor vendor stay as tenant on the creditor) are in default (in reciprocal
vendee) obligations); the effect: is as if there is no
e. Execution of a public instrument
Elements of legal delay:
Rule: (1) The obligation must be due, enforceable and already
a. Before delivery of the thing – Creditor has personal liquidated or determinate in amount
right (jus in personam or jus ad rem). (1164) (2) There must be non-performance
b. Creditor acquires real right (jus in re) only at the (3) There must be a demand, unless demand is not
time of delivery. required
Effects of legal delay:

5. Damages in case of breach a. if determinate thing - debtor bears risk of loss (even
With the fault of the debtor (1170) when there is fortuitous event)
I. Fraud (dolo) b. debtor liable for damages/interest
a. Dolo causante - (consent is defective – c. resolution (Art 1170, in proper cases)
voidable)
b. Dolo incidente (fraud in performance – Rule: No demand (judicial or extrajudicial) no delay
damages) (1169)
Period Exception:
a. Future fraud – Responsibility arising from 1. Law
fraud is demandable in all obligation. Any 2. Stipulation
waiver of an action for future fraud is void. 3. Time is of the essence
(1171) same rule in case of negligence which 4. Demand would be useless
shows bad faith. (1173) 5. Performance of one party in case of reciprocal
b. Past fraud – can be waive obligation
II. Negligence (culpa) – Omission of diligence IV. Contravention of tenor of obligation
required by the nature of the obligation and
corresponds with circumstances of the person,

Damages (MENTAL)
Without the fault of the debtor 1. Moral – Include physical suffering, mental anguish,
Requisites of fortuitous event (Nakpil & Sons vs. CA): fright, serious anxiety, besmirched reputation, wounded
1. The cause of the breach of the obligation must be feelings, moral shock, social humiliation and similar
independent of the will of the debtor injury.
2. The event must be either unforeseeable or 2. Exemplary or corrective – imposed by way of example or
unavoidable correction for the public good. It may be awarded if the
3. The event must be such as to render it impossible for defendant acted in a wanton, fraudulent, reckless,
the debtor to fulfill his obligation in a normal manner oppressive or malevolent manner. (bad faith).
4. The debtor must be free from any participation in, or 3. Nominal – Adjudicated in order that a right of the
aggravation of injury to the creditor plaintiff, which has been violated or invaded by the
defendant, may be vindicated or recognized and not for
Rule: Not liable in case of Fortuitous event (1174) the purpose of indemnifying the plaintiff for any loss
Exception: suffered by him. Awarded in every case where any
1. Law property right has been invaded. (Damages awarded to
a. Delay vindicate a right)
b. Promised to deliver the same thing to 2 or 4. Temperate – More than nominal but less than actual.
more person who do not have the same Awarded when some pecuniary loss have been suffered
interest but its amount can not, from the nature of the case be
c. Lost of generic thing proved with certainty. (Exact amount of damage cannot
d. Obligation arising from crime be ascertained)
2. Stipulation 5. Actual or compensatory – value of loss suffered but also
3. Assumption of risk include profits which the creditor failed to obtain.
Pecuniary loss must be duly proved.
Duty of debtor (Generic thing) 6. Liquidated – those agreed upon by the parties to a
1. Deliver the thing based on quality intended by the contract to be paid in case of breach.(Damage
parties. predetermined before hand)
2. Damages in case of breach
 Usurious transaction shall be governed by special law.
Duty of debtor to do (Positive personal obligation) (1175)
 If a person obliged to do something fails to do it, the  Presumption (1176)
same shall be executed at his cost. a. Receipt of principal without reservation as to interest
This same rule shall be observed if he does it in - interest is already paid
contravention of the tenor of the obligation. b. Receipt of a later installment of debt without
Furthermore, it may be decreed that what has been reservation as to prior installment – later installment
poorly done be undone. (1167) have been paid.
Duty of debtor not to do (Positive personal obligation) REMEDIES OF CREDITORS - generally transmissible
 When the obligation consists in not doing, and the (except: law, stipulation, personal obligation):
obligor does what has been forbidden him, it shall 1. Exact performance - specific, substitute, equivalent
also be undone at his expense. (1168) 2. Attach and execute debtor's property which is not
exempt (art 2236)
3 kinds of Performance: 3. Accion subrogatoria - Exercise all rights and actions
1. SPECIFIC PERFORMANCE - performance of the except those inherent in the person (parental
prestation itself authority, hold office, carry out agency
2. SUBSTITUTE PERFORMANCE - someone else performs Requisites:
or something else is performed at the expense of debtor a. Creditor must have right of return against debtor
3. EQUIVALENT PERFORMANCE - damages b. The debt is due and demandable
c. There is a failure of the debtor to collect his own
Real Obligations to do debt from 3rd persons either through malice or
Remedies Obligatio (Personal Obligation) negligence
n d. Debtor's assets are insufficient
Sp Gen To do Not to do e. The right of account is not purely personal
eci eric 4. Accion pauliana - (impugn or rescind acts or
fic contracts done by the debtor to defraud the
SPECIFIC undo the creditors.
PERFORMANCE Y Y NO things Requisites:
already a. There is a credit in favor of plaintiff
done b. The debtor has performed an act subsequent to
the contract, giving advantage to other persons
EQUIVALENT Can only
c. The creditor is prejudiced by the debtor's act
PERFORMANCE Y Y be Y
which are in favor of 3 rd parties and rescission
demanded
will benefit the creditor
if
d. The creditor has no other legal remedy
obligation
e. The debtor's acts are fraudulent
is not very
personal  All right by virtue of obligation are transmissible (1178)
SUBSTITUTE Undo the Exception: Law and stipulation
PERFORMANCE N Y Y things
already Primary classification of obligation under the civil
done at Code
debtor's 1. Pure –without condition and period
expense  Immediately demandable
RESCISSION/ 2. Conditional
CANCELLATION Y Y Y a.) effect
 Suspensive – give rise to obligation

 Resolutory – extinguish the obligation  Condition for purpose of extinguishing obligation

b.) Form (resolutory) – return to each other what they have
 Express – clearly stated received. In case of loss, deterioration or
 Implied – merely inferred improvement – same rule above to the party bound
c.) Possibility to return (1190)
 Possible – capable of fulfillment  Power to rescind is implied in reciprocal obligation in
 Impossible (1183) case one of the obligor should not comply with what
a. Physically impossible – Nature of the thing is incumbent upon him. (1191)
b. Legally impossible – contrary to law, moral, good a. Injured party may choose fulfillment or
customs, public order or public policy Rescission + damages.
d.) Cause or origin b. Court decree the rescission unless there is just
 Potestatiive - depend upon will of one of the cause authorizing the fixing of a period.
contracting parties (debtor/creditor) (1182)  Both parties committed a breach(1192)
 Casual – depend upon chance or will of a third a. First infractor shall be equitably tempered.
person b. If cannot determined the first infractor –
 Mixed – partly upon chance and partly upon will Obligation extinguish and each shall bear own
of third person damages.
e.) Mode
 Positive – performance Art. 1189. When the conditions have been imposed
 Negative – omission with the intention of suspending the efficacy of an
f.) Numbers obligation to give, the following rules shall be
 Conjunctive – several conditions, all must be observed in case of the improvement, loss or
complied with deterioration of the thing during the pendency of the
 Disjunctive – several conditions, one or some condition:
must be complied with (1) If the thing is lost without the fault of the
g.) Divisibility debtor, the obligation shall be extinguished;
 Divisible – susceptible of partial performance (2) If the thing is lost through the fault of the
 Indivisible – not susceptible of partial debtor, he shall be obliged to pay damages; it is
performance understood that the thing is lost when it perishes, or
goes out of commerce, or disappears in such a way
Conditional obligation that its existence is unknown or it cannot be
 Future and uncertain event or past event unknown to recovered;
parties (1179) (3) When the thing deteriorates without the fault
 Resolutory condition immediately demandable of the debtor, the impairment is to be borne by the
 When the debtor binds himself to pay when his creditor;
means permit him to do so, the obligation shall be (4) If it deteriorates through the fault of the
deemed to be one with a period. (1180) debtor, the creditor may choose between the
 Acquisition or extinguishment of obligation depend rescission of the obligation and its fulfillment, with
upon the happening of the condition (1181) indemnity for damages in either case;
 Positive condition + determinate time = extinguish (5) If the thing is improved by its nature, or by
as soon as the time expire or become indubitable time, the improvement shall inure to the benefit of
that the event will not take place (1184) the creditor;
 Negative condition + determinate time = Effective (6) If it is improved at the expense of the
form the time indicated elapsed or evident that event debtor, he shall have no other right than that
cannot occur. (1185) granted to the usufructuary.
 Constructive fulfillment - The condition shall be
deemed fulfilled when the obligor voluntarily 3. With a period - Future and certain. If uncertain it is
prevents its fulfillment. (1186) conditional. (1193)
 Retroactivity of the conditional obligation. (1187) a.) Effect
a. Reciprocal – fruit and interest deemed mutually 1. Suspensive (Ex die) – arrival- give rise to
compensated obligation. Before arrival of the period no right to
b. Unilateral – Debtor appropriate the fruits an demand. (1193)
interest except Nature and circumstances of  Payment before arrival of the period
obligation the intention of the person constituting (Payment made by mistake), the debtor is
the same was different. unaware of the period – may recover with
c. Obligation to do or not to do – court shall the fruits and interests. (1195)
determine the retroactivity.  Loss, deterioration, improvement before
 Before condition is fulfilled (1188) arrival of the period. Apply Art 1189.
c. Creditor bring action for the preservation of 2. Resolutory (In diem) – arrival- extinguish the
his right obligation. The obligation is immediately
d. Debtor may recover payment by mistake demandable.
 Loss, deterioration, improvement before condition is b.) Source
fulfilled 1. Legal – provided by law
2. Conventional/voluntary – by agreement
Without fault With fault 3. Judicial – fixed by the court
(Debtor) (Debtor) c.) Definiteness
Loss Extinguish Damages 1. Definite – fixed or known when it will come
Deterioration Impairment borne Rescission or 2. Indefinite – not fixed or not known when it will
by the creditor fulfillment + come.
damages
General Rule: The court is not authorized to fix a period:
Nature or Time Expense of the (Reason: The court cannot make a contract for the
debtor parties)
Improvemen Benefit of the Right only of a Exception: Court authorizes to fix the period. (1197)
t creditor usufruct

a.) No period fixed but period was intended (nature and (3) if all are lost due to debtor, the creditor is
circumstances) entitled to damages
b.) Period depend upon the sole will of the debtor. (4) if some are lost, the debtor can choose from the
remaining
 Court shall determine such period as probably
contemplated by the parties. Once fixed by the b. The choice is with creditor
courts, the period cannot change by them. (by the (1) if one or some are lost due to fortuitous event,
court not party) the creditor chooses the remainder
(2) if one or some is lost because of the fault of
General Rule: debtor, the creditor may choose either the
Whenever period is designated, it is presumed for the remainder or the value of any which
benefit of both creditor and debtor except when disappeared, and damages in either case
expressly provided otherwise. (1196) (3) if all is lost due to the debtor's fault, the creditor
Hence, neither the creditor can demand performance nor may choose the value of any if some is lost due
the debtor pay before arrival of the period. to debtor's fault, the creditor chooses the
remainder
Exception: (4) if all is lost due to fortuitous event, obligation is
The debtor shall lose every right to make use of the extinguished
period: (1198) Hence, immediately demandable. (5) if all is lost due to creditor's fault, the obligation
1. When after the obligation has been contracted, he is extinguished
becomes insolvent, unless he gives a guaranty or
security for the debt; Summary: Rule on loss
2. When he does not furnish to the creditor the 1. Debtor choice – Last item lost
guaranties or securities which he has promised; 2. Creditor’s choice - Any item lost through the fault of the
3. When by his own acts he has impaired said debtor
guaranties or securities after their establishment,
and when through a fortuitous event they disappear, Art. 1205. When the choice has been expressly given to the
unless he immediately gives new ones equally creditor, the obligation shall cease to be alternative from the
satisfactory; day when the selection has been communicated to the
4. When the debtor violates any undertaking, in debtor.
consideration of which the creditor agreed to the Until then the responsibility of the debtor shall be governed
period; by the following rules:
5. When the debtor attempts to abscond. (1) If one of the things is lost through a fortuitous event,
he shall perform the obligation by delivering that which
4. Alternative obligation the creditor should choose from among the remainder,
a. Simple – only one prestation is due or that which remains if only one subsists;
b. Compound (2) If the loss of one of the things occurs through the fault
1. Conjunctive – Several prestation and all are due of the debtor, the creditor may claim any of those
2. Distributive – 2 or more prestation is due subsisting, or the price of that which, through the fault
a. Alternative – several prestation are due but of the former, has disappeared, with a right to
performance of one is sufficient. damages;
b. Facultative – Only one is due but debtor may (3) If all the things are lost through the fault of the debtor,
substitute the choice by the creditor shall fall upon the price of
any one of them, also with indemnity for damages.
Gen rule: Right of choice belong to the debtor (1200) The same rules shall be applied to obligations to do or not to
except when expressly grated to the creditor. do in case one, some or all of the prestations should become
impossible. (1136a)
Limitation on the right of choice:
a. Impossible 5. Facultative - When only one prestation has been agreed
b. Unlawful upon, but the obligor may render another in substitution
c. Not the object of obligation (1206)
d. Only one is practicable (1202). In this case the Before substitution
debtor loss the right of choice and the alternative  Loss of the object without fault – not liable
obligation is converted into a simple obligation.  Loss of the object with fault of the debtor - Liable
 Choice produces no effect except from the time it  Loss/deterioration of the substitute with or without
has been communicated. (1201) fault of the debtor – Not liable
 Communication of choice convert alternative
obligation to a simple obligation. (1205) After substitution
 Creditor fault , the debtor cannot make a choice =  Loss of the object with or without fault – not liable
rescind the contract + damages (1203)  Loss of the substitute with fault – liable
 All object loss – Debtor is liable for damages (last  Loss of the substitute without fault – not liable
object)
Rule:
Right of choice: General rule: right of choice belongs to  Right of choice always to debtor
debtor  Only one prestation is due but the debtor may
a. The choice is with debtor substitute
(1) If only 1 is left either because of fortuitous
events or due to debtor's acts, perform what is DISTINCTIONS BETWEEN ALTERNATIVE AND
left. The effect is that the debtor loses the right FACULTATIVE OBLIGATIONS
of choice ALTERNATIVE FACULTATIVE
(2) if the choice is limited because of the creditor's a) Various things are due a) Only one thing is due but
acts, the debtor has the right of resolution and but the giving a substitute may be given
damages principally of one is to render
sufficient payment/fulfillment easy

b) If one of prestations is b) If principal obligations is use of the due diligence, prevented the misfortune. (Art.
illegal, others may be void and there is no 2184)
valid but obligation necessity of giving the 11. The responsibility of two or more persons who are liable
remains substitute; nullity of P for quasi-delict. (Art. 2194)
carries with it nullity of S
c) If it is impossible to give c) If it is impossible to Solidarity under special Law (related law only)
all except one, the last one give the principal, the 1. Liability of directors for watered stocks. (Sec. 65, BP
must still be given substitute does not 68)
have to be given; if it is 2. When the director or trustee who willfully and knowingly
impossible to give the vote for or assent to patently unlawful acts of the
substitute, the principal corporation or who are guilty of gross negligence or bad
must still be given faith in directing the affairs of the corporation or acquire
d) Right to choose may be d) The right of choice is any personal or pecuniary interest in conflict with their
given either to debtor or given only to the debtor duty (Sec 31 BP 68)
creditor 3. Workmen compensation act
4. Where an instrument containing the word "I promise to
pay" is signed by two or more persons, they are deemed
6. Joint /Solidary
to be jointly and severally liable thereon. (Sec 17, g, Act
a.) Individual – one debtor and one creditor
2031)
b.) Collective – Two or more debtor and two or more
5. Joint payees or joint indorsees who indorse are deemed
creditor
to indorse jointly and severally. (Sec 68, Act 2031)
1. Joint – 2or more debt/credit as there are
debtor/creditor (mancomunada,
Kinds of solidarity
mancomunadamente, pro rata, proportionately,
1. Parties bound
We promise to pay signed by 2 or more person)
a. Passive solidarity – Debtor
2. Solidary - Each debtor/creditor is bound to
b. Active solidarity – Creditor
pay/right to demand payment the entire
c. Mixed solidarity – both creditor and debtor
compliance of the obligation ( Joint and/or
2. Source
severally, solidaria, in solidum, juntos o
a. Conventional – by agreement
separademente, Individually and/or collectively,
b. Legal solidarity – imposed by law
I promise to pay signed by 2 or more persons,
c. Real solidarity – nature of the obligation
each will pay the whole value)
3. Legal tie
a. Uniform – bound by the same stipulation
Gen Rule: Joint obligation
b. Non-uniform or varied – not subject to the same
Exception:
stipulation
a. Law
b. Stipulation
Invisibility vs solidarity
c. Nature of obligation requires solidarity (real
1. Prestation vs. juridical tie or legal tie
solidarity)
2. Debtor guilty of breach is only liable vs. all debtor
are liable
Solidarity imposed by law (under the New Civil Code)
3. Exist even only 1 debtor and 1 creditor vs. at least 2
1. 2 or more heirs take possession of the estate - loss or
debtor/creditor
destruction of a thing devised or bequeathed, even
4. Other debtor not liable in case of insolvency of one
though only one of them should have been negligent.
debtor vs. other debtor are proportionately liable
(Art. 927)
2. Death or injury is due to the negligence of a fellow
Solidarity creditor
worker, the latter and the employer shall be solidarily
 Can do useful to but not prejudicial to other solidary
liable for compensation. (Art. 1712)
creditor
3. The collapse of building or structure within fifteen years
 Cannot assign without the consent of the other
(15) from completion of the structure, the engineer or
solidary creditor
architect who supervises the construction shall be
 Novation, compensation, confusion or remission by
solidarily liable with the contractor. (Art 1723)
solidary creditor extinguish the obligation but liable
4. Any wrongful act or omission of any partner acting in the
to the other solidary creditor
ordinary course of the business of the partnership or
 Debtor may pay any one of the solidary creditor.
with the authority of co-partners, loss or injury is caused
Except when one of the solidary creditor demand
to any person. (Art. 1822 and 1824
judicial or extrajudicial payment must be made to
5. Partner received money or property from 3 rd person and
him.
misapplies it or Partnership receives money or property
of a 3rd person and such property was misapplied by any
Solidary debtor
partner while in partnership custody. (Art 1823 and
 Creditor can proceed to any solidary debtor as long
1824)
as the debt has not been fully collected
6. Even when the agent has exceeded his authority, the
 Payment by one of solidary debtor extinguishes the
principal is solidarily liable with the agent if the former
obligation. If 2 or more debtor offers, the creditor
allowed the latter to act as though he had full powers.
may choose which offer to accept.
(Art. 1911)
 Solidary debtor who pay, may claim from his co-
7. Two or more persons have appointed an agent for a
debtor + interest from the date of payment (except
common transaction or undertaking, - Liable to the
when not yet due, no interest for intervening
agent for all the consequences of the agency. (Art. 1915)
period)
8. Two or more bailees (Commodatum) to whom a thing is
 Insolvency of one of solidary debtor – to be borne by
loaned in the same contract (1945)
all his co-debtor in proportion to the debt of each.
9. The responsibility of two or more officious managers
Payment by solidary debtor after the obligation has
(negotiorum gestio) shall be solidary, unless the
prescribed or become illegal – Not entitled to
management was assumed to save the thing or business
reimbursement.
from imminent danger. (Art. 2146)
 Remission made by the creditor of the share of one
10. The owner and his driver in a motor vehicle mishaps, if
of the solidary debtor – Does not release such
the former, who was in the vehicle, could have, by the

solidary debtor toward other co-debtor when the 1.) Compensatory penal clause – take the place of
debt was totally paid before remission. damages (1226)
 Remission of whole obligation obtained by one of the 2.) Punitive penal clause – imposed as punishment for
solidary debtors – not entitled for reimbursement breach
 Loss without fault of any debtor– obligation c. Demandability or effect
extinguished 1.) Subsidiary or alternative penal clause - only penal
 Loss with fault of any debtor – All debtor are liable clause can be enforce.
without prejudice to the action against guilty or 2.) Joint or cumulative – both principal and penal clause
negligent debtor. can be enforce
 Loss due to fortuitous event after delay by any of
the solidary debtor – same all debtor are liable. 1. The penal clause shall substitute the indemnity for
 Claim for Compensation under Workmen’s damages and the payment of interest in case of non
compensation law. (Sec 2, workmen compensation compliance. (1226) However, Penalty may be
law) enforced only when it is demandable.
 Article 19, 20, 21, 22 of the Civil code (Human 2. Proof of actual damages suffered by the creditor not
relations) necessary to enforce the penalty. (1228)
However damages shall be paid
Defense of solidary debtor a. There is stipulation
a. Nature of the obligation – payment , fraud, b. Obligor refuses to pay the penalty
prescription, remission, illegality, absence of c. Guilty of fraud in the fulfillment of the obligation.
consideration, res judicata, non performance of 3. Debtor cannot exempt himself from performance and
suspensive condition to pay only the penalty (except when expressly
b. Those personal to him - incapacity, mistake, granted to him). Neither can the creditor demand the
violence, minority. (personal or complete defense) fulfillment of the obligation and the satisfaction of
c. Those personal to the other. the penalty at the same time, unless this right has
been clearly granted him. (1227) However, if
7. Divisible – Capable of partial fulfillment creditor choose performance but become impossible
8. Indivisible – Not capable of partial fulfillment without his fault, the penalty may be imposed.
Kinds of division
a. Qualitative division – based on quality Causes for reduction of penalty:
b. Quantitative division – based on quantity a. Principal obligation has been partly or irregularly
c. Ideal or intellectual division – exist only in mind of complied with;
the parties b. Penalty is iniquitous or unconscionable
Kinds of indivisibility
 Nullity of the penal clause does not carry of the
a. Legal indivisibility – by law
principal obligation but the nullity of the principal
b. Conventional indivisibility - by agreement
carries with that of the penal clause. (Rule:
c. Absolute or natural indivisibility – nature of the
Accessory follows the principal)
object/prestation
 Divisibility or indivisibility is determined by the Extinguishment of Obligation

purpose or intention of the parties not the possibility Art. 1231. Obligations are extinguished:
or impossibility of partial performance. (except of (1) By payment or performance:
nature indivisibility) (2) By the loss of the thing due:
 Divisible or indivisible refer to the object of he (3) By the condonation or remission of the debt;
obligation not on the cause or legal tie. (4) By the confusion or merger of the rights of creditor and
 Joint indivisible obligation give rise to indemnity for debtor;
damages – one debtor does not comply with his (5) By compensation;
undertaking. (6) By novation.
a. Effect – Obligation is converted into one for
damages. Specific performance or rescission is Other causes of extinguishing an obligation
not a remedy because the other debtors are a. Annulment
willing to fulfill. b. Rescission
 Obligation to give definite thing and not susceptible c. Fulfillment of a resolutory condition
of partial performance – Indivisible d. Prescription
 Object the execution of a certain number of days of e. Arrival of resolutory period
work – Divisible f. Death of the party
 Accomplishment of work by metrical units or g. Mutual desistance/withdrawal
analogous things h. Compromise
 Nature are susceptible of partial performance – i. Impossibility of performance
Divisible j. Happening of a fortuitous event
 Obligation not to do – Determined by the character
of the prestation in each particular case. 1. Payment or performance – not only delivery of money
but also the performance in any other manner of an
9. Obligation with a penal clause – Penalty shall substitute obligation. (1232)
the indemnity for damages and the payment of interests Gen rule: There must be total performance. Partial or
in case of non-compliance (absence of agreement). irregular performance does not extinguish obligation.
a. Principal (1233)
b. Accessory Exception:
a. Substantial performance in good faith. (1234)
Kinds of penal clause Requisites of Substantial Performance
a. Origin 1. Attempt in Good Faith to perform without willful
1.) Legal penal clause - by law or intentional departure
2.) Conventional penal clause – by agreement 2. Deviation is slight
b. Purpose 3. Omission/Defect is technical or unimportant

4. Must not be so material that intention of parties

is not attained 3rd person
Effect of Substantial performance in good faith
1. Obligor may recover as though there has been Valid if
strict and complete fulfillment, less damages
redounded
suffered by the obligee
2. Right to rescind cannot be used for slight breach to the
b. Creditor accepts performance knowing its
incompleteness or irregularity without expression of
benefit of Guarantor
the creditor
protest. (principle of estoppels)(1235)
except
 Creditor may refuse to accept payment payment in
1. Payment by 3rd person
2. Partial performance
good faith in
3. When the debtor has no capacity to alienate or possession of Payment
free disposal of the thing theCreditor
credit Debtor
 General rule: Creditor not bound to accept
Presumed
Acceptance of creditor is always required
performance by 3rd person. (1236) The creditor is benefit
Capacitatto Free disposal of the thing
bound to accept payment only by: the
1. Debtor ed -creditor
Valid Capacity to alienate
2. Has interest in the performance of obligation
Subrogation
Incapacita
(guarantor, surety) Ratification
ted –
3. 3rd person if there is stipulation. Estoppel
But the payment in any case valid if the creditor accepts. valid if
The option to accept is granted to the creditor. the
creditor
 Payment by 3rd person to creditor may recover to
the debtor kept the
a.) With knowledge of the debtor – right of thing
reimbursement (amount paid, not amount of delivered
debt) + subrogation (acquire all the right of the Without
creditor) (1236 par 2) or it
knowledge
b.) Without knowledge/against the will of the debtor redounde
– only benefit to the debtor. 3rd person cannot or against 3rd person
d to his
compel the creditor to subrogate in his rights the will of
such as those arising from mortgage, guaranty benefit
the debtorIntend to be reimbursed
or penalty. (1237) Not intended to be reimbursed - d
c.) No recovery - Payment by 3 rd person who does (Only
not intend to be reimburse is deemed donation beneficial
which requires debtor’s consent. to creditor)
 Payment by one who does not have free disposal of With
the thing due and capacity to alienate – Not valid knowledge
without prejudice to natural obligation. (1239) or not
 Payment must be to the person in whose favor the
obligation has been constituted. (creditor , creditor against the
successor in interest, any person authorized to will of the
receive payment) (1240) debtor
a. Payment to a person who is incapacitated to
administer his property shall be valid if he has (Reimburse
kept the thing delivered or insofar as the ment +
payment has been beneficial to him.
subrogatio
b. Payment to 3rd person shall also be valid insofar
as it has redounded to the benefit of the n)
creditor. (1241)
 Payment made in good faith to any person in
Payment to 3rd person : Presumed that it redounded to possession of the credit shall release the debtor.
the benefit of the creditor: (1242)
a. 3rd person acquires the creditor’s right (subrogation) Requisites:
b. Creditor ratifies the payment to the 3rd person 1. Payment by debtor must be made in good faith
(ratification) 2. Creditor must be in possession of the credit &
c. Creditors' led to believe that the 3 rd person had not merely the evidence of indebtedness
authority to receive the payment (Estoppels)  Payment made to the creditor by the debtor after the
latter has been judicially ordered to retain the debt
shall not be valid. (1243)
 Debtor cannot compel the creditor to receive a
different one although of the same value or more
valuable than that which is due. (1244)
 Obligation to do or not to do, an act or forbearance
cannot be substituted by another act or forbearance
against the obligee’s will. (1242 par 2)
 Obligation to deliver an indeterminate or generic
thing whose quality and circumstances have not
been stated. (1246)

a. Creditor cannot demand a thing of superior  If the debtor does not apply, the creditor may
quality. make the designation. Specify in the receipt
b. Debtor cannot deliver a thing of inferior quality. which debt is being paid
 Extrajudicial expense – account of the debtor  In the absence of above, debt which is most
 Judicial expense – The Rules of court apply. Judicial onerous to the debtor
expense is shouldered by the losing party.  If the same nature and burden – applied to all of
them proportionately.
Place of payment (1251)  Payment applies to interest, then to principal.
1. Place designated in the obligation
2. No express stipulation c. Payment by cession
a. Determinate thing – Place where the thing was, 1. Two or more creditors
at the perfection of the contract 2. Debtor must be partially insolvent
b. Generic thing – domicile of the debtor. 3. Assignment/cession must be accepted by the
Gen Rule: The creditor cannot be compelled to receive creditors.
partial performance. Neither may the debtor be required
to make partial payment.(1248) d. Tender of payment (extrajudicial) and consignation
Exception: (judicial) – Creditor refuse to accept payment
1. Express stipulation without just cause
2. Debt is part liquidated and in part unliquidated.  Must comply with the rules on payment (must be
3. Different prestation are subject to different terms or total)
conditions which affect some of them.  Unconditional and total
 Actual. Manifestation of a desire or intention to
 The payment of debts in money shall be made in the pay is enough.
currency stipulated, and if it is not possible to deliver  The debtor must show possession of the thing at
such currency, then in the currency which is legal the time of the offer (tender).
tender in the Philippines. (1249)  Before creditor accepts the consignation or
 The delivery of promissory notes payable to order, or before judicial declaration, the debtor may
bills of exchange or other mercantile documents shall withdraw the thing deposited.
produce the effect of payment only when they have  Should the creditor authorize to withdraw the
been cashed, or when through the fault of the thing consigned – He lose every preference over
creditor they have been impaired. the thing (co-debtor, guarantors and sureties are
In the meantime, the action derived from the original released)
obligation shall be held in the abeyance. Tender of payment alone cannot extinguish valid
 In case an extraordinary inflation or deflation of debt. However, consignation alone when allowed
the currency stipulated should supervene, the value extinguished obligation.
of the currency at the time of the establishment
of the obligation shall be the basis of payment, Requisites:
unless there is an agreement to the contrary(1250) 1. Existence of valid debt which is due and
demandable
Nota Bene: 2. Tender of payment by the debtor
Section 52. Legal Tender Power. - All notes and coins 3. Refusal without justifiable reason by the creditor
issued by the Bangko Sentral shall be fully guaranteed by to accept it.
the Government of the Republic of the Philippines and shall 4. Previous notice of consignation to persons
be legal tender in the Philippines for all debts, both public interested in the fulfillment of the obligation.
and private: Provided, however, That, unless otherwise (guarantor, mortgagee, solidary debtors, solidary
fixed by the Monetary Board, coins shall be legal tender creditors).
in amounts not exceeding Fifty pesos (P50.00) for 5. Consignation of the thing
denominations of Twenty-five centavos and above, and in 6. Subsequent notice of consignation to in
amounts not exceeding Twenty pesos (P20.00) for interested parties.
denominations of Ten centavos or less. (R.A. 7653)
When tender of payment not required
Hence, Philippine currency notes have no limit to their legal 1. Creditor is absent or unknown or does not
tender power. However, pursuant to BSP Circular No. 537, appear in the place of payment
Series 2006 (Dated: July 18, 2006), coins in denomination of 2. Creditor is incapacitated at the time of payment
1-,5- and 10-piso shall be legal tender in amounts not 3. Creditor refuse to give receipt without just cause
exceeding P1,000.00 while coins in denomination of 1-,5- 4. Two or more person claim the same right to
and 10- and 25 sentimo shall be legal tender in amounts collect
not exceeding P100.00. 5. Title of the obligation has been lost
Special forms of payment Dation in payment vs. Payment by cession

a. Dation in payment / Adjudication or dacion en pago 1. One creditor vs. several creditor
– governed by law on sales 2. Debtor not insolvent vs. debtor insolvent
 Property is alienated to the creditor in 3. Not all property of the debtor vs. all property of
satisfaction of debt in money the debtor
b. Application of payment 4. Creditor become the owner vs. creditor acquire
1. One debtor and one creditor only the right to dispose the thing and apply the
2. Two or more debts proceeds to their credit proportionately.
3. Debt must be of the same kind 5. Act of novation vs. not act of novation
4. The payment for the debt applied must be due
5. Payment must not sufficient to cover all the 2. Loss of determinate thing
debts Kinds of loss
Note: Not really a special form of payment a. Physical loss – perishes
b. Legal loss – goes out of commerce
 Debtor has the 1st choice – must indicate at the c. Civil loss – thing disappears in a such way that its
time of payment existence is unknown.

1. Intervivos – take effect during lifetime of the

Loss of a thing due donor
1. Obligation to give specific thing 2. Mortis cause – effective upon death of the donor
a. Total loss
1. Loss with the fault of the debtor – (Liable)  The delivery of a private document evidencing a
2. Loss without the fault of the debtor - credit, made voluntarily by the creditor to the
Fortuitous event (not liable) debtor, implies the renunciation of the action which
Exception: the former had against the latter.
1. Law If in order to nullify this waiver it should be claimed
a. Delay to be inofficious, the debtor and his heirs may uphold
b. Promised to deliver the same thing to it by proving that the delivery of the document was
2 or more person who do not have made in virtue of payment of the debt. (1271)
the same interest  Whenever the private document in which the debt
c. Lost of generic thing appears is found in the possession of the debtor, it
d. Obligation to deliver a specific thing shall be presumed that the creditor delivered it
arises from crime. (1268) voluntarily, unless the contrary is proved. (1272)
2. Stipulation  The renunciation of the principal debt shall
3. Assumption of risk extinguish the accessory obligations; but the waiver
b. Partial loss – Court shall determine under the of the latter shall leave the former in force. (1273)
circumstances (importance of the partial loss of (accessory follows the principal)
the object) whether partial loss is as to be  It is presumed that the accessory obligation of
equivalent to a complete or total loss. (i.e. pledge has been remitted when the thing pledged,
Broken leg - horse for race or horse to be after its delivery to the creditor, is found in the
slaughtered) possession of the debtor, or of a third person who
2. Obligation to do owns the thing. (1274)
 The debtor in obligations to do shall also be
released when the prestation becomes legally or 4. Merger/confusion – The character of creditor and debtor
physically impossible without the fault of the are merged in the same person. (1275)
obligor. (1266)  Merger which takes place in the person of the
a. Impossibility at the beginning - void principal debtor or creditor benefits the guarantors.
b. Impossibility after the constitution of the (principal obligation is extinguish as well as
obligation accessory obligation) Confusion which takes place in
 When the service has become so difficult as to be the person of any of the latter does not extinguish
manifestly beyond the contemplation of the the obligation. (Only accessory obligation is
parties, the obligor may also be released extinguished) (1276)
therefrom, in whole or in part. (1267)  Confusion does not extinguish a joint obligation
except as regards the share corresponding to the
Kinds of impossibility creditor or debtor in whom the two characters
 Physical impossibility – (Accident/death) concur. (1277)
 Legal impossibility – Ordinance declaring an area
residential zone (i.e. obligation to construct 5. Compensation - When two person, in their own right,
commercial building; Lawyer appointed as judge) are creditors and debtors of each other, (1278)
General rule: When a thing is loss in possession of the Confusion vs. Compensation
debtor it is presumed that it was loss due to his fault. (1265) 1. Only one person who is a debtor and creditor of
Exception: himself vs. two person involved, each of whom is a
1. Earthquake debtor and a creditor of the other
2. Flood 2. Only one obligation vs. 2 obligation
3. Storm 3. Impossiblity of payment vs. indirect payment
4. Other natural calamity
Kinds of compensation
 The obligation having been extinguished by the 1. Effect or extent
loss of the thing, the creditor shall have all the a. Total – Both obligation are of the same amount
rights of action which the debtor may have against b. Partial – Two obligation are of different amount
third persons by reason of the loss. (1269) 2. Cause or origin
a. Legal – Takes place by operation of law
3. Condonation/remission of debt - Condonation or b. Voluntary – by agreement
remission is essentially gratuitous, and requires the c. Judicial – takes place by order from a court in a
acceptance by the obligor. It may be made expressly litigation.
or impliedly. One and the other kind shall be subject to d. Facultative – can be set up only by one of the
the rules which govern inofficious donations. Express parties.
condonation shall, furthermore, comply with the forms of
donation (1270) Art. 1279. In order that compensation may be proper, it is
necessary: (Legal compensation)
Kinds of remission 1.) That each one of the obligors be bound principally, and
a. Extent that he be at the same time a principal creditor of the
1. Complete – cover the entire obligation other;
2. Partial – Not cover the entire obligation 2.) That both debts consist in a sum of money, or if the
b. Form things due are consumable, they be of the same kind,
1. Express – verbal or in writing and also of the same quality if the latter has been
2. Implied – Inferred from conduct stated;
Voluntary delivery of private document 3.) That the two debts be due;
evidencing the credit by the creditor to the 4.) That they be liquidated and demandable;
debtor (Art 1271) 5.) That over neither of them there be any retention or
c. Date of effectivity controversy, commenced by third persons and

communicated in due time to the debtor. (1196) assumes the latter’s obligation with the
consent of the creditor. (Only the
 The parties may agree upon the compensation of debts consent of the creditor and 3 rd person is
which are not yet due.(1282) made)
 If one of the parties to a suit over an obligation has a 1.2. Delegacion – Creditor accepts a third
claim for damages against the other, the former may set person to take the place of the debtor at
it off by proving his right to said damages and the the instance of the latter. It requires that
amount thereof. (1283) the old debtor be release from the old
 When one or both debts are rescissible or voidable, they obligation. (all parties, old debtor, new
may be compensated against each other before they are debtor and the creditor must agree)
judicially rescinded or avoided. (1284) 2. Subrogation – Third person is subrogated in
 The debtor who has consented to the assignment of the rights of the creditor.
rights made by a creditor in favor of a third person, c. Mixed – Combination of real and personal
cannot set up against the assignee the compensation novation.
which would pertain to him against the assignor, unless
the assignor was notified by the debtor at the time he  Novation is never presumed.
gave his consent, that he reserved his right to the  Test: Is the old and new obligation having an
compensation. (1285) independent existence. Positive - compatible (No
 If the creditor communicated the cession to him but the novation); Negative – incompatible - Novation.
debtor did not consent thereto, the latter may set up the  Conventional subrogation be clearly establish (1300)
compensation of debts previous to the cession, but not and it requires the consent of the original parties and
of subsequent ones. of the third person. (1301)
 If the assignment is made without the knowledge of the  Legal subrogation is not presumed except in cases
debtor, he may set up the compensation of all credits provided for by law. (1300)
prior to the same and also later ones until he had  When the principal obligation is extinguished in
knowledge of the assignment. (1198a) consequence of a novation, accessory obligations
 Compensation takes place by operation of law, even may subsist only insofar as they may benefit third
though the debts may be payable at different places, but persons who did not give their consent. (1296)
there shall be an indemnity for expenses of exchange or  If the new obligation is void, the original one shall
transportation to the place of payment. (1286) subsist, unless the parties intended that the former
 If a person should have against him several debts which relation should be extinguished in any event. (1297)
are susceptible of compensation, the rules on the  The novation is void if the original obligation was
application of payments shall apply to the order of the void, except when annulment may be claimed only
compensation. (1289) by the debtor or when ratification validates acts
which are voidable. (1298)
Art. 1287. Compensation shall not be proper when one of  If the original obligation was subject to a suspensive
the debts arises from a depositum or from the obligations of or resolutory condition, the new obligation shall be
a depositary or of a bailee in commodatum. under the same condition, unless it is otherwise
Neither can compensation be set up against a creditor who stipulated. (1299)
has a claim for support due by gratuitous title, without  Subrogation transfers to the persons subrogated the
prejudice to the provisions of paragraph 2 of article 301. credit with all the rights thereto appertaining, either
(1200a) against the debtor or against third person, be they
Art. 1288. Neither shall there be compensation if one of the guarantors or possessors of mortgages, subject to
debts consists in civil liability arising from a penal offense. stipulation in a conventional subrogation. (1303)
(n)  A creditor, to whom partial payment has been made,
may exercise his right for the remainder, and he
6. Novation – Obligations may be modified by: (1) shall be preferred to the person who has been
Changing their object or principal conditions; (2) subrogated in his place in virtue of the partial
Substituting the person of the debtor; (3) Subrogating a payment of the same credit. (1304)
third person in the rights of the creditor. (1291)
Kinds of novation
1. Origin
a. Legal – operation of law
b. Conventional – agreement of the parties
2. How it s constituted
a. Express – Declared in unequivocal term
b. Implied – Old and new obligation are essentially
incompatible with each other
3. Extent or effect
a. Total or extinctive – Old obligation is completely
extinguished
b. Partial or modificatory – Old obligation is merely
modified
4. Subject
a. Real or objective – Object or principal condition
are changed
b. Personal or subjective – person of the debtor is
substituted/ or when a third person is
subrogated in the right of the creditor.
1. Substitution – Person of the debtor is
substituted
1.1. Expromision – 3rd person on his own
initiative and without the knowledge or
against the will of the original debtor

Donation of immovable property must be in a public

instrument, Sale of land or interest therein, the
Real novation authority of the agent must be in writing)
Old Creditor Old Debtor 2. Cause or equivalence of value of prestation
a. Onerous – equivalent value of prestation
Object Expromision b. Gratuitous or lucrative – no equivalent prestation
1. Without the c. Remunerative - the prestation is the benefit or
S knowledge service that had been rendered previously.
u 3. Importance or dependence of one upon another:
2. Against the will a. Principal – can stand alone
b of the debtor b. Accessory – depend upon the existence of another
s Note: Insolvency contract
t c. Preparatory – not considered the contract as an end
of the new by itself but as a mean for entering in future
i debtor – transaction or contract.
t 4.
Obligation of the Parties obligated
u a. Unilateral – only one party has obligation
old debtor is not b. Bilateral – both party has obligation
t revived (1294) 5. Name or designation
i a. Nominate – has a name given by law
o b. Innominate – no name given by law
1. Do ut des (I give that you may give) no longer
nDelegacion innominate. This is now called Barter
All parties agree 2. Do ut facias (I give that you may do)
3. Facio ut des (I do that you may give)
Note: Insolvency 4. Facio ut facias (I do that you may do)
New Debtor of the new 6. Risk of fulfillment
debtor – a. Commutative – real fulfillment, equivalent value are
Subrogation given
Obligation of b. Aleatory – fulfillment depend upon chance.
Conventional - Express the old 7. Time of performance or fulfillment
agreement (debtor, debtor is not a. Executed – prestation are already complied with
original creditor and 3rd b. Executory – prestations are to be complied with in
revived the future
person (new creditor) Exception: 8. According to number of person who participated in the
Legal – by operation of Insolvency was drafting of the contract
law a. Ordinary -
already existing b. Contract of adhesion – Where the terms and
and of public condition of the contract is already drafted by one
knowledge party. The other party only signifies his consent by
signing the contract.
Insolency is
known to the Stages of contract
debtor, when he 1. Preparation (Negotiation, conception or Generacion)
– steps taken by the parties leading to the perfection
delegated his of the contract.
debt. (1295) 2. Perfection (or birth) – Come to a definite agreement
or meeting of the mind upon the object and the
cause.
Art. 1302. It is presumed that there is legal 3. Consummation (death or termination) – parties have
subrogation: performed their respective obiigation
(1) When a creditor pays another creditor who is
preferred, even without the debtor's knowledge; Characteristics of contract
(2) When a third person, not interested in the obligation, 1. Freedom of contract - contracting parties may establish
pays with the express or tacit approval of the debtor; such stipulations, clauses, terms and conditions as they
(3) When, even without the knowledge of the debtor, a may deem convenient (1306)
person interested in the fulfillment of the obligation Limitation:
pays, without prejudice to the effects of confusion as to a. Law
the latter's share. (1210a) b. Moral
c. Good custom
CONTRACTS d. Public order
e. Public policy
Contract - meeting of minds between two persons whereby 2. Mutuality of contract - contract must bind both
one binds himself, with respect to the other, to give contracting parties; its validity or compliance cannot be
something or to render some service. left to the will of one of them (1308). The principle is
based on the essential equality of the parties.
Kinds of contract  The determination of the performance may be left to
1. Formation or perfection a third person, whose decision shall not be binding
a. Consensual – perfected by mere consent (1315) until it has been made known to both contracting
b. Real – perfected by delivery (i.e. depositum, pledge, parties. (1309)
commodatum) (1316)  The determination shall not be obligatory if it is
c. Formal or solemn (i.e. Interest must be in writing evidently inequitable. In such case, the courts shall
(1956); Contribution of immovable property must be decide what is equitable under the circumstances
in a public instrument, donation of personal property (1310)
where the value exceed P5,000 must be in writing;

3. Relativity of contract - Contracts take effect only CONSENT (1319)

between the parties, their assigns and heirs (1311)
Exception: Art. 1319. Consent is manifested by the meeting of the offer
a. Where the obligations arising from contract are not and the acceptance upon the thing and the cause which are
transmissible by nature (personal qualification is to constitute the contract. The offer must be certain and the
involved), by stipulation or by provision of law acceptance absolute. A qualified acceptance constitutes a
(Agency, partnership, commodatum). counter-offer.
b. Stipulation in favor of third person (stipulation pour Acceptance made by letter or telegram does not bind the
autrui) (1311 par 2) offerer except from the time it came to his knowledge. The
If a contract should contain some stipulation in favor contract, in such a case, is presumed to have been entered
of a third person, he may demand its fulfillment into in the place where the offer was made.
provided he communicated his acceptance to the 1. Theory of cognition – The acceptance is considered to
obligor before its revocation. A mere incidental effectively bind the offeror only from the time it came to
benefit or interest of a person is not sufficient. The his knowledge. (Civil code)
contracting parties must have clearly and 2. Theory of manifestation – The contract is perfected at
deliberately conferred a favor upon a third person the moment when the acceptance is declared or made by
c. Contract creating real right (1312) the offeree. (Code of commerce)
d. Contact entered into to defraud the creditors. (1313)
e. Contract which have been violated thru the Art. 1320. An acceptance may be express or implied.
inducement of 3rd person (1314) Art. 1321. The person making the offer may fix the time,
place, and manner of acceptance, all of which must be
Elements of a Contract complied with.
1. Essential elements Art. 1322. An offer made through an agent is accepted from
a. Common (Consent, Object, Cause) the time acceptance is communicated to him. (n)
b. Special Art. 1323. An offer becomes ineffective upon the death, civil
1.) Form – formalities in solemn contract, deliver in interdiction, insanity, or insolvency of either party before
real contract, registration to bind third person acceptance is conveyed.
(Real estate mortgage, chattel mortgage) Art. 1325. Unless it appears otherwise, business
advertisements of things for sale are not definite offers, but
Solemn contract mere invitations to make an offer.
(Consent, Object, Cause + Execution of Art. 1326. Advertisements for bidders are simply invitations
formalities) to make proposals, and the advertiser is not bound to accept
a. Stipulation of interest = writing. the highest or lowest bidder, unless the contrary appears.
b. Contribution of immovable property in Art. 1327. The following cannot give consent to a contract:
partnership = inventory of such property + (7) Unemancipated minors;
public instrument (8) Insane or demented persons, and deaf-mutes who do
c. Donation of personal property where the not know how to write. (1263a)
value exceed P5,000 = in writing Art. 1328. Contracts entered into during a lucid interval are
d. Donation as well as acceptance of real valid. Contracts agreed to in a state of drunkenness or
property = Public instrument. during a hypnotic spell are voidable. (n)
e. Will = writing + formalities prescribed by
law.
f. Agent authority in case of sale of immovable
property in behalf of the principal = writing
Real Contract
(Consent, Object, Cause + Delivery)
a. Deposit
b. Pledge
c. Commodatum
2.) Subject matter
Real estate Real property No delivery
mortgage
Chattel mortgage Personal No delivery
property
Pledge Personal Delivery
property
Antichresis Real property Delivery
3.) Consideration or cause – Sale (price);
Commodatum (liberality)
2. Natural elements – presumed to exist in certain
contracts
a. Warranty against eviction
b. Warranty against hidden defect
3. Accidental elements (by stipulation) – Exist only when
they are expressly provide by the parties. (i.e.
Conditions, period, interest, penalty, place of payment)
Art. 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.

should refer to the substance of the thing which is

Offer becomes ineffective upon
Business the object of the contract, or to those conditions
Death
advertisemen which have principally moved one or both parties to
Civil interdiction enter into the contract.
t of thig for Mistake as to the identity or qualifications of one of
Insanity
sale in not the parties will vitiate consent only when such
Insolvency
definite offer, identity or qualifications have been the principal
Of either party before acceptance is conveyed cause of the contract.
unless appear A simple mistake of account shall give rise to its
otherwise. (! correction.(1331)
325) Offer certain or definite (1)  When one of the parties is unable to read, or if the
Offere may fix the contract is in a language not understood by him, and
Advertsemen mistake or fraud is alleged, the person enforcing the
time, place and he
t for bidders contract must show that the terms thereof have
By telegram
mannner of been fully explained to the former. (1332)
are simply
Offerer (Seller) acceptance
invitation to (offererallOfferee (Buyer)  There is no mistake if the party alleging it knew the
doubt, contingency or risk affecting the object of the
must be complied
knowledge)
make Agent with (1321)
contract. (1333)
proposals. Qualified  Mutual error as to the legal effect of an agreement
when the real purpose of the parties is frustrated,
Advertiser is acceptance
may vitiate consent. (1334)
not bound to Acceptance (express/implied)
Constitute
counter 2. Violence - when in order to wrest consent, serious or
accept. Absolute(2) irresistible force is employed. (1335)
(1326) offer
3. Intimidation - when one of the contracting parties is
compelled by a reasonable and well-grounded fear of an
Incapacity Vices of imminent and grave evil upon his person or property, or
(1327) consent upon the person or property of his spouse, descendants
Unemancipated Error or or ascendants, to give his consent. (1335)
To determine the degree of intimidation, the age, sex
minor mistake and condition of the person shall be borne in mind.
Insane or (1331) A threat to enforce one's claim through competent
demented Violence or authority, if the claim is just or legal, does not vitiate
consent.
persons, and force (1335) 4. Undue influence - when a person takes improper
Deaf-mutes Intimidation advantage of his power over the will of another,
who do not or threat or depriving the latter of a reasonable freedom of choice.
The following circumstances shall be considered: the
know how to duress (1335) confidential, family, spiritual and other relations between
write . Undue the parties, or the fact that the person alleged to have
Note: influence been unduly influenced was suffering from mental
weakness, or was ignorant or in financial distress.
1. ) Conract (1337) (1337)
entered Fraud or 5. Fraud - when, through insidious words or machinations
during deceit (1338) of one of the contracting parties, the other is induced to
enter into a contract which, without them, he would not
lucid have agreed to.
interval  Failure to disclose facts, when there is a duty to
are valid. reveal them, as when the parties are bound by
confidential relations, constitutes fraud. (1339)
2.) State of  The usual exaggerations in trade, when the other
drunkenes party had an opportunity to know the facts, are not
s or during in themselves fraudulent. (1340)
 A mere expression of an opinion does not signify
hypnotic fraud, unless made by an expert and the other party
spell has relied on the former's special knowledge. (1341)
Voidable  Misrepresentation by a third person does not vitiate
consent, unless such misrepresentation has created
OPTION PERIOD (1324) substantial mistake and the same is mutual. (1342)
Art. 1324. When the offerer has allowed the offeree a certain  Misrepresentation made in good faith is not
period to accept, the offer may be withdrawn at any time fraudulent but may constitute error. (1343)
before acceptance by communicating such withdrawal,  In order that fraud may make a contract voidable, it
except when the option is founded upon a consideration, as should be serious and should not have been
something paid or promised. (n) employed by both contracting parties. (1344)
Incidental fraud only obliges the person employing it to
Option money – Consideration for the period (option pay damages.
contract is created) Employed by Employed by 3rd
Downpayment (Earnest money) one of the person
Contract is perfected contracting
party
Violence Voidable Voidable
Vices of Consent Intimidation Voidable Voidable
1. Error or mistake
Fraud without Voidable Valid, unless it
 In order that mistake may invalidate consent, it
connivance/ result to substantial

knowledge by the mistake and the the law requires that a contract be in some form in order
party benefited by same is mutual. It that it may be valid or enforceable, or that a contract be
the fraud can be annulled on proved in a certain way, that requirement is absolute
the ground of and indispensable. In such cases, the right of the parties
mistake stated in the following article cannot be exercised.
Fraud with Voidable Voidable. As if (1356)
connivance/ exercised by the  If the law requires a document or other special form, as
knowledge by the party benefited by in the acts and contracts enumerated in the following
party benefited by the fraud. article, the contracting parties may compel each other to
the fraud observe that form, once the contract has been perfected.
Undue influence Voidable Valid This right may be exercised simultaneously with the
action upon the contract. (1357)
Absolute Relative simulated  The following must appear in a public document: (1358)
simulated or (1) Acts and contracts which have for their object the
fictitious contract creation, transmission, modification or
The parties do not The parties conceal their true extinguishment of real rights over immovable
intend to be bound agreement. (1345) property; sales of real property or of an interest
at all. (1345) therein a governed by articles 1403, No. 2, and
VOID When it does not prejudice a third 1405;
(1346) person and is not intended for any (2) The cession, repudiation or renunciation of
purpose contrary to law, morals, hereditary rights or of those of the conjugal
good customs, public order or partnership of gains;
public policy binds the parties to (3) The power to administer property, or any other
their real agreement. (1346) power which has for its object an act appearing or
which should appear in a public document, or should
prejudice a third person;
OBJECT OF CONTRACTS (4) The cession of actions or rights proceeding from an
 All things which are not outside the commerce of men, act appearing in a public document.
including future things, may be the object of a contract. All other contracts where the amount involved
All rights which are not intransmissible may also be the exceeds five hundred pesos must appear in
object of contracts. writing, even a private one. But sales of goods, chattels
 No contract may be entered into upon future or things in action are governed by articles, 1403, No. 2
inheritance except in cases expressly authorized by and 1405. (1280a)
law.
 All services which are not contrary to law, morals, good REFORMATION OF INSTRUMENTS
customs, public order or public policy may likewise be Art. 1359. When, there having been a meeting of the
the object of a contract. (1347) minds of the parties to a contract, their true intention
 Impossible things or services cannot be the object of is not expressed in the instrument purporting to embody
contracts. (1348) the agreement, by reason of mistake, fraud, inequitable
 The object of every contract must be determinate as to conduct or accident, one of the parties may ask for the
its kind. The fact that the quantity is not determinate reformation of the instrument to the end that such true
shall not be an obstacle to the existence of the contract, intention may be expressed.
provided it is possible to determine the same, without If mistake, fraud, inequitable conduct, or accident has
the need of a new contract between the parties. (1349) prevented a meeting of the minds of the parties, the proper
remedy is not reformation of the instrument but annulment
CAUSE OF CONTRACTS of the contract.
 To be a valid cause, it must be lawful, true and real,
definite or determinate as to its kind and possible. Art. 1366. There shall be no reformation in the following
 In onerous contracts the cause is understood to be, for cases:
each contracting party, the prestation or promise of a (1) Simple donations inter vivos wherein no condition is
thing or service by the other; in remuneratory ones, the imposed;
service or benefit which is remunerated; and in contracts (2) Wills;
of pure beneficence, the mere liberality of the (3) When the real agreement is void.
benefactor. (1350)
 The particular motives of the parties in entering into a  Reformation can be avail only of the innocent party.
contract are different from the cause thereof. (1351)  Reformation may be ordered at the instance of either
 Contracts without cause, or with unlawful cause, produce party or his successors in interest, if the mistake was
no effect whatever. The cause is unlawful if it is contrary mutual; otherwise, upon petition of the injured party, or
to law, morals, good customs, public order or public his heirs and assigns. (1368)
policy. (1352)  When reformation proper
 The statement of a false cause in contracts shall render a. Mutual mistake of the parties causes the failure of
them void, if it should not be proved that they were the instrument to disclose their real agreement
founded upon another cause which is true and lawful. (1361)
(1353) b. One party was mistaken and the other acted
 Although the cause is not stated in the contract, it is fraudulently or inequitably in such a way that the
presumed that it exists and is lawful, unless the debtor instrument does not show their true intention.
proves the contrary. (1354) (1362)
 Except in cases specified by law, lesion or inadequacy of c. When one party was mistaken and the other
cause shall not invalidate a contract, unless there has knew or believed that the instrument did not state
been fraud, mistake or undue influence. (1355) their real agreement, but concealed that fact from
the former. (1363)
FORM OF CONTRACTS d. When through the ignorance, lack of skill,
 Contracts shall be obligatory, in whatever form they may negligence or bad faith on the part of the
have been entered into, provided all the essential person drafting the instrument or of the clerk
requisites for their validity are present. However, when or typist, the instrument does not express the true

intention of the parties. (1364) latter cannot in any other manner collect the claims
e. If two parties agree upon the mortgage or pledge of due them;
real or personal property, but the instrument states  The action to claim rescission must be
that the property is sold absolutely or with a right of commenced within four years (1389)
repurchase. (1365)  Alienation which are presumed to have been
 When one of the parties has brought an action to entered into in fraud of creditors
enforce the instrument, he cannot subsequently ask a. Gratuitous title - donor did not reserve
for its reformation. (1367) sufficient property to pay all debts contracted
 The procedure for the reformation of instrument shall before the donation.
be governed by rules of court. (1369) b. Onerous title - when made by persons
against whom some judgment has been
INTERPRETATION OF CONTRACTS issued. The decision or attachment need not
 If the terms of a contract are clear and leave no doubt refer to the property alienated, and need not
upon the intention of the contracting parties, the literal have been obtained by the party seeking the
meaning of its stipulations shall control. (1370) rescission.
If the words appear to be contrary to the evident Note: The design to defraud creditors may be
intention of the parties, the latter shall prevail over the proved in any other manner recognized by the
former. law of evidence. (1387)
 In order to judge the intention of the contracting parties,  Whoever acquires in bad faith the things
their contemporaneous and subsequent acts shall be alienated in fraud of creditors, shall indemnify
principally considered. (1371) the latter for damages suffered by them on
 However general the terms of a contract may be, they account of the alienation, whenever, due to any
shall not be understood to comprehend things that are cause, it should be impossible for him to return
distinct and cases that are different from those upon them.
which the parties intended to agree. (1372) If there are two or more alienations, the first
 If some stipulation of any contract should admit of acquirer shall be liable first, and so on
several meanings, it shall be understood as bearing that successively. (1388)
import which is most adequate to render it effectual. d. Those which refer to things under litigation if they
(1373) have been entered into by the defendant without the
 The various stipulations of a contract shall be interpreted knowledge and approval of the litigants or of
together, attributing to the doubtful ones that sense competent judicial authority;
which may result from all of them taken jointly. (1374)  The action to claim rescission must be
 Words which may have different significations shall be commenced within four years (1389)
understood in that which is most in keeping with the e. All other contracts specially declared by law to be
nature and object of the contract. (1375) subject to rescission.
 The usage or custom of the place shall be borne in mind  The action to claim rescission must be commenced
in the interpretation of the ambiguities of a contract, and within four years (1389)
shall fill the omission of stipulations which are ordinarily
established. (1376) Limitation on the exercise of rescission
 The interpretation of obscure words or stipulations 1. Contracts can be rescinded only in cases provided by law
in a contract shall not favor the party who caused 2. Being a subsidiary action, it can be exercised only when
the obscurity. (1377) there is no other legal means to obtain reparation for the
 When it is absolutely impossible to settle doubts by the same. (1383)
rules established in the preceding articles, and the 3. Can be exercised only to the extent necessary to cover
doubts refer to incidental circumstances of a gratuitous the damages caused. (1384)
contract, the least transmission of rights and interests 4. Rescission creates the obligation to return the things
shall prevail. If the contract is onerous, the doubt shall which were the object of the contract, together with their
be settled in favor of the greatest reciprocity of interests. fruits, and the price with its interest (mutual restitution).
If the doubts are cast upon the principal object of Hence, it can be demanded only if the one claiming
the contract in such a way that it cannot be known rescission can return whatever he may be obliged to
what may have been the intention or will of the restore.
parties, the contract shall be null and void. (1378) 5. It cannot be availed when the things which are the
 The principles of interpretation stated in Rule 123 of object of the contract are legally in the possession of
the Rules of Court shall likewise be observed in the third persons who did not act in bad faith. In this case,
construction of contracts. (1379) indemnity for damages may be demanded from the
person causing the loss (1385)
DEFECTIVE CONTRACTS 6. The action for rescission has not been prescribed.
1. Rescissible contract – Rescissible contract is valid until
rescinded. It is allowed by reason of injury or damage 2. Voidable Contract – The consent is defective by reason
to one parties or to a third person. of incapacity of one party or vices of consent. It is valid
The following contracts are rescissible: (1381) until annulled.
a. Those which are entered into by guardians whenever The following contracts are voidable or annullable, even
the wards whom they represent suffer lesion by though there may have been no damage to the
more than one-fourth of the value of the things contracting parties: (1390)
which are the object thereof; a. Those where one of the parties is incapable of
 Not applicable when approved by court (1386) giving consent to a contract;
 Prescriptive period: Four years from the b. Those where the consent is vitiated by mistake,
termination of incapacity violence, intimidation, undue influence or fraud.
b. Those agreed upon in representation of absentees, if
the latter suffer the lesion stated in the preceding These contracts are binding, unless they are annulled by
number; a proper action in court. They are susceptible of
 Not applicable when approved by court (1386) ratification.
 Prescriptive period: Four years from the date the Grounds Prescriptive period
domicile of the absentee is known. Intimidation, violence or 4 years from the time the
c. Those undertaken in fraud of creditors when the undue influence defect of the consent

ceases subscribed by the party charged, or by his agent;

Mistake or fraud 4 years from the time of evidence, therefore, of the agreement cannot be
the discovery* of the received without the writing, or a secondary
same evidence of its contents:
minors or other 4 years from the time the (a) An agreement that by its terms is not to be
incapacitated persons guardianship ceases performed within a year from the making
*Note: If there is registration of the property, count from the thereof;
date of registration. (b) A special promise to answer for the debt,
default, or miscarriage of another;
 Ratification extinguishes the action to annul avoidable (c) An agreement made in consideration of
contract. (1392) marriage, other than a mutual promise to
 Express ratification – Done in writing or orally marry;
 Tacit ratification - with knowledge of the reason which (d) An agreement for the sale of goods, chattels
renders the contract voidable and such reason having or things in action (personal property), at
ceased, the person who has a right to invoke it should a price not less than five hundred pesos,
execute an act which necessarily implies an intention to unless the buyer accept and receive part of
waive his right. (1393) such goods and chattels, or the evidences, or
 Ratification may be effected by the guardian of the some of them, of such things in action or pay at
incapacitated person. (1394) the time some part of the purchase money; but
 Ratification does not require the conformity of the when a sale is made by auction and entry is
contracting party who has no right to bring the action for made by the auctioneer in his sales book, at the
annulment. (1395) time of the sale, of the amount and kind of
 Ratification cleanses the contract from all its defects property sold, terms of sale, price, names of the
from the moment it was constituted. (1396). purchasers and person on whose account the
 The action for the annulment of contracts may be sale is made, it is a sufficient memorandum;
instituted by all who are thereby obliged principally or (e) An agreement of the leasing for a longer
subsidiarily. However, persons who are capable cannot period than one year, or for the sale of (real
allege the incapacity of those with whom they property) or of an interest therein;
contracted; nor can those who exerted intimidation, (f) A representation as to the credit of a third
violence, or undue influence, or employed fraud, or person.
caused mistake base their action upon these flaws of the (3) Those where both parties are incapable of giving
contract. (1397) consent to a contract.
 An obligation having been annulled, the contracting
parties shall restore to each other the things which have  Statutes of fraud is no longer applicable when:
been the subject matter of the contract, with their fruits, a. There is total or partial performance (Partially or
and the price with its interest, except in cases provided totally executed)
by law. In obligations to render service, the value b. Failure to object to the presentation of oral
thereof shall be the basis for damages. (1398) evidence to prove the contract.
 When the defect of the contract consists in the incapacity  Cannot be assailed by third person (1408)
of one of the parties, the incapacitated person is not  Effect of ratification by parents or guardian (1407)
obliged to make any restitution except insofar as he has a. Only one party – Voidable contract
been benefited by the thing or price received by him. b. Both parties- valid
(1399)
 Whenever the person obliged by the decree of 4. Void contract – contract that never exist in the eyes of
annulment to return the thing can not do so because it law. It has no effect at all and cannot be ratified.
has been lost through his fault, he shall return the fruits
received and the value of the thing at the time of the The following contracts are inexistent and void from the
loss, with interest from the same date. (1400) beginning: (1409)
 The action for annulment of contracts shall be (1) Those whose cause, object or purpose is contrary to
extinguished when the thing which is the object thereof law, morals, good customs, public order or public
is lost through the fraud or fault of the person who has a policy;
right to institute the proceedings. (2) Those which are absolutely simulated or fictitious;
If the right of action is based upon the incapacity of any (3) Those whose cause or object did not exist at the
one of the contracting parties, the loss of the thing shall time of the transaction;
not be an obstacle to the success of the action, unless (4) Those whose object is outside the commerce of men;
said loss took place through the fraud or fault of the (5) Those which contemplate an impossible service;
plaintiff (1401) (6) Those where the intention of the parties relative to
 As long as one of the contracting parties does not the principal object of the contract cannot be
restore what in virtue of the decree of annulment he is ascertained;
bound to return, the other cannot be compelled to (7) Those expressly prohibited or declared void by law.
comply with what is incumbent upon him.(1402) These contracts cannot be ratified. Neither can the
right to set up the defense of illegality be waived.
3. Unenforceable contract – Contract that cannot be
enforce unless ratified. Rules in determining contracts void
The following contracts are unenforceable, unless they 1. Absence of any of essential requites of contract
are ratified: (1403) (Consent, Object or Cause)
(1) Those entered into in the name of another person by 2. Contract that are prohibited by law. (i.e Sale
one who has been given no authority or legal between husband and wife, donation between
representation, or who has acted beyond his husband and wife)
powers;  The action or defense for the declaration of the
(2) Those that do not comply with the Statute of inexistence of a contract does not prescribe. (1410)
Frauds as set forth in this number. In the following  Interest paid in excess of the interest allowed by the
cases an agreement hereafter made shall be usury laws may be recovered by the debtor, with
unenforceable by action, unless the same, or some interest thereon from the date of the payment.
note or memorandum, thereof, be in writing, and (1413)

 Where one of the parties to an illegal contract is

incapable of giving consent, the courts may, if the
interest of justice so demands allows recovery of
money or property delivered by the incapacitated
person. (1415)
 When the agreement is not illegal per se but is
merely prohibited, and the prohibition by the law is
designated for the protection of the plaintiff, he may,
if public policy is thereby enhanced, recover what he
has paid or delivered. (1416)
 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.
(1417)
 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. (1418)
 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. (1419)
 In case of a divisible contract, if the illegal terms can
be separated from the legal ones, the latter may be
enforced. (1420)
 The defense of illegality of contract is not available to
third persons whose interests are not directly
affected. (1421)
 A contract which is the direct result of a previous
illegal contract is also void and inexistent. (1422)

Business Law Atty. Ong/Lopez BL.1301-Obligation and Contracts OCT 2012

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Business Law Atty. Ong/Lopez BL.1301-Obligation and Contracts OCT 2012

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Since 1977

BUSINESS LAW ATTY. ONG/LOPEZ

OBLIGATION failed the defendant voluntarily performs the obligation,

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2. Personal obligation time and place. (1173) It is also demandable in

Effects of legal delay:

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 Resolutory – extinguish the obligation  Condition for purpose of extinguishing obligation

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 Divisibility or indivisibility is determined by the Extinguishment of Obligation

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4. Must not be so material that intention of parties

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Special forms of payment Dation in payment vs. Payment by cession

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1. Intervivos – take effect during lifetime of the

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Donation of immovable property must be in a public

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3. Relativity of contract - Contracts take effect only CONSENT (1319)

Art. 1318. There is no contract unless the following

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should refer to the substance of the thing which is

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ceases subscribed by the party charged, or by his agent;

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 Where one of the parties to an illegal contract is

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