Outline – Reviewer in The Law

on Obligations and Contracts

Edited and Compiled by: Atty. Gerard M. Castillo

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CAVEAT
This outline - reviewer is not purely the result of the original creation of
the author/editor but only a compilation of the works of several authors in
which the editor has provided additional inputs for easier understanding
of the readers.

The main part of this work is from the expanded outline of Atty. Karichi
Santos. The editor has added some important annotations as well as
other related items from sources such as the Textbooks of Hector De Leon
and Justice Edgardo Paras and some doctrines laid down in Supreme
Court’s decisions on this field of law.

The editor hopes that through this outline-reviewer, the readers,

especially the students of Business Law, would have a more
comprehensive understanding of the subject in an easier manner.

This work is purely for academic purposes only. This is not for sale.

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OBLIGATIONS AND CONTRACTS

Title I. OBLIGATIONS
Chapter I. General Provisions

CONCEPT OF OBLIGATIONS

Definition: Art 1156 An obligation is a juridical necessity to give, to do or not to do.

More accurate definition:

An obligation constructs a juridical relation whereby a person (who may either be a creditor or an obligee) may
demand from another (who may either be a debtor or obligor) the performance or observance of a determinate
conduct (which may either be an act of giving, doing, or not doing).1

Elements / Essential Requisites of Obligation

1. Active subject – the person who is entitled to demand the fulfillment of the obligation.2
 obligee/creditor
2. Passive subject – the person who is bound to the fulfillment of the obligation.3
 obligor/debtor
*Active and Passive subjects are also called the Personal Elements of an obligation.

3. Prestation or Object – this is the subject matter of the obligation. It is the particular conduct required to be
observed or fulfilled by the debtor.

KINDS OF PRESTATION
a. TO GIVE – consists in the delivery of a movable or an immovable thing, in order to create a real right or
for the use of the recipient or for its simple possession or in order to return to its owner
b. TO DO – all kinds of work or services, whether mental or physical
c. NOT TO DO – consists in abstaining from some act, includes “not to give,” both being negative obligations

REQUISITES OF PRESTATION
a. Physically and juridically possible
b. Determinate or at least determinable according to pre-established elements or criteria
c. Possible equivalent in money
 Pecuniary interest need not be for one of the parties, it maybe for the benefit of 3rd person/s
distinct from the parties to the contract
 Prestation need not be of economic character to have pecuniary value, if it does not have value
the law attributes to it economic value e.g. moral and nominal damages

4. Efficient cause or juridical tie or vinculum juris – relation between obligor and oblige which is established:
- By law (e.g. relation of husband and wife giving rise to the obligation to support)
- By bilateral acts (e.g. contracts giving rise to the obligations stipulated therein)
- By unilateral acts (e.g. crimes and quasi-delicts)

Additional Element of Obligation:

Form in which the obligation is manifested – may or may not be considered essential

                                                            
1
  J.B.L. Reyes, Lawyer’s Journal, 31 January 1951, p. 47. 
2
 The Law on Obligations and Contracts; Hector De Leon. 2003 Ed. p. 18 
3
 De Leon, p. 17 
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Kinds of Obligation According to Subject Matter4

1. Real Obligation – the obligation to give (subject matter is a thing)

2. Personal Obligation – the obligation to do or not to do
a. Positive personal obligation – obligation to do or to render service
b. Negative personal obligation – obligation not to do (naturally includes obligations not to give)

Kinds of Obligation From the Viewpoint of the Persons Obliged5

1. Unilateral – where only one of the parties is bound

Example: A owes B Php 1 million. A must pay B.
2. Bilateral – both parties are bound
Example: In a contract of sale, the buyer is obliged to pay while the seller is obliged to deliver.

SOURCES OF OBLIGATIONS

A. LAW
Art 1158 Obligations derived from law are not presumed. Only those expressly determined in this Code or in
special laws are demandable, and shall be regulated by the precepts of the law which establishes them; and as to
what has not been foreseen, by the provisions of this book.

- Imposed by the law itself (no need to have agreement of the parties)
- Not presumed, only those expressly provided are enforceable

B. CONTRACTS
Art 1159 Obligations arising from contracts have the force of law between the contracting parties and should be
complied with in good faith.

Legal Definition of Contract:

Art 1305 A contract is a meeting of minds between two persons whereby one binds himself, with respect to the
other, to give something or to render some service.

In order to be a source of obligation it presupposes that contract is valid and enforceable.

A contract is valid when:
1. It has all the essential elements of a contract (Consent, Object Consideration)
In some instances form and delivery are also necessary to have a perfected contract.
2. Not contrary to law, public policy and morals

How about pre-contractual obligations?

- In order to recover damages in pre contractual obligations (contract is not yet perfected), the following must be
present:
o Offers is clear and definite, leading offeree in good faith to incur expenses in expectation of entering into a
contract
o Withdrawal of the offer must be without any illegitimate cause.
o In cases where the offeror is:
 Guilty of fault or negligence, liability would be based on Art 2176 (Quasi – Delicts)
 without fault or negligence, but withdrawal was in abuse of right, liability would be based on Art 19
(Human Relations)
                                                            
4
 De Leon, p. 19‐20 
5
 Civil Code of The Philippines Annotated, by Edgardo L. Paras; p.79 
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example: breach of promise to marry

C. QUASI-CONTRACTS or DELICTS
Art 1160 Obligations derived from quasi-contracts shall be subject to the provisions of Chapter 1, Title XVII.

Definition:
A quasi-contract is that juridical relation resulting from a lawful, voluntary and unilateral act, and which has for its
purpose the payment of indemnity to the end that no one shall be unjustly enriched or benefited at the expense of
another.6

Two Principal Kinds of Quasi-contracts

1. Negotiorum gestio (unauthorized management)

Art 2144 Whoever voluntarily takes charge of the agency or management of the business or property of another,
without any power from the latter, is obliged to continue the same until the termination of the affair and its
incidents, or to require the person concerned to substitute him, if the owner is in a position to do so.
As a rule, reimbursement must be made to the gestor for necessary and useful expenses.

This juridical relation DOES NOT arise in either of these instances:

1) When the property or business is not neglected or abandoned
2) If in fact the manager has been tacitly authorized by the owner

Example: During a typhoon, a flash flood occurred. A saved the property of B without the knowledge of the latter.
B is now bound to pay A just compensation.

2. Solutio indebiti (undue payment)

Art 2154 If something is received when there is no right to demand it, and it was unduly delivered through
mistake, the obligation to return it arises.

Example: A’s bank account was wrongfully credited with Php 10, 000.00. A is bound to return the said amount.

*A quasi-contract is not an implied contract since there is no meeting of the minds of the parties.

D. CRIMES / ACTS or OMISSIONS PUNISHED BY LAW

Art 1161 Civil obligations arising from criminal offense shall be governed by the penal laws, subject to the
provisions of Art 2177, and of the pertinent provisions of Chapter 2, Preliminary Title on Human Relations and of
Title XVIII of this Book, regulating damages.

Art 100, Revised Penal Code: Every person criminally liable for a felony is also civilly liable.

GENERAL RULE: Civil liability is a necessary consequence of criminal liability

 Reason: Commission of crime causes not only moral evil but also material damage.

Scope of Civil Liability

Art 104, RPC What is included in civil liability
1. Restitution – (restoration of the thing)
2. Reparation of damage caused
3. Indemnification for consequential damages

Civil liability for crimes is extinguished the same causes provided in the Civil Code for the extinguishment of
other obligations.

                                                            
6
 Paras; p. 94 
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E. QUASI-DELICTS (Tort or Culpa Aquiliana)
Art 1162 Obligations derived from quasi-delicts shall be governed by the provisions of Chapter 2, Title XVII of this
Book and by special laws.
Art 2176 Whoever by act or omission causes damage to another, there being fault or negligence, is obliged to pay
for the damage done. Such fault or negligence when there is no pre-existing contractual relation between the
parties, is called quasi-delict and is governed by the provisions of this Chapter.

A quasi-delict is a fault or act of negligence (or omission of care) which causes damage to another, there being no
pre-existing contractual relations between the parties.7

 Based on the principle of equity

Definition of Negligence: It is the failure to observe, for the protection of the interests of another person, that
degree of care, precaution, and vigilance which the circumstances justly demand, whereby such other person suffers
injury. It is the omission of diligence which is required by the circumstances of person, place and time.8

Test of Negligence: Would a prudent man, in the position of the person to whom negligence is attributed, foresee
harm to the person injured as a reasonable consequence of the course about to be pursued?

ELEMENTS OF NEGLIGENCE
a) duty on the part of the defendant to protect the plaintiff from injury of which the latter complains
b) failure to perform such duty
c) an injury to the plaintiff through such failure

KINDS OF NEGLIGENCE
1. Culpa aquilana – or culpa extra-contractual; negligence as a source of obligation, a quasi-delict
2. Culpa contractual – negligence in the performance of a contract
3. Culpa criminal – criminal negligence

Distinction between Culpa Aquilana and Culpa Contractual

CULPA AQUILANA CULPA CONTRACTUAL

(culpa extra-contractual)
Governed by Art 2176 to 2194 Governed by Art 1179 et sequel
Negligence as a source of obligation Negligence in the performance of a contract
Fault or negligence which constitutes an Fault or negligence of the debtor as an incident in
independent source of obligation between parties the fulfillment of an existing obligation
not previously bound
Negligence of defendant should be the proximate Not a source of an obligation since there is already
cause of damage if liability is to attach an existing one

Distinction between Quasi-delicts and Crimes

AS TO… QUASI-DELICT CRIMES

Nature of right violated; Private rights; wrong against the individual Public right; wrong against the state
- An obligation can arise from
both crime and quasi-delict at
the same time (e.g. physical
injuries) BUT can only recover
damage once and not twice

Condition of mind Criminal intent is not necessary. Possible that Criminal intent is necessary for the existence
there is not criminal charge but only civil of liability, without it, there can be no crime
                                                            
7
 Paras; p. 106 
8
 Paras; p. 106 
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liability for damages arising from quasi-delict
Legal basis of liability Actionable in any act or omission wherein fault Not as broad as quasi-delict, can be punished
or negligence intervenes only when there is a penal law clearly
penalizing it
Liability for damages Liability for damages to the injured party Certain crimes do not have civil liability e.g.
contempt, gambling, violations of ordinances
and traffic regulations when nobody is injured
Forms of redress Reparation of the injury suffered by the Fine (accruing to the public treasury),
injured party  compensation, indemnification imprisonment or both  punishment
Amount of evidence Preponderance of evidence Beyond reasonable doubt
Compromise Can be compromised as any other civil liability Can never be compromised

Requisites of Liability under Quasi-Delicts9

1. There must be fault or negligence attributable to the person charged
2. There must be damage or injury
3. There must be a direct relation of cause and effect between the fault or negligence on one hand and the damage
or injury on the other hand.

Liability for fault of others - Obligation arising from quasi-delict is demandable not only for one’s own acts or
omissions, but also for those of persons for whom one is responsible.

                                                            
9
 Paras; p. 107 
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Chapter II. Nature and Effects of Obligations

A. Obligation TO GIVE

This refers to an obligation to deliver of give a specific or determinate thing.

SPECIFIC THING (determinate) GENERIC THING (indeterminate)

One that is individualized and can be identified or distinguished Indicated only by its kind, without being designated and
from others of its kind distinguished from others of the same kind.

Particularly or physically segregated from its class One which cannot be pointed out with particularity

Object due becomes determinable from moment of delivery

A specific or determinate thing is identified by its individuality and the debtor cannot substitute it with another even if
the latter is of the same kind and quality if there is no consent of the creditor. A generic or indeterminate thing,
however, is identified only by its specie and the debtor can give anything of the same class as long as it is of the same
kind.

DUTIES OF THE DEBTOR/OBLIGOR IN OBLIGATION TO GIVE A DETERMINATE THING

a. to preserve thing with due care

Art 1163 Every person obliged to give something is also obliged to take care of it with the proper
diligence of a good father of a family, UNLESS the law or the stipulation of the parties requires another
standard of care.
Rationale - the obligation to delivery would be illusory.
Required diligence - DILIGENCE OF GOOD FATHER OF FAMILY (Art 1173), unless the law or parties’
stipulation requires another standard of care;
o Failure to preserve the thing would result to liability for damages
o Effect of Fortuitous Event: Exempted from liability

b. to deliver thing itself

Art 1244 Par 1 The debtor of a thing cannot compel the creditor to receive a different one, although the
latter may be of the same value as, or more valuable than which is due.
Exception: If the creditor gives his consent

Waiver of Defect
Defects of the thing may be waived by the creditor IF
o Expressly declares
o With knowledge thereof, he accepts the thing without protest or disposes or consumes it

c. to deliver the fruits

Art 1164 Par 1 The creditor has a right to the fruits of the thing from the time the obligation to deliver
it arises. However, there is no real right until the same has been delivered to him.

Rationale: the ownership of things is transferred not only by mere agreements but by delivery

REAL RIGHT – Real right is the right or power of a person to demand from another, as a definite passive
subject, the fulfillment of the latter's obligation to give, to do, or not to do.
- Gives to a person a direct and immediate power over a thing, which is susceptible of being
exercised, not only against a determinate person but against the whole world
- E.g. rights of ownership and possession
PERSONAL RIGHT – Personal right is the right or interest of a person over a specific thing without a definite
passive subject against whom the right may be personally enforced.

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Kinds of Fruits:
 Natural Fruits – spontaneous products of the soil, and the young and other products of animals
 Industrial Fruits – produced by lands of any kind through cultivation or labor
 Civil Fruits – Those derived by virtue of a juridical relation

Ownership Acquired By Delivery

Ownership and other real rights over property are acquired and transmitted in consequence of certain
contracts by delivery. Mere agreement does not effect transfer of ownership.10

d. to deliver the accessions and accessories

Art 1166 Obligation to give a determinate thing includes that of delivering all its accessions and
accessories, even though they may not have been mentioned.
Exception: If there is a contrary stipulation

ACCESSIONS ACCESSORIES
Includes everything which is produced by a thing, or which is Those things which, destined for embellishment, use or
incorporated or attached thereto, either naturally or artificially. preservation of another thing or more important, have for
Does not include fruits because Art 1164 mentioned it already their object the completion of the latter for which they are
Accesion continua which includes: indispensable or convenient.
1. Accesion natural– e.g. alluvion
2. Accesion industrial – e.g. building, planting, sowing

CORRELATIVE RIGHTS OF THE OBLIGEE/CREDITOR

1. Right to compel delivery (if possible) with a right to indemnity for damages
2. Right to rescission or cancellation with a right to recover damages
3. Right to demand payment of damages should it be the only feasible remedy

Generic thing (indeterminate)

Art 1246 When the obligation consists in the delivery of an indeterminate or generic thing, whose quality
and circumstances have not been stated, the creditor cannot demand a thing of superior quality. Neither can
the debtor deliver a thing of inferior quality. The purpose of the obligation and other circumstances shall be taken
into consideration.
 Creditor may ask for compliance by 3rd person at debtor’s expense; action for substituted performance
(Art 1165)

LIMITED GENERIC THING – generic objects confined to a particular class, the class is considered in itself a
determinate object

RIGHTS OF A CREDITOR
 To ask for the performance of the obligation
 To ask that the obligation be complied with at the expense of the debtor
 To recover damages in case of breach of obligation

B. Obligation TO DO
Art 1167 If a person is obliged to do something fails to do it, the same shall be executed at his cost.
The same rule may be observed if he does it in contravention of the tenor of the obligation. Furthermore, it may
be decreed that what has been poorly done be undone.

DUTIES OF OBLIGOR
1. To do perform the obligation
2. To shoulder the cost if it was done by a third party (Art 1167)
3. To undo what has been poorly done (Art 1167)
4. To pay damages (Art 1170-1172, 2201-2202)

                                                            
10
 De Leon, p. 38 
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 No action for compliance because that would be involuntary servitude which is prohibited by the
constitution. (violation of right against involuntary servitude)

C. Obligation NOT TO DO

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

DUTIES OF OBLIGOR
1. Not to do what should not be done
2. To shoulder the cost to undo what should not have been done
3. To pay damages in case of breach

Grounds for Liability

a. Failure to deliver
 Legal excuse for breach of obligation or delay: FORTUITOUS EVENT (FE), unless there is
o Law expressly providing for the contrary
o Stipulation to the contrary
o Nature of obligation requires assumption of risk
 Fortuitous Event APPLICABLE TO:
o Nonperformance
o Delay
o Loss/deterioration of specific thing
Art 1189 Before happening of suspensive condition
Art 1190 Before happening of resolutory condition
 Debtor still liable despite Fortuitous Event:
o Expressly specified by law
Art 1942 Bailee liable for loss (commodatum)
Art 2001 Act of a thief
Art 2147 Negotiorum gestio
Art 1993 Loss of deposit
o Stipulation e.g. debtor becomes “insurer” of the obligation
o Assumption of risk
o Fraud or malice (bad faith)
Art 1165 Par 3 Delivers to two or more persons having different interest
o Debtor in delay already when FE happened (Art 1165 Par 3)
o Debtor guilty of concurrent negligence
o Liability arises from criminal act except if debtor tenders thing and creditor
unjustifiably refuses to receive (Art 1268)
b. Fraud
c. Negligence in performance
d. Delay or default
e. Any manner in contravention of the tenor of obligation

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BREACH OF OBLIGATION

CONCEPT

VOLUNTARY - arises from the modes provided in Art 1170

INVOLUNTARY - arises because of fortuitous events

Distinction between SUBSTANTIAL and CASUAL/SLIGHT breach

SUBSTANTIAL CASUAL
Total Partial
Amounts to non-performance A part is performed
Basis for rescission and payment of damages Gives rise to liability for damages

GENERAL RULE: Rescission will not be permitted for a slight or casual breach of the contract, but only for such
breaches as are so substantial and fundamental as to defeat the object of the parties in making the agreement.

MODES OF BREACH
Art 1170 Those who in the performance of their obligations are guilty of FRAUD, NEGLIGENCE, or DELAY and those
who in any manner CONTRAVENE THE TENOR thereof, are liable for damages.

1 FRAUD (Dolo)

Concept Fraud is the voluntary execution of a wrongful act, or a willful omission, knowing and intending the
effects which naturally and necessarily arise from such act or omission.
- Deliberate and intentional evasion of the normal fulfillment of obligations
- Any voluntary and willful act or omission which prevents the normal realization of the prestation, knowing and
intending the effects which naturally and necessarily arise from such act
- Fraud in the performance of a pre-existing obligation
- Synonymous to bad faith (dishonest purpose or some moral obliquity and conscious doing of wrong)
- The element of INTENT and NOT the harm done is the test

KINDS OF FRAUD
1. Fraud in the performance (Art 1171)
2. Fraud in the execution/creation/birth of the contract
a. Dolo causante (Art 1344)
b. Dolo incidente (Art 1338)

FRAUD (Art 1171) DOLO CAUSANTE (Art 1338) DOLO INCIDENTE (Art 1344)
WHEN During the performance of a pre- During the perfection of a contract During the perfection of a contract
PRESENT existing obligation
PURPOSE Evade the normal fulfillment of Secure the consent of another to Secure the consent of another to
obligation enter into contract enter into contract BUT fraud was
not the principal inducement in
making the contract
RESULTS IN Breach of the obligation Vitiation of consent; Does not result in the vitiation of
Voidable contract consent
GIVES RISE TO Right in favor of creditor to recover Right of the innocent party to annul Gives rise to a right of the innocent
damages the contract party to claim for damages

Non-waiver of Future Fraud Art 1171 Responsibility arising from fraud is demandable in ALL OBLIGATIONS. Any
waiver of action for future fraud is VOID.
- To permit such advance renunciations would practically leave the obligation without effect.
- The law does not prohibit the renunciation of the action for damages on the ground of fraud
already committed.

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Effects of Fraud - Liability for damages, a crime or a quasi-delict (Art 1170)

2 NEGLIGENCE (Culpa contractual)

Art 1172 Responsibility arising from negligence in the performance of EVERY KIND OF OBLIGATION is also
demandable, but such liability may be regulated by courts, according to the circumstances.

Concept – absence of due diligence

Art 1173 Par 1 The fault or negligence of the obligor consists in the omission of that diligence which is required by
the nature of obligation and corresponds with the circumstances of the persons, of the time and the place. When
negligence shows BAD FAITH, the provisions of Art 1171 (responsibility arising from fraud) and Art 2201 Par 2
(responsible for all damages reasonably attributed to non-performance) shall apply.
 Art 2201 Par 2 In case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible for
all damages which may be REASONABLY ATTRIBUTED to the non-performance of obligation.

Distinction between Culpa and Dolo

CULPA (Negligence) DOLO (Fraud)

Mere want of care or diligence, not the Willfulness or deliberate intent to cause damage or
voluntariness of act or omission injury to another
Liability may be mitigated by courts Liability cannot be mitigated by courts
Waiver for future negligence Waiver for future fraud is void
valid if simple
void if gross

Standard of care required

Art 1173 Par 2 If law or contract does not state diligence which is to be observed in the performance, that which is
expected of a GOOD FATHER OF FAMILY is required.

Exemption from Liability for Negligence

1. INSURANCE: A party to a contract is relieved from the effects of his fault or negligence by a 3rd person
2. Party to a contract renounces in advance the right to enforce liability arising from the fault or negligence of
the other
a. VOID if gross negligence  Stipulations exempting from liability for that amount to a fraud
b. VALID if simple negligence only

Effects of Negligence
1. Damages are demandable
2. Invalidates defense of fortuitous event

3 DELAY (mora)

Concept – non-fulfillment of obligation with respect to TIME

Art 1169 Those obliged to DELIVER or to DO something incur in delay from the time the OBLIGEE JUDICIALLY
OR EXTRAJUDICIALLY DEMANDS from them the fulfillment of their obligations.

However, the DEMAND by the creditor shall NOT be necessary in order that delay may exist:
1. When the OBLIGATION or LAW expressly so declares
2. When from the nature and the circumstances of the obligation it appears that the DESIGNATION OF THE
TIME when the thing to be delivered or the service is to be rendered was a controlling motive for the
establishment of the contract
3. When demand would be USELESS, as when the obligor has rendered it beyond his power to perform

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In reciprocal obligations, neither party incurs in delay if the other DOES NOT COMPLY or is NOT READY to comply
in a proper manner with what is incumbent upon him. From the moment ONE of the parties fulfills his obligation,
delay by the other begins.

 There can only be delay in positive obligations (to give and to do) and not in negative obligations (not to
give and not to do).

Kinds of Mora

a. Mora solvendi – default on the part of the debtor

REQUISITES OF MORA SOLVENDI

1. PRESTATION is due, demandable and already liquidated or determinate in amount
2. That the debtor delays performance
- Effects of mora only arise when the delay is due to the causes imputable to the debtor;
3. That the creditor requires or demands the performance of the obligation which is due, extra-judicially or
judicially (not just a mere reminder or notice)

b. Mora accipiendi – default on the part of the creditor

REQUISITES OF MORA ACCIPIENDI

1. Offer of performance by the debtor who has the required capacity
2. Offer must be to comply with the prestation as it should be performed
3. Creditor refuses the performance without just cause

c. Compensatio morae – parties in a bilateral contract can regulate the order in which they shall comply with their
reciprocal prestations. Otherwise, the fulfillment must be SIMULTANEOUS and RECIPROCAL

GENERAL RULE: Fulfillment of parties should be simultaneous

EXCEPTION: Contrary stipulation (e.g. installment plans)

Effects of Mora

A. Mora solvendi
1. Debtor may be liable for interest or damages
2. Debtor may also have to bear risk of loss
3. Debtor is liable even for a fortuitous event11

B. Mora accipiendi
1. Responsibility of the debtor for the thing is reduced and limited to fraud and gross negligence
2. Debtor is exempted from the risk of loss of thing, which automatically pass to the creditor
3. All expenses incurred by the debtor for the preservation of the thing after the mora shall be chargeable to
the creditor
4. If the obligation bears interest, the debtor does not have to pay it from the moment of the mora
5. The creditor becomes liable for damages
6. The debtor may relieve himself of the obligation by the consignation of the thing

C. Compensation morae
1. Exceptio non adempleti contractus – one is not compelled to perform his prestation when the other
contracting party is not yet prepared to perform his prestation; default of one compensates the default of
the other

Cessation of effects of mora

1. Renunciation by the creditor
a. Express
                                                            
11
 Paras, p. 125‐126 
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b. Implied: when after delay has been incurred, the creditor grants an extension of time to the
debtor or agrees to a novation of the obligation
2. Prescription

4 CONTRAVENTION OF TENOR – any illicit act which impairs the strict and faithful fulfillment of the obligation or
every kind of defective performance
o Malicious or negligent violation of the terms and conditions stipulated in the obligation
o Must not be due to fortuitous even or force majeure, otherwise there would be no liability
o Immaterial whether or not the actor is in bad faith or negligent, what is required is that it is his fault or
the act done contravenes their agreement

5 ABSOLUTE NON-PERFORMANCE

REMEDIES OF CREDITOR IN CASE OF BREACH

 Action for performance (specific performance or obtain compliance)

 Action for rescission
 Action for damages (exclusively OR in addition to either of the first actions)

A. ACTION FOR PERFORMANCE

1. Action for specific performance (in obligation to give specific thing)

Art 1165 Par 1 When what is to be delivered is a determinate thing, the creditor, in addition to the right granted
him by Art 1170 (indemnification for damages), may compel the debtor to make the delivery.

 Implies that the basis is a contractual relation between plaintiff and defendants.

2. Action for substituted performance (in obligation to give a generic thing)

Art 1165 Par 2 If the thing is indeterminate or generic, he may ask that the obligation be complied with at the
expense of the debtor.

 Delivery of anything belonging to the species stipulated will be sufficient.

 Debtor cannot avoid obligation by paying damages if the creditor insists on the performance.

3. Action for substituted performance or undoing of poor work (in obligation to do)

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

4. Action for undoing (in obligation not to do)

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

 EXCEPTION: When the only feasible remedy is indemnification for the damages caused:
 If has become impossible to undo the thing physically or legally
 If the act is definite and will not cease even if undone

B. ACTION FOR DAMAGES

Art 1170  Recoverable damages include any and all damages that a human being may suffer. Responsibility for
damages is indivisible.

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C. ACTION FOR RESCISSION
Art 1191 The power to rescind obligation is implied in reciprocal ones, in case one of the obligors should not
comply with what is incumbent upon him.
The injured party may choose between FULFILLMENT and the RESCISSION of the obligation, with the
payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the
latter should become IMPOSSIBLE.
The court shall decree the rescission claimed UNLESS there be a just cause authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons who have acquired the thing, in
accordance with Articles 1385 and 1388 and the Mortgage Law.

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

 The remedy is alternative. Party seeking rescission can only elect one between fulfillment and rescission. There
can be no partial performance and partial rescission.
 Only applies to reciprocal obligations, where there is “reciprocity” between the parties i.e. creditor debtor relations
arise from the same cause or “identity of cause”

Effects of Rescission
1. Extinguishes obligatory relation as if it had never been created, extinction has a retroactive effect. Equivalent
to invalidate the juridical tie, leaving things in their status before the celebration of the contract
2. Mutual restitution

 EXPRESS RESOLUTORY CONDITION: automatic resolution if one of the parties does not comply with his
obligation. Often found in insurance contracts. Its nature is a “facultative resolutory condition” (Taylor v Uy Tieng)


EXTINGUISHMENT OF LIABILITY IN CASE OF BREACH DUE TO FORTUITOUS EVENT

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

Concept of Fortuitous Event [Force Majeure, Fuerza Mayor, Caso Fortuito]

A. Act of God – by nature e.g. earthquakes, storms, floods, epidemics, fires, etc; all human agencies excluded
B. Act of Man – by acts of man, e.g armed invasion, attack by bandits, governmental prohibitions, robbery, etc;
for as long as that they have a force of an imposition which the debtor could not have resisted

 Includes unavoidable accidents, even if there has been intervention of human element, provided that the fault or
negligence cannot be imputed to the debtor

ELEMENTS TO VALIDLY CONSTITUTE FORTUITOUS EVENT

1. The cause of breach of the obligation must be independent of the will of the debtor
2. The event must be either unforeseeable or unavoidable
3. The event must be such to render it impossible for the debtor to fulfill his obligation in a normal manner
4. The debtor must be free from any participation in, or aggravation of, the injury to the creditor12

Effect of CONCURRENT FAULT of the Debtor

 Debtor is still liable for the performance of the obligation

Extinguishment of Liability
GENERAL RULE: No liability if there fortuitous events intervene
                                                            
12
 Juan F. Nakpil and Sons, et al. v. CA, et al. GR No. 47851, Oct. 03, 1986 
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Exceptions:
a. Contrary and express stipulation by the parties
b. Obligation requires assumption of risk

FULFILLMENT OF OBLIGATIONS

Presumptions in payment of interests and installments

Art 1176 The receipt of the principal by the creditor, without reservation with respect to the interest, shall give rise
to the presumption that interest has been paid.
The receipt of a later installment of a debt without reservation as to prior installments, shall likewise raise the
presumption that such installments have been paid.

 GENERAL RULE: If the debt produces interests, payment of the principal shall not be deemed to have been
made unless the interests have been covered.
 PRESUMPTIONS are rebuttable by evidence

TRANSMISSIBILITY OF RIGHTS
Art 1178 Subject to the laws, all rights acquired in virtue of an obligation are transmissible, if there has been no
stipulation to the contrary.

EXCEPTIONS:
1. Not transmissible by their very nature e.g. purely personal rights
2. There is a stipulation of the parties that they are not transmissible  not be easily implied but clearly
established or at the very least, clearly inferable
3. Not transmissible by law

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Chapter III. Different Kinds of Civil Obligations

I. Pure and Conditional obligations

A. PURE OBLIGATIONS
Art 1179 Par 1 Every obligation whose performance DOES NOT depend upon a future or uncertain event OR upon
a past event unknown to the parties is demandable at once.
 Contains no term or condition whatever upon which depends the fulfillment of the obligation contracted by the
debtor. Immediately demandable and nothing would exempt that debtor from compliance therewith.

B. CONDITIONAL OBLIGATIONS
Art 1181 In conditional obligations, the acquisition of rights, as well as extinguishment or loss of those already
acquired, shall depend upon the happening of the event which constitutes the condition.

CONDITION – It is a future and uncertain event, upon the happening of which, the effectivity or extinguishment of an
obligation (or right) subject to it depends.

A condition must not be impossible.

Kinds of Conditions

1. As to effect on obligation
Art 1181 “Acquisition of rights” and “extinguishment or loss of those already acquired”

SUSPENSIVE RESOLUTORY
When condition fulfilled Obligation arises Obligation is extinguished
When condition not fulfilled The juridical or legal tie does not appear Legal tie consolidated, becomes absolute
Effect Acquisition of rights Extinguishment or loss of those already acquired

SUSPENSIVE (condition precedent/antecedent)

 A condition the fulfillment of which will give rise to an obligation (or right).

Retroactive effect when “suspensive” condition is fulfilled - The binding tie of conditional obligation is
produced from the time of perfection, not happening of condition.
 Can also be seen as “Rights of creditor and debtor after fulfillment of the condition”

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

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

 Until the fulfillment of suspensive condition, creditor cannot enforce the obligation as his right then was merely an
expectancy. However, upon happening, the debtor can be compelled to perform.
 REASON FOR RETROACTIVITY: Condition is only accidental and not an essential element of the obligation. The
obligation is constituted when the essential elements which give rise there to concur.

Rights of creditor and debtor before fulfillment of condition

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

 PAYMENT BEFORE HAPPENING OF CONDITION: Debtor may only recover what he paid by mistake before
happening of suspensive condition, hence if condition has been fulfilled, he can no longer claim because of
retroactivity of the condition.
- If the payment was with knowledge of condition: implied waiver of condition and cannot recover
- If the payment was with knowledge but the condition did not happen: debtor can recover lest the creditor
will be unjustly enriched.
- Principle of solutio indebiti may also apply.

RESOLUTORY (condition subsequent)

 A condition the fulfillment of which will extinguish an already existing obligation (or right).

2. As to cause or origin
Art 1182 When the fulfillment of the condition depends upon the sole will of the debtor the conditional
obligation shall be VOID. If it depends upon chance or upon the will of a 3rd person, the obligation shall TAKE
EFFECT in conformity with the provisions of this Code.

POTESTATIVE – One which depends upon the will of one of the contracting parties; in the power of one of the
parties to realize or prevent

KINDS OF POTESTATIVE CONDITION

1. Simple potestative – presupposes not only a manifestation of will but also the realization of an external act
- On the part of the debtor: Does not prevent formation of valid obligation because in part depends on
contingencies over which he has no control
2. Purely potestative – depends solely and exclusively upon the will
- Effect if fulfillment of condition depends solely on the will of the debtor  VOID
- If dependent exclusively on the will of creditor  VALID
- Applicable only to SUSPENSIVE CONDITION and NOT to resolutory condition

Debtor’s promise to pay when he can is not a conditional obligation

Art 1180 When the debtor binds himself to pay WHEN his means permit him to do so, the obligation shall be deemed
to be one with a period subject to the conditions of Art 1197 (period was intended).
- Creditor will have to ask the court to fix a period because an immediate action to enforce the obligation
would be premature.

CASUAL – depends exclusively upon chance, will of a third person or other factors, and not upon the will of the
contracting parties

MIXED – depends upon the will of one of the contracting parties and other circumstances, including the will of third
persons

3. As to possibility
Art 1183 IMPOSSIBLE CONDITIONS, those contrary to good customs or public policy and those prohibited by law
shall annul the obligation which depends upon them. If the obligation is DIVISIBLE, that part thereof which is
not affected by the impossible or unlawful condition shall be valid.

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

IMPOSSIBLE – may either be physical (contrary to the law of nature) or juridical (contrary to law, morals, good
customs, and public policy AND restricts certain rights which are necessary for the free development of human activity
i.e. political rights, family rights and constitutional rights and liberties e.g. condition not to change domicile, religion or
contract marriage)

Effect of Impossible Conditions

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 Annuls only obligations which are POSITIVE and SUSPENSIVE. In the case of a negative impossible condition,
it’s considered as not written and the obligation is converted to a pure and simple one.
 Impossibility of condition must exist at the time of the creation of the obligation (not existence of a valid
obligation subsequently rendered impossible under Art 1266 on “subsequent impossibility”)
 DIVISIBLE OBLIGATION: part not affected by the impossible condition shall remain valid

4. As to mode

POSITIVE (suspensive)
Art 1184 The condition that some event happen at a determinate time shall EXTINGUISH the obligation as soon as
the time expires OR if it has become indubitable that the event will not take place.

 If there is no period fixed, the rule in Par 2 of Art 1185 is applicable. Intention of the parties is controlling, and
the time shall be that which the parties may have probably contemplated, taking into account the nature of
the obligation.

NEGATIVE (suspensive)
Art 1185 The conditions that some event will not happen at a determinate time shall render the obligation
EFFECTIVE from the moment the time indicated has elapsed OR if it has become evident that the event cannot occur.

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

LOSS, DETERIORATION or IMPROVEMENT pending happening of the condition

Art 1189 When the conditions have been imposed with the intention of SUSPENDING the efficacy of an obligation
to give, the following rules shall be observed in case of the improvement, loss or deterioration of the thing during the
pendency of the condition:
1. Loss without fault of debtor: obligation extinguished
2. Loss through the fault of debtor: Debtor is obliged to pay damages.
A thing is loss when it:
a. Perishes
b. Goes out the commerce of man
c. Disappears in such a way that its existence is unknown or it cannot be recovered
3. Deteriorates without fault of the debtor: impairment is to be borne by the creditor
4. Deteriorates through the fault of debtor: creditor may choose between the rescission of the obligation and its
fulfillment with indemnity for damages in either case
5. Improved by its nature, time: inures to the creditor
6. Improved at the expense of the debtor: debtor has no other right than that granted to a usufructuary

 Applicable only to obligations to deliver a determinate or specific thing. NO application to generic objects
(genus never perishes).
 Apply only in case suspensive condition is fulfilled.

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

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

As for obligations to do or not to do, the provisions of 2nd par of Art 1187 shall be observed as regards the effect
of the extinguishment of obligation.

Definitions
LOSS 1. Perishes
2. Goes out of the commerce of man
3. Disappears in such a way that its existence is unknown or it cannot be recovered
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DETERIORATION Any reduction or impairment in the substance or value of a thing which does not amount to a loss. The
thing still exists at the time the condition is fulfilled, but it is no longer intact, OR is less than what it was
when the obligation was constituted.
IMPROVEMENT Anything added to, incorporated in, or attached to the thing that is due.

Effect of loss or deterioration

LOSS DETERIORATION
Without debtor’s fault Extinguished, unless there is a stipulation to the Not liable for damage, creditor must accept the
contrary. Mode of extinguishment Art 1262 Par 1 thing in impaired condition
With debtor’s fault Liable to damages upon fulfillment of condition May demand the thing OR ask for rescission, in
either case, creditor may recover damages

Effect of improvement
MODE
By nature or time Inures to the benefit of the creditor by virtue of principle of retroactivity of conditional obligations
At debtor’s expense Only usufructuary rights; Governed by Art 579 (useful improvements or for mere pleasure, remove if
possible to remove without damage to property) and Art 580 (set off the improvements he may have
made against any damage)

Effect of prevention of the fulfillment of the condition by the obligor

Art 1186 The condition shall be deemed fulfilled when the obligor voluntarily prevents fulfillment.

CONSTRUCTIVE FULFILLMENT – a condition which although not exclusively within the will of the debtor, may in some
way be prevented by the debtor from happening.
REQUISITES:
a. Intent of the obligor to prevent the fulfillment of the condition  ESSENTIAL
b. Actual prevention of the compliance

C. RECIPROCAL OBLIGATIONS
Art 1191 The power to rescind obligation is implied in reciprocal ones, in case one of the obligors should not
comply with what is incumbent upon him.

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

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

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

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

Concept: RECIPROCITY arises from identity of cause and necessarily, two obligations are created at the same time.
Each party is a creditor and debtor of the other and they are to perform simultaneously.
 Power to rescind is given to the injured party

Alternative remedies of injured party in case of breach  injured party should choose only one (he cannot ask
for partial rescission and partial fulfillment)

a. Action for Fulfillment  when fulfillment is no longer possible, rescission takes place

b. Action for Rescission

 Requisites for rescission
a. One of the creditors failed to comply with what is incumbent upon him
b. Obligor who performed chose rescission over fulfillment or performance is impossible
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c. The breach is substantial so as to defeat the object of the parties in making the agreement – it will
not be granted in slight or casual breach

 Effects of Rescission
1. Extinguishes obligatory relation as if it had never been created  Equivalent to invalidate the juridical
tie, leaving things in their status before the celebration of the contract
2. Mutual restitution

II. Obligation with a Period

Art 1193 Obligations whose fulfillment a day certain has been fixed, shall be demandable only when that day comes.
Obligations with a resolutory period take effect at once but terminate upon arrival of the day certain.
A “day certain” is understood to be that which must necessarily come, although it may not be known when.

If the uncertainty consists in whether the day will come or not, the obligation is CONDITIONAL, and it shall be
regulated by the rules of the preceding Section.

Art 1180 When the debtor binds himself to pay WHEN his means permit him to do so, the obligation shall be
deemed to be one with a period, subject to the provisions of Art 1197.

Concept: A space of time which, exerting an influence on obligations as a consequence of a juridical act, suspends
their demandability or determines their extinguishment.
o Requisites of Period
1. Future
2. Certain
3. Possible

Period/Term vs. Condition

AS TO TERM/PERIOD CONDITION
Fulfillment Event must necessarily come, whether known Event is uncertain
beforehand OR at a time which cannot be
predetermined
Influence on the No effect on the existence, but only on their Gives rise to an obligation or extinguishes one
obligation demandability or performance, HENCE, does not already existing
carry with it any retroactive effect
Time Always to the future May refer to past event not know to the parties
Will of the debtor If dependent on will of debtor, merely empowers If dependent on sole will of debtor: obligation is void
court to fix such period

Rules in case of loss, deterioration or improvement before arrival of period

Art 1194 In case of loss, deterioration or improvement of the thing before the arrival of the day certain, the rules in
Art 1189 shall be observed.
o Same as Art 1189

Effect of loss or deterioration

LOSS DETERIORATION
Without debtor’s fault Extinguished, unless there is a stipulation to the Not liable for damage, creditor must accept the
contrary. Mode of extinguishment Art 1262 Par 1 thing in impaired condition
With debtor’s fault Liable to damages upon fulfillment of condition May demand the thing OR ask for rescission, in
either case, creditor may recover damages

Effect of improvement
MODE
By nature or time Inures to the benefit of the creditor by virtue of principle of retroactivity of conditional obligations
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At debtor’s expense Only usufructuary rights; Governed by Art 579 (useful improvements or for mere pleasure, remove if
possible to remove without damage to property) and Art 580 (set off the improvements he may have
made against any damage)

Effect of payment in advance

Art 1195 Anything paid or delivered before the arrival period, the obligor being unaware of the period OR believing
that the obligation has become due and demandable, may be RECOVERED, with the fruits and interests.
o Only applies to obligations to give
o The action only lies before the arrival of the day certain, when the day certain comes cannot recover
o Fruits and interests not recoverable in these cases:
 Reciprocal obligation and there has been a premature performance on both sides
 When the obligation is a loan on which the debtor is bound to pay interest
 When the period is exclusively for the benefit of the creditor, because the debtor who pays in
advance loses nothing
 If payment was with knowledge of the term, it cannot be recovered because it is considered as
tacit waiver of the benefit of the term (not only fruits and interest, but also principal)

Note: Art 1197 Par 3 In every case, the court shall determine such period as may under the circumstances have
been probably contemplated by the parties. Once fixed by the courts, the period cannot be changed by them.

Benefit of Period

1. For whose benefit and its effects

Creditor May demand performance anytime, but not compelled to accept before period expires
E.g. payment of interest, wants to keep his money safely invested instead of having it in his hands, protects
himself from sudden decline in purchasing power of the currency loaned
Debtor May oppose a premature demand, but may validly pay any time before period expires
E.g. time to raise money
Both Presumption in absence of stipulation or in case of doubt
Creditor must give consent first before debtor may pay in advance especially when creditor receives other
benefits by reason of the term

2. Presumption  for the benefit of BOTH the creditor and debtor

Art 1196 Whenever in an obligation a period is designated, it is presumed to have been established for the benefit
of BOTH creditor and debtor, UNLESS from the tenor of the same or other circumstances it should appear that
the period has been established in favor of one or the other.

3. When debtor loses right to make use of period

Art 1198 The debtor shall lose every right to make use of the period:
1) When after the obligation has been contracted, he becomes insolvent UNLESS he gives a guaranty or
security for the debt
2) When he does not furnish to the creditor the guaranties or securities which he has promised
3) When by his own acts he has impaired said guaranties or securities after their establishment, and
when through a fortuitous event they disappear, UNLESS he immediately gives new ones which are
equally satisfactory
4) When the debtor violates any undertaking in consideration of which the creditor agreed to the period
5) When the debtor attempts to abscond

 Obligation becomes immediately due and demandable even if period has not yet expired; converted to a pure
obligation

When court may fix period

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Art 1197 If the obligation does not fix a period, but from its nature and circumstance it can be inferred that a
period was intended, the courts may fix the duration thereof.
Par 2 The courts shall also fix the duration of the period when it depends upon the will of the debtor.
Par 3 The courts shall determine which period as may under the circumstances have been probably contemplated
by the parties. Once fixed by the courts, the period cannot be changed by them.

III. Alternative obligations

(plurality of objects)

Alternative obligation is one wherein various prestations are due but the performance of one of them is sufficient
as determined by the choice which, as a general rule, belongs to the debtor.13

Art 1199 A person alternatively bound by different prestations shall completely perform one of them.
The creditor cannot be compelled to receive part of one and part of the other undertaking.

Right of choice  belongs to debtor unless expressly granted to creditor

Art 1200 The right of choice belongs to the debtor, UNLESS it has been expressly granted to the creditor.
Par 2 The debtor shall have no right to choose those prestations which are impossible, unlawful or which could not
have been the object of the obligation
o Grant to creditor cannot be implied
o Choice may also be entrusted by the parties to a third person
o LIMITATIONS ON RIGHT OF CHOICE
 Right to choose is indivisible (cannot choose part of one and part of the other)
 Cannot choose prestations which are impossible, unlawful or could not have been the object of
the obligation

Effect of notice of choice

 The obligation is converted to a simple obligation to perform the prestation chosen.
 The effect of notice of choice is to limit the obligation to the object or prestation selected, with all the
consequences which the law provides.
 Once the selection has been communicated, it becomes irrevocable.

When notice produces effect

Art 1201 The choice shall produce no effect except from the time it has been communicated.
 Notice of selection/choice may be in any form provided it is sufficient to make the other party know that
election has been made.
o Orally
o In writing
o Tacitly  tacit declaration of the selection may be done:
 performance by the debtor who has the right to choose or in the acceptance of a
prestation by the creditor when he has the right of selection
 when the creditor sues for the performance of one of the prestation
o Any other unequivocal terms
 Law does not require the other party to consent to the choice made by the party entitled to choose. A mere
declaration of the choice, communicated to the other party is sufficient

Effect of loss or impossibility of one or all prestations

Art 1202 The debtor shall lose the right of choice, when among the prestations whereby he is alternatively bound, only
one is practicable.

                                                            
13
 De eon, p. 127 
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 Converted to a simple and pure obligation; the impossibility of the act must not be due to creditor’s act where
Art 1403 shall apply.
 Creditor cannot claim damages, because it’s the debtor’s call

Art 1203 If through the creditor’s act, the debtor cannot make a choice according to the terms of the obligation,
the latter may rescind the contract with damages.

Art 1204 The creditor shall have a right to indemnity for damages when, through the fault of the debtor,
a. ALL THE THINGS which are alternatively the object of the obligation have been LOST or
b. COMPLIANCE of the obligation has become IMPOSSIBLE.
Par 2 The indemnity shall be fixed taking as a basis the VALUE of the last thing which disappeared OR that of the
service which last became impossible.
Par 3 Damages other than the value of the last thing or service may also be awarded.

 Applies to cases where the debtor has the right to choose

 If only some of the prestations are lost/impossible, not liable for damages because he can still comply by
performing the remaining prestations even if there is only one (Art 1202)
 If the loss is through fortuitous event: obligation is extinguished, debtor is not liable for damages

Art 1205 When the choice has been expressly given to the creditor, the obligation shall cease to be alternative
from the day when the selection has been communicated to the debtor.
Par 2 Until then, the responsibility of the debtor shall be governed by the following rules:
1. If ONE of the thing is LOST through fortuitous event, he shall perform the obligation by delivering that
which the creditor should choose from the remainder, or that which remains if only one subsists.
2. If the LOSS of ONE of the things occurs through the fault of the debtor, the creditor may claim any of
those subsisting, or the price of that which, through the fault of the debtor has disappear, with a right to
damages.
3. If ALL the things are LOST through the fault of the debtor, the choice by the creditor shall fall upon the
price of any of them, also with indemnity for damages.
Par 3 the same rules shall be applied to obligations to do or not to do, in case ONE, OR SOME OR ALL of the
prestations should become IMPOSSIBLE.

FACULTATIVE OBLIGATION

Art 1206 When only one prestation has been agreed upon, but the obligor may render another in substitution, the
obligation is called facultative.
Par 2 The LOSS or DETERIORATION of the thing intended as a substitute through the negligence of the obligor,
does not render him liable. BUT once the substitution has been made, the obligor is liable for the loss of the
substitute on account of his delay, negligence or fraud.

Concept Only one prestation is due, but the obligor reserved the right to render another in substitution

Distinguished from Alternative Obligation

AS TO ALTERNATIVE FACULTATIVE
Contents of Various prestations all of which constitute parts of the Only the principal constitutes the obligation , the
the obligation obligation accessory being only a means to facilitate payment
Nullity of Nullity of one prestation does not invalidate the Nullity of the principal prestation (e.g. when the object
prestation obligation which is still in force with respect to those is unlawful or outside the commerce of man)
which are valid invalidates the obligation.

Nullity of the substitute does not invalidate the

obligation when substitution has not yet been made
Choice Right to choose generally belongs to the debtor but Only the debtor can choose the substitute prestation
may be given to the creditor
Effect of Loss Only the IMPOSSIBILITY OF ALL the prestations due Impossibility of the principal prestation is sufficient to
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(fortuitous without fault of the debtor extinguishes the obligation extinguish the obligation, even if the substitute is
event) possible.

Loss of substitute does not make debtor liable, unless

substitution has been made
Effect of Loss Debtor not liable if other prestation still available Debtor is liable if the principal object is lost due to his
(through fault) If choice belongs to creditor, loss of one alternative fault
gives rise to liability Loss of the substitute before substation does not
render debtor liable

Effects of Substitution
o Before the substitution is effected, the substitute is not the prestation that is due.
o From the time the debtor communicates to the creditor that he elects to perform the substitute prestation,
substitution is effective.
o
 In the absence of an indication that an obligation is facultative, the presumption is that it is ALTERNATIVE
because creditor would be at a disadvantage if facultative. Facultative obligation is never presumed.

IV. Joint and Solidary obligation

JOINT OBLIGATIONS
Concept Each of the debtors is liable only for a proportionate part of the debt, and each creditor is entitled only to a
proportionate part of the credit. Each creditor can recover only his share of the obligation and each debtor can be
made to pay only his part.

Requisites of Joint Obligations

1. Plurality of subjects
2. Determination of the shares in the demandability of the fulfillment of the obligation
 Words used to indicate joint obligations
o Mancomunada
o Mancomunada Simple
o Pro rata
o “We promise to pay…” signed by two or more persons

Presumptions in Joint Obligations

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

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

 Joint character is presumed

 Equal shares

Effects of Joint Obligation

a. Extent of liability of debtor

1. Only with respect to his particular share in the debt
2. Vices of each obligation arising from the personal defect of a particular debtor or creditor does not affect the
obligation or rights of the others

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3. The insolvency of a debtor does not increase the responsibility of his co-debtors nor does it authorize a
creditor demand anything from his co-creditors
4. JOINT DIVISIBLE OBLIGATION: defense of res judicata is not extended from one debtor to another

b. Extent of right of creditor

1. Demand by one creditor upon one debtor produces the effects of default only with respect to the creditor
who demanded and the debtor on whom the demand was made, but not with respect to others
2. Interruption of prescription by the judicial demand of one creditor upon a debtor does not benefit the other
creditors nor interrupt the prescription as to other debtors

c. In case of:
 Novation: Affects only the share of the joint co-debtor in whom the novation is created
 Compensation: Affects only the share of the joint co-debtor in whom the compensation takes place
 Confusion: Art 1277 Confusion does not extinguish a joint obligation except as regards the share
corresponding to the creditor or debtor in whom the two characters concur.
 Remission: Benefits only the joint co-debtor in whom the remission is granted, obligation extinguished

SOLIDARY OBLIGATIONS
Concept Each of the debtors is liable for the entire obligation, and each creditor is entitled to demand the whole
obligation. Each creditor may enforce the entire obligation and each debtor may be obliged to pay it in full.

Solidarity is NOT presumed.

Solidary obligations exist only by:

o Stipulation of the parties
o Law
o Nature of obligation
o Charge of condition is imposed upon legatees or heirs
o Imputed by final judgment upon several defendants

 Words used to indicate joint obligations

o Mancomunada solidaria
o Joint and several
o In solidum
o “I promise to pay…” followed by the signature of two or more persons
o “Individually and collectively”

KINDS OF SOLIDARY OBLIGATIONS

a. As to source

 LEGAL - by provision of law

 CONVENTIONAL - by stipulation of parties

 REAL – by the nature of the obligation

b. As to parties bound

 ACTIVE – solidarity of creditors; each has right to collect the whole of the prestation from the common
debtor

 PASSIVE – solidarity of debtors; each is liable to pay the whole to the common creditor

 MIXED – simultaneously active and passive

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c. As to uniformity

 UNIFORM – same terms and condition for all

 VARIED/NON-UNIFORM
 Art 1211 Solidarity may exist although the creditors and the debtors may not be bound in the same manner
and by the same periods and conditions.
 Effects of non-uniform solidary liability: only the portion due at the time of the demand is
collectible from any of the debtors or by anyone of the creditors

EFFECTS OF SOLIDARY OBLIGATIONS

a. SOLIDARY CREDITOR in relation to:

i. Common debtor

Right to demand
 Debtor may pay to any solidary creditor, but if a judicial demand is made against him, he must pay only to
the plaintiff. (Art 1214)
 Payment to creditor who did not sue is a payment to 3rd person.
 DEMAND BY SEVERAL CREDITORS: Pay the one who notified him first. If simultaneous,
debtor reserves the right to choose.
 Does not apply to MIXED SOLIDARITY: solidary co-debtor may pay in behalf of the one to
whom demand has been made AND to any of the solidary creditors
 The creditor may proceed against ANY ONE of the solidary debtors or SOME or ALL of them
simultaneously. (Quiombing v CA) The demand made against one of them shall not be an obstacle to
those which may be subsequently be directed against others, so long as the debt has not been fully
collected. (Art 1216)
 Payment made by one of the solidary debtors extinguishes the obligation. If two or more solidary
debtors offer to pay, the creditor may choose which to accept. (Art 1217, Par 1)
 Each creditor may renounce his right even against the will of the debtor, and the latter need not
thereafter pay the obligation to the former.

In case of novation, compensation, confusion, remission by a creditor

 Novation, compensation, confusion or remission of the debt, made by any of the solidary creditors OR
with any of the solidary debtors, shall extinguish the obligation, without prejudice to the provisions of
Art 1219 i.e. responsibility of a solidary co-debtor with respect to reimbursement prior to his remission
(Art 1215 Par 1)

ii. Solidary co-creditor/s

In case of novation, compensation, confusion, remission

 The creditor who may have executed any of these acts, as well as he who collects the debt, shall be
liable to others for the share in the obligation corresponding to them (Art 1215 Par 2)
o Remission done by several but not all of the creditors: those who made it do not have action
against each other, but all of them liable for the share of one who does not remit

Prejudicial acts prohibited

 Each one of the solidary creditors may do whatever is useful to the others, but not anything which may be
prejudicial to the latter. (Art 1212)
o E.g. remission, novation, compensation and merger/confusion
o To harmonize with Art 1215: The prejudicial acts are valid as to the debtor, but not with respect
to the co-creditors whose rights subsists and can be enforced against the creditor who performed
prejudicial acts

Assignment of rights not allowed

 Solidary creditor cannot assign his rights without the consent of others (Art 1213)
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o As a solidary creditor, he is an agent of others, and he cannot assign that agency without the
consent of his principals.
o Assignment of rights allowed as to co-creditor

b. SOLIDARY DEBTOR in relation to:

i. Common creditor

Obligation to perform
 Each one of the solidary co-debtor is bound to render entire compliance with the prestations (Art 1207)

In case of novation, compensation, confusion, remission by a creditor

 Extinguishes the obligation without prejudice to the responsibility of a solidary co-debtor with respect
to reimbursement prior to his remission (Art 1215 Par 1)

ii. Solidary co-debtor

In case of payment by a co-debtor

 Payment by one of the solidary co-debtors extinguishes the obligation. (Art 1217, Par 1)
 Solidary co-debtor who paid may reimburse from his co-debtors only the share which corresponds to
each, with the interest for the payment already made, but if the payment is made before debt is due, no
interest for the intervening period may be demanded. (Art 1217, Par 3)
 Converted into a Joint Obligation as to co-debtors, but no real case of subrogation because the
old one is extinguished and the new one is created
 Partial payment: may recover only insofar as the payment exceeded his share of the obligation
 When one of the solidary debtors is insolvent and cannot reimburse, his share will be borne by all his co-
debtors in proportion to the debt of each. (Art 1217, Par 3)
 Payment by co-debtor does not entitle him to reimburse from co-debtors if such payment is made after
the obligation has prescribed or become illegal. (Art 1218)
 Also applies to prior total remission in favor of one debtor
 The remission made by the creditor of the share which affects one of the solidary debtors does not
release the latter from his responsibility towards the co-debtors, in case debt had been totally paid by
anyone of them before remission was effected. (Art 1219)
 Applies when one of the debtors has already paid the obligation in full (in such a case, the
obligation as to the creditor is already extinguished and nothing more to remit even partially)
 Relationship of the creditor with the solidary debtor does not extend to the relationship among
solidary co-debtors
 The remission of the whole obligation, obtained by one of the solidary debtors, does not entitle him to
reimbursement from his co-debtors. (Art 1220)

In case of fortuitous event

 If the thing has been LOST OR if the prestation has become IMPOSSIBLE without the fault of the
solidary debtors, the obligation shall be extinguished (Art 1221, Par 1)
 If there was fault on the part of any one of them, ALL shall be responsible to the creditor, for the price
and payment of damages and interests, without prejudice to their action against the guilty or negligent
debtor. (Art 1221, Par 2)
 Guilty creditor who pays indemnity cannot recover from his co-debtors.
 Other co-debtors who pay the indemnity can recover the full amount from the guilty co-debtor.
 If through a fortuitous event, the thing is LOST or the performance of the prestation has become
IMPOSSIBLE after one of the solidary debtors has incurred in delay through the judicial or extra-judicial
demand upon him by creditor, the provisions of the preceding paragraph shall apply. (Art 1221, Par 3)

LOST or IMPOSSIBLE without fault / fortuitous event Obligation is extinguished

All liable for damages and interest, but co-debtors
LOST or IMPOSSIBLE with fault of any one
have right against guilty debtor
LOST or IMPOSSIBLE without fault / fortuitous event but All liable for damages and interest, but co-debtors
after any one incurred in delay have right against guilty debtor
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JOINT INDIVISIBLE OBLIGATIONS

Concept The legal tie is joint, but the performance is indivisible. One in which the object of the object or prestation is
indivisible or not susceptible to division; while the tie between the parties is joint or that their liability is only to a
proportionate share. (Art 1209)
 Several creditors or debtors but the prestation is indivisible, obligation is joint unless solidary has been
stipulated

Indivisibility distinguished from solidarity

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

INDIVISIBILITY SOLIDARITY
Each creditor cannot demand more than his share and each Each creditor may demand the full prestation and each debtor
debtor is not liable for more than his share has the duty to comply with the entire prestation
Indivisibility refers to the prestation that is not capable of Solidarity refers to the legal tie or vinculum defining the extent
partial performance of liability
Only the debtor guilty of breach of obligation is liable for All of the debtors are liable for the breach of obligation
damages, thereby terminating the agency committed by any one of the debtors
Can exist even if there is only one debtor or only one creditor Can only exist when there is at least two creditor or debtors
(requires plurality of subjects)
The other debtors are not liable in case of insolvency of one The other debtors are proportionately liable in case of
debtor insolvency of one debtor

Effects of Joint Indivisible Obligation

Art 1209 If the division is impossible, the right of the creditors may be prejudiced only by their collective acts
1. Creditors prejudiced only by their collective acts
2. Co-debtors not liable for the share of the insolvent debtor
3. Creditor must proceed against all the joint debtors, because the compliance of the obligation is possible
only if all the joint debtors would act together.
4. If one of the debtors cannot comply, the obligation is converted into monetary consideration (liability for
losses and damages). One who is ready and willing to comply will pay his proportionate share plus
damages when his financial condition improves.
5. Debtor must deliver to all the creditors. If he delivers to only one, liable for non-performance as to other
creditors. Damages are divisible and each creditor can recover separately his proportionate share.

Liability for damages in case of breach

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

V. DIVISIBLE AND INDIVISIBLE OBLIGATION – performance of the prestation and not to the
thing which is the object thereof

DIVISIBLE OBLIGATIONS
Concept: One which is susceptible of partial performance; debtor can legally perform the obligation by parts and
the creditor cannot demand a single performance of the entire obligation.
 DIVISIBILITY OF THINGS different from DIVISIBILITY OF OBLIGATIONS
o Divisible Thing: When each one of the parts into which it is divided forms a homogenous and
analogous object to the other parts as well as to the thing itself
o Indivisible Thing: When if divided into parts, its value is diminished disproportionately
 Test of Divisibility

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1. Will or intention of the parties
2. Objective or purpose of the stipulated prestation
3. Nature of the thing
4. Provisions of law affecting the prestation

Effects of Divisible Obligations

1. Art 1223 The divisibility or indivisibility of the things that are the object of obligations in which there is only
one debtor and only one creditor does not alter or modify the provisions of Chapter 2 of this Title (Nature
and Effect of Obligations).
2. Art 1233 A debt shall not be understood to have been paid unless the thing or service in which the obligation
consists has been completely delivered or rendered as the case may be.

INDIVISIBLE OBLIGATIONS
Concept: Whatever may be the nature of the thing which is the object thereof, it cannot be validly performed in
parts.

Distinguished from Solidary Obligations

INDIVISIBILITY SOLIDARITY
Each creditor cannot demand more than his share and each Each creditor may demand the full prestation and each debtor
debtor is not liable for more than his share has the duty to comply with the entire prestation
Indivisibility refers to the prestation that is not capable of Solidarity refers to the legal tie or vinculum defining the extent
partial performance of liability
Only the debtor guilty of breach of obligation is liable for All of the debtors is liable for the breach of obligation
damages, thereby terminating the agency committed by any one of the debtors
Can exist even if there is only one debtor or only one creditor Can only exist when there is at least creditor or debtors
(requires plurality of subjects)
The other debtors are not liable in case of insolvency of one The other debtors are proportionately liable in case of
debtor insolvency of one debtor

Kinds of Indivisible Obligations

NATURAL
Art 1225 Par 1 For the purposes of the preceding articles, obligations to give definite things and those which
are not susceptible of partial performance shall be deemed to be indivisible.
1. Obligation to give definite things
2. Not susceptible of partial performance

LEGAL
Art 1225 Par 3 However, even though the object or service may be physically divisible, an obligation is indivisible
if so provided by law or intended by parties.

CONVENTIONAL
Art 1225 Par 3 However, even though the object or service may be physically divisible, an obligation is indivisible
if so provided by law or intended by parties.

Presumptions in Indivisible Obligations

INDIVISIBILITY
Art 1225 Par 1 For the purposes of the preceding articles, obligations to give definite things and those which are
not susceptible of partial performance shall be deemed to be indivisible.
 Presumption of indivisibility also applies in obligations to do

DIVISIBILITY
Art 1225 Par 2 When the obligation has for its object the execution of certain number of days of work, the
accomplishment of work by metrical units or analogous things which by their nature are susceptible of partial
performance, shall be divisible.
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Divisibility and indivisibility in obligations not to do
Art 1225 Par 4 In obligations not to do, divisibility or indivisibility shall be determined by the character of the
prestation in each particular case.

Effects of Indivisible Obligations

1. Art 1223 The divisibility or indivisibility of the things that are the object of obligations in which there is only
one debtor and only one creditor does not alter or modify the provisions of Chapter 2 of this Title (Nature
and Effect of Obligations).
2. Art 1233 A debt shall not be understood to have been paid unless the thing or service in which the obligation
consists has been completely delivered or rendered as the case may be.

EXCEPTIONS:
a. Obligation has been substantially performed in good faith (Art 1234)
b. When the creditor accepts performance, knowing its completeness, and without protest, the obligation
is deemed fully performed (Art 1235)
3. Art 1224 A joint indivisible obligation gives rise to indemnity for damages from the time anyone of the
debtors does not comply with his undertaking. The debtors who may have been ready to fulfill their
promises shall not contribute to the indemnity beyond the corresponding portion of the price of the thing
or of the value of the service which the obligation consists.

Cessation of Indivisibility
a) Natural Indivisibility: conversion of the obligation to pay damages
b) Conventional/Legal Indivisibility: novation, death of creditor (division among heirs)

VI. OBLIGATIONS WITH A PENAL CLAUSE

Concept: An accessory undertaking to assume greater responsibility in case of breach. A clause attached to an
obligation to ensure performance.
 Generally a sum of money, but can be any other thing stipulated by the parties, including an act or
abstention
 Double function: (1) provide for liquidated damages and (2) strengthen the coercive force of the
obligation by the treat of greater responsibility in the event of breach
 Mere non-performance of the principal obligation gives rise to damages

Demandability of penalty
Art 1226 Par 2 The penalty may be enforced only when it is demandable in accordance with the provisions of Code.

a. Only when the non-performance is due to the fault or fraud of the debtor
b. Non-performance gives rise to the presumption of fault  creditor does not need to prove the fault of the
debtor. Burden of proof for the excuse on the debtor. (Art 1228)
c. When creditor elected fulfillment but the same has become impossible (Art 1227)
 HOWEVER, penalty is not enforceable when the principal obligation becomes IMPOSSIBLE:
 Due to fortuitous event
 Because the creditor prevents the debtor from performing the principal obligation

Effects of penal clause

1. Substitute for indemnity for damages and payment of interest (Art 1226)
EXCEPTION: Unless there is a stipulation to the contrary e.g. becomes a facultative obligation

2. Does Not exempt debtor from performance – penalty is not a defense for leaving obligation unfulfilled
Art 1227 The debtor cannot exempt himself from the performance of the obligation by paying the penalty
EXCEPTION: Where this right to substitute penalty has been expressly reserved for him

3. Creditor cannot demand both performance and penalty at the same time
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Art 1227 Neither can the creditor demand the fulfillment of the obligation and the satisfaction of the penalty at the
same time”
EXCEPTION: Unless this right has been clearly granted him

4. Creditor cannot collect other damages in addition to penalty

Art 1226 Substitute the indemnity for damages and the payment of interest in case of non-fulfillment *
EXCEPTIONS:
1. There is an express provision to that effect
2. Debtor refuses to pay the penalty
3. Debtor is guilty of fraud in the non-fulfillment of the obligation

When penalty shall by equitably reduced

Art 1229 The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly
complied with by the debtor. Even if there is no performance, the penalty may also be reduced by the courts if it is
iniquitous or unconscionable.
 “Partial” – quantity or extent of fulfillment
 “Irregular” – form of fulfillment
 Only applies to penalties prescribed in contracts and not to collection of the surcharge on taxes that are
due, which is mandatory on the collector

Effects of Nullity of Principal Obligation or Penal Clause

Art 1230 The nullity of the penal clause does not carry with it that of the principal obligation. The nullity of the
principal obligation carries with it that of the penal clause.

GENERAL RULES:

5. Nullity of principal obligation >> Also nullifies the penal clause

 EXCEPTIONS: Penal clause may subsist even if the principal obligation cannot be enforced
 When the penalty is undertaken by a 3rd person precisely for an obligation which is unenforceable,
natural or voidable  assumes a form of guaranty which is valid under Art 2052
 Nullity of principal obligation itself gives rise to liability of debtor for damages e.g. vendor knew
that the thing was inexistent at the time of the contract, vendor becomes liable for the damages
although contract itself is void

2. Nullity of penal clause >> Does not affect the principal obligation
 In the case of non-performance, damages shall be determined by the same rules as if no penalty had
been stipulated
 Penal clause may be void because it is contrary to law, morals, good customs, public order or public
policy
 Rationale: Penalty is merely an accessory to the principal obligation

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Chapter IV. Extinguishment of Obligations

I. Modes of Extinguishment

Art 1231 Obligations are extinguished:

A. Payment or performance
B. Loss of the thing due or Impossibility of performance
C. Condonation or Remission of the debt
D. Confusion or Merger of the rights of the creditor and debtor
E. Compensation
F. Novation
G. Other causes of extinguishment of obligations
- Annulment
- Rescission
- Fulfillment of resolutory condition
- Prescription

II. Payment or performance

CONCEPT: Fulfillment of the prestation due, a fulfillment that extinguishes the obligation by the realization of the
purposes for which it was constituted.
 Juridical act which is VOLUNTARY, LICIT, and MADE WITH THE INTENT TO EXTINGUISH THE OBLIGATION
 Requisites of a Valid Payment
1. Person who pays
2. Person to whom payment is made
3. Thing to be paid
4. Manner, time and place of payment
 What are the elements/characteristics of a valid payment?
1. Identity – what is to be paid, payment should be the very same obligation/prestation promised to be
performed/not performed
2. Integrity – how payment should be made, it should be complete (not only specific thing but all of its
accessions and accessories)
 Can anybody pay? GENERAL RULE: YES, as long as his payment has integrity and identity and the creditor
accepts it as a valid tender of payment

1. Who can pay

a. In general (creditor cannot refuse valid tender of payment)

1. Debtor
2. Anyone acting on his behalf
a. Duly authorized agent or representatives
b. Heirs (means that debtor is dead, if alive, they would be third persons interested in obligation)
c. Successors in interest and assignees

b. Third person who is an INTERESTED PARTY (creditor cannot refuse valid tender of payment)
Meaning of INTERESTED PARTY – interested in the extinguishment of the obligations such as:
 Co-debtors  Guarantors
 Sureties  Owners of mortgaged property or pledge

Art 1302 (3) When even without the knowledge of the debtor, a person interested in the fulfillment of the
obligation pays, without prejudice to the effects of confusion as to the latter’s share.

Effects of Payment by 3rd Person – Interested

1. Valid payment; obligation extinguished
2. Debtor to reimburse fully 3rd person interested
3. 3rd person subrogated to the rights of the creditor

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c. Third person who is NOT AN INTERESTED PARTY but WITH CONSENT of debtor
Art 1302 (2) When a third person, not interested in the obligations, pays with the express or tacit approval of
the creditor.
Art 1236 Par 1 The creditor is not bound to accept payment or performance by a third person who has no
interest in the fulfillment of the obligation, unless there is a stipulation to the contrary.

Effects of Payment by 3rd Person – Not Interested – With Debtor’s Consent

1. 3rd person is entitled to full reimbursement
 Demand from the debtor what he has paid
2. Legal subrogation (novation) – 3rd person is subrogated/steps into the shoes of creditor
 Payor can exercise all the rights of the creditor arising from the very obligation itself,
whether against the debtor or third person
3. Creditor may refuse to accept payment

d. Third person who is NOT AN INTERESTED PARTY and WITHOUT THE KNOWLEDGE OR AGAINST
THE WILL OF THE DEBTOR
Art 1236 Par 1 The creditor is not bound to accept payment or performance by a third person who has no
interest in the fulfillment of the obligation, unless there is a stipulation to the contrary.
Art 1236 Par 2 Whoever pays for another may demand from the debtor what he has paid, except that if he
paid without the knowledge or against the will of the debtor, he can recover only insofar as the payment
has been beneficial to the debtor.
Art 1237 Whoever pays on behalf of the debtor without the knowledge or against the will of the latter, cannot
compel the creditor to subrogate him in his rights, such as those arising from a mortgage, guaranty or
penalty.

Effects of Payment by 3rd Person – Not Interested – Without Knowledge or Against the Will
1. 3rd person can only be reimbursed insofar as payment has been beneficial to debtor
 Burden of proof of payment on the 3rd person
 Benefit to the creditor need not be proved in the following cases:
a. If after the payment, the third person acquires the creditor’s right
b. If the creditor ratifies the payment to the third person
c. If by the creditor’s conduct, the debtor has been led to believe that the third
person had authority to receive the payment
d. Assignment of credit without notice to debtor (Art 1626)
2. 3rd person cannot compel creditor to subrogate him in the latter’s rights

e. Third person who does NOT INTEND TO BE REIMBURSED  DEBTOR MUST GIVE CONSENT
Art 1238 Payment by third person who does not intend to be reimbursed by the debtor is deemed to be a
donation, which requires the debtor’s consent. But the payment is in any case valid as to the creditor who
has accepted it.

Effects of Payment by 3rd person – Interested or not – Does not intend to be reimbursed
1. Payment is deemed as a donation/offer of donation
2. Donation must be in proper form (i.e. if above P5K it must be in writing)

f. In obligation to give
Art 1239 In obligation to give, payment made by one who does not have free disposal of the thing due
and capacity to alienate it shall not be valid, without prejudice to the provisions of Art 1427 under Title on
Natural Obligations.
Art 1427 When a minor 18-21 entered into a contract without the consent of the parent or guardian,
voluntarily pays a sum of money or delivers a fungible thing in fulfillment of an obligation, there shall be no
right to recover the same from the obligee who has spent or consumed it in good faith. (Note: at present,
to be considered as a minor, one must be below 18 years old)

Effect of Incapacity of the payor

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1. No free disposal and no capacity to alienate
 Payment is invalid, but without prejudice to natural obligations
2. Minor who entered contract without consent of parent/guardian
 No right to recover fungible thing delivered to the creditor who spent or consumed it in
good faith

g. In case of active solidarity

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

2. To whom payment can be made

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

1. Creditor/person in whose favor obligation was constituted

2. His successor in interest
3. Any person authorized to receive it

Effect of Payment to a wrong third party

GENERAL RULE: Not valid, obligation is not extinguished, even if in good faith of the debtor
EXCEPTION:
1. Extinguished if the mistake is imputable to the fault or negligence of the creditor (PAL v CA)
2. Payment in good faith to person in possession of credit (Art 1242)

Effect of Payment to an Incapacitated person

Art 1241 Par 1 Payment to a third person incapacitated to administer his property shall be valid if he has kept
the thing delivered or insofar as the payment has been beneficial to him.

GENERAL RULE: Payment not valid

EXCEPTION - When payment to an incapacitated person is valid:
a) If creditor has kept the thing delivered
b) Insofar as payment benefited creditor
 Benefit to the creditor need not be proved in the following cases:
e. If after the payment, the third person acquires the creditor’s right
f. If the creditor ratifies the payment to the third person
g. If by the creditor’s conduct, the debtor has been led to believe that the third
person had authority to receive the payment
h. Assignment of credit without notice to debtor (Art 1626)

b. Effect of Payment to Third person

Art 1241 Par 2 Payment to a third person shall also be valid insofar as it has redounded to the benefit of the
creditor.
GENERAL RULE: VALID if third person proves that it redounded to creditor’s benefit; otherwise VOID
EXCEPTION; When proof of benefit not required  also applicable to INCAPACITATED PERSONS
Art 1241 Par 3 Such benefit to the creditor need not be proved in the following cases:
1. If after the payment, the third person acquires the creditor’s right
2. If the creditor ratifies the payment to the third person
3. If by the creditor’s conduct, the debtor has been led to believe that the third person had authority
to receive the payment
4. Assignment of credit without notice to debtor (Art 1626)
5. Payment in good faith to any person in possession of the credit shall release the debtor (Art 1242)
 EFFECT: Debtor is released

Art 1243 Debtor pays creditor after being judicially ordered to retain debt
EFFECT: Payment not valid if the property is attached or garnished
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c. In case of active solidarity
Art 1214 The debtor may pay any one of the solidary creditors, but if any demand, judicial or extrajudicial has
been made by one of them, payment should be made to him.
 If no demand is made, debtor may pay to any of the solidary creditors
 If any judicial/extrajudicial demand is made by any of the creditors who made the demand

3. What is to be paid (“identity”)

a. In general
 The very prestation (thing or service) due

b. In obligations to…

- GIVE a specific thing

Art 1244 Par 1 The debtor of a thing cannot compel the creditor to receive a different one, although the
latter may be of the same value as, or more valuable than which is due.
1. Give specific things itself
2. Accessions and accessories
3. If with loss, improvements, deterioration  Apply Art 1189

- GIVE a generic thing

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

- Pay money
Art 1249 The payment of debts in money shall be made in the currency stipulated, and if it is not possible
to deliver such currency, then in the currency which is the legal tender in the Philippines.
The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents
shall produce effect of payment only when they have been cashed, or when through the fault of
the creditor they have been impaired.
In the meantime, the action derived from the original obligation shall be held in abeyance.

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

- DO or NOT TO DO
Art 1244 Par 2 In obligations to do or not to do, an act or forbearance cannot be substituted by another
act or forbearance against the obligee’s will.
 Substitution cannot be done against the will of creditor

c. Payment of interest
Art 1956 No interest shall be due unless it has been expressly stipulated in writing.
Art 1253 Interest must be satisfied first before capital

4. How is payment to be made (“integrity”)

a. In general
Art 1233 A debt shall not be understood to have been paid unless the thing or service in which the obligation
consists has been completely delivered or rendered as the case may be.
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GENERAL RULE: Partial payment is not allowed  Creditor cannot be compelled to receive partial prestations; Debtor
cannot be compelled to give partial payments
EXCEPTIONS:
1. Contrary stipulation
o Art 1248 Par 1 Unless there is an express stipulation to that effect, the creditor cannot be compelled partially to
receive the prestations, in which the obligation consists. Neither may the debtor be required to make partial payments.
2. Debt is partly liquidated and partly unliquidated
o Art 1248 Par 2 However, when the debt is in part liquidated and in part unliquidated, the creditor may demand and
the debtor may effect the payment of the former without waiting for the liquidation of the latter.
3. When there are several subjects/parties are bound under different terms and conditions
4. Compensation

b. Substantial performance in good faith

Art 1234 If the obligation has been substantially performed in good faith, the obligor may recover as
though there had been a strict and complete fulfillment, less damages suffered by the oblige.
 Requisites of Substantial Performance
1. Attempt in good faith to perform, without any willful or intentional departure
2. Deviation from the obligation must be slight
3. Omission or defect is unimportant and technical
4. Must not be so material that intention of the parties is not attained

c. Estoppel
Art 1235 When oblige accepts the performance, knowing its incompleteness or irregularity, and without
expressing any protest or objection, the obligation is deemed fully complied with.
- Constitutes a “waiver of defect in performance”  there must however be an intentional relinquishment of
a known right. Waiver will not result from mere failure to assert a claim for defective performance when
the thing or work is received
- Applies only when he knows the incompleteness or irregularity of the payment, obligation is deemed
extinguished. Estopped from complaining

d. Presumptions in payment of interests and installments

INTEREST
Art 1176 The receipt of the principal by the creditor, without reservation with respect to the interest, shall give
rise to the presumption that said interest has been paid.
Art 1253 If the debt produces interest, payment of the principal shall not be deemed to have been made
until the interests have been covered.

 If principal amount is received without reservation as to interest

 interest is presumed to have been paid

INSTALLMENTS
Art 1176 Par 2 The receipt of a later installment of debt, without reservation as to prior installments shall
likewise raise the presumption that such installments have been paid.

 If a latter installment is received without reservation to prior installments

 prior installments are presumed to have been paid

5. When is payment to be made

 When obligation is due and demandable but debtor may pay before due date if period is for the benefit
of debtor. If for the benefit of both the debtor and creditor, debtor may only prior to the due date if
creditor consents thereto.

a. In general
Art 1169 Debtor incurs in delay from the time creditor judicially or extra-judicially demands fulfillment of
the obligation

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b. See Chapter 2: Delay

6. Where payment is to be made

a. In the designated place in the obligation (Art 1251 Par 1)

b. If no place is expressly designated

Art 1251 Par 2 There being no express stipulation and if the undertaking is to deliver a determinate thing the
payment shall be made wherever the thing might be at the moment the obligation was constituted.

Art 1251 Par 3 In any other case (not to deliver a determinate thing), the place of payment shall be at the
domicile of the debtor.

Art 1251 Par 4 If the debtor changes his domicile in bad faith, or after he has incurred in delay, the
additional expenses shall be borne by him. (Absent such circumstances, it will be borne by the creditor)

7. Expenses of making payment

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

SPECIAL FORMS OF PAYMENT

APPLICATION OF PAYMENTS

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

If the debtor accepts from the creditor a receipt in which an application of the payment is made, the former
cannot complain of the same, UNLESS there is a cause for invalidating the consent.

Concept Designation of the debt which is being paid by a debtor who has SEVERAL OBLIGATIONS OF THE SAME
KIND, in favor of one creditor to whom payment is being made

Requisites for Application of Payment

1. Same debtor
2. Same creditor
3. Various debts are of same kind, generally monetary character
o Cannot apply to prestation to give specific thing
o Can apply to prestation to give generic thing
4. All obligations must be due
o EXCEPTIONS:
 Mutual agreement of parties
 upon consent of the party in whose favor the term was established
5. Payment is not enough to extinguish all debts
6. Debtor has preferential right to choose the debt which his payment is to be applied
o Not absolute; LIMITATIONS:
 Cannot make partial payments
 Cannot apply to unliquidated debts
 Cannot choose a debt whose period is for the benefit of the creditor, and period has not
yet arrived
 Right to apply debts must be exercised at the time when debt is paid

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Rules in Application of Payment
1. Right to apply must be exercised at the time of the payment (Art 1252)
2. Creditor may undertake application, subject to the debtor’s approval. Once the latter accepts receipt of
application, he cannot complain UNLESS there is a cause for invalidating the contract. (Art 1252)
3. Apply to interest first. BOTH (1) interest stipulated and (2) interest due because of debtor’s delay
Art 1253 If debt produces interest, payment of the principal shall not be deemed to have been made until the
interest are covered.

If rules are inapplicable and application cannot be inferred

Art 1254 When payment cannot be applied in accordance with preceding rules, or if application can not be inferred
from other circumstances, the debt which is MOST ONEROUS (burdensome) TO THE DEBTOR among those due,
shall be deemed to have been satisfied.
If the debts are of the same nature and burden, the payment shall be applied to all of them proportionately.

Meaning of “MOST ONEROUS TO DEBTOR”

 Fundamentally a question of act, which courts must determine on the basis of circumstances of each case eg.
o Co-debtor (especially if solidary) vs. sole debtor
o Same amount, younger vs. older
o Secured vs. unsecured

PAYMENT BY CESSION

Art 1255 The debtor may cede or assign his property to his creditors in payment of his debts. This cession, UNLESS
there is stipulation to the contrary, shall only release the debtor from responsibility for the net proceeds of the
thing assigned. The agreements which on the effect of the cession, are made between the debtor and his creditors
shall be governed by law.

Concept: Abandonment of the universality of the property of the debtor for the benefit of his creditors, in order that
such property may be applied to the payment of his credits.
 Debtor transfers all the properties not subject to execution in favor of creditors that the latter may sell them
and thus apply the proceeds to their credits
 Initiative comes from the debtor but must be accepted by the creditors in order to become effective
 Usually done by debtors in state of insolvency

Requisites for Payment by Cession

1. Plurality of debts
2. Plurality of creditors
3. Complete or partial insolvency of the debtor
4. Abandonment of all debtor’s property not subject to execution
5. Acceptance or consent on the part of the creditors

Effects of Payment by Cession

1. Creditors do not become the owner; they are merely assignees with authority to sell
2. Debtor is released up to the amount of the net proceeds of the sale, unless there is a stipulation to the
contrary  not total extinguishment
3. Creditor will collect credits in the order of preference agreed upon, or in default of agreement, in order
ordinarily established by law.

DATION IN PAYMENT (Dacion en Pago)

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

Concept: Delivery and transmission of ownership of a thing by the debtor and to the creditor as an accepted
equivalent of the performance of the obligation.
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 An onerous contract of alienation because object is given in exchange of credit
 Special form of payment because one element of payment is missing: “identity”

Distinguished from payment by cession

DATION IN PAYMENT PAYMENT BY CESSION

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

Requisites for Dation in Payment

1. Consent of creditor  sale presupposes the consent of both parties
2. Dacion will not prejudice of other creditors
3. Debtor is not declared judicially insolvent
4. Not a pactum commissorium (a stipulation entitling the creditor to appropriate automatically the thing given as
security in case debtor fails to pay)

Effects of Dation in Payment

1. Extinguishes payment to the extent of the value at the thing to be delivered, either as agreed upon by the
parties, or as may be proved, unless the parties by agreement expressly or impliedly or by their silence,
consider the thing as equivalent to the obligation in which case the obligation is totally extinguished.
2. If property delivered to the creditor assumption that it is a PLEDGE, as it involves less transmission of rights
unless it is clearly the intention of parties

TENDER OF PAYMENT AND CONSIGNATION

1. TENDER OF PAYMENT

Concept The act of offering the creditor what is due him together with a demand that the creditor accept the same
 When creditor refuses without just cause to accept payment, he is in mora accipiendi and debtor is released
from responsibility if he consigns the thing due
 Manifestation made by debtor to creditor of desire to comply with obligation
 Preparatory act to consignation; does not cause extinguishment of obligation unless completed by
consignation
 Required ONLY when the creditor refuses without just cause to accept payment
 What are the examples of unjust cause for refusal
1. There was a previous tender of payment, without which the consignation is ineffective
2. Tender of payment was of the very thing due, or in case of money obligations, that the legal tender
currency was offered
3. Tender of payment was unconditional
4. Creditor refused to accept payment without just cause
 What are the examples of just cause for refusal
1. Debt is not yet due and the period is for the benefit of the creditor
2. Payment by third persons not interested in the fulfillment of the obligation  because to begin with,
tender presupposes capacity of the payor
3.
 Accrual of interest will be suspended from the date of such tender if immediately deposited with the court

Requisites of a Valid Tender of Payment

1. Made in lawful currency
2. Should include interest due
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3. Must be unconditional; but the creditor cannot vary the terms of a tender accepted by him
4. Unaccepted offer in writing to pay is equivalent to actual production and tender of money or property

2. CONSIGNATION

Concept The act of depositing the thing due with the court or judicial authorities whenever the creditor cannot accept
or refuses to accept payment.
 Generally requires prior tender of payment
 Made by depositing the things due at the disposal of judicial authority (includes sheriff)

Purpose Avoid performance of an obligation becoming more onerous to the debtor by reasons not imputable to him
 Duty of attending indefinitely to its preservation, without remedy to be relieved from the debt

Requisites of Consignation
1. There is a debt due
2. The consignation of the obligation was made because of some legal cause
o Previous valid tender was unjustly refused
o Other circumstances making previous tender exempt
3. Prior notice of consignation had been given to the person interested in the obligation (1st notice)
4. Actual deposit/consignation with proper judicial authority
5. Subsequent notice of consignation (2nd notice)
o May be complied with by the service of summons upon the defendant creditor together with a
copy of the complaint
o Given to all interested in the performance of obligations: passive (co-debtors, guarantors,
sureties) or active (solidary co-creditors, possible litigants)

a. When tender and refusal not required

Art 1256 Par 2 Consignation alone shall produce the same effect in the following cases:
1. Creditor is absent or unknown or does not appear at place of payment
2. Incapacitated to receive payment at the time it is due  need not be legally declared
3. Without just case, he refuses to give a receipt
4. Two or more persons claim the same right to collect
5. Title of the obligation has been lost

b. Two notice requirement

FIRST NOTICE: Art 1257 Par 1 In order that the consignation of the thing due may release the obligor, it must
FIRST be announced to the persons interested in the fulfillment of the obligation.

SECOND NOTICE: Art 1258 Par 2 The consignation having been made, the interested parties shall also be
notified thereof.

Effects of non-compliance
Art 1257 Par 2 The consignation shall be ineffectual if it is not made strictly in consonance with the
provisions which regulate payment. (Soco v Militante)

c. Effects of Consignation  when properly made, charged against the creditor

Art 1260 Par 1 Once the consignation has been duly made, the debtor may ask the judge to order the
cancellation of the obligation.
1. The debtor is released in the same manner as if he had performed the obligation at the time
of consignation, because this produces the effect of a valid payment.
2. The accrual of interest on the obligation is suspended from the moment of the consignation.
3. The deteriorations or loss of a thing or amount consigned occurring without fault of the debtor must
be borne by the creditor, because the risks of the thing are transferred to the creditor from the
moment of deposit.
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4. Any increment or increase in value of the thing after the consignation inures to the benefit of the
creditor.

d. Withdrawal by debtor BEFORE acceptance by creditor OR approval by the Court

- Before the consignation is effected, the debtor is still the owner and he may withdraw it. (TLG v Flores)

Art 1260 Par 2 Before the creditor has accepted the consignation, or before a judicial declaration that the
consignation has been properly made, the debtor may withdraw the thing or sum deposited allowing
the obligation to remain in force.

Effects of withdrawal before consignation is final

1. Obligation remains in force
2. Debtor bears all the expenses incurred because of the consignation

e. Withdrawal by debtor AFTER proper consignation

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

- With creditor’s approval

EFFECTS: revival of the obligation and relationship between creditor and debtor is restored to the
condition in which it was before the consignation
- Without creditor’s approval
EFFECTS:

f. Expenses of consignation

Art 1259 The expenses of consignation, when properly made, shall be charged against the creditor.
o Consignation is properly made when:
 After the thing has been deposited in the court, the creditor accepts the consignation
without objection and without reservation of his right to contest it because of failure to
comply with any of the requisites for consignation
 When the creditor objects to the consignation but the court, after hearing declares that
the consignation has been validly made.

III. Loss or Impossibility

LOSS OF THE THING DUE

Concept: Not limited to obligations to give but extends to those which are personal, embracing therefore all causes
which may render impossible performance of the prestation.
 Generally applies to determinate things
 Must be subsequent to the execution of the contract in order to extinguish the obligation
 If impossibility already existed when the contract was made, the result is not extinguishment but inefficacy of
the obligation under Art 1348 (impossible things or services cannot be object of contracts) and Art 1493
(Sales; loss object of contract, contract without any effect).

Art 1189 (2) If the thing is lost through the fault of the debtor, he shall be obliged to pay damages; it is understood
that the thing is loss when it:
a. Perishes
b. Goes out of the commerce of man
c. Disappears in such a way that its existence is unknown or it cannot be recovered

Kinds of Loss
a. As to extent
TOTAL
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PARTIAL

Requisites of Loss of the Thing Due

Art 1262 In order to extinguish obligation:
1. Lost or destroyed without the fault of the debtor
2. Loss occurred before the debtor incurs in delay
3. After the obligation is constituted

Presumption in Loss of the Thing Due

Art 1265 Whenever the thing is lost in the possession of the debtor, it shall be presumed that the loss was
DUE TO HIS FAULT, UNLESS there is proof to the contrary, and without prejudice to the provisions of Art 1165.
 Burden of explaining the loss of the thing in the possession of the debtor, rest upon him.
Art 1165 Action for specific performance or substituted performance
 When not applicable  In case of earthquake, flood, storm or other natural calamity.

Effects of Loss of the Thing Due

a. In obligation to give a specific thing

Art 1262 Loss or destruction of determinate thing without fault of debtor AND before he incurs in delay
EXTINGUISHES OBLIGATION

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

EXCEPTIONS:
1. Debtor is at fault i.e. in bad faith, negligence, delay
2. Debtor is made liable for fortuitous event by law, contractual stipulation or nature of obligation
requires assumption of risk on part of debtor

b. In obligation to give a generic thing  not extinguished

Art 1263 In an obligation to deliver a generic thing, the loss or destruction of anything of the same kind does
not extinguish the obligation.
 Genus nunquam perit or “The genus never perishes”

c. In case of partial loss

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

d. Action against third persons

Art 1269 The obligation having been extinguished by the loss of the thing, the creditor shall have all
rights of action which the debtor may have against third person by reason of the loss.
 Refers not only to the rights and actions which the debtor may have against third persons but also to any
indemnity which the debtor may have already received.
 E.g. money paid to the debtor upon expropriation of the property which is the object of obligation;
insurance received by owner of company with respect to victims of sunk vessel

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IMPOSSIBILITY OF PERFORMANCE
Concept

Art 1266 The debtor in obligations to do shall also be released when the prestation becomes legally or
physically impossible without the fault of the obligor.
 Refers to “SUBSEQUENT IMPOSSIBILITY”  arises AFTER the obligation has been constituted. If existing
BEFORE, the obligation constituted is under VOID contracts

Art 1267 When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the
obligor may also be released therefrom, in whole or in part.
 Doctrine of unforeseen events, “rebus sic stantibus” : the parties stipulate in the light of certain prevailing
conditions, and once these conditions cease to exist, the contract also ceases to exist.
 Requisites for application of Art 1267
1. Event or change in circumstances could not have been foreseen at the time of the execution of the contract
2. Makes the performance of the contract extremely difficult but not impossible
3. Event must not be due to the act of any of the parties
4. Contract is for a future prestation

Kinds of Impossibility

1. As to extent
TOTAL
PARTIAL – significant in Art 1264 (extinguishment due to partial loss subject to the court’s determination)

2. As to source
LEGAL
a. Direct – prohibited by law
b. Indirect – prevented by supervening legal duty such as military service
PHYSICAL – By reason of its nature, cannot be accomplished

Requisites of Impossibility
Art 1266
1. Obligation used to be possible at the constitution of obligation
2. Subsequent impossibility
3. Without the fault of the debtor

Effects of Impossibility

a. In obligations to do
Art 1266 releases debtor from obligation if prestations has become legally or physically impossible
Art 1267 releases debtor if performance has become so difficult to be so manifestly beyond the contemplation
of the parties
Art 1262 Par 2 (by analogy) Impossibility due to fortuitous events does not extinguish obligation if:
o By law
o By stipulation
o Nature of the obligation requires assumption of risk

 In case of partial performance by the debtor: creditor must pay the part done so long as he benefits from
such partial compliance.
 If debtor received anything from creditor prior to loss or impossibility: return anything in excess of what
corresponds to the part already performed when the impossibility supervened.

Impossibility vs. Difficulty

 Manifest disequilibrium in the prestations, such that one party would be placed at a disadvantage by the
unforeseen event.

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b. In case of partial impossibility
Art 1264 The courts shall determine whether, under the circumstances, the partial loss of the object of the
obligation is so important as to extinguish the obligation.

IV. Condonation or Remission

Concept: An act of liberality by virtue of which, without receiving any equivalent, the creditor renounces the
enforcement of obligation, which is extinguished in its entirety or in that part or aspect of the same to which the
remission refers.
 It is an essential characteristic of remission that it be gratuitous , that there is no equivalent received for the
benefit given; once such equivalent exists, the nature of the act changes

Kinds of Condonation

1. As to extent
TOTAL
PARTIAL – refer to the amount of indebtedness, or to an accessory obligation (such as pledge or interest) or
to some other aspect of the obligation (such as solidarity)

2. As to form

Art 1270 Par 1 Condonation or remission is essentially gratuitous, and requires the acceptance by the obligor.
It may be expressly or impliedly.

EXPRESS – when made formally, accordance with the forms of ordinary donations
IMPLIED – inferred from the acts of parties

Requisites of Condonation
1. Debts must be existing and demandable at the time remission is made
2. The renunciation of the debt must be gratuitous or without any equivalent or consideration
3. Debtor must accept the remission
 Unilateral renunciation is possible under Art 6 and nothing prevents him from abandoning his rights
 Parties must be capacitated and must consent; requires acceptance by the obligor, implied in mortis
causa (effective upon the death of the creditor) and express inter vivos (effective during the lifetime
of the creditor)

When formalities required

Art 1270 Par 2 One and other kind shall be subject to the rules which govern inofficious donation. EXPRESS
condonation, shall furthermore, comply with the forms of donation.
 Bilateral acts which requires acceptance by the debtor
 Subject to the rules on donations with respect to acceptance, amount and revocation
 Formalities of a donation are required in the case of an express remission
 Revocable – subject to the rule on inofficious donation (excessive, legitime is impaired), ingratitude and
condition not followed

Presumptions in Condonation

1. Art 1271 The DELIVERY of a private document evidencing a credit, made voluntarily by a creditor to the
debtor, IMPLIES the renunciation of the action which the former had against the latter.
 Not applicable to public documents because there is always a copy in the archives which can be used to prove
the credit.
 Surrender of weapon of enforcement of his rights

2. Art 1272 Whenever the private document in which the debt appears is found in the POSSESSION of the
debtor, it shall be presumed that the creditor delivered it voluntarily, unless the contrary is proved.
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 Only prima facie and may be overcome by contrary evidence to show that notwithstanding the possession by
the debtor of the private document of credit, it has not been paid.

3. Art 1274 It is presumed that the accessory obligations of pledge has been REMITTED when the thing pledged,
after its delivery to the creditor, is found in the possession of the debtor, or a third person who owns the
thing.

Effects of Condonation
1. In general  extinguishes obligation either totally or partially
2. In case of joint or solidary obligations  affects the share corresponding to the debtor in whose benefit the
remission was given

Effects of Renunciation of Principal or Accessory Obligation

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

V. Confusion or Merger of Rights

Concept: Merger or confusion is the meeting in one person of the qualities of the creditor and the debtor with respect
to the same obligation.
 Erases the plurality of subjects of the obligation and extinguishes the obligation because it is absurd that a
person should enforce an obligation against himself.
 May be revoked, as a result of which the obligation is recreated in the same condition that it had when merger
took place
 CAUSE OF MERGER: Anything that brings about succession to the credit e.g. debtor inherits credit from the
creditor. However, this cannot be the other way around because under the present law, heirs do not inherit
the debts of their predecessors.

Requisites for Confusion

1. Must take place between the creditor and the principal debtor (Art 1276)
2. Very same obligation must be involved, for if the debtor acquires rights from the creditor, but not
particular obligation in question, there will be no merger
3. Confusion must be total or as regards the entire obligation

Effects of Confusion
1. In general  extinguish the obligation
2. In case of
 Joint obligations - Art 1277 Confusion does not extinguish a joint obligation EXCEPT as regards
the share corresponding to the creditor or debtor in whom the two characters concur.
 Solidary obligations – Art 1215 “… confusion… made by any of the solidary creditors or with any of the
solidary debtors shall extinguish the obligation, without prejudice to the provisions of Art 1219.”
(Solidary co-debtor who has been remitted is still liable to co-debtors if one of the had paid the
obligation in full prior the remission)

Confusion in Principal or Accessory Obligation

Art 1276 Merger which takes place in the person of the principal debtor or creditor benefits the guarantors.
Confusion which takes place in the person of any of the latter does not extinguish the obligation.
 Merger releases the guarantor because they are merely accessory obligations
 Guarantor acquires the credit, his obligation as guarantor is extinguished, but the principal obligation subsists
which he can enforce against the debtor and other co-guarantors.
 When mortgaged property belongs to a third person, mortgagee acquires a part of the property; the same is
released from the encumbrance. The obligation merely becomes a partly (if the acquisition is not total)
unsecured obligation.

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VI. Compensation

Concept: It is a mode of extinguishing the obligation to the concurrent amount, the obligations of those persons who
in their own right are reciprocally debtors and creditors of each other.
 Offsetting of two obligations which are reciprocally extinguished if they are of equal value or extinguished to
the concurrent amount if of different values.
 Balancing between two obligations, involves a figurative operation of weighing two obligations simultaneously
in order to extinguish them to the extent in which the amount of one is covered by the other.
 Payment is simplified and assured between persons who are indebted to each other.
 Although it takes place by operation of law, it must be alleged and proved by the debtor who claims its
benefits. Once proved, its effect retroacts to the moment when the requisites provided by law concur.
 Distinguished from payments

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

Advantage of Compensation over Payment

1. Simple, taking effect without action by either party to extinguish their respective obligations
2. More guaranty in making the credit effective, because there is less risk of loss by the creditor due to
insolvency or fraud of the creditor

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

Distinguished from Confusion

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

Kinds of Compensation

1. As to extent

TOTAL – when two obligations are of the same amount

PARTIAL – when the amounts are not equal

2. As to origin

LEGAL – takes place by operation of law because all the requisites are present

VOLUNTARY/CONVENTIONAL – when the parties agree to compensate their mutual obligations even if
some requisite is lacking, such as that provided in Art 1282
Art 1279 Requisites of legal compensation is inapplicable
Art 1282 The parties may agree upon the compensation of debts which are not yet due.
 Requisites of Voluntary Compensation
1. Each of the parties can dispose of the credit he seeks to compensate
2. They agree to the mutual extinguishment of their credits

JUDICIAL – when decreed by the court in a case where there is a counterclaim e.g. defendant is the creditor
of the plaintiff for an unliquidated amount, sets up his credit as a counterclaim against the plaintiff and his
credit is liquidated by judgment, thereby compensating it with the credit of the plaintiff. Legal compensation is
not possible because the claim is unliquidated

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

FACULTATIVE – when it can be claimed by one of the parties who, however, has the right to object to it,
such as when one of the obligations has a period for the benefit of one party alone and who renounces that
period so as to make the obligation due
 When legal compensation cannot take place for want of some legal requisites
 As compared with conventional: facultative is unilateral, while conventional depends
upon agreement of both parties

LEGAL COMPENSATION
Requisites for Legal Compensation
Art 1279 In order that compensation may be proper it is necessary that:
 
1. Each one of the obligors be bound principally and that at the same time a principal creditor of the other 
 “Principals” not applicable if only a guarantor  
 Solidary debtor cannot set up the obligation of the creditor in favor of a co-debtor, except as
regards the share of the latter  
2. That both debts consists in a sum of money, or if the things due are consumable, they be of the same kind
and also of the same quality if the latter has been stated 
3. That the two debts are due 
4. That they be liquidated and demandable 

“Liquidated debts” – when its existence and amount are determined

“Demandable” - enforceable in court

What are not subject to compensation
o Period which has not yet arrived
o Suspensive condition has not yet happened
o Obligation cannot be sued upon e.g. natural obligation
5. That over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor 
 Not applicable to facultative obligations, but applicable to those with penal clause  

Art 1280 Notwithstanding the provisions of the preceding article, the guarantor may set up compensation as regards
what the creditor may owe the principal debtor.
 Liability of the guarantor is only subsidiary; it is accessory to the principal obligation of the debtor
 If debtor’s obligation is compensated, it would mean the extinguishment of the guaranteed debt and benefits
the guarantor

Effects of Legal Compensation

1. Both debts are extinguished to the concurrent amount (Art 1290)
2. Interests stop accruing on the extinguished obligations or the part extinguished
3. Period of prescription stops with respect to the obligation or part extinguished
4. All accessory obligations of the principal which has been extinguished are also extinguished
5. If a person should have against him several debts which are susceptible of compensation, the rules on
application of payments shall apply to the order of the compensation. (Art 1289)

When compensation is not allowed

1. Depositum (Art 1287)
2. Commodatum (Art 1287)
3. Support due gratuitous title (Art 1287)
4. Civil liability arising from a penal offense (Art 1288)

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

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Neither can compensation be set up against a creditor who has a claim for support due by gratuitous title, without
prejudice to the provisions of Art 301 (support in arrears can be compensated).
 Why? A deposit is made or a commodatum is given on the basis of confidence of the owner. It is
therefore, just that the depositary or borrower should in fact perform his obligation; otherwise the trust of
the depositor or lender would be violated.

Art 1288 Neither shall there be compensation if one of the debts consists in civil liability arising from a penal offense.
 Why? Satisfaction of such obligation is imperative

No compensation may occur even when all the requisites concur:

1. When there is renunciation of the effects of compensation by a party  rests upon a potestative right
and unilateral declaration of renunciation is sufficient
2. When the law prohibits compensation
a. Art 1287
b. Art 1288

Compensation of debts payable in different places

Art 1286 Compensation takes place by operation of law, even though the debts may be payable at different
places, but there shall be an indemnity for expenses of exchange or transportation to the place of payment.
 Applies to legal compensation but not to voluntary compensation

Effects of Nullity of debts to be compensated

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

Effects of Assignment of Credit

A. Made AFTER compensation took place: no effect; compensation already perfected, nothing to assign at all
- Assignee is left with an action for eviction or for damages for fraud against assignor

B. Made BEFORE compensation took place

1. With consent of debtor  cannot set up against assignee UNLESS debtor reserved his right to
compensation when he gave his consent

Art 1285 Par 1 The debtor who has consented to the assignment of rights made by a creditor in favor of a third person,
cannot set up against the assignee the compensation which would pertain to him against the assignor, UNLESS the
assignor was notified by the debtor at the time he gave his consent, that he reserved his right to the compensation.

2. With knowledge but without consent of debtor  only debts prior to assignment, not subsequent

Art 1285 Par 2 If the creditor communicated the cession to him but the debtor did not consent thereto, the latter may
set up the compensation of debts previous to the cession, but not of subsequent ones.
 
3. Without the knowledge of debtor  all debts maturing prior to his knowledge

Art 1285 Par 3 If the assignment is made without the knowledge of the debtor, he may set up the compensation of all
credits prior to the same and also later ones until he had knowledge of the assignment.
Rationale: As far as the debtor is concerned, the assignment does not take effect except from the time he is
notified thereof.

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VII. Novation

Concept: The extinguishment of an obligation by the substitution or change of the obligation by a subsequent one
which extinguishes or modifies the first either by:
1. Changing the object or principal conditions
2. Substituting the person of the debtor
3. Subrogating a third person in the rights of the creditor
 Unlike other acts of extinguishing obligation, novation is a juridical act of dual function in that at the time
it extinguishes an obligation, it creates a new one in lieu of the old.
 Does not operate as absolute but only as a relative extinction.

Art 1291 Obligations may be modified by:

1. Changing the object or principal conditions
2. Substituting the person of the debtor
3. Subrogating a third person in the rights of the creditor

Kinds of Novation

1. As to form

EXPRESS – parties declare that the old obligation is extinguished and substituted by the new obligation
IMPLIED – incompatibility between the old and the new obligations that they cannot stand together

2. As to origin

CONVENTIONAL – by express stipulation of the parties

LEGAL – by operation of law

3. As to object

OBJECTIVE/REAL – change in the cause, object or principal

SUBJECTIVE/PERSONAL – modification of obligation by the change of the subject
o passive - substitution of debtor
o active - subrogation of a third person in the rights of the creditor
MIXED – both objective and subjective novation

4. As to effect

PARTIAL – only a modification or change in some principal conditions of the obligation

TOTAL – obligation is completely extinguished

Art 1292 In order that obligation may be extinguished by another which substitutes the same, it is imperative that
1. It be so declared in unequivocal terms (express)
2. Old and the new obligations be on every point incompatible with each other (implied)
 Novation is not presumed
 Express novation: expressly disclose that their object in making the new contract is to extinguish the old
contract
 Implied novation: no specific form is required, all that is needed is incompatibility between original and
subsequent contracts
 Test of incompatibility: If the two contracts can stand together and each one having independent existence
 The change must refer to the object, the cause or the principal conditions of the obligations. Accidental
changes do not produce novation.

Requisites of Novation
1. Previous valid obligation
2. The agreement of all parties to the new contract
3. Extinguishment of the old contract
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4. Validity of the new one
5. Animus novandi or intent to novate (especially for implied novation and substitution of debtors)

Effects of Novation
1. In general  extinguishment of the original obligation and creation of a new one
2. When accessory obligation may subsist  only insofar as they may benefit third person who did not give the
consent to the novation
 Why? Mortgage, pledge, guaranty was given to any for a particular obligation or for the insolvency
of a particular debtor; any change in either of this destroys the basis of the consent of the
mortgagor, pledgor, surety or guaranty

Effect of the Status of the Original or the New Obligation

1. Nullity of the original obligation  new obligation is VOID

 One of the requisites of novation is a previous valid obligation
 Also applies to voidable that are already annulled/extinguished

Voidability of the original obligation

 new obligation is VALID if ratified before novation
 new obligation is VALID even if not ratified, but voidable at the instance of the debtor
 Consent of debtor constitutes implied waiver of the action for nullity
 Defect is not completely cured in expromision wherein debtor has not intervened or
consented

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

2. Nullity of the new obligation  original SUBSISTS, UNLESS intends extinguishment of former in any event

Voidability of the new obligation  new obligation is VALID

 BUT if new obligation is annulled and set aside, original SUBSISTS

Art 1297 If the new obligation is void, the original one shall subsist, unless the parties intended that the former one shall
be extinguished in any event.

3. Suspensive or resolutory condition of original obligation  New is pure

 If intention is merely to suppress the condition, no novation
 If intention is extinguish the original obligation itself by the creation of a new obligation, the novation
does not arise except from fulfillment of the condition from original obligation.
 Where the original obligation is conditional, novation itself must be held to be conditional also and
its efficacy depends upon whether the condition which affects the former is complied with or not
 Suspensive condition of the original not performed, obligation does not come into existence, cause
for the new obligation is wanting
 Resolutory condition, same category as void obligation or one which has been extinguished

Original obligation is pure  New obligation is conditional

 If the intention is merely to attach the condition to the original obligation, there is no novation.
 If the new conditional obligation is intended to substitute the original and pure obligation,
novation (and consequent extinguishment of the original) is subject to the condition.
 Pending the happening of the condition, the old obligation is enforceable

Art 1299 If the original obligation was subject to a suspensive or resolutory condition, the new obligation shall be under
the same condition, unless it is otherwise stipulated.

OBJECTIVE NOVATION – change in the object of prestations

Meaning of “PRINCIPAL CONDITIONS” - principal conditions or terms (e.g. making the debt absolute instead of
conditional and vice-versa)

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SUBJECTIVE NOVATION
 In all kinds of subjective novation, the consent of the creditor is required.

1. By change of debtor
 CONSENT OF THE THIRD PARTY ALWAYS REQUIRED. Why? Because he assumes the obligation
 CONSENT OF THE CREDITOR IS LIKEWISE INDISPENSABLE. Why? Substitution of one debtor for another may
delay or prevent the fulfillment of the obligation by reason of the inability or insolvency of the new debtor
o Consent may be implied or express as long as it is given.
o However, it cannot be presumed from his acceptance of payments by a 3rd party for the benefit of
the debtor without further acts; no novation because no consent to the transfer of the debt itself
 It is not enough to extend the juridical relation to a 3rd person, it is necessary that the old debtor be released
from the obligation and the 3rd person or new debtor takes his place.
 Without the release, there is no novation, the person who assumed the obligation of the debtor merely
becomes a co-debtor or a surety
 No agreement to solidarity, the first and the new debtor are considered obligated jointly.

a. EXPROMISION
- May be done at the instance of the creditor or the third party himself

Requisites of Expromision
1. Consent of two parties (new debtor and creditor)
2. Knowledge or consent of the debtor is not required

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

Art 1236 Par 2 Whoever pays for another may demand from the debtor what he has paid, except that if he paid without the
knowledge or against the will of the debtor, he can recover only insofar as the payment has been beneficial to the debtor.

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

Effects of Expromision
1. The debtor is released from obligation
2. Creditor generally cannot recourse from the old debtor if the new debtor is insolvent
3. If substitution is without his knowledge or consent
a. Old debtor is not liable for the insolvency or non-fulfillment of the new debtor (Art 1294)
b. The new debtor can only compel old debtor to reimburse inasmuch as the payment has been
beneficial to him  No subrogation takes place (Art 1237)
4. If substitution is with knowledge and consent
a. New debtor is entitled to full reimbursement of the amount paid and subrogation

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

b. DELEGACION
 Debtor offers and the creditor accepts a third person who consents to the substitution so that the
consent of the three is necessary
 Delegante (old debtor), delegatario (creditor) and delegado (third person new debtor)

Requisites of Delegacion (vs. Art 1293)

1. Initiative for substitution must emanate from the old debtor
2. Consent of the new debtor
3. Acceptance by the creditor

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Effects of Delegacion
1. Original debtor is released from the obligation
2. The new debtor is subrogated in the rights of the creditor. He may demand from the old debtor the entire
amount of what he has paid for the obligation. (Art 1302 Par 2)
3. GENERAL RULE: Old debtor is not liable for the insolvency or non-fulfillment of the new debtor (Art 1295)
EXCEPTION:
i. He is aware of the insolvency at the time he delegated his debt (Art 1295)
ii. At the time of the delegation, the new debtor’s insolvency is already existing and of public
knowledge (Art 1295)

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

2. By change of creditor: subrogation of a third person in the rights of the creditor

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

a. CONVENTIONAL SUBROGATION
- Takes place by agreement of the parties

Requisites of Conventional Subrogation (Art 1301)

1. Consent of the old creditor  because his right is extinguished
2. Consent of the debtor  old is extinguished and he becomes liable to a new obligation
3. Consent of the third person/new creditor  becomes a party to the new relation

Effects of Conventional Subrogation

1. Art 1303 Subrogation transfers to the person subrogated the credit with all the rights thereto
appertaining, either against the creditor or against third persons, be they guarantors or possessors of
mortgages, subject to stipulation in a conventional subrogation.
o If suspensive condition is attached, that condition must be fulfilled first in order that the new
creditor may exercise his rights.

2. Art 1304 A creditor, to whom partial payment has been made, may exercise his right for the remainder
and he shall be preferred to the person who has been subrogated in his place in virtue of the partial
payment of the same credit.

b. LEGAL SUBROGATION
- Takes place without agreement but by operation of law because of certain acts
- GENERAL RULE: Not presumed, EXCEPTION: Art 1302
- The third person is called “legal subrogee”

When is Legal Subrogation presumed

Art 1302 It is presumed that there is legal subrogation:
1. When a creditor pays another creditor who is preferred, even without the debtor’s knowledge
2. When a 3rd person, not interested in the obligation, pays with the express/tacit approval of the debtor
3. When, even without the knowledge of the debtor, a person interested in the fulfillment of the
obligation pays, without prejudice to the effects of confusion as to the latter’s share

Effects of Legal Subrogation

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1. Art 1303 Subrogation transfers to the person subrogated the credit with all the rights thereto
appertaining, either against the creditor or against third persons, be they guarantors or possessors of
mortgages, subject to stipulation in a conventional subrogation.
o If suspensive condition is attached, that condition must be fulfilled first in order the new creditor
may exercise his rights.

2. Art 1304 A creditor, to whom partial payment has been made, may exercise his right for the remainder
and he shall be preferred to the person who has been subrogated in his place in virtue of the partial
payment of the same credit.

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Title II. CONTRACTS
Chapter I. General Provisions

A. DEFINITION
Art 1305 A contract is a meeting of minds between two persons whereby one binds himself, with respect to the
other, to give something or to render some service.
- Sanchez Roman: “a juridical convention manifested in legal form, by virtue of which one or more persons
bind themselves in favor of another or others, or reciprocally, to the fulfillment of a prestation to give, to
do or not to do.”
- Limited to that which produces patrimonial liabilities
- Binding effect of contract based on the following principles
o Obligations arising from the contract have the force of law between the contracting parties
o There must be mutuality between the parties based on their essential equality, to which is
repugnant to have one party bound by the contract leaving the other free therefrom

B. ELEMENTS OF A CONTRACT
1. Essential elements (Chapter II, infra) – without which there can be no contract
a. Consent
b. Object
c. Cause
2. Natural elements – exist as part of the contract even if the parties do not provide for them, because the
law, as suppletory to the contract, creates them. E.g. warranty against hidden defects or eviction in the
contract of purchase and sale
3. Accidental elements – agreed upon by the parties and which cannot exist without being stipulated e.g.
mortgage, guaranty, bond

C. CHARACTERISTICS OF A CONTRACT

1. Obligatory force – constitutes the law as between the parties

Art 1308 The contracts must bind both contracting parties; its validity or compliance cannot be left to the
will of one of them.

2. Mutuality – validity and performance cannot be left to the will of only one of the parties
 Purpose is to render void a contract containing a condition which makes fulfillment dependent
exclusively upon the uncontrolled will of the one of the contracting parties.

Art 1308 The contracts must bind both contracting parties; its validity or compliance cannot be left to the
will of one of them.

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

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

Art 1473 The fixing of the price can never be left to the discretion of one of the contracting parties.
However, if the price fixed by one of the parties is accepted by the other, the sale is perfected.

CONTRACT OF ADHESION: A contract in which one party has already prepared a form of a contract containing
stipulations desired by him and he simply asks the other party to agree to them if he wants to enter into the contract.

3. Relativity – binding only upon the parties and their successors

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a. Contracts take effect only between the parties, their assignments and heirs

Art 1311 Par 1 Contracts take effect only between the parties, assigns and heirs EXCEPT in case
where the rights and obligations arising from the contract are no transmissible by their nature or by
stipulation or by provision of law. The heir is not liable beyond the value of property he received from
the decedent.
INTRANSMISSIBLE CONTRACTS:
a. Purely personal e.g. partnership and agency
b. Very nature of obligation that requires special personal qualifications of the
obligor
c. Payment of money debts not transmitted to the heirs but to the estate

b. No one may contract in the name of another

Art 1317 No one may contract in the name of another without being authorized by the latter or unless
he has by law a right to represent him.
 Unenforceable unless ratified expressly or impliedly (Unenforceable Contracts, Art 1302 Par 1)

Two more general principles of contracts that were not included in your book/syllabus

4. Consensuality
5. Freedom – entering into contracts is a guaranteed right of the citizens. They are free to do so as long as it’s
not contrary to law, good morals, customs, public order and public policy.

D. PARTIES IN A CONTRACT

1. Auto-contracts
o Necessary for the existence of a contract that two distinct persons enter into it
o No general prohibitions, only special prohibitions such as Art 1491 (Persons who cannot acquire by
purchase, even at a public or judicial auction)
o Auto-contracts are generally VALID  Existence of a contract is not determined by the number of
persons who intervene in it, but by the number of parties. Not by the number of individual wills but
by the number of declarations of will.
o As long as there are two distinct patrimonies, even if they are represented by the same person.

2. Freedom to contract
Art 1306 The contracting parties may establish such stipulations, clauses, terms and conditions as they may
deem convenient, provided they are not contrary to law, morals, good customs, public order and public policy.

Special disqualifications:
o Art 87, FC inter vivos donation between spouses
o Art 1490 husband and wife generally cannot sell property to each other, subject to exceptions
o Art 1491 special prohibition as to who cannot acquire by purchase
o Art 1782 persons prohibited from giving each other any donation or advantage, cannot enter into
universal partnership

3. What they may not stipulate

Art 1306 “… contrary to law, morals, good customs, public order and public policy”
o A contract is to be judged by its character, courts will look into the substance and not to the mere
form of the transaction

a. Contrary to law
Laws a contract must not intervene:
1. Expressly declare their obligatory character
2. Prohibitive
3. Express fundamental principles of justice which cannot be overlooked by the contracting parties
4. Impose essential requisites without which the contract cannot exist
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i. Pactum commissorium – automatic foreclosure
Art 2088 The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose
of them. Any stipulation to the contrary is null and void.

ii. Pactum leonina – one party bears the lion’s share of the risk
Art 1799 A stipulation including one or more parties from any share in the profits or losses is void

iii. Pactum de non alienado – not to alienate

Art 2130 A stipulation forbidding the owner from alienating the immovable mortgaged shall be void  

b. Contrary to morals
 Man’s innate sense or notion of what is right and wrong. More or less universal.

c. Contrary to good customs

 Custom pertains to certain precepts that cannot be universally recognized as moral, sometimes they
only apply to certain communities or localities
 E.g. Liguez v CA

d. Contrary to public order

 Consideration of the public good, will or weal (welfare), peace and safety of the public and health of
the community

e. Contrary to public policy

 Court must find that the contract contravenes some established interest of the society
 E.g. Ferrazzini v Gsel - stipulation not to engage in competitive enterprise after leaving the
employment. Those stipulation must be limited to time, place and extent

E. CLASSIFICATION OF CONTRACTS

1. According to subject matter

a. Things
b. Services

2. According to name

a. NOMINATE – have their own individuality (names) and are regulated by special provisions of law,
b. INNOMINATE – without particular names
Art 1307 Innominate contract shall be regulated by the stipulations of the parties, by the provisions of
Titles I and II of this Book, by the rules governing the most analogous nominate contracts and by
customs of the place.

i. Do ut des I give, you give

ii. Do ut facias I give, you do
iii. Facio ut facias I do, you do
iv. Facio ut des I do, you give

3. According to perfection

a. By MERE CONSENT (consensual) – e.g. purchase and sale

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

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4. According to its relation to other contracts, degree of dependence
a. Preparatory – e.g. agency
b. Principal – e.g. lease or sale
c. Accessory – e.g. pledge, mortgage or suretyship

5. According to form
a. Common or informal – e.g. loan
b. Special or formal – e.g. donations and mortgages of immovable property

6. According to purpose
a. Transfer of ownership – e.g. sale or barter
b. Conveyance of use – e.g. commodatum
c. Rendition of services – e.g. agency

7. According to the nature of the vinculum produced, nature of obligation produced

a. Unilateral - e.g. commodatum or gratuitous deposit
b. Bilateral or sinalagmatico – e.g. purchase and sale
c. Reciprocal

8. According to cause
a. Onerous
b. Gratuitous or lucrative

9. According to risk
a. Commutative
b. Aleatory

F. STAGES OF CONTRACTS
a. Preparation – period of negotiation and bargaining, ending at the moment of agreement of the parties
b. Perfection – moment when the parties come to agree on the terms of the contract
c. Consummation or death – fulfillment or the performance of the terms agreed upon in the contract

G. WITH RESPECT TO THIRD PERSONS

1. Stipulations in favor of third persons (stipulation pour autrui)  may demand its fulfillment provided the
acceptance is made prior to revocation

Art 1311 Par 2 If a contract should contain some stipulation in favor of a third person, he may demand its
fulfillment provided he communicated his acceptance to the obligor before its revocation. A mere
incidental interest or benefit of a person is not sufficient. The contracting parties must have clearly and
deliberately conferred favor upon third person.

 Test of beneficial stipulation - A mere incidental interest of a 3rd person is not within the doctrine; it must
be the purpose and intent of the stipulating parties to benefit the third person
 Requisites of stipulacion pour autrui
a. Stipulation in favor of third person is a part, not the whole of the contract
b. Favorable stipulation not conditioned or compensated by any kind of obligation whatever
c. Neither of the contracting parties bear the legal representation or authorization of the third party
d. Benefit to the 3rd person was clearly and deliberately conferred to by parties
e. Third person communicated his acceptance to the obligor before the latter revokes the same

2. Possession of the object of contract by third persons  only for real rights
Art 1312 In contracts creating real rights, third persons who come into possession of the object of the contract
are bound thereby, subject to he provisions of the Mortgage Law and the Land Registration laws.

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3. Creditors of the contracting parties
Art 1313 Creditors are protected in cases of contracts intended to defraud them.
 Art 1387 - in rescissible contracts, presumption of fraudulent alienation when debtor does leave sufficient
property to cover his obligations
 Creditor may ask for rescission – Art 1177 (accion subrogatoria) and Art 1381 (accion pauliana)

4. Interference by third persons

Art 1314 Any third person who induces another to violate his contract shall be liable for damages to the
other contracting party.
 Liability for damages: third person’s liability cannot be more than the party he induced (Daywalt v Recoletos)
 Requisites of Interference With Contractual Relation by Third Person
a. Existence of a valid contract
b. Knowledge by a third person of the existence of a contract
c. Interference by the third person in the contractual relation without legal justification

Chapter II. Essential Requisites of Contracts

CONSENT

Art 1319 Consent is manifested by the MEETING of the offer and the acceptance upon the thing and the cause
which are to constitute the contract. The offer must be certain and the acceptance absolute. A qualified acceptance
constitutes a counter-offer.
Acceptance made by letter or telegram does not bind the offerer except from the time it came to his
knowledge. The contract, in such a case, is PRESUMED to have been entered into in the place where the offer
was made.

REQUISITES OF CONSENT
1. Plurality of subjects
2. Capacity to give consent
3. Intelligent and voluntary
4. Express or tacit manifestation of will
5. Conformity of the internal will and its manifestation

1. Must be MANIFESTED by the concurrence of the offer and acceptance  with respect to object and cause

OFFER – unilateral proposition which one party makes to the other for the celebration of the contract. It must be:

a. Must be certain (Art 1319)

 DEFINITE – so that upon acceptance an agreement can be reached on the whole contract; not definite if
object is not determinate
 COMPLETE – indicating with sufficient clearness the kind of contract intended and definitely stating the
essential conditions of the proposed contract, as well as the non-essential ones desired by the offeror
 INTENTIONAL – should be serious and not made for fun or in jest

b. What may be fixed by the offeror  time, place and manner of acceptance
Art 1321 The person making the offer may fix the time, place and manner of acceptance, all of which must
be complied with.
 Acceptance not made in the manner provided by the offeror is ineffective.

c. When made through the agent  accepted from the time acceptance communicated to the agent
Art 1322 An offer made through an agent is accepted from the time acceptance is communicated to him.

d. Circumstances when offer becomes defective  death, civil interdiction, insanity or insolvency

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Art 1323 An offer becomes ineffective upon the death, civil interdiction, insanity or insolvency of either
party before acceptance is conveyed.

e. Business advertisements of things for sale  not definite offers

Art 1325 Unless it appears otherwise, business advertisements of things for sale are not definite offers, but
mere invitation to make an offer.  

f. Advertisement for bidders

Art 1326 Advertisements for bidders are simply invitations to make proposals, and the advertiser is not
bound to accept the highest of lowest bidder, UNLESS the contrary appears.
o Not applicable to judicial sale wherein the highest bid must necessarily be accepted

ACCEPTANCE – an unaccepted offer does not give rise to consent

 Contract is perfect when the offeror or counter-offeror learns about the acceptance!

a. Must be absolute (Art 1319)

b. Kinds of acceptance
EXPRESS (Art 1320)
IMPLIED (Art 1320) arise from acts or facts which reveal the intent to accept such as the consumption
of things sent to the offeree, or the fact of immediately carrying out the contract offered
QUALIFIED (Art 1319) not an acceptance but constitutes a counter-offer

c. If made by letter or telegram

Art 1319 Par 2 Acceptance made by letter or telegram does not bind the offerer except from the time it
came to his knowledge.

Four theories on when the contract is perfected

1. Manifestation theory – counterofferee manifest his acceptance
2. Expedition Theory – sending of the letter, mailing if by letter
3. Reception Theory – receipt of the message of acceptance
4. Cognition Theory – knowledge of offeror of the acceptance
Art 1319 Par 2 “… except from the time of his knowledge”

d. Period of acceptance
Art 1324 “When the offerer has allowed the offeree a certain period to accept…”
 Offeree may accept any time until such period expires.
 Acceptance beyond the time fixed is not legally an acceptance but constitutes a new offer.
 Acceptance not made in the manner provided by the offeror is ineffective.
 If offeror has not fixed the period, the offeree must accept immediately within a reasonable tacit period.
 Offer implies an obligation on the part of the offeror to maintain it for such a length of time as to permit
the offeree to decide whether to accept it or not.
 Extinguishment or annulment of offer
o Withdrawal by the offeror
o Lapse of the time for option period
o Legally incapacitated to act
o Offeree makes counter-offer
o Contract becomes illegal

e. Contract of option
Art 1324 “… the offer may be withdrawn at any time before acceptance by communicating such
withdrawal, EXCEPT when the option is founded upon a consideration, as something paid or promised.”
 Preparatory contract in which one party grants to the other, for a fixed period and under specified
conditions, the power to decide whether or not to enter into a principal contract
 Must be supported by an independent consideration and the grant must be exclusive
 If the option is not supported by an independent consideration, offeror can withdraw the privilege at any
time by communicating the withdrawal to the other party, even if the “option” had already been accepted.
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2. Necessary LEGAL CAPACITIES of the parties

Who cannot give consent

Art 1327 The following cannot give consent to a contract:
1. Unemancipated minors
2. Insane or demented persons
3. Deaf-mutes who do not know how to write

When offer and/or acceptance is made

 During a lucid interval  VALID
 In a state of drunkenness  VOIDABLE utter want of understanding
 During a hypnotic spell  VOIDABLE utter want of understanding

3. The consent must be INTELLIGENT, FREE, SPONTANEOUS and REAL

Art 1330 A contract where consent is given through mistake, violence, intimidation, undue influence, or fraud is
VOIDABLE.
 Mistake and violence – spontaneous and intelligence

Effect of Defects of Will: Contract is VOIDABLE (Art 1330)

VICES OF CONSENT

a. Mistake or Error – a wrong or false notion about such matter, a belief in the existence of some circumstance,
fact or event which in reality does not exist.

Art 1331 In order that MISTAKE may invalidate consent, it should refer to the substance of the thing which is the
object of the contract, or to those conditions which have principally moved one or both parties to enter into the
contract.
Mistake as to the identity or qualifications of one of the parties will vitiate consent only when such identity or
qualifications have been the principal cause of the contract.
A simple mistake of account shall give rise to its correction.

KINDS OF MISTAKE

1. Mistake of fact - generally not a ground for annulment of contracts

 Ground of mistake based on error is limited to cases in which it may reasonably be said that without
such error the consent would not have been given
 Effect of mistake is determined by whether the parties would still have entered into the contract despite
knowledge of true fact  “influence upon party”

a. As to substance of object Invalidates consent if refers to the substance of the thing

 But if mistake in lot number for instance, remedy is only
reformation of the contract
b. As to principal conditions (essential or Invalidates consent
substantial in character)
c. As to identity or qualifications of one For identity/error as to person - generally not, except when the
of the parties qualification is the principal cause of the contract especially in
gratuitous contracts
For qualifications – Invalidates consent
Solvency of the party – not a cause of nullity
d. As to quantity, as distinguished from Error of account is a mistake in computation  make proper
simple mistake of account correction
Error as to quantity – may vitiate a contract if the primary
consideration is the quantity e.g. parcel of land was actually only 10
ha and not 30 ha
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Mistakes that do not affect the validity of the contract
a. Error with respect to accidental qualities of the object of the contract
b. Error in the value of thing
c. Error which refers not to conditions of the thing, but to accessory matters in the contract, foreign to
the determination of the objects

2. Error of law – mistake as to the existence of a legal provision or as to its interpretation or application

GENERAL RULE: Ignorantia legis neminem excusat

Art 3 Ignorance of the law excuses no one from compliance therewith.

EXCEPTION: Mutual error of law

Art 1334 Mutual error as to the legal effect of an agreement when the real purpose of the parties is frustrated,
may vitiate consent.
 Requisites for mutual error of law
a. Error must be as to the legal effect of an agreement includes rights and obligations of the
parties, not as stipulated in the contract but as provided by law
b. Must be mutual
c. Real purpose of the parties is frustrated

When one of the parties is unable to read and fraud is alleged  burden of proof on party enforcing the contract
Art 1332 When one of the parties is unable to read, or if the contract is in a language not understood by him, and
mistake or fraud is alleged, the person enforcing the contract must show that the terms thereof have been fully
explained to the former.

Inexcusable mistake  knew the doubt, contingency or risk

Art 1333 There is no mistake if the party alleging it knew the doubt, contingency or risk affecting the object of
the contract.
 Party cannot alleged error which refers to a fact known to him or which he should have known by ordinary
diligent examination of the facts
 Courts consider not only the objective aspect of the case but also the subjective e.g. intellectual capacity
of the person who made the mistake
 E.g. Caused by manifest negligence

b. Violence and Intimidation

Art 1335 There is VIOLENCE when in order to wrest consent, serious or irresistible force is employed.
There is INTIMIDATION when one of the contracting parties is compelled by a reasonable and well-grounded
fear of an imminent and grave evil upon his person or property, or upon the person or property of his spouse,
descendants or ascendants, to give his consent.
To determine the degree of intimidation, the age, sex and condition of the person shall be borne in mind.
A threat to enforce one's claim through competent authority, if the claim is just or legal, does NOT vitiate consent.

 DURESS: degree of constraint or danger either actually inflicted (violence) or threatened and impending
(intimidation) sufficient to overcome the mind and will of a person of ordinary firmness
 Seriousness of the evil or wrong measured both objectively (degree of harm that the evil in itself is likely to
produce) and subjectively (determining the effect of the threat upon the mind of the victim in view of his
personal circumstances and his relation to the author of the intimidation)

VIOLENCE
 Physical force or compulsion
 External and generally serve to prevent an act from being done
 Requisites of Violence
1. Physical force employed must be irresistible or of such a degree that the victim has no other course, under
the circumstances, but to submit
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2. That such force is the determining cause in giving the consent to the contract

INTIMIDATION
 Moral force or compulsion
 Internal operating upon the will and induces the performance of an act
 Influences the mind to choose between two evils, between the contract and the imminent injury
 Requisites of Intimidation
1. Intimidation must be the determining cause of the contract, or must have caused the consent to be given
2. That the threatened act be unjust or unlawful
3. That the threat be real and serious, there being an evident disproportion between the evil and the
resistance which all men can offer, leading to the choice of the contract as the lesser evil
4. That it produces a reasonable and well-grounded fear from the fact that the person from whom it come
has the necessary means or ability to inflict the threatened injury

“Person” not limited to life and physical integrity but also includes liberty ad honor, covers all injuries which are not
patrimonial in nature

“Reasonable fear” fear occasioned by the threat must be reasonable and well-grounded; it must be commensurate
with the threat

Effect of Violence and Intimidation

Art 1336 Violence or intimidation shall ANNUL the obligation, although it may have been employed by a third
person who did not take part in the contract.

c. Undue Influence – any means employed upon a party which, under the circumstances, he could not well
resist, and which controlled his volition and induced him to give his consent to the contract which otherwise he
would not have entered into.

Art 1337 There is UNDUE INFLUENCE when a person takes improper advantage of his power over the will of
another, depriving the latter of a reasonable freedom of choice. The following circumstances shall be considered: the
confidential, family, spiritual and other relations between the parties, or the fact that the person alleged to
have been unduly influenced was suffering from mental weakness, or was ignorant or in financial distress.

 In some measure destroy the free agency of a party and interfere with the exercise of that independent
discretion which is necessary for determining the advantages and disadvantages of a contract.
 Distinguished from intimidation

UNDUE INFLUENCE INTIMIDATION

There need not be an unjust or unlawful act Unlawful or unjust act which is threatened and
which causes consent to be given
Moral coercion

 By analogy, undue influence by a third person may also vitiate consent (Art 1336)

d. Fraud or Dolo – every kind of deception whether in the form of insidious machination, manipulations
concealments, misrepresentation, for the purpose of leading a party into error and thus execute a particular act.
 Must have a determining influence on the consent of the victim
 Compared with error

ERROR FRAUD
Vitiate the consent only when it refers to the Mistake induced by fraud will always vitiate consent
matters mentioned in Art 1331 when fraud has a decisive influence on such
consent

 Requisites of Fraud
1. Must have been employed by one contracting party upon the other (Art 1342 and Art 1344)
 If both party, they cannot have action against each other, fraud is compensated

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2. Induced the other party to enter into a contract (Art 1338)
3. Must have been serious (Art 1344)
4. Must have resulted in damage or injury to the party seeking annulment

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

“Insidious words and machinations” constituting deceit includes false promises, exaggeration of hopes or
benefits, abuse of confidence, fictitious names, qualifications or authority, all the thousand and one forms of deception
which may influence the consent of a contracting party, without necessarily constituting estafa or some offense under
the penal laws.

KINDS OF FRAUD

1. Dolo causante – determines or is the essential cause of the consent; ground for annulment of contract
Art 1338 “…without them, he would not have agreed to.”

2. Dolo incidente – does not have such a decisive influence and by itself cannot cause the giving of consent, but
only refers to some particular or accident of the obligation; only gives rise to action for damages
Art 1344 Par 2 Incidental fraud only obliges the person employing it to pay damages.

Failure to disclose facts; duty to reveal them  FRAUD

Art 1339 Failure to disclose facts, when there is a duty to reveal them, as when the parties are bound by
confidential relations, constitutes FRAUD.
 GENERAL RULE: Silence or concealment does not constitute a fraud
 EXCEPTIONS:
1. There is a special duty to disclose certain facts
2. According to good faith and usages of commerce the communication should have been made

Usual exaggeration in trade; opportunity to know the facts  NOT FRAUD

Art 1340 The usual exaggerations in trade, when the other party had an opportunity to know the facts, are NOT
in themselves fraudulent
 Also known as “tolerated fraud” or lawful misrepresentation (dolus bonus) as long as they do not go to the
extent of malice or bad faith such as changing the appearance of the thing by false devices and of preventing
all verification or discovery of truth by the other party
 Caveat emptor! (Buyers beware) Do not give rise action for damages because of their insignificance OR
because the stupidity of the victim is the real cause of his loss.  import of “opportunity to know facts”

Mere expression of an opinion  NOT FRAUD, unless made by an expert and relied upon by the plaintiff
Art 1341 A mere expression of an opinion DOES NOT signify fraud, unless made by an expert and the other party has
relied on the former's special knowledge.

Effects of Fraud
1. Nullity of the contract
2. Indemnification for damages

Art 1344 In order that fraud may make a contract voidable, it should be serious and should not have been employed
by BOTH contracting parties. Incidental fraud only obliges the person employing it to pay damages.

e. Misrepresentation

1. By a third person
Art 1342 Misrepresentation by a third person does NOT vitiate consent, unless such misrepresentation
has created substantial mistake and the same is mutual.

GENERAL RULE: Fraud by third person does not vitiate the contract
EXCEPTIONS:
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a. If 3rd person is in collusion with one of the parties, he is considered an accomplice to the fraud and
contract becomes VOIDABLE
b. If 3rd person not in connivance with any of the parties but leads them both into error (mutual error),
the consent is vitiated, contract is VOIDABLE.

VIOLENCE AND INTIMIDATION BY 3RD PERSON: annuls the contract

FRAUD BY 3RD PERSON: does not annul unless it produces substantial mistake on the part of both parties
JUSTIFICATION FOR THE DIFFERENCE:
 Party has nothing to do with fraud by a third person and cannot be blamed for it
 Intimidation can be more easily resisted than fraud

2. Made in good faith  not fraudulent but may constitute error

Art 1343 Misrepresentation made in good faith is not fraudulent but may constitute error.

3. Active/passive
o Applicable to legal capacity especially age

f. Simulation of Contracts – declaration of a fictitious will, deliberately made by agreement of the parties in
order to produce, for the purposes of deception the appearance of a juridical act which does not exist or is
different from that which was really executed.

Kinds of Simulated Contracts

Art 1345 Simulation of a contract may be ABSOLUTE or RELATIVE. The former takes place when the parties do not
intend to be bound at all; the latter, when the parties conceal their true agreement.

Effects of simulation of contracts

Art 1346 An absolutely simulated or fictitious contract is void. A relative simulation, when it does not prejudice a third
person and is not intended for any purpose contrary to law, morals, good customs, public order or public policy binds
the parties to their real agreement.

ABSOLUTE (simulados) RELATIVE (disimulados)

Color of contract, without any substance thereof, the Parties have an agreement which they conceal under the
parties not having intention to be bound guise of another contract
VOID - Does not legally exist. Illusory, mere phantom, VALID except when it prejudices 3rd persons or has an illicit
injuring 3rd persons, generally fraudulent purpose
1. Ostensible acts – apparent or fictitious; contract that
the parties pretend to have executed
2. Hidden act – real; true agreement between the
parties

Recovery under simulated contract in absolute simulation

1. If does not have illicit purpose – prove simulation to recover what may have been given
2. If simulated has illegal object – IN PARI DELICTO rules apply

OBJECT OF CONTRACTS
 Thing, right or service which is the subject-matter of the obligation arising from the contract
 Object of the contract and object of the obligation created thereby are identical

What may be the Object of Contracts

Art 1347 All things which are not outside the commerce of men, including future things, may be the object of a
contract. All rights which are not intransmissible may also be the object of contracts.
No contract may be entered into upon future inheritance except in cases expressly authorized by law.
All services which are not contrary to law, morals, good customs, public order or public policy may likewise be the
object of a contract.

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1. All things not outside the commerce of man
 Including “future things” do not belong to the obligor at the time the contract is made; they may be made,
raised or acquired by the obligor after the perfection of the contract
o Conditional – subject to the coming into existence of the thing
o Aleatory – one of the parties bears the risk of the thing never coming into existence
 “Outside the commerce of man” – all kinds of things and interests whose alienation or free exchange is
restricted by law or stipulation, which parties cannot modify at will
o Services which imply an absolute submission by those who render them, sacrificing their liberty,
independence or own beliefs or disregarding in any manner the equality and dignity of persons e.g.
perpetual servitude or slavery
o Personal rights e.g. patria postestas, marital authority, status, capacity of persons, honorary titles
o Public offices, inherent attributes of the public authority, political rights of individuals e.g. right of suffrage
o Property while they pertain to the public dominion
o Sacred things e.g. air and sea
2. All rights not intransmissible
3. All services not contrary to law, morals, good customs, public order or public policy

Requisite of Object of Contracts

1. Within the commerce of man (Art 1347)
2. Licit, not contrary to law, morals, good customs, public policy or public order (Art 1347)
3. Possible (Art 1348)
4. Determinate as to its kind
Art 1349 The object of every contract must be determinate as to its kind. The fact that the quantity is not determinate shall
not be an obstacle to the existence of the contract, provided it is possible to determine the same, without the need of a new
contract between the parties.

What may NOT be the Objects of Contracts

1. Contrary to law, morals, good customs, public policy or public order
2. Indeterminable as to their kind
3. Outside the commerce of man
4. Intransmissible rights
5. Future inheritance, except when authorized by law
Art 1347 Par 2 No contract may be entered into upon future inheritance except in cases expressly authorized by law.
 The succession must not have been opened at the time of the contract
 Exception to “future things”
6. Impossible things or services
Art 1348 Impossible things or services cannot be the object of contracts.
 E.g. of impossible things:
o Not susceptible of existing
o Outside the commerce of man
o Beyond the ordinary strength of power of man
 Liability for damages
o Debtor knew of impossibility – liable for damages
o Debtor is ignorant of impossibility and ignorance is justifiable – no liability for damages
o Both parties have knowledge of impossibility – no liability for damages
 Impossibility must be actual and contemporaneous with the making of the contract and not subsequent
o ABSOLUTE or objective: nobody can perform it
o RELATIVE or subjective: due to the special conditions or qualification of the debtor it cannot be
performed
 TEMPORARY – does not nullify the contract
 PERMANENT – nullifies the contract

CAUSE OF CONTRACTS

Meaning of “CAUSE”

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 Why of a contract; the immediate and most proximate purpose of the contract, the essential reason which
impels the contracting parties to enter into it and which explains and justifies the creation of the obligation
through such contract
 Essential reason that moves the parties to enter into a contract
 Requisites of Cause
1. Exist
2. True
3. Lawful
 As distinguished from object
o Object is the starting point of agreement, without which the negotiations or bargaining between the
parties would never have begun
o Object may be the same for both of the parties
o Cause is different with respect to each party
 As distinguished from consideration CONSIDERATION < CAUSE

CONSIDERATION CAUSE
Reason or motive or inducement by which a man is Why of contracts; essential reason that compels
moved into bind himself by agreement contracting parties to celebrate the contract
Requires a legal detriment to the promisee more than a Never rejects any cause as insufficient; need not be
moral duety material at all and may consist in moral satisfaction for
the promissory

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

a. Onerous Contracts
 Prestation or promise of a thing or service by the other
 Need not be adequate or an exact equivalent in point of actual value especially in dealing with objects
which have rapidly fluctuating price

b. Remuneratory Contracts
 One where a party gives something to another because of some service or benefit given or rendered by
the latter to the former where such service or benefit was not due as a legal obligation
 E.g. bonuses

c. Contracts of pure beneficence (Gratuitous)

 Essentially agreements to give donations

As distinguished from motive

Art 1351 The particular motives of the parties in entering into a contract are different from the cause thereof.

CAUSE MOTIVE
Objective, intrinsic and juridical reason for the existence of Psychological, individual or personal purpose of a party to
the contract itself the contract
Essential reason for the contract Particular reason for a contracting party, which does not
affect the other and which does not impede the existence
of a true distinct cause
Objective of a party in entering into the contract Person’s reason for wanting to get such objective
Always the same for both parties Differs with each person

GENERAL RULE: Motive does not affect the validity of the contract.
EXCEPTIONS:
1. When the motive of a debtor in alienating property is to defraud his creditors, alienation is rescissible
2. When the motive of a person in giving his consent is to avoid a threatened injury, in case of intimidation the
contract is voidable.
3. When the motive of a person induced him to act on the basis of fraud or misrepresentation by the other party,
the contract is likewise voidable.

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Defective causes and their effects

a. Absence of cause and unlawful cause  produces no effect whatever

Art 1352 Contracts without cause, or with unlawful cause, produce no effect whatever. The cause is
unlawful if it is contrary to law, morals, good customs, public order or public policy.
 E.g. simulated contracts

b. Statement of a false cause in the contract  VOID if there is no other true and lawful cause
Art 1353 The statement of a false cause in contracts shall render them VOID, if it should not be proved that
they were founded upon another cause which is true and lawful.

c. Lesion or inadequacy of cause  VALID unless fraud, mistake or undue influence is present
Art 1355 Except in cases specified by law, lesion or inadequacy of cause shall not invalidate a contract,
UNLESS there has been fraud, mistake or undue influence.
 Gross inadequacy suggest fraud and is evidence thereof

Presumption of the existence and lawfulness of a cause, though it is not stated in the contract
Art 1354 Although the cause is not stated in the contract, it is presumed that it exists and is lawful, unless the
debtor proves the contrary.

Chapter III. Form of Contracts

A. GENERAL RULE: Contracts shall be obligatory, in whatever form they may have been entered into, provided all
essential requisites for their validity are present.
(“Spiritual system” of the Spanish Code)

Art 1356 Contracts shall be obligatory, in whatever form they may have been entered into, provided all the essential requisites
for their validity are present.

B. EXCEPTION: When the law requires that a contract be in some form in order that it may be VALID or
ENFORCEABLE
(Anglo-American principle in Statutes of Fraud)  indispensable and absolute; parties

Art 1356 However, when the law requires that a contract be in some form in order that it may be valid or
enforceable, or that a contract be proved in a certain way, that requirement is absolute and indispensable. In such
cases, the right of the parties stated in the following article cannot be exercised.

C. KINDS OF FORMALITIES REQUIRED BY LAW

1. Ad esentia, ad solemnitatem  Those required for the validity of contracts, such as those referred to in
Art 748 Donation of movable
Art 749 Donation of immovable
Art 1874 Sale of piece of land through an agent
Art 2134 Contract of antichresis; amount of principal and of the interst
Art 1771 Partnership; immovable property or real rights are contributed
Art 1773 Partnership; inventory of immovable property contributed
Art 1956 Interest for using someone else’s money
Art 2140 Chattel mortgage

2. Those required, not for the validity, but to make the contract effective as against third persons, such
as those covered by Art 1357 (if law requires a special form, parties may compel each other to observe that
form upon perfection of the contract) and Art 1358 (documents which must appear in a public document; it
also constitutes constructive dellivery)

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(1) Acts and contracts which have for their object the creation, transmission, modification or extinguishment
of real rights over immovable property; sales of real property or of an interest therein a governed by Articles 1403,
No. 2, and 1405;
(2) The cession, repudiation or renunciation of hereditary rights or of those of the conjugal partnership of gains;
(3) The power to administer property, or any other power which has for its object an act appearing or which
should appear in a public document, or should prejudice a third person;
(4) The cession of actions or rights proceeding from an act appearing in a public document.

All other contracts where the amount involved exceeds five hundred pesos must appear in writing, even a
private one. But sales of goods, chattels or things in action are governed by Articles, 1403, No. 2 and 1405.

3. Ad probationem  Those required for the purpose of proving the existence of the contract, such as those
under the Statute of Frauds in Art 1403

Chapter IV. Reformation of Instruments

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

Reason for Reformation of Instruments

 Equity dictates the reformation of instrument in order that the true intention of the contracting parties may be
expressed. Unjust and unequitable to allow the enforcement of a written instrument which does not reflect or
disclose the real meeting of the minds of the parties
 Court do not attempt to make a new contract for the parties, but only to make the instrument express their
real agreement
 Statute of Frauds is no impediment to the reformation of an instrument

Distinguished from Annulment

REFORMATION ANNULMENT
Action presupposes a valid existing contract between the parties No meeting of the minds or the consent of either one was
and only the document or instrument which was drawn up and vitiated by mistake or fraud
signed by them does not correctly express the terms of
agreement
Gives life to the contract upon certain corrections Involves a complete nullification of contracts

Requisites for Reformation of Instruments

1. Meeting of the minds upon the contract
2. The true intention of the parties is not expressed in the instrument
3. The failure of the instrument to express the true agreement is due to mistake, fraud, inequitable conduct or
accident

Causes for Reformation

1. Mutual – instrument includes something which should not be there or omit what should be there
a. Mutual
b. Mistake of fact
c. Clear and convincing proof
d. Causes failure of instrument to express true intention
2. Unilateral
a. One party was mistaken
b. Other either acted fraudulently or inequitably or knew but concealed

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c. Party in good faith may ask for reformation
3. Mistake by 3rd persons – due to ignorance, lack of skill, negligence, bad faith of drafter, clerk or typist
4. Others specified by law – to avoid frustration of true intent

Example of cases where reformation is allowed

1. Art 1361 When a mutual mistake of the parties causes the failure of the instrument to disclose their real
agreement, said instrument may be reformed.
2. Art 1363 When one party was mistaken and the other knew or believed that the instrument did not
state their real agreement, but concealed that fact from the former, the instrument may be reformed.
3. Art 1364 When through the ignorance, lack of skill, negligence or bad faith on the part of the person drafting
the instrument or of the clerk or typist, the instrument does not express the true intention of the parties,
the courts may order that the instrument be reformed.

Cases where no reformation is allowed

1. Oral contracts – there’s nothing to reform at all!
2. Art 1366 There shall be no reformation in the following cases:
(1) Simple donations inter vivos wherein no condition is imposed;
(2) Wills;
(3) When the real agreement is void.

Implied ratification
Art 1367 When one of the parties has brought an action to enforce the instrument, he cannot subsequently
ask for its reformation.
 There has been election between two inconsistent remedies, one in affirmance, the other in disaffirmance

Who may ask for reformation

 MUTUAL MISTAKE: either party or successor in interest
 MISTAKE BY ONE: injured party, heirs or assigns
1. Art 1368 Reformation may be ordered at the instance of either party or his successors in interest, if the
mistake was mutual; otherwise, upon petition of the injured party, or his heirs and assigns.
2. Art 1362 If one party was mistaken and the other acted fraudulently or inequitably in such a way that the
instrument does not show their true intention, the former may ask for the reformation of the instrument.

Procedure of reformation
Art 1369 The procedure for the reformation of instrument shall be governed by ROC to be promulgated by the
Supreme Court.

Chapter V. Interpretation of Contracts

(Compare with Rules on Statutory Construction)

Primacy of intention
 “Verba intentione non e contradebent inservare” - words ought to be subservient to the intent, not the intent
to the word
 Look for the contractual intent

Art 1370 If the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the
literal meaning of its stipulations shall control.

Art 1372 However general the terms of a contract may be, they shall not be understood to comprehend things that
are distinct and cases that are different from those upon which the parties intended to agree.
 “Generalia verba sunt generaliter intelligencia”  general things are to understood in a general sense

How to determine intention

Art 1371 In order to judge the intention of the contracting parties, their contemporaneous and subsequent acts
shall be principally considered.
 Also take note of the usage and customs of the place

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How to interpret a contract

1. When it contains stipulations that admit of several meanings

Art 1373 If some stipulation of any contract should admit of several meanings, it shall be understood as
bearing that import which is most adequate to render it effectual.

2. When it contains various stipulations, some of which are doubtful

Art 1374 The various stipulations of a contract shall be interpreted together, attributing to the doubtful ones
that sense which may result from all of them taken jointly.

3. When it contains words that have different significations

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

4. When it contains ambiguities and omission of stipulations

Art 1376 The usage or custom of the place shall be borne in mind in the interpretation of the ambiguities
of a contract, and shall fill the omission of stipulations which are ordinarily established.

5. With respect to the party who caused the obscurity

Art 1377 The interpretation of obscure words or stipulations in a contract shall not favor the party who
caused the obscurity.
o Contracts of adhesion – resolved against the party who prepared the contract and in favor of the
one who merely adhered to it

6. When it is absolutely impossible to settle doubts by the rules above

Art 1378 Par 1 When it is absolutely impossible to settle doubts by the rules established in the preceding
articles, and the doubts refer to incidental circumstances of a gratuitous contract, the least
transmission of rights and interests shall prevail. If the contract is onerous, the doubt shall be settled in
favor of the greatest reciprocity of interests.

a. In gratuitous contracts, incidental circumstances  least transmission of rights and interests

b. In onerous contracts  greatest reciprocity of interests

7. When the doubts are cast upon the principal objects so that the intention cannot be known
Art 1378 Par 2 If the doubts are cast upon the principal object of the contract in such a way that it cannot be
known what may have been the intention or will of the parties, the contract shall be null and void.

Applicability of Rule 12, Rules of Court (now Secs. 10-19, Rule 130)
Art 1379 The principles of interpretation stated in Rule 123 of the Rules of Court shall likewise be observed in the
construction of contracts.
 Law in evidence; interpretation of documents)

In between VALID and DEFECTIVE contracts is RELATIVELY INEFFECTIVE – ineffectively only with respect to
certain parties, but are effective as to other persons.
 Against voidable contract: ineffectiveness is produced ipso jure
 Void or inexistent contract: can be made completely effective by the consent of the person as to whom it
is effective or by the cessation of the impediment which prevents its complete ineffectiveness
(1) assignment of the lease by the lessee without the consent of the lessor is ineffective only as regards the lessor,
(2) transfer of a debt by the debtor to another, without the consent of the creditor is ineffective as to the creditor,
(3) the payment by a debtor to his creditor after the credit has been garnished or attached by a third person is
ineffective to the latter

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DEFECTIVE CONTRACTS
1. RESCISSIBLE – contract that has caused a particular damage to one of the parties or to a third person and
which for EQUITABLE REASONS may be set aside even if valid
2. VOIDABLE OR ANNULLABLE (contrato nulo) – contract in which CONSENT of one of the parties is
defective, either because of WANT OF CAPACITY or because it is VITIATED , but which contract is VALID until
JUDICIALLY set aside
3. UNENFORCEABLE – contract that for some reason CANNOT BE ENFORCED, UNLESS RATIFIED in the
manner PROVIDED BY LAW
4. VOID AND NON-EXISTENT (contrato inexistente) – contract which is an ABSOLUTE NULLITY and
produces NO EFFECT, as if it had never been executed or entered into

Chapter VI. Rescissible Contracts

Kinds of Rescissible Contracts

Art 1381 The following are rescissible contracts:

1. Entered into by guardians whenever the wards suffer lesion by more than ¼ of value of things object
 Guardian: authorized only to “manage” ward’s property, no power to dispose without prior approval of
court. Only includes those which are “ordinary course” of management of estate of the ward, because if
sale, mortgage and other encumbrance AND not approved by court, it becomes unenforceable.

2. Agreed upon in representation of absentee, suffer lesion by more than ¼ of the value of things object
 Same principle in relation to contracts by guardians

3. In fraud of creditors who cannot collect claims due them

 Requisites of Accion Pauliana
1. Plaintiff asking for rescission (subsidiary action) has a credit prior to the alienation
2. Debtor has made subsequent contract, giving advantage to a 3rd person
3. Creditor has no other remedy but to rescind the debtor’s contract to the 3rd person (last resort)
4. Act being impugned is fraudulent
5. 3rd person who received the property is an accomplice in the fraud
 Credit must be existing at the time of the fraudulent alienation, although not yet due. But at the time of
accion pauliana, the credit must already be due because it presupposes a judgment and unsatisfied
execution which cannot exist when the debt is not yet demandable at the time the rescissory action is
brought.
 GENERAL RULE: Credit is prior to the alienation
 EXCEPTION: Credit is after alienation but entitled to accion pauliana because of some prior right
1. Claims were acknowledged by the debtor after alienation, but origin of which antedated the
alienation
2. Those who become subrogated, after the alienation, in the rights of a creditor whose credits were
prior to the alienation
 Even secured creditors are entitled to AP
 Conveyance was intentionally fraudulent which may be established by the presumption in Art 1387
 TEST OF FRAUD: Whether the conveyance was a bona fide transaction or a trick and contrivance to
defeat creditors or whether it conserves to the debtor a special right; founded on good consideration or is
made with bona fide intent.  Does it prejudice the right of creditors??
 Good consideration: creditor is not prejudiced becomes the property was merely replaced or substituted
 Badges of fraud applicable

4. Things under litigation, without knowledge and approval of litigant or of competent judicial authority
 To secure the possible effectivity of a claim

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 Transferee of property in good faith who acquires property for valuable consideration, without knowledge
of the litigation or claim of the plaintiff, cannot be deprived of property.

5. Specially declared by law to be subject of rescission

Characteristics of Rescissible Contracts

1. Their defect consist in injury or damage either to one of the contracting parties or to third persons
LESION: injury which one of the parties suffers by virtue of contract that is disadvantageous to him; must be
known or could have been known at the birth of contract and not due to subsequent thereto or unknown to
the parties
E.g.
Art 1098 Partition, judicial and extra-judicial may be rescinded on account of lesion
Art 1539 Sale of real estate of inferior thing
Art 1542 Sale of real estate made for a lump sum
2. They are valid before rescission
3. They can be attacked directly only, not collaterally
4. They can be attacked only either by a contracting party, or by a third person who is injured or defrauded
5. They can be convalidated only by prescription and not by ratification

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

Definition Remedy granted by law to the contracting parties and even to third persons, to secure the reparation of
damages caused to them by a contract, even if this should be valid, by means of the restoration of things to their
condition at the moment prior to the celebration of said contract.

 Relief for the protection of one of the contracting parties AND third persons from all injury and damages the
contract may cause OR protect some incompatible and preferential right created by the contract
 Implies a contract which, even if initially valid, produces a lesion or pecuniary damage to someone
 Set asides the act or contract for justifiable reasons of equity
 Grounds for rescission can only be for legal cause
 Voidable contracts may also be rescinded

Rescission Art 1380 Distinguished from Resolution Art 1191

Art 1191 Resolution Art 1380 Rescission

Similarities 1. Presuppose contracts validly entered into and existing
 Rescission v. Annulment: the latter there is a defect which vitiates/invalidates the contract
2. Mutual restitution when declared proper
Who may Only by a party to the contract Party to the contract suffering lesion
demand Third parties prejudiced by the contract
Grounds Non-performance (implied tacit condition in reciprocal Various reasons of equity provided by the grounds,
obligation) mainly economic injury or lesions
Scope of judicial Court determines sufficiency of reason to justify Sufficiency of reason does not affect right to ask for
control extension of time to perform obligation (whether rescission (cannot be refused if all the requisites are
slight or casual breach) satisfied)
Kind of obligation Only to reciprocal Unilateral, reciprocal
applicable to Even when contract is fully fulfilled
Character Principal Remedy Secondary/Subsidiary

MUTUAL DISSENT not the same with rescission, because mutual dissent is tantamount to a simple creation of new
contract for the dissolution of the previous one. In order for rescission to take place, the requisites must first be
satisfied:

Requisites for Rescission

1. The contract is rescissible

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Art 1381 Kinds of rescissible contracts
Art 1382 Payments made in a state of insolvency for obligations to whose fulfillment the debtor could not
be compelled at the time (has not yet matured) they were effected, are also rescissible.

2. The party asking for rescission has no other legal means to obtain reparation
Art 1383 The action for rescission is subsidiary; it cannot be instituted except when the party suffering
damage has no other legal means to obtain reparation for the same.

3. He is able to return whatever he may be obliged to restore if rescission is granted

Art 1385 “Rescission creates the obligation to return the things which were the object of the contract,
together with their fruits, and the price with its interest…”

4. The object of the contract has not passed legally to the possession of a third person acting in good faith
Art 1385 “…consequently, it can be carried out only when he who demands rescission can return whatever
he may be obliged to restore.”
Art 1385 Par 3 Neither shall rescission take place when the things which are the object of the contract are
legally in the possession of third persons who did not act in bad faith.

5. The action for rescission is brought within the prescriptive period of four years
Art 1389 The action to claim rescission must be commenced within four years.
For persons under guardianship and for absentees, the period of four years shall not begin until the
termination of the former’s incapacity or until the domicile of the latter is known.
o Period commences on the termination of the ward’s incapacity or absentee’s domicile is known

Effect of Rescission
 If in fraud of the creditors: Property alienated reverts to the patrimony of the debtor and becomes liable to
creditor who sought rescission, under its original liability as a guaranty of the debtor’s obligation
 Art 1385 Rescission creates the obligation to return the things which were the object of the contract,
together with their fruits, and the price with its interest; consequently, it can be carried out only when he who
demands rescission can return whatever he may be obliged to restore.

With respect to third persons who acquired the thing in good faith
 Transferee of property in good faith who acquires property for valuable consideration, without knowledge of the
litigation or claim of the plaintiff, cannot be deprived of property.
 Art 1385 Par 2 Neither shall rescission take place when the things which are the object of the contract are legally
in the possession of third persons who did not act in bad faith.
 Art 1385 Par 3 In this case, indemnity for damages may be demanded from the person causing the loss.
 Right of transferee to retain alienation:
 Nature of transfer
o ONEROUS
 Good faith – no rescission
 Bad faith – rescissible because of his complicity in the fraud  not entitled for reimbursement
because in pari delicto; if not possible to return, indemnify the plaintiff;
o GRATUITOUS
 Good faith – does not protect him because he gave nothing; rescissible, though not required
to restore the fruits
 Bad faith – rescissible because of his complicity in the fraud; if not possible to return,
indemnify the plaintiff

Who may bring action for rescission

1. Creditor injured
2. Heirs of creditor injured
3. Creditors of creditor injured (by virtue of accion subrogatoria)

Extent of Rescission
Art 1384 Rescission shall be only to the extent necessary to cover the damages caused.
 As to the excess, alienation is maintained even if transferee is in bad faith
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 Benefits only the plaintiff creditor, not everyone
 BUT if transferee is willing to pay, no rescission

Presumptions of Fraud
Art 1387 All contracts by virtue of which the debtor alienates property by gratuitous title are presumed to have
been entered into in fraud of creditors, when the donor did not reserve sufficient property to pay all debts
contracted before the donation.
Alienations by onerous title are also presumed fraudulent when made by persons against whom some
judgment has been issued. The decision or attachment need not refer to the property alienated, and need not
have been obtained by the party seeking the rescission.
In addition to these presumptions, the design to defraud creditors may be proved in any other manner recognized
by the law of evidence.
 Rebuttal by evidence that conveyance was made:
o In good faith
o For a sufficient cause
 Effect of Fraud: Does not necessarily make the alienation rescissible. It is only one of the requisites for accion
pauliana. Can be overruled by a transferee in good faith and for valuable consideration

Badges of Fraud (indicia of fraud) – rules by which fraudlent character of transaction may be determined
1. Fictitious/insufficient consideration
2. Conveyance is after suit is filed and while it is pending
3. Sale on credit by insolvent debtor
4. Evidence of insolvency or large indebtedness
5. Transfer of All or nearly all of debtor’s property
6. Transfer is between father and son when some of above is present
7. Failure of vendee to take exclusive possession of the property

Liability for acquiring in bad faith the things alienated in fraud of creditors
Art 1388 Whoever acquires in bad faith the things alienated in fraud of creditors, shall indemnify the latter for
damages suffered by them on account of the alienation, whenever, due to any cause, it should be impossible
for him to return them.
If there are two or more alienations, the first acquirer shall be liable first, and so on successively.

Chapter VII. Voidable or Annullable Contracts

Kinds of Voidable/Annullable Contracts

Art 1390 Although no damage to contracting parties:
1. Want of capacity
2. Vitiated consent

Characteristics of Voidable/Annullable Contracts

1. Their defect consists in the vitiation of consent of one of the contracting parties
2. They are binding until they are annulled by a competent court
3. They are susceptible of convalidation by ratification or by prescription

ANNULMENT

Annulment distinguished from Rescission

NULLITY (Voidable) RESCISSION (Rescissible)

Declares inefficiency which contract already carries in itself Merely produces inefficiency, which did not exist essentially
(intrinsic defect) in the contract (external defect i.e. pecuniary damages or
prejudice to one of the contracting parties or 3rd persons)
Requires act of ratification to be cured Needs no ratification to be effective
Based on a vice of the contract which invalidates it Compatible with the perfect validity of the contract
Annulment is a sanction based on law Rescission is a remedy based on equity

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Demanded only by the parties to the contract Demanded even by third parties affected by it
Public interest predominates Private interest predominates

Grounds for Annulment Art 1390

1. Incapacity to consent
 Not a requisite sine qua non of the contract; want is only a ground for annulment
2. Vices of consent: violence, intimidation, undue influence, mistake or fraud

Who may and may not institute an Action for Annulment Art 1397
A. MAY: All who are obliged principally or subsidiarily
Art 1395: action does not require conformity of the other party who has no right to bring action for annulment
Requisites:
a. Interest in the contract – there must be legal capacity by being bound to the contract either principally or
subsidiarily
b. Victim and not the party responsible for the defect – he who comes to the court must come with clean
hands (so not applicable to the successor in interest of one who has contracted with a minor)
B. MAY NOT:
1. Capable parties cannot allege the incapacity of those with whom they contracted
2. Parties who exerted intimidation, violence or undue influence or employed fraud or caused mistake
3. Third person who is a stranger to the contract. UNLESS he can prove that the contract prejudiced his rights
with respect to one of the contracting parties, he may ask for annulment e.g. guarantors and sureties
(Singsong v. Isabela Sawmill)

Prescription of Action for Annulment – after prescription, contract can no longer be set aside
Art 1391 - Within 4 years
Period shall begin:
1. Intimidation, violence or undue influence: from the time consensual defect ceases
2. Mistake or fraud: from the time of discovery of the same
3. Incapacity: from the time guardianship ceases
* Extinctive prescription applies not only to action for annulment, but also to the defense of nullity
* Applies to the parties of to the contract, but NOT to third persons

Effects of Annulment– cleanses the contract from all its defect from the moment it was constituted (retroactive
effect), but does not prejudice rights of 3rd persons acquire before the ratification Art 1396

a. MUTUAL RESTITUTION Art 1398 Restore to each other things which have been the subject matter of the
contract, together with fruits and the price with interest,
 EXCEPT in cases provided by law (principle of unjust enrichment): compensation, services rendered in
contracts of service
 ELIMINATES AWARD FOR DAMAGES. But when there is loss or suffered damages, injured party may be
entitled to recover indemnity for damages.

b. Art 1402 as long as one does not restore what he is bound to return, the other cannot be compelled to return
 LOSS THROUGH PLAINTIFF’S (party entitled to bring action) FAULT or FRAUD: Action is extinguished,
even if at the time of the loss the plaintiff is still a minor or insane (Art 1401)
 LOSS THROUGH FORTUITOUS EVENT, BUT PLAINTIFF WILLING TO PAY: Apply Art 1400, defendant
should return but not including the interest because loss not due to his fault.
 LOSS OF FRUITS AND ACCESSIONS: Apply Art 1400, pay value if cannot return (both plaintiff and
defendant)

1. When one of the parties is incapacitated

Art 1399 not obliged to make any restitution EXCEPT insofar as he has been benefited by the price/thing
received
 Benefit not necessarily a material and permanent increase in fortune
 Proof of benefit incumbent upon the defendant, in the absence of such proof, the presumption is there is
no benefit/profit to the incapacitated person
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 If still in the patrimony at the time incapacity ceases, deemed to have been benefited. If he asks for
annulment, he must return it to the other party. If he squanders, it is ratification.

2. When the thing is lost through the fault of the party obliged to return the same (i.e. defendant)
Art 1400 return the fruits received AND the value of thing at the time of loss, with interest from same date
LOSS THROUGH FORTUITOUS EVENT: pay the value of the thing lost but not fruits and interests

Extinguishment of the Action

a. Art 1392 By ratification
Confirmation/ratification: cures a defect of nullity
Acknowledgment: remedies deficiency of proof
b. Art 1401 When the thing is lost through the fault of the person who has the right to file the action
 LOSS NOT THROUGH THE FAULT, e.g. fortuitous event: not extinguished because extinguishment limited only
to the loss by fault of plaintiff. Unjust enrichment if the loss is returned for the defendant to bear. Hence, the
defendant cannot be obliged to make restitution to the plaintiff because of Art 1402 (cannot compelled to
return if the other party does not return)
 Cannot extinguish action for annulment by any event not imputable to the fault or fraud of the plaintiff

RATIFICATION

Requisites of Ratification
a. Contract is voidable/annullable (i.e. consent of one party is defective)
b. Ratification is made with the knowledge of the cause for nullity
c. At the time of the ratification, the cause of nullity has already ceased to exist

Forms of Ratification
a. Art 1393 Express or tacit: execute an act which necessarily implies an intention to waive his rights
E.g. of EXPRESS: any oral or written manifestation of the person entitled to ask for annulment that he agrees to
be bound by the contract or that he will not seek its annulment
E.g. of IMPLIED:
 silence or acquiescence
 acts showing approval or adoption of the contract
 acceptance and retention of benefits flowing therefrom
b. Art 1394 By the parties themselves or by the guardian in behalf of an incapacitated party
- During the existence of incapacity
- Right to ratify is transmitted to the heirs of the party entitled to such right.

Effects of Ratification
a. Art 1392 Action to annul is extinguished
b. Art 1396 The contract is cleansed retroactively from all its defects from the time it was constituted
EXCEPTION: Right of 3rd persons prior to ratification

Chapter VIII. Unenforceable Contracts

Characteristics of Unenforceable Contracts

1. They cannot be enforced by a proper action in court
2. They are susceptible of ratification
3. They cannot be assailed by third persons Art 1408

Unenforceable distinguished from Rescissible and Annullable

UNENFORCEABLE RESCISSIBLE AND ANNULLABLE

Produces NO legal effect unless ratified by competent court Produce legal effects unless set aside by competent court

Kinds of Unenforceable Contracts

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1. Entered into in the name of another person by one who has no authority or no legal representation OR acted
beyond his powers
2. Do not comply with Statute of Frauds (SoF), which are agreements unenforceable unless in written memorandum
and subscribed by the party charged
a. Not to be performed within 1 year from the making  If no time is fixed and nothing to show that it
cannot be performed within a year, then not within Statute of Frauds; Partial performance also takes it out
of STATUTE OF FRAUDS
b. Special promise to answer for the debt, default or miscarriage of another Default or Miscarriage
include liability for tort and are not to be restricted to defaults and miscarriages arising out of contracts;
Must be collateral only and not primarily liable for the debt
c. Agreement made in consideration of marriage other than “mutual” promise to marry  not limited to
marrying parties but also to promises by a third person to one of the parties contemplating the marriage
d. Sale of goods, chattels or things in action, priced > P500 unless buyer accept and receive part of
such goods and chattels or the evidences or some of them or pay at the time some part of the purchase
money. EXCEPTION: sale is by auction and entry is made by auctioneer in his sales book (because it
constitutes sufficient memorandum)
e. Leasing for period longer than one year OR sale of real property or of an interest therein
f. Representation to the credit of a 3rd person
3. Both parties are incapable of giving consent to contract

Art 1403 Par 1: Unauthorized contracts

Governing rules in Unauthorized Contracts: Art 1404 Governed by Art 1317 (no one may contract in the name of
the other without being authorized or unless he has by law a right to represent him; representation without authority
or legal representation makes the contract unenforceable) and principles of Agency in Title X of this Book
- Does not having binding effect on the principal, UNLESS principal ratifies it which cures the unauthorized contract.
- Agent who binds his principal without authority to do so is liable to 3rd persons.

Art 1403 Par 2: Contracts covered by the Statute of Frauds

Statute of Frauds: descriptive of statutes which requires certain classes of contracts to be in writing. Merely
regulates the formalities of the contract necessary to render it enforceable.
 NOT APPLICABLE TO: (1)Action for specific performance, (2) Violation of the contract
 APPLICABLE TO: Executory and not to complete or executed contracts  intention of the parties become
apparent by their execution. However, partial performance must also be proven.
 Exclusive list of agreements/contracts enumerated; Rule of exclusion
 A personal defense (hence cannot be raised by 3rd persons) and the same may be waived
 Does not determine credibility or weight of the evidence, merely concerned with the admissibility thereof

Purpose of Statute: Prevent (and not to encourage it) fraud and perjury in the enforcement of obligations
depending for their evidence upon the unassisted memory of witnesses, by requiring certain enumerated contracts
and transactions to be evidenced by a writing signed by the party to be charged.
- Provides for the manner which contracts under it shall be proved
- Does not attempt to make contracts invalid if not executed in writing, only makes ineffective the action for
specific performance
- Principal aims: (1) prevent commission of injustice due to faulty memory, (2) discouraging intentional
misrepresentations

WRITTEN MEMORANDUM OR NOTE evidence of the agreement and is used to show the intention of the parties
Minimum requirement for written memorandum:
1. Names of the parties
2. Terms and conditions of the agreement
3. Description of the subject matter sufficient to render it capable of identification
4. Date and place of the making of the agreement
5. Signature of the party assuming the obligation

How to ratify contracts under Statute of Frauds? Art 1405

1. Failure to object to the presentation of oral/parole evidence to prove the same
2. Acceptance of benefits under them  SoF cannot be invoked when the contract has been partly executed
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Right of the parties when a contract is ENFORCEABLE BUT a public document is NECESSARY for its registration
Art 1406  may avail of their rights under Art 1357 (parties may compel each other to observe the necessary form
once the contract has been perfected)

Art 1403 Par 3: Contracts executed by parties who are both incapable of giving consent to a contract
Art 1407
a. Effect of ratification by the parent or guardian of one of the parties: (express or implied)
o Converts the contract into a voidable contract, at the option of the party who has not ratified.
o The non-ratifying party may: enforce the contract OR ask for the annulment
b. Effect of ratification by the parents or guardians of both parties: validated from the inception

Chapter IX. Void or Inexistent Contracts

Characteristics of Void/Inexistent Contracts

1. Void from the beginning
2. Produces no effect whatsoever  nullity exist ipso jure, judgment of nullity is merely declaratory
3. Cannot be confirmed or validated (by prescription OR ratification), neither can the right to set up the defense
of illegality be waived Art 1409

ACCION REIVINDICATORIA – any person may invoke the inexistence of the contract whenever juridical effects
founded thereon are asserted against him

Action to Declare Nullity

- necessary because nobody can take the law into his own hands
- if the void contract is still executory, no party need to bring an action; but if one party brings action to
enforce it, nullity can be set up as defense

Void/inexistent contracts distinguished from other defective contracts

VOID RESCISSIBLE
Defect is inherent in the contract itself Defect is in their effects, either to one of the parties or to a 3rd
party
Matter of law and public interest Based on equity and more a matter of private interest
No legal effects even if no action is taken to set it aside No action, remains valid and produces all its effects
Action to declare nullity of void contracts never prescribes Action to rescind prescribes in 4 years
VOID UNENFORCEABLE
Cannot be the basis of actions to enforce compliance
Can never be ratified and become enforceable Can be ratified and thereafter enforced
There is no contract at all There is a contract which, however, cannot be enforced unless
properly ratified
VOID VOIDABLE
One of those essential requisites is wanting, either in fact or in Essential requisites for validity is present, BUT consent is
law or is declared void by statute vitiated
No contract, but only appearance of one, produces no effect Valid until set aside, validity may only be assailed directly, never
even if not set aside by direct action (collateral attack allowed) by a 3rd person
Not susceptible of ratification May be rendered perfectly valid by ratification
Action to declare nullity does not prescribe, permanent, even if Action for annulment prescribes in 4 years
the cause of nullity ceased to exist

Kinds of Void/Inexistent Contracts Art 1409

Contracts that are VOID

Art 1409 1. Those whose cause, object or purpose is contrary to law, morals, good customs, public order, or public
Par 1 policy

a. Art 1411 When the act constitutes a criminal offense (illegality of cause or object)
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IN PARI DELICTO RULE
1. BOTH are in pari delicto
 No action against each other
 BOTH will be prosecuted
 RPC provision relative to the disposal of effects/instruments of a crime shall apply
2. ONLY ONE is guilty
 INNOCENT PARTY may claim what he has given
 INNOCENT PARTY not bound to comply with his promise

b. Art 1412 When the act is unlawful but does not criminal offense

IN PARI DELICTO RULE

1. BOTH parties at fault
 Neither party may recover what he has given by virtue of the contract
 Neither party may demand the performance of the other’s undertaking
2. ONLY ONE is guilty
 INNOCENT PARTY may demand the return of what he has given without obligation to comply
with his promise
 PARTY AT FAULT cannot recover what he has given by reason of the contract
 PARTY AT FAULT cannot ask for the fulfillment of what has been promised to him

 Not applicable to fictitious contracts because they refer to contracts with an illegal cause or subject-matter
(criminal offense OR only illegal), OR to contracts that are null and void ab initio. Fictitious or simulated
contracts don’t have cause.

EXCEPTIONS TO THE IN PARI DELICTO RULE

General Statement of the Exception (Art 1416): Agreement is not illegal per se, but merely prohibited
 Prohibition is designed for the protection of the plaintiff
 Plaintiff may recover what he paid or delivered if public policy is enhanced
 ILLEGAL PER SE – one that by universally recognized standards is inherently or by its very nature
bad, improper, immoral or contrary to good conscience.

OTHER SPECIFIC EXCEPTIONS

c. Art 1414 When the PURPOSE is illegal and money is paid or property delivered therefore  maybe repudiated by
one of the parties before the purpose has been accomplished OR before any damage has been caused
to a 3rd person. Courts may allow the party repudiating the contract to recover the money or property, if the
public interest will thus be subserved.

d. Art 1415 When the CONTRACT is illegal and one of the parties is INCAPABLE of giving consent  courts may
allow recovery of money/property delivered by the incapacitated person, if interest of justice so demands

e. Art 1417 When the amount paid exceeds the maximum fixed by law  any person paying in excess of the
maximum price may recover such excess

f. Art 1418 When by virtue of contract a laborer undertakes to work longer than the maximum number of hours of
work fixed by law  worked may demand additional compensation for service rendered beyond the limit

g. Art 1419 When a laborer agrees to accept a lower wage than that set by law  entitled to recover deficiency

h. Art 1420 When the contract is divisible  if illegal terms can be separated from legal ones, enforce latter
 In case of doubt, contract is considered as divisible or separable.
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 EXCEPTIONS:
1. Nature of contract requires indivisibility e.g. contract of compromise
2. Intention of the parties is that the contract be entire e.g. if what is void be the essential part, void
the entire contract. Divisibility will only be followed when the nullity affects only the secondary or
accessory obligations.

i. Art 1422 When the contract is the DIRECT RESULT of a previous illegal contract  also void and inexistent

Art 1409 2. Those whose object is outside the commerce of man

Par 4 
Art 1409 3. Those which contemplate an impossible service
Par 5 
Art 1409 4. Those where the intention of the parties relative to the principal object of the contract cannot be
Par 6  ascertained
Art 1409 5. Those expressly prohibited are declared void by law
Par 7 

Contracts that are INEXISTENT

Art 1409 1. Those which are absolutely simulated or fictitious

Par 2 
Art 1345 Simulation of contracts may be ABSOLUTE (parties do not intend to be bound at all) or
RELATIVE (parties conceal their true agreement)
Art 1346 Absolute or Fictitious: void
Art 1409 2. Those whose cause or object did not exist at the time of the transaction
Par 3 

Right to set up defense of illegality cannot be waived Art 1409

The action or defense for the declaration of the inexistence of a contract

1. Art 1410 Does not prescribe, defect is permanent and incurable
2. Art 1421 Is NOT available to 3rd persons whose interest is not directly affected
* Ratification may take the form of a new contract, in which case its validity shall be determined only by the
circumstances at the time of the execution of the new contract. However, the same does not retroact to the
constitution of the first contract.
See Table of Defective Contracts in the next page.

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DEFECTIVE CONTRACTS
Professor E. A. Labitag

DEFECTIVE AS TO NATURE OF EFFECT ON ASSAILABLE? WHO CAN WHEN TO

CURABLE? HOW? WHO CAN CURE? WHEN TO CURE?
CONTRACTS DEFECT CONTRACT HOW? ASSAIL? ASSAIL?
YES but only through
Contracts of By ward
RESCISSIBLE DIRECT action for
guardians (acts of
rescission Within 4 years from YES
(Arts 1381 – 1389) administration) when Or by guardian ad
Economic prejudice or VALID No rescission if: gaining (minor) or By ratification Within 4 years from
wards they represent litem of ward during By ward
damage to: until rescinded a. plaintiff has other regaining (insane) (Confirmation by the (re)gaining capacity
suffer lesion of more incapacity of ward in
- owner legal means to obtain capacity ward)
than 25% of the value action against original
- 3rd person reparation (subsidiary)
- litigant
of thing guardian
b. plaintiff cannot
return what must be
Can generally be Contracts in
restored
ASSAILED and CURED representation of Within 4 years from
by: Injured Party c. object in the hands Within 4 years from
absentees when VALID YES knowledge of domicile
of 3rd persons in good By absentee knowledge of domicile By absentee
latter suffers lesion of until rescinded By prescription or knowledge of
EFFECTS: faith of absentee
more than 25% of fraudulent contract
Mutual restitution d. Contract approved
value of thing
by court (Art 1386)

By plaintiff-creditor
Contracts entered into
By heirs of creditor
by debtor who is a
BY creditors of Within 4 years from Within 4 years from
state of insolvency, i.e. VALID YES
YES but only through creditors injured (accion knowledge of By creditor knowledge of
contracts entered into until rescinded By prescription 
DIRECT action for subrogatoria) By other fraudulent contract fraudulent contract
in fraud of creditors
rescission third parties prejudiced
(Accion Pauliana)
No rescission if: by the contract
a. plaintiff has other
Contracts which refer legal means to obtain
to things in reparation (subsidiary)
litigation without the b. plaintiff cannot Within 4 years from Within 4 years from
VALID YES
knowledge and return what must be By party litigant knowledge of By party litigant knowledge of
until rescinded By prescription 
approval of litigants or restored fraudulent contract fraudulent contract
competent judicial c. object in the hands
authority of 3rd persons in good
All other contracts faith
declared by law to VALID
be subject of rescission until rescinded
E.g. Art 1098 Partition

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DEFECTIVE AS TO NATURE OF EFFECT ON ASSAILABLE? WHO CAN WHEN TO
CURABLE? HOW? WHO CAN CURE? WHEN TO CURE?
CONTRACTS DEFECT CONTRACT HOW? ASSAIL? ASSAIL?
Want of capacity All who are obliged Within 4 years from YES Within 4 years from
VOIDABLE - age principally or cessation of By ratification cessation of
(Arts 1390 – 1402) - insanity subsidiarily (i.e. (re)gaining capacity By prescription (re)gaining capacity
Vitiated consent guarantors and
sureties) YES By parties themselves
EFFECT: YES. Both through 1 By ratification
Cleanses defect of VALID direct and collateral Within 4 years from: - Express Within 4 years from:
Consent is vitiated by: Incapacitated party; By guardian in behalf
contract until annulled by court attacks. - cessation of - Implied - cessation of
- mistake or error not the party with of an incapacitated
Does not prejudice right action intimidation, violence, (silence or acquiescence, intimidation, violence,
- violence and capacity party during existence
of 3P prior to ratification Action for annulment undue influence acts showing approval or undue influence
intimidation (duress)
Mutual restitution (consensual defect) adoption of contract, of incapacity (consensual defect)
- undue influence Victim; not the party
- discovery of mistake acceptance and retention - discovery of mistake
- fraud, misrepresentation who cause the defect
or fraud of benefits) or fraud

2 By prescription

YES. Not by direct

UNENFORCEABLE
action but by
(Arts 1403 – 1408)
VALID DEFENSE of At any time one party
Contract entered into
but cannot be unenforceability of attempts to enforce Person in whose name
name of another
ENFORCED contract through By owner of property contract against the By ratification the contract was
without authority or in
by a proper action in motion to dismiss other through a court entered into
excess of authority
court complaint on the action
ground that contract is
unenforceable

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YES. Not by direct
action but by By acknowledgement
DEFENSE of By performance of oral
unenforceability of contract
contract either
Contracts covered by VALID At any time one party
through: By other party By failure to object
Statute of Frauds but cannot be attempts to enforce By party against whom
1. motion to dismiss By his privies (heirs, seasonably to
and not complying ENFORCED contract against the the contract is being
complaint on the representatives and presentation of oral
with requirement of a by a proper action in other through a court enforced
ground that contract is assigns) evidence
written memo court action
unenforceable
2. objection to By acceptance of
presentation of oral benefits under the
evidence to prove contract
contract

YES. Not by direct

By other party
action but by By parents or
VALID DEFENSE of At any time one party guardians of both
By his privies (heirs,
Both parties are but cannot be unenforceability of attempts to enforce parties
representatives and
legally incapacitated ENFORCED contract through contract against the By confirmation
assigns)
to act by a proper action in motion to dismiss other through a court Both parties after
court complaint on the action (re)gaining capacity to
By guardian
ground that contract is act
unenforceable

VOID or
By innocent party
INEXISTENT
(Arts 1409 – 1422)
Cause, object or
YES.
purpose of contract By 3rd persons whose
DOES NOT CREATE By an action for
contrary to law, good interest are directly
RIGHTS AND CANNOT declaration for Imprescriptible Cannot be cured -- --
customs, morals, affected
IMPOSE OBLIGATION nullity
public order or public (If in pari delicto,
By defense of nullity
policy (Art 1401, Par 1) neither has an action
against each other)

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One or some of
essential requisites
of valid contract
lacking in fact or in law
a. Absolutely
simulated
b. Those whose cause YES. By any of the
or object did not exist DOES NOT CREATE By an action for contracting parties
c. Object outside the RIGHTS AND CANNOT declaration for By 3rd persons whose Imprescriptible Cannot be cured -- --
commerce of man IMPOSE OBLIGATION nullity interests are directly
d. Contemplate an By defense of nullity affected
impossible service
e. Where intention of
parties re: principal
object of contract
cannot be ascertained
(Art 1402 Pars 2 to 6)
By party whose
YES. protection the
Contracts expressly DOES NOT CREATE By an action for prohibition of the law
prohibited by law RIGHTS AND CANNOT declaration for is designed Imprescriptible Cannot be cured -- --
(Art 1409 Par 7) IMPOSE OBLIGATION nullity By 3rd party whose
By defense of nullity interests are directly
affected

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