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OBLIGATIONS AND CONTRACTS:

Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

PRESCRIPTION
GENERAL PROVISIONS

Art. 1106. By prescription, one acquires ownership and other real rights through
the lapse of time in the manner and under the conditions laid down by law.
In the same way, rights and conditions are lost by prescription.

PRESCRIPTION
 An acquisition of a right by a lapse of time; a limitation which refers to the time within which an
action must be brought after the right of action has accrued.
 A statute of repose whose object is to suppress fraudulent and stale claims from springing up at
great distances of time
 Negligence as basis of prescription—Both kinds of prescription are essentially based on
negligence of the owner of the right.
 Retroactive—Acquisition of rights through prescription is retroactive. One is deemed to have
acquired the right at the moment the prescription began to run, once the period is completed.
 Prescription v. laches—Laches is based on grounds of public policy which requires, for the peace
of society, the discouragement of stale claims

PRESCRIPTION LACHES
 Fact of delay  Effect of delay
 Fixed time  Not time-bound
 Question of time  Question of equity in permitting the
 Statutory enforcement of a claim
 Basis: law  Not statutory
 Basis: equity
Requisites of laches
 Conduct on the part of defendant, which gives rise to a claim
 Delay in asserting complainant’s rights, the complainant having the knowledge &
opportunity to file suit
 Lack of knowledge or notice of the part of the defendant that the complainant
would assert a right
 Injury or prejudice to the defendant in the event relief is accorded to the
complainant

TYPES OF PRESCRIPTION
a. Acquisitive—acquisition of a right; adverse possession; usurpation. Refers to the possessor as the
actor, as a claimant in possession. Vests property. Basis: assertion of the usurper of an adverse
right, uncontested by the true owner of the right, and gives rise to the presumption that the latter
has given up the right to the former.
 Effect of acquisitive prescription? Two sides.
- One side says the right to return the thing is extinguished upon prescription.
- Another (Tolentino’s) says that a natural obligation to return the thing subsists, for two
reasons: the law considers an obligation barred by prescription as a natural one1, and the
voluntary return of the thing can be considered as a renunciation of prescription.2

1Art. 1423. Obligations are civil or natural. Civil obligations give a right of action to compel their performance. Natural obligations, not being based on
positive law but on equity and natural law, do not grant a right of action to enforce their performance, but after voluntary fulfillment by the obligor,
they authorize the retention of what has been delivered or rendered by reason thereof. Some natural obligations are set forth in the following articles.
Art. 1424. When a right to sue upon a civil obligation has lapsed by extinctive prescription, the obligor who voluntarily performs the contract cannot
recover what he has delivered or the value of the service he has rendered.
2 Art. 1112. Persons with capacity to alienate property may renounce prescription already obtained, but not the right to prescribe in the future.

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OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

b. Extinctive—loss of the right; limitation of actions. Refers to the neglect of the owner, who is out of
possession. Bars the right of action. Basis: probability that alleged right never existed or has
already been extinguished, or if it exists, the inconvenience caused by the prescription should be
borne by the negligent party.

Art. 1107. Persons who are capable of acquiring property or rights by the other
legal modes may acquire the same by means of prescription.
Minors and other incapacitated persons may acquire property or rights by
prescription, either personally or through their parents, guardians or legal
representatives.

CAPACITY FOR PRESCRIPTION


 General rule: Capacity to acquire property or rights by other legal modes is required for
prescription.
 Exception: Minors and other incapacitated persons with discernment can acquire through
prescription, but this acquisition will be voidable or annullable, and can be ratified when the
minor comes of age or when the incapacitated becomes capacitated. When discernment is absent,
these persons can acquire through their legal representatives. This acquisition is completely valid.
Discernment requires animus rem sibi habiendi (an intent to appropriate the thing as one’s own),
an essential element of possession.

VALID ACQUISITION VOIDABLE ACQUISITION


 Majority age  Minority age or incapacitated without the
 Minority age or incapacitated, as long as assistance of parents, guardians, or legal
through legal representatives representatives

 If the property requires just title: the same capacity required for the possession of title is
required. If by donation, capacity for donees is required, etc. In other cases where title is
unnecessary, capacity for possession is required—it is an element common to all kinds of
acquisitive prescription.

Art. 1108. Prescription, both acquisitive and extinctive, runs against:


(1) Minors and other incapacitated persons who have parents, guardians or
other legal representatives;
(2) Absentees who have administrators, either appointed by them before
their disappearance, or appointed by the courts;
(3) Persons living abroad, who have managers or administrators;
(4) Juridical persons, except the State and its subdivisions.
Persons who are disqualified from administering their property have a right
to claim damages from their legal representatives whose negligence has been the
cause of prescription.

Art. 1109. Prescription does not run between husband and wife, even though there
be a separation of property agreed upon in the marriage settlements or by judicial
decree.
Neither does prescription run between parents and children, during the
minority or insanity of the latter, and between guardian and ward during the
continuance of the guardianship.

PERSONS AFFECTED BY PRESCRIPTION

SUBJECTED TO PRESCRIPTION NOT SUBJECTED TO PRESCRIPTION

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OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

 Minors and incapacitated persons who When such minors do not have parents,
have parents, guardians, and legal guardians, or legal representatives
representatives
 Absentees who have administrators When such absentee did not leave an
appointed by them or the courts administrator and there is no way that the
absentee could return
 Persons abroad who left managers or When such person abroad did not leave a
administrators manager/administrator and there is no way
that the absentee could return to the domicile
 Juridical persons It does not run against the State and its
Will run against the State’s political political subdivisions acting in their sovereign
subdivisions that act in their capacity.
proprietary capacity (engaged in
business, like a normal corporation).

 Husband and wife, in specific cases Husband and wife for all other cases, even
provided by the law, such as legal though there be a separation of property
separation, or objections to decisions agreed upon in the marriage settlememts or by
made by the husband over the judicial decree
administration of common property.
 Parents and children during the age of Parents and children during minority and/or
majority of the latter, or when the insanity of the latter
children are in the age of majority and
are sane
 -- Guardian and ward during the time of the
guardianship

Art. 1110. Prescription, acquisitive and extinctive, runs in favor of, or against a
married woman.

 A useless article, honestly.

Art. 1111. Prescription obtained by a co-proprietor or a co-owner shall benefit the


others.

CO-OWNERSHIP; HOW PRESCRIPTION APPLIES


 General rule: Actual possession of the other parties in the co-ownership is not a requisite for the
acquisition to favor the others. There is also no need for ratification of other co-owners in order
that a prescription obtained by a party may benefit the others. Exception: When the prescription
has no/distant relation with the properties owned in common, ratification is needed.

Art. 1112. Persons with capacity to alienate property may renounce prescription
already obtained, but not the right to prescribe in the future.

RENUNCIATION OF PRESCRIPTION
 Bars the remedy, but does not bar the debt.
 Usually happens when there is a pending debt and the prescriptive time has elapsed, but the
debtor acknowledges the debt and promises to pay it outside of the prescriptive period. The
debtor effectively waives the right to the benefits of prescription, one of which is the inability of
the creditor to collect the debt that has prescribed. Renunciation enables to creditor to recover the
original contract.

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OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

 Unilateral—does not require the approval of the person benefited by it.


 Tacit—requires 1) acknowledgement of a debt and 2) the promise to pay it outside of the period
and benefits of prescription
 Renunciation not valid when—1) Made in advance: an agreement that obligations arising from a
contract shall not be subject to prescription is not binding. 2) Made by representatives: only
persons with capacity to alienate property may renounce the prescription already obtained.

Art. 1113. All things which are within the commerce of men are susceptible of
prescription, unless otherwise provided. Property of the State or any of its
subdivisions not patrimonial in character shall not be the object of prescription.

OBJECTS OF PRESCRIPTION NOT OBJECTS OF PRESCRIPTION


 Everything within the commerce of man,  Common things (air, high seas)
and can be appropriated, can be acquired  Properties of public dominion**
by prescription.  Intransmissible rights
- Patrimonial property* is an  “Unless otherwise provided”—though
exclusion from the properties of within the commerce of man, the following
public dominion that cannot be cannot be acquired by prescription:
acquired by prescription - Movables possessed through a
- This interpretation is based on crime4
statutory construction to reconcile - Lands registered under the Torrens
a conflict between Art 1113 and Art system5
1108.3

* Patrimonial property is private government property that is no longer intended for public use or
service, according to Art. 421 of the Civil Code.

**According to Article 240 of the Civil Code, properties of public dominion include the following:
1. Those intended for public use, such as roads, canals, rivers, torrents, ports and bridges
constructed by the State, banks, shores, roadsteads, and others of similar character
2. Those which belong to the State without being for public use, or are intended for some public
service or for the development of national wealth.

Art. 1114. Creditors and all other persons interested in making the prescription
effective may avail themselves thereof notwithstanding the express or tacit
renunciation by the debtor or proprietor.

 Saving clause for creditors: Even if a person bound by the obligation renounces the prescription,
a creditor can still plead the prescription, thereby resisting payment. This plea does not extend to
other creditors.

Art. 1115. The provisions of the present Title are understood to be without
prejudice to what in this Code or in special laws is established with respect to
specific cases of prescription.

 In case of a conflict between other Civil Code provisions: The more specific provision will prevail.
 In case of conflict between the Civil Code and other statutes: If there are different prescriptive
periods and different types of causes of action, the provisions do not exclude each other from
being availed of by the parties.

3 Art 1108 says prescription runs against juridical persons, but not against the State and its subdivisions.
4 Art 1133.
5 Art 1126.

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OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

Art. 1116. Prescription already running before the effectivity of this Code shall be
governed by laws previously in force; but if since the time this Code took effect the
entire period herein required for prescription should elapse, the present Code shall
be applicable, even though by the former laws a longer period might be required.

 Present Civil Code took effect on August 30, 1950. This article is a transitory provision.
 Three rules:
1. If the prescriptive period under the old Civil Code had already elapsed before the effectivity of
the new Civil Code, the old prescriptive period applies.
2. If the prescriptive period under the old civil Code has not elapsed upon the effectivity of the
new Civil Code, the new Civil Code will apply if the new Civil Code provides for a shorter time
for the prescription.
3. If the prescriptive period under the old civil Code has not elapsed upon the effectivity of the
new Civil Code, the old Civil Code will apply if the new Civil Code provides for a longer time
for the prescription.

PRESCRIPTION OF OWNERSHIP AND OTHER REAL RIGHTS

Art. 1117. Acquisitive prescription of dominion and other real rights may be
ordinary or extraordinary.
Ordinary acquisitive prescription requires possession of things in good faith
and with just title for the time fixed by law.

REQUISITES OF ACQUISITIVE ORDINARY PRESCRIPTION EXTRAORDINARY


PRESCRIPTION / TYPES PRESCRIPTION

1. Capacity to acquire by See Art 1107 See Art 1107


prescription
2. A thing capable of See Art 1113 See Art 1113
acquisition by
prescription
3. Possession of the thing  Good faith and with just  Bad faith
under certain conditions title  In the concept of an
 In the concept of an owner
owner  Open, exclusive, and
 Open, exclusive, and uninterrupted ownership
uninterrupted ownership

4. Lapse of time provided  Movable / personal  Movable property – 8


by law property – 4 years6 years8
 Immovable property – 10  Immovable property –
years7 30 years9

CONVERSION OF PRESCRIPTION
 What if a possessor’s good faith transforms to bad faith?: Three possible solutions10, but the
most acceptable solution is that the prescription will be extraordinary but the possession in good

6 Art 1132
7 Art 1134
8 Art 1132
9 Art 1137

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OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

faith shall be computed in proportion to the period of extraordinary prescription. This reflects the
difference between the two kinds of acquisitive prescription, and puts value to the possession in
good faith.

Art. 1118. Possession has to be in the concept of an owner, public, peaceful and
uninterrupted.

Art. 1119. Acts of possessory character executed in virtue of license or by mere


tolerance of the owner shall not be available for the purposes of possession.

POSSESSION, TO BE VALID, MUST BE:

1. In the concept of an owner


 The possessor asserts dominion on the property to the exclusion of all others; must be en
concepto dueño, an adverse possession
 Acts pertaining to the concept of an owner: (Ramos v. CA) continuous possession, payment of
real estate taxes
 Not in the concept of an owner:
a. Mere possession with a juridical title (unless such title is repudiated), such as being a trustee,
usufructuary, lessee, agent, pledge
b. That which subsists by mere tolerance or is in virtue of a license, because both of these imply
consent on the part of the owner, and thus constitute a recognition by the possessor that
somebody else owns the property
c. Merely transient, in which case the owner is not divested of the title, but cannot exercise
ownership in the meantime

2. Public—a notorious holding of the property known to the community

3. Peaceful—for the period of years required by law for the acquisitive prescription to apply, there
must be no valid interference from others claiming or asserting their rights to the property

4. Uninterrupted—see following notes.

Art. 1120. Possession is interrupted for the purposes of prescription, naturally or


civilly.

Art. 1121. Possession is naturally interrupted when through any cause it should
cease for more than one year.
The old possession is not revived if a new possession should be exercised by
the same adverse claimant.

Art. 1122. If the natural interruption is for only one year or less, the time elapsed
shall be counted in favor of the prescription.

Art. 1123. Civil interruption is produced by judicial summons to the possessor.

Art. 1124. Judicial summons shall be deemed not to have been issued and shall
not give rise to interruption:
(1) If it should be void for lack of legal solemnities;

10The other two are: 1) the bad faith erases the good faith, and the time of extraordinary prescription will run from the time of possession in bad faith
(this puts the possessor in a worse place than one who started in bad faith), and 2) the period of extraordinary prescription will run from the time the
possession began (gives identical effect to both kinds of acquisitive prescriptions).

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OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

(2) If the plaintiff should desist from the complaint or should allow the
proceedings to lapse;
(3) If the possessor should be absolved from the complaint.
In all these cases, the period of the interruption shall be counted for the
prescription.

Art. 1125. Any express or tacit recognition which the possessor may make of the
owner's right also interrupts possession.

INTERRUPTIONS TO PRESCRIPTION
 Once interrupted, all the benefits already accrued in prescription cease; when the prescription
runs again, it will be a new one. It is in suspension where past periods may be included in the
computation (e.g., suspension because of insanity of a child or during guardianship11)

NATURE OF INTERRUPTION INTERRUPTED NOT INTERRUPTED


a. Natural—any cause For a period more than one year. If the time elapsed is one year or
except civil less.
b. Civil—comes in the form It shall be considered an It shall not be considered an
of judicial summons to interruption: interruption:
the possessor 1) If the judicial summons 1) If the judicial summons
—interruption occurs is valid, is void,
upon receipt of the 2) If the plaintiff pursues 2) If the plaintiff desists
judicial summons, and the complaint to its end, and proceedings elapse,
not the date of filing of a and and
complaint 3) Upon a final decision 3) Upon a final decision
against the possessor. absolving the possessor.

c. Express or tacit When the possessor him/herself When a third person declares
recognition by possessor declares or recognizes non- non-ownership by the possessor
of owner’s right—one ownership
cannot recognize the  E.g., where the sale is subject
right of another and at to the owner’s right of
the same time claim redemption, prescription
adverse possession which runs only after the expiration
can ripen into of the redemption period.
ownership.

Art. 1126. Against a title recorded in the Registry of Property, ordinary


prescription of ownership or real rights shall not take place to the prejudice of a
third person, except in virtue of another title also recorded; and the time shall
begin to run from the recording of the latter.

 General rule: A Torrens title recorded in the Registry of Property is never a subject of
prescription to the prejudice of a third person.12 However, the Torrens title can be challenged
by a claim of laches, if applicable.
 Exception: When another title is also recorded, prescription will begin to run from the
recording of such title.

11 Art
1109.
12
A third person is considered one who has acquired a right subsequently by relying on the record on the registry. The third person has to acquire
under the following conditions: 1) under onerous title, 2)acquisition is from someone who, according to the registry, can transmit such title, 3) that the
acquisition is registered, and 4) that such person has no knowledge of the prescription.

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OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

Art. 1127. The good faith of the possessor consists in the reasonable belief that
the person from whom he received the thing was the owner thereof, and could
transmit his ownership.

Art. 1128. The conditions of good faith required for possession in Articles 526,
527, 528, and 529 of this Code are likewise necessary for the determination of
good faith in the prescription of ownership and other real rights.

GOOD FAITH
 Its essence lies in the honest belief in the validity of one’s right, ignorance of a superior claim,
and the absence of intention to overreach another
 When the possessor is not aware of any flaw that exists in the title or mode of acquisition13
 Mistake upon a doubtful or difficult question of law
 Always presumed, and the burden of proof lies in one the party alleging bad faith
 Does not lose its character until the moment when facts show that the possessor is aware of
that he or she possesses the thing wrongfully
 Cannot be invoked in the following examples: knowingly using a forged document to establish
one’s possession by acquisitive prescription, or receiving constructive notice of the legal and
valid rights of the possession of another during the prescriptive period

Art. 1129. For the purposes of prescription, there is just title when the adverse
claimant came into possession of the property through one of the modes
recognized by law14 for the acquisition of ownership or other real rights, but the
grantor was not the owner or could not transmit any right.

Art. 1130. The title for prescription must be true and valid.

Art. 1131. For the purposes of prescription, just title must be proved; it is never
presumed.

JUST TITLE
 An act which has for its purpose the transmission of ownership, and which would have
actually transferred ownership if the grantor had been the owner.
 Thus, just title in prescription is understood in the sense of a titulo colorado—such title
where, although there was a mode of transferring ownership, still something is wrong because
the grantor is not the owner (Solis v. CA)

Art. 1132. The ownership of movables prescribes through uninterrupted


possession for four years in good faith.
The ownership of personal property also prescribes through uninterrupted
possession for eight years, without need of any other condition.
With regard to the right of the owner to recover personal property lost or of
which he has been illegally deprived, as well as with respect to movables acquired
in a public sale, fair, or market, or from a merchant's store the provisions of
Articles 559 and 1505 of this Code shall be observed.

 3rd paragraph: An owner who has lost or has been unlawfully deprived of property can recover the
thing from the person in possession of the same. If the possessor of the property lost or unlawfully
deprived from its owner acquired the thing at a public sale, reimbursement shall be required.

13 Art 526
14 Examples: succession, inheritance, donation

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OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

Art. 1133. Movables possessed through a crime can never be acquired through
prescription by the offender.

 But prescription will run if the movables are acquired subsequently by another who is not an offender
in a crime.

Art. 1134. Ownership and other real rights over immovable property are acquired
by ordinary prescription through possession of ten years.

Art. 1135. In case the adverse claimant possesses by mistake an area greater, or
less than that expressed in his title, prescription shall be based on the possession.

 Basis shall always be the possession, regardless of what is indicated in the title.

Art. 1136. Possession in wartime, when the civil courts are not open, shall not be
counted in favor of the adverse claimant.

 However, if the civil courts are open during wartime, prescription shall be counted.

Art. 1137. Ownership and other real rights over immovables also prescribe
through uninterrupted adverse possession thereof for thirty years, without need of
title or of good faith.

Art. 1138. In the computation of time necessary for prescription the following
rules shall be observed:
(1) The present possessor may complete the period necessary for
prescription by tacking his possession to that of his grantor or predecessor
in interest;
(2) It is presumed that the present possessor who was also the possessor
at a previous time, has continued to be in possession during the intervening
time, unless there is proof to the contrary;
(3) The first day shall be excluded and the last day included.

 1st rule contemplates a transfer of property from one person to another in a manner provided by law.
It is allowed only when there is a privity of contract or relationship between the previous and the
present possessors.
 2nd rule: A presumption arises that a person has occupied a property during the intervening time if
there are facts showing possession on two different times. However, this presumption can be
destroyed by evidence to the contrary.

PRESCRIPTION OF ACTIONS

Art. 1139. Actions prescribe by the mere lapse of time fixed by law.

Art. 1140. Actions to recover movables shall prescribe eight years from the time
the possession thereof is lost, unless the possessor has acquired the ownership by
prescription for a less period, according to Articles 1132, and without prejudice to
the provisions of Articles 559, 1505, and 1133.

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OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

 Without prejudice here means that if a possessor has acquired ownership, no action to recover may be
filed, even though there may still be several years remaining in the prescribed 8 years.

Art. 1141. Real actions over immovables prescribe after thirty years.
This provision is without prejudice to what is established for the acquisition
of ownership and other real rights by prescription.

Art. 1142. A mortgage action prescribes after ten years.

 A mortgage is an accessory contract, constituted to serve a debt so if the debtor fails to pay the
principal obligation, the creditor can foreclose on the mortgage by selling the same in a public sale
and using the proceeds to pay off the debt and interest. If there is any deficiency, the creditor can still
go against the debtor. The action to file a claim for the deficiency is a mortgage action.

Art. 1143. The following rights, among others specified elsewhere in this Code, are
not extinguished by prescription:
(1) To demand a right of way, regulated in Article 649;
(2) To bring an action to abate a public or private nuisance.

Art. 1144. The following actions must be brought within ten years from the time
the right of action accrues:
(1) Upon a written contract;
(2) Upon an obligation created by law;
(3) Upon a judgment.

 The cause of action for a written contract occurs when there is a breach of such contract.

Art. 1145. The following actions must be commenced within six years:
(1) Upon an oral contract;
(2) Upon a quasi-contract.

 A quasi-contract is a juridical relation characterized by certain lawful, voluntary and unilateral acts to
the end that no one should be unjustly enriched at the expense of the other.

Art. 1146. The following actions must be instituted within four years:
(1) Upon an injury to the rights of the plaintiff;
(2) Upon a quasi-delict.

 A quasi-delict is a contractual relation where whoever by act or omission causes damage to another,
there being fault or negligence, is obliged to pay for the damage done

Art. 1147. The following actions must be filed within one year:
(1) For forcible entry and detainer;
(2) For defamation.

Art. 1148. The limitations of action mentioned in Articles 1140 to 1142, and 1144
to 1147 are without prejudice to those specified in other parts of this Code, in the
Code of Commerce, and in special laws.

 Without prejudice means that in proper cases, the prescriptive period in this chapter may be availed
of notwithstanding other provisions in other laws

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OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

Art. 1149. All other actions whose periods are not fixed in this Code or in other
laws must be brought within five years from the time the right of action accrues.

Art. 1150. The time for prescription for all kinds of actions, when there is no
special provision which ordains otherwise, shall be counted from the day they may
be brought.

Art. 1151. The time for the prescription of actions which have for their object the
enforcement of obligations to pay principal with interest or annuity runs from the
last payment of the annuity or of the interest.

Art. 1152. The period for prescription of actions to demand the fulfillment of
obligation declared by a judgment commences from the time the judgment
became final.

Art. 1153. The period for prescription of actions to demand accounting runs from
the day the persons who should render the same cease in their functions.
The period for the action arising from the result of the accounting runs from
the date when said result was recognized by agreement of the interested parties.

 General rule: Art. 1150. Exceptions: Art. 1151, 1152, and 1153.

Art. 1154. The period during which the obligee was prevented by a fortuitous
event from enforcing his right is not reckoned against him.

Art. 1155. The prescription of actions is interrupted when they are filed before the
court, when there is a written extrajudicial demand by the creditors, and when
there is any written acknowledgment of the debt by the debtor.

 The interruption renews or starts a new period of prescription. It is not a mere suspension.

OBLIGATIONS AND CONTRACTS

OBLIGATIONS
GENERAL PROVISIONS

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

ESSENTIAL ELEMENTS OF AN OBLIGATION


1. Juridical tie or vinculum juris—efficient cause established by the sources of obligations (Art. 1157)
2. Object—the prestation or conduct required, which in this case is to give, to do, or not to do
3. Subject-persons—the parties involved in an obligation, which consist of the active (obligee,
creditor) and the passive (obligor, debtor). Includes both natural and juridical persons.

Art. 1157. Obligations arise from:


(1)Law;
(2)Contracts;
(3)Quasi-contracts;
(4)Acts or omissions punished by law; and

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OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

(5)Quasi-delicts.

SOURCES OF OBLIGATIONS
 This enumeration is exclusive. No other sources of obligations are provided by the law. These sources
are further discussed below.

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.

1. LAW
 Not presumed
 Does not depend upon the will of the parties, since this is imposed by the State and generally imbued
with public policy considerations
 Significance: Existing law enters into and forms part of a valid contract without need for the parties
expressly making reference thereto.

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

2. CONTRACTS
 A contract involves two or more persons whereby a right is acquired by at least one of them to an act
or acts, or to forbearance, on the part of the other or others
 Whatever stipulations, terms, and conditions are included in the contract, as long as they are not
contrary to law, morals, good customs, and public policy or public order, such contract is the law
between the two parties.
 The Court may interfere with a contract in the following cases:
- When the Court fixes a period upon a suspensive potestative condition imposed upon the
fulfilment of the obligation
- When the Court fixes a period when a debtor binds himself to pay when his/her means
permit him/her to do so
- When the Court equitably reduces the penalty when the principal obligation has been
partially fulfilled by a debtor, or when the penalty is iniquitous or unconscionable
- When the Court releases the obligor from an obligation that has become so difficult to be
manifestly beyond the contemplation of the parties

Art. 1160. Obligations derived from quasi-contracts shall be subject to the


provisions of Chapter 1, Title XVII, of this Book.

3. QUASI-CONTRACT
 A quasi-contract is a juridical relation involving certain lawful, voluntary, and unilateral acts which
prevent unjust enrichment at the expense of another.

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

4. FELONIES

12
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

 Basis: Civil liability attaches to any person who may be found to be criminally liable.15 This source of
obligations is guided by the following rules:
a. The plaintiff shall not be entitled to recover damages twice for the same act or omission of the
defendant, even though the negligence may constitute an entirely different cause of action.16
b. When the accused in a criminal prosecution is acquitted on the ground that his guilt has not
been proved beyond reasonable doubt, a civil action of damages for the same act or omission
may be instituted, requiring only a preponderance of evidence.17
c. When a separate civil action is brought to demand civil liability arising from a criminal
offense, and no criminal proceedings are instituted yet during the pendency of the civil case, a
preponderance of evidence is sufficient to prove the act complained of.18
d. In cases of defamation, fraud, physical injuries, or when a member of a city or municipal
police force fails to render aid or protection to any person in case of danger to life or property,
or when any constitutional right under Art. 32 is violated, the civil action shall proceed
independently of the criminal action, requiring only a preponderance of evidence.19

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.

5. QUASI-DELICT
 A juridical relation where, if there is no existing pre-contractual relation between the parties, whoever
by act or omission causes damage to another, there being no fault or negligence, is obliged to pay for
the damage done.20

NATURE AND EFFECT OF OBLIGATIONS

I. TO GIVE

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.

STANDARD OF CARE REQUIRED FOR THINGS TO BE GIVEN


 General rule: The standard of care required of the person who has the duty to give a determinate
object is that of the “proper diligence of a good father of a family.”
 Exception: Unless the law or stipulation of the parties requires another standard of care. However, in
case of a contrary stipulation by the parties, such stipulation should not contemplate a relinquishment
or waiver of the most ordinary diligence.
- Example of another standard of care: “extraordinary diligence” exercised by common
carriers. Common carriers are persons, corporations, firms, or associations engaged in
the business of transporting passengers or goods or both.

TWO KINDS OF THINGS


1. Determinate—an object definite, known, and has already been decided and particularly specified
as the matter to be given among the same things belonging to the same kind (e.g., an apple with
Atty. Mel’s autograph)
2. Indeterminate or generic—any object belonging to the same kind (e.g., any normal apple)

15 Art. 2176
16 Art. 2177
17 Art. 29
18 Art. 30
19 Art. 33, 34, 32
20 Art. 2176

13
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

Art. 1164. The creditor has a right to the fruits of the thing from the time the
obligation to deliver it arises. However, he shall acquire no real right over it until
the same has been delivered to him.

RIGHTS BEFORE & UPON DELIVERY OF THE THING

BEFORE DELIVERY UPON DELIVERY


 Creditor has a personal right over the thing.  Creditor has a real right over the thing.
- A personal right is the power of - A real right is the power belonging
one person to demand of another, to one person over a specific thing,
as a definite passive subject, the without a passive subject
fulfillment of the protestation to individually determined, against
give, to do, or not to do whom such right may be personally
- Such right which is enforceable exercised
only upon the debtor who is under - Such right which is enforceable
an obligation to give against the whole world and will
prejudice anybody claiming the
same object of protestation
 If the creditor is prejudiced by the acquisition  If an innocent third party is prejudiced by the
of an innocent third party, the creditor can go acquisition of the creditor, the innocent third
against the debtor for damages party can go against the debtor for damages

Art. 1165. When what is to be delivered is a determinate thing, the creditor, in


addition to the right granted him by Article 1170, may compel the debtor to make
the delivery.
If the thing is indeterminate or generic, he may ask that the obligation be
complied with at the expense of the debtor.
If the obligor delays, or has promised to deliver the same thing to two or
more persons who do not have the same interest, he shall be responsible for any
fortuitous event until he has effected the delivery.

NON-DELIVERY OF THE THING

DETERMINATE THING INDETERMINATE THING *IN CASE OF FORTUITOUS EVENT


REMEDIES
1. Action of “specific 1. The creditor may have it  General rule: Debtor is excused if
performance”—an done or delivered in any non-delivery of determinate thing
action to compel the reasonable way, was due to a fortuitous event.
debtor to make the charging all expenses of  Exceptions:
delivery such fulfillment to the a. If the debtor delays
2. & damages, if the debtor b. If the debtor has promised to
non-delivery is deliver the same thing to two
accompanied by the Thus, the creditor has the right or more persons who do not
debtor’s fraud, to have somebody else to have the same interest
negligence, delay, or perform the obligation and the Thus:
breach of contract right to charge the expenses 1. The obligor may be liable for
thereof to the debtor. damages
2. Or will be bound to replace
the lost object if the obligee
agrees

14
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

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

 In short, obligor is mandated by law to deliver the whole thing.

II. TO DO & NOT 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 poorly done
be undone.

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. (1099a)

NON-ACCOMPLISHMENT OF THE ACT


 In a prestation to do, the debtor shall always be liable for the cost in the following instances:
1. When the debtor fails to do it
2. When the debtor contravenes the tenor of the obligation
3. When the debtor poorly fulfils the obligation
4. When the debtor does what is forbidden
 “At his cost” in the article both means 1) the right to have somebody else perform the obligation and
2) the right to charge the expenses thereof to the debtor.

III. TO GIVE, TO DO & NOT TO DO

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

DEMAND
 A demand makes an obligation become due. Demand is needed only when the obligation is to do
something other than the payment of money. In the payment of money, the time defaulted is
compensated for by interest.

15
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

 Two kinds of demand: extra-judicial and judicial. A commencement of a suit is a sufficient (judicial)
demand.

DELAY
 Delay, or default, as contemplated in this article, means delay with fault or negligence. If it is delay
by mere inadvertence, the obligor will not be held liable under Article 1169.

DEMAND DELAY
EFFECTS One becomes liable for damages for the When a party defaults, the other party has
delay not from the time the object of two choices:
prestation is to be delivered, but from the 1) to ask for specific performance and
time of the demand damages, or
2) to ask for the rescission of the
contract and damages
WHEN Generally, demand is not needed for the ff:
NOT a. When the obligation or the law expressly declares. E.g., indication in contract, taxes
NEEDED b. When time is of the essence for a particular contract. E.g. delivery of wedding car
c. When the obligor has rendered the obligation beyond his or her power to perform.
E.g. donation of a collateral to a third party

Other cases
a. Filing of a suit as a demand
General rule: For a party to be able to file a suit to compel the other party to
perform an obligation, the law does not make, as a prerequisite, that extra-judicial
demand must be made first on such other party prior to the filing of the suit.
(Rationale: The filing of the suit is the demand itself. It is a judicial demand.)
b. Reciprocal obligations
“Substantial compliance”: The performance of one is conditioned upon the simultaneous
fulfillment of another. The obligation of one is a resolutory condition of the obligation of
the other, the non-fulfillment of which entitles the other party to rescind the contract.

WHEN Exceptions: Two cases. Extra-judicial demand should be made prior to the filing of a civil
NEEDED suit in ejectment or consignment cases.
(Rationale: Fair notice must be given to the debtors in these cases.)

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.

 Rationale for Art. 1170: The compliance with an obligation must always be done in good faith.
 Need for demand and delay is irrelevant here.
 There are four causes provided by law which bring forth a suit for damages: 1) fraud, 2) negligence, 3)
contravention of the tenor of the obligation, and 4) delay.
 If a fortuitous event occurs after any of the causes above (and in effect, aggravates such causes), the
obligor cannot be excused from being liable on the obligation.

Art. 1171. Responsibility arising from fraud is demandable in all obligations. Any
waiver of an action for future fraud is void.

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

16
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

Art. 1173. The fault or negligence of the obligor consists in the omission of that
diligence which is required by the nature of the obligation and corresponds with
the circumstances of the persons, of the time and of the place. When negligence
shows bad faith, the provisions of Articles 1171 and 2201, paragraph 2, shall
apply.
If the law or contract does not state the diligence which is to be observed in
the performance, that which is expected of a good father of a family shall be
required.

CAUSE HOW COMMITTED OTHER CHARACTERISTICS


Fraud This implies fraud committed after  It is demandable in all obligations.
two parties agree to a contract, and  Any waiver for an action of future fraud is
not one which occurs to deceive a void.
party into agreeing for a contract.

Negligence  An omission of diligence which is  Presumption of diligence is that expected


required by the nature of the of a good father
obligation  If committed with bad faith, provisions of
 Subjective: limited by the Art. 1171 and 2201 (2) apply. Bad faith is
circumstances of time, nature, a state of mind affirmatively operating
and place—liability is judged by with furtive design and some motive of ill
these circumstances will. Not equated with a honest mistake,
but a design to mislead another
Contravention See Art. 1166 to 1168
of tenor of
obligations
Delay See Art. 1169

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

FORTUITOUS EVENT
 An act of God, an accident due directly and exclusively to natural causes without human intervention,
which by no amount of foresight, pains or care, reasonably to have been expected, could have been
prevented
 Applicable only to determinate things in case of obligations to give. In case of fortuitous event on
generic things, the creditor can simply ask for another copy of the thing
 Does not serve to extend the contract
 General rule: fortuitous event excuses an obligor. Exceptions are the ff:
1. When there is fraud, negligence, delay, or breach of contract
2. When there is an assumption of risk in the nature of the obligation
3. When the contract provides that a fortuitous event will not excuse the obligor
4. Other instances provided by law (insurance contract, because its very nature involves the
assumption of risk)
Requisites:
1. The cause of breach of obligation must be independent of the will of the debtor
2. The event must either be unforeseeable or unavoidable
3. The event must be such to render it impossible for the debtor to fulfill his or her
obligation in a normal manner
4. The debtor must be free from any participation in, or the aggravation of the injury

17
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

Art. 1175. Usurious transactions shall be governed by special laws.

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.
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.

PRESUMPTIONS OF PAYMENT
 These presumptions are overturned by strong proof to the contrary.
1. Receipt of principal payment: presumption that interest has been paid.
2. Receipt of last instalment: presumption that all previous instalments have been paid. The receipt
of the last instalment should refer to the specific date of the last instalment.

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

OTHER REMEDIES FOR THE CREDITOR


 The following successive measures must be taken by a creditor before he or she may bring an action
for rescission of an allegedly fraudulent sale:
1. Exhaust the properties of the debtor through levying by attachment and execution upon all the
property of the debtor, except as such exempt by law from execution
2. Exercise all the rights and actions of the debtor, save those which are personal to him (accion
subrogatoria)
3. Seek the rescission of the contracts executed by the debtor in fraud of their rights (accion
pauliana)

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.

TRANSMISSIBLE RIGHTS
 General rule: Rights acquired in the virtue of an obligation are automatically transmissible. Real
rights are usually transmissible, while personal rights are not.
 Exceptions: 1) If there is a law or a stipulation in the contract to the contrary, and 2) the owner of the
right cannot transfer rights greater than what he or she possesses to the transferee.

DIFFERENT KINDS OF OBLIGATIONS

I. PURE AND CONDITIONAL OBLIGATIONS

Art. 1179. Every obligation whose performance does not depend upon a future or
uncertain event, or upon a past event unknown to the parties, is demandable at
once.
Every obligation which contains a resolutory condition shall also be
demandable, without prejudice to the effects of the happening of the event.

PURE OBLIGATION

18
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

 An unqualified obligation which is demandable immediately. Its performance does not depend upon a
future and uncertain event, or upon a past event unknown to the parties.

CONDITIONAL OBLIGATION
 The reverse of a pure obligation. Its performance depends upon a future and uncertain event or upon
a past event unknown to the parties, and its efficacy or obligatory force is subordinated by the
happening of the future and uncertain event.

CONDITION
 A condition is an act or event, other than a lapse of time, which, unless the condition is excused, must
occur before a duty to perform a promise in the agreement arises or which discharges a duty of
performance that has already arisen.

RESOLUTORY CONDITION SUSPENSIVE CONDITION


 Extinguishes the obligation once the future and  Gives rise to the obligation upon the happening
uncertain event happens of a future and unknown event or a past event
 Demandable at once unknown to the parties
 A condition subsequent  Demandable only at the time the event happens
E.g. in reciprocal obligations, the obligation of one  A condition precedent
is a resolutory condition of the obligation of the E.g. contract to sell (sale upon completion of
other payment) and contract of sale (perfection of sale
upon completion of payment)

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 Article 1197.

 This is one of the cases when the Court assigns a period within which the payment is to be made,
especially when the period depends upon the will of the debtor (“when his means permit him to do so”
in this article).

Art. 1181. In conditional obligations, the acquisition of rights, as well as the


extinguishment or loss of those already acquired, shall depend upon the
happening of the event which constitutes the condition.

 See table at Art. 1179.

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 third person, the obligation shall take effect in conformity with the
provisions of this Code.

SUSPENSIVE POTESTATIVE CONDITION


 A condition whose fulfilment depends upon the sole will of the debtor
 Absolute rule: A suspensive potestative condition is always void. It is the obligation accompanying
the condition which may be:
- Void, if the suspensive potestative condition is imposed on the birth of the obligation.
This is now called a suspensive condition facultative as to the debtor
- Valid, if the suspensive potestative condition is imposed merely on the fulfilment of the
obligation. In this case, the parties must go to court to have the period fixed.

19
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

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 CONDITIONS
 General rule: An obligation with an impossible condition is void. In addition, the condition to do an
impossible thing is deemed not agreed upon, and is thus not part of the contract.
 Exception: If the obligation is divisible, the part thereof not affected by the impossible condition is
still valid.

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.

Art. 1185. The condition that some event will not happen at a determinate time
shall render the obligation effective from the moment the time indicated has
elapsed, or if it has become evident that the event cannot occur.
If no time has been fixed, the condition shall be deemed fulfilled at such
time as may have probably been contemplated, bearing in mind the nature of the
obligation.

CONDITION THAT AN EVENT WILL HAPPEN AT A DETERMINATE TIME


 Two effects:
1. Will extinguish the obligation as soon as the time expires, or
2. Will extinguish the obligation if it has become unquestionable that the event will not happen

CONDITION THAT AN EVENT WILL NOT HAPPEN AT A DETERMINATE TIME


 Two effects:
1. Shall render the obligation effective from the moment the time indicated has elapsed
2. Shall render the obligation effective if it has become evident that the event will not occur
 If no time has been fixed, the time as may have been probably contemplated will be considered

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

CONSTRUCTIVE FULFILMENT
 If the obligor voluntarily prevents the fulfilment of a condition in an obligation, the law states that the
obligation shall be fulfilled. Also called the doctrine of prevention.
 Basis: good faith in both of the parties should not impede, hinder, or obstruct or prevent the
fulfilment of the obligation.

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.

20
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

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

RETROACTIVE APPLICATION OF OBLIGATIONS


 General rule: An obligation is deemed to have been fulfilled not on the day of its fulfilment, but the
day of the constitution of the obligation. Only applicable to obligations with suspensive conditions.
 Application:
1. In reciprocal obligations: the fruits and interests of the object during the pendency of the
condition cancel each other out.
2. In unilateral obligations: the fruits and interests of the object during the pendency of the
obligation belong to the obligor, unless the circumstances or the intention of the person
constituting the obligation says otherwise

Art. 1188. The creditor may, before the fulfillment of the condition, bring the
appropriate actions 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.

PROTECTIVE MEASURES BEFORE THE FULFILLMENT OF AN OBLIGATION


 For the creditor: bring appropriate actions, e.g., an injunction suit to stop the debtor from alienating
a property which is the object of an obligation, to protect his/her right
 For the debtor: recover what he or she has paid by mistake before the fulfillment of a condition in an
obligation

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) If the thing is lost without the fault of the debtor, the obligation shall be
extinguished;
(2) If the thing is lost through the fault of the debtor, he shall be obliged to pay
damages; it is understood that the thing is lost when it perishes, or goes out of
commerce, or disappears in such a way that its existence is unknown or it cannot
be recovered;
(3) When the thing deteriorates without the fault of the debtor, the impairment is
to be borne by the creditor;
(4) If it deteriorates through the fault of the debtor, the creditor may choose
between the rescission of the obligation and its fulfillment, with indemnity for
damages in either case;
(5) If the thing is improved by its nature, or by time, the improvement shall inure
to the benefit of the creditor;
(6) If it is improved at the expense of the debtor, he shall have no other right than
that granted to the usufructuary.

SCENARIOS DURING THE PENDENCY OF AN OBLIGATION


 This article applies to those obligations with suspensive conditions.
 Choice of remedy always belongs to the creditor.

EVENT W/O DEBTOR’S FAULT W/ DEBTOR’S FAULT


LOSS* Obligation is extinguished Debtor to pay damages
DETERIORATION Impairment is borne by creditor 1.Rescission of obligation +
damages

21
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

2.Fulfilment of obligation +
damages
IMPROVEMENT (By nature or time) Shall inure to (At the expense of debtor) Debtor
the benefit of creditor shall only be a usufruct**

*A thing is deemed lost when it 1) perishes, 2) goes out of commerce, 3) disappears in such a way that its
existence is unknown or it cannot be recovered
**A usufruct gives a right to enjoy the property of another with the obligation of preserving its form and
substance unless the title constituting it or the law provides.

Art. 1190. When the conditions have for their purpose the extinguishment of an
obligation to give, the parties, upon the fulfillment of said conditions, shall return
to each other what they have received.
In case of the loss, deterioration or improvement of the thing, the
provisions which, with respect to the debtor, are laid down in the preceding article
shall be applied to the party who is bound to return.

 This article applies to obligations with resolutory conditions. Same scenarios as in Art. 1198.

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

POWER TO RESCIND
 To rescind does not merely mean to terminate a contract and release the parties from further
obligations to each other, but more importantly, it means to abrogate the contract from the beginning
and restore the parties to their original positions as if no contract has been made.
 Requires a substantial breach of an obligation: substantial as to defeat the object of the parties in
entering into an agreement.

RESCISSION IMPLIED RECISSION EXPRESS RECISSION


ENFORCEMENT Court action Stipulation in the contract that
the violation of its terms shall
cause the cancellation,
termination, or rescission thereof
w/o court intervention
PURPOSE OF COURT ACTION To enforce recission To judge whether the rescission
is proper. Final judgment of
court shall only confirm such
recission
REVOCATORY ACT Final judgment of the court. Notice to the defaulter of such
Court shall fix a period, however, recission
if there is a just cause.

22
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

Injured party who suffers a substantial breach has the following choices:
1. Fulfillment of obligation + damages
2. Rescission of obligation + damages
3. Rescission, even after the injured party has chosen fulfillment, if fulfillment should become
impossible + damages

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

IN PARI DELICTO
 If first violator is determined: Such first violator is liable, but his liability will be tempered because
the other party is also at fault
 If first violator cannot be determined: Obligation shall be deemed extinguished, and each shall bear
his/her own damages

II. OBLIGATIONS WITH A PERIOD

Art. 1193. Obligations for whose fulfillment a day certain has been fixed, shall be
demandable only when that day comes.
Obligations with a resolutory period take effect at once, but terminate upon
arrival of the day certain.
A day certain is understood to be that which must necessarily come,
although it may not be known when.
If the uncertainty consists in whether the day will come or not, the obligation is
conditional, and it shall be regulated by the rules of the preceding Section.

PERIOD
 Designates a particular time which is certain to happen as the moment when the obligation will either
be effective or be extinguished. A day certain is understood to be that which must necessarily come,
although it may not be known when. When the day may not necessarily come, it is a condition.
1. Suspensive period—gives rise to the effectivity of the obligation
2. Resolutory period—extinguishes the obligation

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

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

PAYMENT BEFORE PERIOD COMES


 If the debtor is unaware of the period:
- He or she may recover the thing with fruits and interests only during the time he or she
was not obligated to give the thing.
 If the debtor and creditor have full knowledge of the period: no problems. Obligation is fulfilled.

Why does the law use “fruits and interests”?


 The preceding term is “paid or delivered.” Fruits refer to “delivered” and interests refer to “paid.”

Why does the law include fruits and interests in a case for damages?

23
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

 The obligor has lost the opportunity to make productive use of the money, so the law compensates for
that.

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


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

BENEFIT OF THE PERIOD


 General rule: The period is always deemed to be established for the benefit of both the creditor and
debtor. In reciprocal obligations, for example, either party does not incur in delay unless the other
starts the fulfilment of his part during the period stipulated. Designations of “creditor” and “obligor”
are irrelevant.
 Exception: The benefit of the period may be waived (expressly or impliedly) by the party in whose
favor it was constituted.

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

WHEN COURTS SHALL FIX THE PERIOD


 Two –step process:
1. Court must determine whether the obligation does not fix the period (e.g. depends on the will of
the debtor), and from the circumstances and nature of the obligation, a period was intended by
the parties.
2. Court must determine the period contemplated by the parties. The Court cannot fix a period
based on its opinion.21 This period determined by the court is final and cannot be changed by
anyone again.

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 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.

LOSS OF THE RIGHT TO A PERIOD


 Article 1198 applies to both reciprocal and unilateral obligations and those where the period is for the
benefit of both parties or one party.

21 Gregorio Araneta Inc. v. Phil. Sugar Estates Development Co., Ltd.

24
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

1. INSOLVENCY
- Insolvency is defined as the inability to pay, and not necessarily the loss of property.
- Need not be judicially declared.
- General rule: Period is lost, but the obligation does not become demandable, upon
insolvency
- Exception: If the party can give securities or guarantees, the period is restored. Since the
law gives an option for the party to furnish guarantees, the obligation is not immediately
demandable in case of insolvency.

2. FAILURE TO FURNISH SECURITIES / GUARANTEES


- In this case, the obligation is immediately demandable, as distinguished from the first
case.
- Securities can take the form of mortgages or real-estate pledges.
- If the guarantor has committed him/herself solidarily to the obligation, the creditor can
opt to go against the guarantor immediately without even going to the principal.

3. IMPAIRMENT / LOSS OF GUARANTEES


- Impairment does not mean destruction, but merely a diminishing of the guarantee.
- General rule: 1) If by his/her own acts, the party impairs the guarantee, he/she loses the
right to a period. 2) If through a fortuitous event, the guarantee is impaired, the right to a
period is lost too.
- Exception: In both cases, the period will be restored if the party gives new guarantees
equally satisfactory.

4. VIOLATION OF ANY CONSIDERATION TO A PERIOD


- Because the consideration is the reason why the period was agreed upon, any violation of
the consideration results to the loss of the right to the period, and the obligation becomes
immediately demandable.
- The consideration is not a resolutory condition. A resolutory condition extinguishes the
obligation. The consideration here hastens the extinguishment of the obligation.

5. ATTEMPT TO ABSCOND
- To abscond means to physically flee, and not merely a failure to respond to the creditor’s
demands.
- Mere attempt make the obligation immediately demandable, because if the party
succeeds in absconding, the creditor may never collect.

III. ALTERNATIVE OBLIGATIONS

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.

 “Different prestations” (to give, to do, and not to do) as contemplated in this article refers to both the
loose and strict sense of the protestation. (But to be less confused, treat each object of the prestation
individually, as a rule.)
 Rules in alternative obligations:
- Complete performance of one of the alternatives, unless the creditor accepts partial
performance.
- If all but one of the alternatives shall become impossible, the obligation ceases to be
alternative.

25
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

Art. 1200. The right of choice belongs to the debtor, unless it has been expressly
granted to the creditor.
The debtor shall have no right to choose those prestations which are
impossible, unlawful or which could not have been the object of the obligation.

Art. 1201. The choice shall produce no effect except from the time it has been
communicated.

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

RIGHT OF CHOICE OF THE DEBTOR


 Presumed by law. The right of choice implies that the debtor can freely destroy the other choices, as
long as one still remains.
 To have effect, it must be communicated to the creditor. Mode of communication may vary.
 This right of choice implies that the prestations are not impossible, unlawful, or those which could
not have been the object of the obligation. The debtor cannot choose such prestations.
 In addition, the right of choice is lost when only one prestation is practicable. Practicable means
‘capable of being done,’ or feasible. Creditor cannot complain.

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

Art. 1204. The creditor shall have a right to indemnity for damages when, through
the fault of the debtor, all the things which are alternatively the object of the
obligation have been lost, or the compliance of the obligation has become
impossible.
The indemnity shall be fixed taking as a basis the value of the last thing
which disappeared, or that of the service which last became impossible.
Damages other than the value of the last thing or service may also be
awarded.

LOSS OF ALTERNATIVES
 Creditor’s fault:
- If nothing in the prestations is possible because of the fault of the creditor, the debtor can
rescind the contract plus damages; or
- Provided that there are still viable alternatives left, the debtor can still choose among the
other alternatives if the creditor still wants to pursue the contract
 Debtor’s fault: Damages based on the last thing lost or the service which became impossible, plus
other 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.
Until then the responsibility of the debtor shall be governed by the following
rules:
(1) If one of the things is lost through a fortuitous event, he shall perform the
obligation by delivering that which the creditor should choose from among the
remainder, or that which remains if only one subsists;

26
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

(2) If the loss of one of the things occurs through the fault of the debtor, the
creditor may claim any of those subsisting, or the price of that which, through the
fault of the former, has disappeared, with a right to damages;
(3) If all the things are lost through the fault of the debtor, the choice by the
creditor shall fall upon the price of any one of them, also with indemnity for
damages.
The same rules shall be applied to obligations to do or not to do in case one,
some or all of the prestations should become impossible.

WHEN THE CHOICE IS EXPRESSLY GIVEN TO THE CREDITOR


 Obligation shall cease to be alternative. However, the following rules will govern the obligation while
the selection of the creditor has not been communicated:
1. If the debtor loses one of the choices through fortuitous event, the debtor:
- Can perform the obligation by delivering that which the creditor chooses
- Or delivering the remaining choice, if one is left
2. If the debtor loses one of the choices through his/her own fault, the creditor:
- May claim any of the subsisting alternatives
- Or the price of that alternative which disappeared because of the debtor, plus damages
3. If the debtor loses all of the choices through his/her own fault, the creditor:
- Can claim the price of any of the things lost, plus damages

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

FACULTATIVE-ALTERNATIVE OBLIGATION
 Involves a principal obligation and a substitute obligation
 General rule: That the substitute must be given in case the principal obligation is not fulfilled is not
mandatory.
 Exception: However, there is nothing stopping the parties from stipulating such in the contract.
Moreover, if the debtor does give the substitute in place of the principal, the creditor cannot decline.
 A facultative-alternative obligation—
- Is voidable when the substitute is a consideration crucial to the agreement of one of the
parties to the obligation, and there was fraud involved with the substitute object
- Becomes valid if the creditor, however accepts the principal object. The contract is cured
of the fraud involving the substitute.

IV. JOINT & SOLIDARY 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 prestation. There is a solidary liability only when the obligation expressly
so states, or when the law or the nature of the obligation requires solidarity.

SOLIDARY OBLIGATIONS: NATURE


 Implies a situation where there are debts or obligations incurred by two or more debtors in favor of
two or more creditors, and giving anyone, some or all of the creditors the right to demand from

27
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

anyone, some, or all of the debtors the satisfaction of the total obligation and not merely the share of
each debtor in the debts or obligations
 Not presumed by law. A solidary obligation exists only when:
1. Expressly stated in the contract
- However, if a judicial decision supersedes the contract and declares that the obligation is
merely joint, then it must be enforced in a joint manner
2. When the law requires solidarity
- E.g., Family Code: Spouses are solidarily liable with their separate properties for
liabilities of the APC or CPG if such APC or CPG is insufficient to cover for the unpaid
balance
3. When the nature of the obligation requires solidarity
- Art. 19-22 of the Civil Code, when violated by two or more persons, has been deemed to
give rise to a solidary obligation, according to Tolentino

WHEN AN OBLIGATION IS SOLIDARY


 Use of the following terms:
- “Individually and jointly liable”
- “Collectively”
- “Separately”
- “Distinctly”
- “Respectively”
- “Severally”
- “Jointly and severally guaranteed”
- “I promise,” or “I hereby bind myself” but only if the names were not identified in the
body of the contract itself. (If a name or some names are identified, obviously it is not a
solidary obligation, because a specific person is liable, and not the debtors as a whole.)

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 debt shall
be presumed to be divided into as many 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.

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

JOINT OBLIGATIONS: NATURE


 Presumption of the law is that an obligation is always joint.
 The joint debtors are obliged to pay only their share in the indebtedness while the creditors can claim
their share in the credit.

JOINT INDIVISIBLE OBLIGATIONS


 An indivisible obligation is one whose payment cannot be divided. Indivisibility refers to the object of
the prestation.
 Rules:
1. Creditors must act collectively when enforcing the debt. In the same way, the creditors can be
prejudiced only by their collective acts.
2. The debtors must also perform the obligation collectively. If one of the debtors fails to perform,
indemnity for damages arises.
- Those who were willing to perform the obligation shall only be liable for their
corresponding portion in the price of the thing.

28
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

- Those who refused to perform the obligations shall be liable for their corresponding
portion, plus additional damages.
3. In case of insolvency of one of the debtors, the others shall not be responsible for the share of the
insolvent debtor.

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

 Solidarity refers to the nature of the obligation, while indivisibility of the obligation refers to the
nature of the object of prestation.

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.

Art. 1212. Each one of the solidary creditors may do whatever may be useful to the
others, but not anything which may be prejudicial to the latter.

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

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.

Art. 1215. Novation, compensation, confusion or remission of the debt, made by


any of the solidary creditors or with any of the solidary debtors, shall extinguish
the obligation, without prejudice to the provisions of Article 1219.
The creditor who may have executed any of these acts, as well as he who
collects the debt, shall be liable to the others for the share in the obligation
corresponding to them.

Art. 1216. The creditor may proceed against any one of the solidary debtors or
some or all of them simultaneously. The demand made against one of them shall
not be an obstacle to those which may subsequently be directed against the
others, so long as the debt has not been fully collected.

SOLIDARY OBLIGATIONS: ACTIONS OF CREDITORS


1. Collective actions: Creditors can act individually when such acts are beneficial to the others. (E.g.,
one solidary creditor can sue the debtors without the other creditors joining the suit.) If such creditor
acts prejudicially to the others, he/she may be liable for the others’ share in the indebtedness, plus
damages.
2. Transfer or rights: No one among the creditors can transfer his/her rights. A transfer of rights may
prejudice the other creditors.
3. Receipt of payment, general rule: Anyone among the creditors can receive payment. Exception:
When a specific solidary creditor makes a judicial or extra-judicial demand, payment should be made
to him/her. Sta. Maria thinks the strict interpretation of this provision should be abandoned,
considering Art. 1212. The proper interpretation should be that the creditor who makes the demand is
simply given preference without necessarily curtailing the rights of the other creditors to collect.
4. When an obligation is extinguished: The obligation shall be extinguished whenever any of the
solidary creditors (with the solidary debtors) shall make any of the following actions:
a. Novation—change of the creditors, debtors, or the principal obligation of the contract.
b. Compensation—two persons, in their own rights, are creditors and debtors of each other

29
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

c. Confusion—merger of the characters of debtor and creditor in the same person


d. Remission—condonation of the obligation
*To prevent prejudice against the others, the creditor who may have executed any of these acts, as
well as he/she who collects the debt, shall be liable to the others for the share in the obligation
corresponding to them.
5. Demand of payment: A creditor can proceed against any one or all of the debtors simultaneously. A
demand against one is not a bar against a demand against others, as long as the debt is not yet paid.
In other words, even though a creditor has a right not to accept partial payment, he/she can accept
partial payment from one of the debtors as such acceptance does not bar the creditor from collecting
from the others.

Art. 1217. Payment made by one of the solidary debtors extinguishes the
obligation. If two or more solidary debtors offer to pay, the creditor may choose
which offer to accept.
He who made the payment may claim from his co-debtors only the share
which corresponds to each, with the interest for the payment already made. If the
payment is made before the debt is due, no interest for the intervening period may
be demanded.
When one of the solidary debtors cannot, because of his insolvency,
reimburse his share to the debtor paying the obligation, such share shall be borne
by all his co-debtors, in proportion to the debt of each.

Art. 1218. Payment by a solidary debtor shall not entitle him to reimbursement
from his co-debtors if such payment is made after the obligation has prescribed or
become illegal.

Art. 1219. The remission made by the creditor of the share which affects one of
the solidary debtors does not release the latter from his responsibility towards the
co-debtors, in case the debt had been totally paid by anyone of them before the
remission was effected.

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

Art. 1221. If the thing has been lost or if the prestation has become impossible
without the fault of the solidary debtors, the obligation shall be extinguished.
If there was fault on the part of any one of them, all shall be responsible to the
creditor, for the price and the payment of damages and interest, without prejudice
to their action against the guilty or negligent debtor.
If through a fortuitous event, the thing is lost or the performance has become
impossible after one of the solidary debtors has incurred in delay through the
judicial or extrajudicial demand upon him by the creditor, the provisions of the
preceding paragraph shall apply.

Art. 1222. A solidary debtor may, in actions filed by the creditor, avail himself of
all defenses which are derived from the nature of the obligation and of those
which are personal to him, or pertain to his own share. With respect to those
which personally belong to the others, he may avail himself thereof only as
regards that part of the debt for which the latter are responsible.

SOLIDARY OBLIGATIONS: ACTIONS OF OBLIGORS


1. Payment:

30
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

a. Any of the solidary debtors can pay. The creditor may choose from whom among the debtors
he will receive payment.
b. The debtor who paid can claim from his co-debtors only their individual shares, plus interest
only if the payment was made after the debt is due.
c. If one of the co-debtors is insolvent, such share shall be borne by the co-debtors, in
proportion to the debt of each.
d. A solidary debtor cannot demand from the other co-debtors if he or she made payment after
the obligation has prescribed or become illegal.
2. Remission: Depends on the time the remission was made. Also, as far as Art. 1219 is concerned,
this is applicable only when there is one creditor. If there are many creditors and one creditor
individually made a remission, the remission is an act prejudicial to the others according to Art,
1212. If the remission is done, the creditor will be liable for the share the other creditors should
receive plus damages, if applicable.
a. A solidary debtor is not entitled to reimbursement when a co-debtor obtained the remission
before such solidary debtor has paid the debt on the date due.
b. A solidary debtor is entitled to reimbursement when a co-debtor obtains the remission after
such solidary debtor has paid the debt on the date due.
3. Loss of the thing or if prestation becomes impossible:
a. Without fault of any of the debtors: obligation is extinguished.
b. With fault of any of the debtors: all shall be liable for damages plus interest, without prejudice
to the innocent debtors’ actions against the guilty or negligent debtor.
c. Fortuitous event with delay: apply choice b.

V. DIVISIBLE & INDIVISIBLE OBLIGATIONS

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.

 Simply put: number of creditors or debtors do not affect the nature of the object of the prestation.

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

 In a joint indivisible obligation, the joint co-debtors must cooperate to fulfil the object of the
prestation. In case one of the co-debtors does not cooperate and the obligation is not fulfilled because
of his/her non-cooperation, the obligation shall be converted to a claim for damages, but:
a. The cooperating co-debtors will only be liable for their share in the obligation.
b. The non-cooperating co-debtor will be liable for his or her share in the obligation plus the sum of
all damages.

Art. 1225. For the purposes of the preceding articles, obligations to give definite
things and those which are not susceptible of partial performance shall be deemed
to be indivisible.
When the obligation has for its object the execution of a certain number of
days of work, the accomplishment of work by metrical units, or analogous things
which by their nature are susceptible of partial performance, it shall be divisible.
However, even though the object or service may be physically divisible, an
obligation is indivisible if so provided by law or intended by the parties.

31
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

In obligations not to do, divisibility or indivisibility shall be determined by


the character of the prestation in each particular case.

IN JOINT OBLIGATIONS TO GIVE


DIVISIBLE OBLIGATIONS INDIVISIBLE OBLIGATIONS
 Object of obligation is any of the following:  Obligations to give definite things
- Execution of a certain number of  Obligations which are not susceptible of partial
days of work performance
- Accomplishment ofwork by  If so provided by law or intended by the parties.
metrical units Here, the wording of the contract will be very
- Analogous things which by their material to show the character of the prestation
nature are susceptible of partial in each case
performance
IN JOINT OBLIGATIONS NOT TO DO
 Divisibility of the obligation shall be determined by the character of the prestation in each particular
case

VI. OBLIGATIONS WITH A PENAL CLAUSE

Art. 1226. In obligations with a penal clause, the penalty shall substitute the
indemnity for damages and the payment of interests in case of noncompliance, if
there is no stipulation to the contrary. Nevertheless, damages shall be paid if the
obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the
obligation.
The penalty may be enforced only when it is demandable in accordance with
the provisions of this Code.

PENAL PROVISIONS
 A penal provision is an accessory obligation which the parties attach to a principal obligation for the
purpose of insuring the performance thereof by imposing upon the debtor a special prestation in case
the obligation is not fulfilled or is inadequately or irregularly fulfilled.22 Its purpose is to do away with
the necessity of proving damages in case of non-fulfillment.
 General rule: A penal provision substitutes the indemnity for damages and the interests in case of
non-compliance. Exception: If the obligor a) refuses to pay the penalty or is b) guilty of fraud in the
fulfilment of the obligation, damages shall be paid.
 General rule: The penalty clause is enforced only when it is demandable in accordance with the
provisions of this Code. Exception: Unless the stipulation of the parties or the nature of the contracts
(time is of the essence) otherwise demands.

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

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

22 3 Castan, Eighth Edition, Page 118

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OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

PENALTY AS AN ACCESSORY OBLIGATION


 General rules: a) Debtor cannot pay the penalty instead of fulfilling the obligation. b) Also, the
creditor cannot demand the fulfilment of the obligation and the penalty at the same time. Exceptions:
The debtor can pay the penalty if this right has been expressly reserved for him or her. b) Also, the
creditor can demand the obligation and the penalty simultaneously if this right has been granted.
 Special rule: If the creditor requires the obligation to be fulfilled, and performance thereof becomes
impossible without his or her fault, the penalty may be imposed.
 The nullity of the principal obligation also nullifies the penalty clause; however, the nullity of the
penalty clause does not extinguish the principal obligation.

Art. 1229. The judge shall equitably reduce the penalty when the principal
obligation has been partly or irregularly complied with by the debtor. Even if there
has been no performance, the penalty may also be reduced by the courts if it is
iniquitous or unconscionable.

INTERVENTION OF THE COURTS IN PENALTY CLAUSES


 This is one exception to the rule that a contract is the law between the parties. If the penalty is
unconscionable, the courts may temper, reduce, or in some cases, delete it.

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.

EXTINGUISHMENT OF OBLIGATIONS
GENERAL PROVISIONS

Art. 1231. Obligations are extinguished:


(1) By payment or performance:
(2) By the loss of the thing due:
(3) By the condonation or remission of the debt;
(4) By the confusion or merger of the rights of creditor and debtor;
(5) By compensation;
(6) By novation.
Other causes of extinguishment of obligations, such as annulment, rescission,
fulfillment of a resolutory condition, and prescription, are governed elsewhere in
this Code.

EXTINGUISHMENT OF OBLIGATIONS
 Re: death
- General rule: Death does not extinguish an obligation. Exception: It extinguishes the
obligation if such obligation is personal in nature or intransmissible.
- General rule: Where civil liability does not exist independently of the criminal
responsibility, the extinction of the latter by death ipso facto extinguishes the former,
provided that death supervenes before final judgment. Exception: If the civil liability
neither solely nor originally springs from the crime, the civil liability shall persist despite
the extinction of the criminal liability.

I. PAYMENT OR PERFORMANCE

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

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OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

 There are two prestations involved in payment: 1) to give (delivery of money) and 2) to do
(performance of an obligation).
 Payment is done both by the creditor and debtor in reciprocal obligations.
 The law expressly declares that in obligations to give, what is required is the delivery of money—and
not cash, check, etc.

Art. 1233. A debt shall not be understood to have been paid unless the thing or
service in which the obligation consists has been completely delivered or
rendered, as the case may be.

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

Art. 1235. When the obligee accepts the performance, knowing its incompleteness
or irregularity, and without expressing any protest or objection, the obligation is
deemed fully complied with.

FULFILMENT OF PAYMENT
 An obligation is deemed fulfilled when he obligation has been completely delivered or rendered,
including the delivery of all the accessories of a determinate thing in an obligation to give. Anything
less than a complete performance may be considered a breach in obligation. There are two exceptions
to this rule:
1. Substantial compliance in good faith: for this to apply, the part unperformed must not destroy
the value or purpose of the contract. The breach in obligation is not a material one enough to
compel the obligor to rescind the obligation. The debtor can pay less damages suffered by the
obligee.
2. Waiver of obligee of incomplete or irregular performance: by not expressing any protest or
objection, the obligee accepts the performance of the obligation as fully complied with despite his
or her knowledge of such irregularity or incompleteness. (If there is a protest, the law does not
require such to be made in any particular manner or time.)

Art. 1236. 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.

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.

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

PAYMENT BY THIRD PARTY DEBTOR


 Whether or not one who paid completely acquires the rights of the creditor depends on whether or not
the payment has been made without the knowledge or against the will of the debtor. Five situations
may arise. If the third party pays—

34
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

1. Without the knowledge or against the will of the debtor: third person who paid can recover only
to the extent the debtor has benefited (this is to be invoked by the debtor, and the extent is to be
decided by law). The beneficial effects must be determined at the time the payment was made.
2. With the knowledge but against the will of the debtor: same as 1.
3. With the knowledge and consent of the debtor: there is legal subrogation which transfers to the
person subrogated the credit with all the rights thereto appertaining. Third person can recover
from the debtor the amount paid to the creditor, as well as compel the creditor to transfer to him
or her any mortgage, guarantee or penalty.
4. Because it is allowed in contract: same as 3.
5. Without the intention to be reimbursed by the debtor: obligation is extinguished whether or not
the consent of the debtor is obtained. The payment will be treated as a donation.

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

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.

Art. 1241. Payment to a person who is incapacitated to administer his property


shall be valid if he has kept the thing delivered, or insofar as the payment has
been beneficial to him.
Payment made to a third person shall also be valid insofar as it has
redounded to the benefit of the creditor. Such benefit to the creditor need not be
proved in the following cases:
(1) If after the payment, the third person acquires the creditor's rights;
(2) If the creditor ratifies the payment to the third person;
(3) If by the creditor's conduct, the debtor has been led to believe that the third
person had authority to receive the payment.

Art. 1242. Payment made in good faith to any person in possession of the credit
shall release the debtor.

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

VALIDITY OF PAYMENTS

VALID PAYMENTS INVALID PAYMENTS


 Payment made to:  Payment made by a person without free
a. The person in whose favour the obligation disposal of a thing.
has been constituted - A person has “free disposal” of a
b. The successors-in-interest thing when he/she owns it or has
c. Any person authorized to receive it been given authority by the owner
- Such person must be authorized by to use the property as payment
the creditor and the law - Any contract entered into by a
minor with respect to the
*Payment made by the debtor to a third person, alienation of something is
even though in error and good faith, shall not annullable
release the debtor from the obligation and will not

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OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

deprive the creditor the right to demand payment,  Payment to a third person, even though in error
except if the payment redounded to the benefit of and in good faith, when no benefit redounded
the creditor to the creditor

General rule: If the payment redounded to the  Payment made after the debtor has been
benefit of the creditor, such benefit needs to be judicially ordered to retain the debt
proven. - Usually this order is made to
Exception: Such benefit does not need to be protect other creditors
proven:
a. If the third person acquires the creditor’s
rights after payment
b. If the creditor ratifies the payment
c. If the creditor’s conduct has led the debtor
to believe that the third person had
authority to receive payment

 Payment made to a person incapacitated to


administer his/her property, if:
a. The incapable person has kept the thing
delivered
b. Or, insofar as the payment has been
beneficial to him/her

*Payment to the incapacitated is often


disadvantageous for the capacitated party, because
the capacitated person party cannot annul the
contract on the basis of the incapacity of the other
person. If the contract is annulled, the capacitated
person cannot compel the incapacitated person to
make a restitution, except only to the extent the
latter has been benefited.

 Payment made in good faith to the person in


possession of the credit
- Whether the creditor negligently,
intentionally, or accidentally
allowed a third person to possess
the credit is immaterial as far as
the debtor who paid in good faith is
concerned

Art. 1244. The debtor of a thing cannot compel the creditor to receive a different
one, although the latter may be of the same value as, or more valuable than that
which is due.
In obligations to do or not to do, an act or forbearance cannot be
substituted by another act or forbearance against the obligee's will.

Art. 1245. Dation in payment, whereby property is alienated to the creditor in


satisfaction of a debt in money, shall be governed by the law of sales.

Art. 1246. When the obligation consists in the delivery of an indeterminate or


generic thing, whose quality and circumstances have not been stated, the creditor

36
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

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.

Art. 1247. Unless it is otherwise stipulated, the extrajudicial expenses required by


the payment shall be for the account of the debtor. With regard to judicial costs,
the Rules of Court shall govern.

Art. 1248. Unless there is an express stipulation to that effect, the creditor cannot
be compelled partially to receive the prestations in which the obligation consists.
Neither may the debtor be required to make partial payments.
However, when the debt is in part liquidated and in part unliquidated, the
creditor may demand and the debtor may effect the payment of the former
without waiting for the liquidation of the latter.

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

Art. 1250. In case an extraordinary inflation or deflation of the currency stipulated


should supervene, the value of the currency at the time of the establishment of the
obligation shall be the basis of payment, unless there is an agreement to the
contrary.

MODES OF PAYMENT
 General rule: The debtor has no choice in the payment of the obligation other than what has been
agreed upon by the parties.
 Exception: Unless the prestation is subject to a facultative or alternative condition

DATION IN PAYMENT
 Also dacion en pago. This is the delivery and transmission of ownership of a thing by the debtor or
creditor as an accepted equivalent of the performance of an obligation. Requisites:
a. Animo solvendi, or the performance of the prestation in lieu of payment which may consist in the
delivery of the corporeal thing, real right, or a credit against the third person
b. Aliud pro alio, or a difference between the prestation and what is given in substitution
c. An agreement between the creditor and the debtor that the obligation is immediately
extinguished by reason of the performance of a prestation different from that due. Agreement
may be express or implied, or even silent. It is important that both parties consider the substitite
thing as equivalent to the obligation
- How does one judge the intention of the parties to agree in a dacion en pago? Their
contemporaneous and subsequent acts shall be considered.

DACION EN PAGO PACTUM COMMISORIUM


 Before the creditor becomes the owner of the  The parties agree, generally in one single
collateral property, an intervening agreement contract, that in the event the debtor fails to
subsequent and independent from the original pay, the mortgaged or pledged property of the

37
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

contract is entered into by the creditor and the debtor shall be automatically appropriated or
debtor to have the property collaterized as owned by the debtor
payment, thereby extinguishing the obligation

 Valid, because the appropriation of the  Void, because as a rule, properties mortaged
property is not automatic, as compared to a should be subject to a foreclosure sale first if
pactum commisorium the properties shall be used to satisfy a debt

PAYMENT OF AN INDETERMINATE THING


 If the quality has not been stated, the delivery of the indeterminate thing shall neither be of superior
or inferior quality. The quality shall be determined instead through the purpose of the obligation and
other circumstances (e.g., financial).

PARTIAL PAYMENTS
 General rule: Creditor cannot be compelled to receive partial payments, nor the debtor required to
make partial payments.
 Exceptions:
a. Unless there is an express stipulation to that effect
b. When the debt is part liquidated and part unliquidated, the creditor may demand and the debtor
may effect the payment without waiting for the liquidation of the unliquidated part of the debt
c. Even if there is no express stipulation, if the creditor accepts the partial payment and benefits
from it.

PAYMENT OF DEBTS IN MONEY


 Shall be made in the currency stipulated, and if it is not possible, the currency which is legal tender in
the Philippines
 In the fulfilment of an obligation by payment by money, only payment in cash will extinguish the
obligation.

PAYMENT OF DEBTS IN OTHER FORMS


 Promissory notes payable to order, bills of exchange, or other mercantile documents shall be produce
the effect of payment only when encashed, or when through the fault of the creditor they have been
impaired.
a. Promissory note—a document where an unconditional promise to pay on a fixed or determinable
future time is made by the debtor to the creditor
b. Bill of exchange—an unconditional order in writing addressed by one person to the other, signed
by the person giving it, requiring the person to whom it is addressed to pay on demand or at a
fixed or determinable future time a sum of money to the bearer
c. Check—a bill of exchange drawn on a bank payable on demand
- In Far East Bank and Trust Company v. Diaz Realty Inc., the Court said that if payment
by way of a fully-funded check were offered or tendered and the obligee accepts the
payment after the obligor’s manifestation that it had been given to settle an obligation,
such oblige shall be stopped from denouncing the efficacy of such tender of payment
- Delays in check encashment: Normally a check has to be deposited six months from the
date indicated. If the creditor delays, the drawer of the check shall be discharged from
liability to the extent of the loss caused by delay. Note how the drawer will only be
discharged from a certain amount of liability; the drawer’s obligation is not extinguished
by mere delay of the creditor. It is only when the creditor does not present the check for
payment and thereafter the bank collapses that it cannot meet the demands for payment,
that the drawer of the check shall be discharged.

IN CASE OF EXTRAORDINARY INFLATION OR DEFLATION OF CURRENCY

38
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

 General rule: The value of the currency at the time of the establishment of the obligation shall be the
basis of payment
 Exception: Unless there is a stipulation to the contrary
 Extraordinary inflation exists when there is an increase or decrease in the purchasing power of the
Philippine currency which is unusual or beyond the common fluctuation in the value of said
currency, and such decrease or increase could not have been reasonably foreseen.
- Effects of such inflation should be officially declared by competent authorities, such as
the Bangko Sentral or the Department of Finance.
- Only applies to obligations arising from contracts, and not those arising from law

EXTRA-JUDICIAL EXPENSES FOR PERFORMANCE OF PAYMENT


 General rule: These expenses hall be shouldered by the debtor. (Regarding judicial costs, the Rules of
Court shall govern.)
 Exception: Unless there is a stipulation to the contrary.

Art. 1251. Payment shall be made in the place designated in the obligation.
There being no express stipulation and if the undertaking is to deliver a
determinate thing, the payment shall be made wherever the thing might be at the
moment the obligation was constituted.
In any other case the place of payment shall be the domicile of the debtor.
If the debtor changes his domicile in bad faith or after he has incurred in delay,
the additional expenses shall be borne by him.
These provisions are without prejudice to venue under the Rules of Court.

VENUE OF PAYMENT
 General rule: Payment shall be made in the place designated in the obligation.
 Exception: If there is no express stipulation, and if the thing is determinate, payment shall be made
wherever the thing might be when the obligation was established. In all other cases, payment shall be
made at the domicile of the debtor.
- If the debtor changes domicile in bad faith, or after he/she has incurred in delay,
additional expenses shall be borne by the debtor.

A. 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 which are not yet due.
If the debtor accepts from the creditor a receipt in which an application of
the payment is made, the former cannot complain of the same, unless there is a
cause for invalidating the contract.

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.

Art. 1254. When the payment cannot be applied in accordance with the preceding
rules, or if application cannot be inferred from other circumstances, the debt
which is most onerous to the debtor, among those due, shall be deemed to have
been satisfied.

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OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

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

PAYMENT OF MULTIPLE DEBTS


 A debtor with multiple debts may declare at the time of making one payment to which debt must such
payment apply. The general rules of payment already discussed (Art 1232 – 1251) still apply here.
 However, if the payments cannot be applied in accordance with Art 1252 and 1253, or if the
application cannot be inferred from other circumstances, then the debt which is most onerous to the
debtor shall be deemed to have been satisfied. If the debts are all of the same nature, then the
payment shall be applied to them proportionately.
- The most onerous debt is the debt which exacts the heaviest burden from among many.
 General rule: Application shall not be made to debts which are not yet due.
 Exceptions:
a. Unless the parties so stipulate
b. Or when the application for payment is made by the party for whose benefit the term has been
constituted
 General rule: If the debtor accepts a receipt in which an application of payment is made, the debtor
cannot complain. The debtor must not merely receive the receipt, but accept it. Basis: doctrine of
estoppel.
 Exceptions: Unless there is a cause for invalidating the contract, like fraud or intimidation. These are
causes for annulling the contract.

DEBTS WITH INTEREST


 The presumption is that the payment of the principal, notwithstanding any remaining interest,
supposes that such interest has been paid. Thus, the rule is if the interests have not been covered yet,
the principal has not been paid as well. However this is merely directory, and is rebuttable with
sufficient evidence.
 As such, the right to apply payment first to the interest can also be waived by the creditor.

B. 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 special laws.

 Payment by cession is another mode of extinguishing a debt. Cession under this article presupposes
financial difficulties on the part of the debtor, and refers to a situation where the debtor owes two or
more creditors. It refers not only to the cession of a debtor of his/her property, but property that is
not exempted from being alienated.
 Valid only if the creditors agree to the cession.

C. Tender of payment and consignation

Art. 1256. If the creditor to whom tender of payment has been made refuses
without just cause to accept it, the debtor shall be released from responsibility by
the consignation of the thing or sum due.
Consignation alone shall produce the same effect in the following cases:
(1) When the creditor is absent or unknown, or does not appear at the place of
payment;
(2) When he is incapacitated to receive the payment at the time it is due;

40
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

(3) When, without just cause, he refuses to give a receipt;


(4) When two or more persons claim the same right to collect;
(5) When the title of the obligation has been lost.

Art. 1257. In order that the consignation of the thing due may release the obligor,
it must first be announced to the persons interested in the fulfillment of the
obligation.
The consignation shall be ineffectual if it is not made strictly in consonance
with the provisions which regulate payment.

Art. 1258. Consignation shall be made by depositing the things due at the disposal
of judicial authority, before whom the tender of payment shall be proved, in a
proper case, and the announcement of the consignation in other cases.
The consignation having been made, the interested parties shall also be
notified thereof.

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

Art. 1260. Once the consignation has been duly made, the debtor may ask the
judge to order the cancellation of the obligation.
Before the creditor has accepted the consignation, or before a judicial
declaration that the consignation has been properly made, the debtor may
withdraw the thing or the sum deposited, allowing the obligation to remain in
force.

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

IN CASE OF CREDITOR’S UNREASONABLE REFUSAL TO ACCEPT PAYMENT


 General rule: The debtor has to make a tender of payment, and then consign the thing to the judicial
authorities.
 Exceptions—consignation alone is enough when:
a. The creditor is absent or unknown, or does not appear at the place of payment
b. That the creditor is incapacitated to receive payment at the time it is due
c. That without just cause, the creditor refuses to give a receipt
d. Two or more persons claim the same right to collect
e. The title of the obligation has been lost
 Expenses of a proper consignation shall be charged to the creditor, because it is the creditor’s failure
to accept payment which led to the consignation

TENDER OF PAYMENT CONSIGNATION


Both apply in any contract where there is an obligation to pay
 Tender of payment is an offer of payment  Consignation is the act of depositing the thing
antecedent to the consignation. It may be due with the court or judicial authorities
extra-judicial. It is necessary that whenever the creditor cannot accept or refuses
a. There be a fusion of intent, ability, and to accept payment and it generally requires a
capability to make good such offer, which prior tender of payment.
must be absolute and must cover the
amount due
b. That the tender be made in lawful currency

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OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

Requisites for a consignation to be effectual:


1. That there was a debt due
2. The consignation of the obligation had been made because the creditor to whom tender of
payment has been made refused to accept it, or was incapacitated or absent, or because several
persons claimed to be entitled to receive the amount due
3. The previous notice of the consignation has been given to the person interested in the
performance of the obligation
4. The amount has been placed in the disposal of the court
5. After the consignation is made, the person interested was notified thereof.
- The purpose of the notice is to give the creditor the opportunity to reconsider his/her
unjustified refusal and accept payment thereby avoiding consignation and subsequent
litigation
- The circumstances of the case and the order of the court granting the motion can be
considered substantial compliance with the requirement of notice to the creditor

EFFECTS OF CONSIGNATION
 Once consignation has been made, the debtor may ask the judge to order the cancellation of the
obligation. The consignation is retroactive, such that the payment is deemed to have been made at the
time of the deposit of the money in court, or when it was placed in the disposal of the judicial
authorities.
 Before creditor has accepted the consignation or before the judicial declaration of consignation has
been made, however, the debtor can still withdraw the thing or the sum deposited, allowing the
obligation to remain in force.
 Prior to the withdrawal of the debtor of the amount, the creditor may accept the amount consigned
either conditionally or with reservation.
 If the creditor authorizes the debtor to withdraw the amount after consignation, the obligation is
revived, but the creditor shall lose preference to the thing previously deposited to pay his/her debt.
Solidary creditors also lose the preference, since the creditor cannot revive the obligation without
their consent. This means that any other person who has an interest in the payment can go after it.

II. LOSS OF THE THING DUE

Art. 1262. An obligation which consists in the delivery of a determinate thing shall
be extinguished if it should be lost or destroyed without the fault of the debtor,
and before he has incurred in delay.
When by law or stipulation, the obligor is liable even for fortuitous events,
the loss of the thing does not extinguish the obligation, and he shall be
responsible for damages. The same rule applies when the nature of the obligation
requires the assumption of risk.

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.

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.

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,

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Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

and without prejudice to the provisions of article 1165. This presumption does not
apply in case of earthquake, flood, storm, or other natural calamity.

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.

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.

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.

OBLIGATION IS EXTINGUISHED OBLIGATION IS NOT EXTINGUISHED


 If the thing is determinate and it is lost or  If the thing is determinate, and it is lost, the
destroyed without the fault of the debtor and obligation is not extinguished:
before the debtor has incurred in delay. a. When by law or stipulation, the obligor is
liable even for fortuitous events
When is loss presumed to be the fault of the b. When the nature of the obligation requires
debtor? When the thing lost was in possession of the assumption of risk
the debtor, unless there is proof to the contrary,
and without prejudice to the provisions of Art 1165 .  If the thing is generic, the loss or destruction of
(I.e., Thing lost through fortuitous event will still be the same kind does not extinguish the
compensated for if the obligor delays, or if the obligation
obligor promises the same thing to two or more
obliges who do not have the same interest.)  If the debt of the thing certain and determinate
proceeds from a criminal offense, the debtor
 In obligations to do, when the prestation shall not be exempted whatever the cause of the
becomes legally or physically without the fault loss may be, unless the creditor refuses without
of the debtor just cause to accept it

COURTS WILL DECIDE


 Partial loss of an object: courts will judge based on the circumstances and whether the obligation is so
important as to extinguish the obligation.
- The court may consider the partial loss complete, and extinguish the obligation. If it is
complete, the rules under Art 1262 and 1263 must apply

 In obligations to do, when the service has become difficult as to be beyond the contemplation of the
parties
- Based on the doctrine of rebus sic stantibus, or where the parties stipulate in the light of
certain prevailing conditions, and once these conditions cease to exist, the contract also
ceases to exist. This is one case where the court can enter into the contract, by judging
from the intention of the parties whether the obligation should be extinguished
- Only in absolutely exceptional changes of circumstances that equity demands assistance
for the debtor
Requisites:
1. The prestation has become so difficult to render
2. And the service has become manifestly beyond the contemplation of the parties

43
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

- But difficulty alone does not excuse the debtor from fulfilling the prestation. This has
been referred to as a “subjective impossibility,” where a promissor’s duty is never
discharged by the mere fact that the supervening events deprive him/her of the ability of
the ability to perform, if they are not such to deprive other persons, likewise, of the ability
to render such performance

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

 A provision for the protection of the creditor. “Third persons” may be insurance companies or
guarantors.

III. CONDONATION OR REMISSION OF THE DEBT

Art. 1270. Condonation or remission is essentially gratuitous, and requires the


acceptance by the obligor. It may be made expressly or impliedly.
One and the other kind shall be subject to the rules which govern inofficious
donations. Express condonation shall, furthermore, comply with the forms of
donation.

 In effect, a condonation is a donation of the obligee’s credit in favour of the debtor. It is governed by
the rules on inofficious donations. A donation is inofficious if it turns out that the amount donated
(remitted or condoned) encroaches or infringes upon the legitime or successional rights of the heirs of
the condoning creditor.

Art. 1271. The delivery of a private document evidencing a credit, made voluntarily
by the creditor to the debtor, implies the renunciation of the action which the
former had against the latter.
If in order to nullify this waiver it should be claimed to be inofficious, the
debtor and his heirs may uphold it by proving that the delivery of the document
was made in virtue of payment of the debt.

Art. 1272. Whenever the private document in which the debt appears is found in
the possession of the debtor, it shall be presumed that the creditor delivered it
voluntarily, unless the contrary is proved.

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

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

PRESUMPTIONS IN CONDONATION
1. The delivery of the private document evidencing a credit (usually a promissory note), made
voluntarily by the creditor to the debtor, implies the renunciation of the debt
- To nullify this waiver, it should be claimed to be inofficious, and the debtor and his/her
heirs may do this by proving that the delivery of the document was made in virtue of
payment of a debt
2. Whenever the private document in which the debt appears is found in possession of the debtor, it
shall be presumed the creditor delivered it voluntarily. However, this is a refutable presumption.

44
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

3. Renunciation of the principal debt shall extinguish the accessory obligations (but not vice versa)
4. The necessary obligation has been remitted when the thing pledged, after its delivery to the
creditor, is found in the possession of the debtor or any third person who owns the thing (usually
a guarantor). However, this is a refutable presumption.
- A pledge involves a movable property constituted by the owner of such property who has
free disposal of it, to secure the fulfilment of a principal obligation and such contract is
perfected only upon the delivery of the thing pledged to the creditor. It is an accessory
contract.

IV. CONFUSION OR MERGER OF RIGHTS

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

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.

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.

 Basis of confusion: a person cannot collect a debt from him/herself.


 Extinguishes the obligation for the following: Confusion between the principal debtor and creditor
benefits the guarantors.
 Does not extinguish the obligation for the following:
a. Confusion between a guarantor and a creditor/debtor does not extinguish the principal
obligation, only the accessory obligation.
b. Confusion in a joint obligation except the share corresponding to the creditor or debtor in which
the two characters concur

V. COMPENSATION

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

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


(1) That each one of the obligors be bound principally, and that he be at the same
time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if the latter
has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced
by third persons and communicated in due time to the debtor.

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.

45
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

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

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

 Compensation is a mode of extinguishing an obligation whereby parties are mutually debtors and
creditors of each other. Compensation is effected whereby parties are mutually debtors and creditors
of each other. May be total or partial.
 Compensation is effected by operation of law as long as the requisites are present and even though
the debts are payable at different places. In partial compensation, however, indemnities may exist for
the expenses of exchange or transportation to places of payment

REQUISITES OF COMPENSATION
1. Each of the obligors be bound principally and that each of them be at the same time the principal
creditor of the other
- Exception: Compensation can be set up by the guarantor, even if the creditor and
guarantor are not mutual creditors and debtors of each other. The obligation of the
guarantor can be extinguished by invoking compensation as far as the principal debtor is
concerned
- Taxes are not debts for purposes of legal compensation

2. Both debts consist in an amount of money, or if the things due are consumable, that they be of the
same kind, and also the same quality of the latter has been stated
- “Consumable” as used in this law means fungible, or capable of substitution
- There can be compensation involving things which are determined, such as any
computer, but not specific determinate things like a computer with the serial number 777

3. That two debts are due


- However, they do not need to be incurred at the same time
- General rule: A debt cannot be demanded if it is not yet due. Exception: The parties can
agree that the compensation can be made even as to the debts which are not yet due. This
is called a contractual compensation.

4. That the debts be liquidated and demandable


- Debt must be determined and certain. Compensation cannot take place where one of the
debts is not yet liquidated (e.g., there’s a running interest)

5. Neither of the debts have any retention or controversy, commenced by third persons and
communicated in due time to the debtor
- “Due time” should be meant the period before legal compensation was supposed to take
place, considering that legal compensation operates so long as the requisites occur, even
without any conscious intent on the part of the parties

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.

 Voidable contracts are valid until annulled. Thus, compensation may take place as long as the contract
is valid.

JUDICIAL SET-OFF
 For this to apply, the amount of damages or the claim sought to be compensated must be duly proven

46
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

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.

Art. 1285. The debtor who has consented to the assignment of rights made by a
creditor in favor of a third person, cannot set up against the assignee the
compensation which would pertain to him against the assignor, unless the
assignor was notified by the debtor at the time he gave his consent, that he
reserved his right to the compensation.
If the creditor communicated the cession to him but the debtor did not
consent thereto, the latter may set up the compensation of debts previous to the
cession, but not of subsequent ones.
If the assignment is made without the knowledge of the debtor, he may set up the
compensation of all credits prior to the same and also later ones until he had
knowledge of the assignment.

ASSIGNMENT OF CREDIT IN COMPENSATION


Case 1
 Creditor assigns his/her rights in favor of a third person:
- If the debtor consents to the assignment and reserves his/her right to compensation, and
notifies the creditor of such reservation, compensation can set it up against the third
person as well
- If the debtor consents to the assignment but does not notify the debtor that he/she
reserved the right to compensation, it cannot be set up against the third person

Case 2
 Debtor did not consent to the assignment of rights even if he/she was notified of it
- The debtor may set up the compensation of dents previous to the cession (assignment of
rights), but not of subsequent ones

Case 3
 Debtor did not have any knowledge at all of the assignment of rights
- The debtor may set up compensation of all the credits prior to the same and also later
ones until he/she had knowledge of the assignment

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

Art. 1287. Compensation shall not be proper when one of the debts arises from a
depositum or from the obligations of a depositary or of a bailee in commodatum.
Neither can compensation be set up against a creditor who has a claim for
support due by gratuitous title, without prejudice to the provisions of paragraph 2
of Article 301.

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

WHEN COMPENSATION IS IMPROPER


 Basically compensation is improper in these cases because the persons are not mutual creditors and
debtors of each other

47
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

1. Debts arising for a depositum or from the obligations of depository. A deposit is constituted from
the moment a person receives the thing belonging to another with the obligation of safely keeping
it and returning the same
2. Obligation of a bailee in commodatum—the bailee acquires the use of the thing loaned but not its
fruits. The bailee cannot retain the thing loaned on the ground that the bailor owes him
something, even though it may be by reason of expenses
3. Debts arising from duty to support.
4. Debts consisting of a civil liability arising from a penal offense

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

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

VI. NOVATION

 Novation here refers to extinctive obligation and not modificatory novation. Extinctive novation
presupposes that an obligation’s terms are still existing before change is introduced upon it. The
change must refer to the principal obligation; there is no novation regarding the accessory obligation.
 Novation is never presumed. No specific form of words or writing is necessary to give effect to a
novation.

REQUISITES OF NOVATION
1. A previous valid obligation
2. The agreement of all the parties to a new contract
3. The extinguishment of the old contract
4. Validity of the new one
 There can be no novation unless two distinct and successive binding contracts take place, with the
later one designed to replace the preceding convention. Also, if a subsequent contract is designed to
novate a previous contract and not all parties to the original contract consented to or are made parties
to the original contract, there can be no novation.
 A new contract which merely supplements the old one (by modifying the terms of payment and
adding other obligations compatible with the old one) is not novation.

Art. 1291. Obligations may be modified by:


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

Art. 1292. In order that an obligation may be extinguished by another which


substitute the same, it is imperative that it be so declared in unequivocal terms, or
that the old and the new obligations be on every point incompatible with each
other.

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

48
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

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

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

Art. 1296. When the principal obligation is extinguished in consequence of a


novation, accessory obligations may subsist only insofar as they may benefit third
persons who did not give their consent.

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

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

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.

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

Art. 1301. Conventional subrogation of a third person requires the consent of the
original parties and of the third person.

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


(1) When a creditor pays another creditor who is preferred, even without the
debtor's knowledge;
(2) When a third person, not interested in the obligation, pays with the express or
tacit approval of the debtor;
(3) When, even without the knowledge of the debtor, a person interested in the
fulfillment of the obligation pays, without prejudice to the effects of confusion as
to the latter's share.

Art. 1303. Subrogation transfers to the persons subrogated the credit with all the
rights thereto appertaining, either against the debtor or against third person, be
they guarantors or possessors of mortgages, subject to stipulation in a
conventional subrogation.

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

49
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

TYPES OF NOVATION
1. Objective novation—a change in the object or principal conditions of an existing obligation. (E.g.,
a dacion en pago) To effect change in the obligation, such change must be:
a. Express: it is imperative that the new obligation expressly declare in unequivocal terms that
the old obligation is extinguished
b. Implied: the new obligation is on every point incompatible with the new one. The test of
incompatibility is whether ot not the two obligations can stand together, each one having its
own independent existence. If they cannot, there are incompatible and the latter obligation
novates the first. Corollarily, the changes must be essential and not merely accidental.
2. Subjective novation—there is a change of either the person of the debtor, or of the creditor of an
existing obligation.
a. Change in the debtor may be in the form of any of the following. (It must be noted that it is
necessary for any of these two to exist that the old debtor be released expressly from the
obligation, and the third person or new debtor assumes his/her place in the relation.)
- Expromission: Old debtor is substituted without the knowledge of the debtor, but with
consent of the creditor
- Delegacion: Old debtor suggests to the creditor that he/she be substituted by a new
debtor of his/her choice and the creditor agrees
—In both cases, payment by the new debtor gives him/her the rights in Art 1236 and 1237. On
the other hand, the insolvency of the new debtor produces the following effects:
o If it is an expromission, the new debtor’s insolvency or non-fulfillment of the
obligation shall not make the old debtor liable
o If it is a delegacion, the new debtor’s insolvency shall not revive the action
against the old debtor except when the said insolvency was 1) already existing and
public knowledge, 2) or was already known to the debtor when he/she delegated
the debt
b. Change in the creditor is called subrogation. It has two forms:
- Legal subrogation takes effect by the mandate of the law and does not proceed from the
agreement of the parties. The law which forms the basis of the subrogation must be
clearly identified and invoked to enforce the rights pertinent thereto. It is presumed there
is legal subrogation when:
o A preferred creditor is paid by another creditor without the debtor’s knowledge
o A third person not interested in the obligation pays with the express or tacit
approval of the debtor
o A third person interested in the fulfilment of the obligation (guarantor or solidary
debtor) pays without the consent of the debtor, without prejudice to the effects of
confusion as to the third person’s share
- Conventional subrogation must be clearly be established in unequivocal terms of the
substituting obligation or by the evident incompatibility of the new and old obligations in
every point. It requires the consent of the third parties and the third person
—In both cases, the new creditor shall possess all the rights thereto appertaining. In a
conventional subrogation, the parties, however, can stipulate the extent of the subrogation,
provided these are not contrary to law or public policy.

IN A NEW OBLIGATION
1. If third persons did not give their consent to the novation, the accessory obligations may subsist
insofar as to benefit such third persons
2. If the new obligation is void, the former one will subsist unless the parties agree that in any event
the old one will be extinguished
3. The novation is void if the original obligation was void, unless it is clear that the subsequent one
can stand on itself without any reference to the old one
4. 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 expressly stipulated

50
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

CONTRACTS
GENERAL PROVISIONS

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. (1254a)

WHAT IS A CONTRACT?
 Since its is a source of obligation, it can be defined as a legally enforceable agreement
 A juridical convention manifested in legal form, by virtue of which two or more persons bind
themselves in favor of another or others, or reciprocally, to the fulfilment of the prestation to give, to
do, or not to do23
 In its broadest sense, it is an agreement whereby at least one of the parties acquires a right, either in
rem or in personam, in relation to some person, thing, act, or forbearance
 However, there are some cases where there is a “meeting of the minds” in a contract but it cannot be
legally enforced because it lacks some of the formal requirements for enforceability (e.g., agreements
under the Statute for Frauds)

STAGES OF A CONTRACT
1. Negotiation—covers the period from the time the prospective contracting parties indicate
interest in the contract to the time the contract is concluded (perfected)
2. Perfection—takes place upon the concurrence of the essential elements thereof
- A contract consensual in perfection is so established upon the mere meeting of the minds,
or the concurrence of offer and acceptance
- A real contract requires the above-mentioned plus the delivery of the object of the
agreement (as in a bailee in commodatum)
- A solemn contract requires compliance in certain formalities prescribed by law (such as
in a donation) to be perfected
3. Consummation—begins when the parties perform their respective undertakings under the
contract, resulting in the extinguishment thereof

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, or public policy.

Art. 1307. Innominate contracts shall be regulated by the stipulations of the


parties, by the provisions of Titles I and II of this Book, by the rules governing the
most analogous nominate contracts, and by the customs of the place.

ATTRIBUTES OF CONTRACTS

1. AUTONOMY
 General rule: Persons are free to stipulate anything in their contracts. Proviso: Such stipulations
must not be contrary to law, morals, good customs, and public policy.
- This rule also forbids anyone from coercing or intimidating another to enter into a
contract
 Cases:
- Azcuna Jr. V. Court of Appeals: While there is a rule limiting stipulations in contracts to
those consistent with public policy, a person, after entering into an agreement, cannot
turn his or her back on his word with the plea that he or she was inflicted a penalty so

23 Jardine Davis v. CA

51
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

shocking to the conscience and impressed with inequity as to call for relief sought on the
part of the judicial tribunal
- Pakistan International Airlines v. Ople: Contractual stipulations contravening provisions
of the law designed to protect laborers and employees were not valid. Matters of public
policy are deemed written into the contract.
- Teves v. People’s Homesite and Housing Corporation: In the absence of express
legislation or constitutional prohibition, a court, in order to declare a contract void as
against public policy, must find that such contract has a tendency to injure the public, is
against the public good, or contravenes some established interest of society, or is
inconsistent with sound policy and good morals.

*INNOMINATE CONTRACTS
 Contracts which are not specifically governed by any provision in the Civil Code, but which likewise
involve the fulfilment or accomplishment of some prestations:
- A prestation where the parties mutually give each other a certain thing (do ut des)
- A prestation to mutually render a service (facio ut facias)
- A mixed prestation: one party gives something and the other party does something (do ut
facias, facias ut des)
 These contracts are governed by the following, in order of priority:
a. Stipulation of the parties, as long as there are not contrary to law, morals, good customs, public
order, or public policy
b. Provisions regarding obligations and contracts under Title I and II of the Civil Code. Though
innominate, these are still contracts which are sources of obligations, and hence, they should
follow the general rule on obligations and contracts
c. Rules governing the most analogous nominate contracts (sale, barter, exchange, lease,
partnership, agency loan, deposit, aleatory contracts, etc.
d. Customs. A custom is a rule of conduct formed by repetition of oral acts uniformly observed as a
social rule, legally binding and obligatory and must be proved as fact.

2. NON-IMPAIRMENT
 General rule: Only laws existing at the time of the execution of the contract are applicable thereto.
Exception: Unless the contract specifically intended that it should have a retroactive effect.
 General rule: The contract is the law between the parties. Exception: This rule yields to the superior
and legitimate exercise of police power by the State to promote the general welfare of the people.
 Statutes promulgated in the exercise of valid police power are considered written into the contract.
- Ortigas v. CA: The construction of a buyer of a commercial edifice in consonance with a
zoning ordinance does not impair the contract of sale which says that only residential
buildings may be built in the piece of land.

Art. 1308. The contract 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.

3. MUTUALITY
 Garcia v. Rita Legarda Inc.: There must be mutuality between the two contracting parties based on
their essential equality [because it is] repugnant to have one party bound by the contract leaving the

52
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

other free therefrom. The purpose of this article is to render void a contract containing a condition
which makes fulfilment dependent exclusively upon the will of one of the contracting parties
 There is mutuality in the following cases:
- When the vendor has the right to declare a contract cancelled in case of default of one the
vendee
- A stipulation in the lease contract which says that the contract may be renewed for a like
term at the option of the lessee
 No mutuality:
- When one of the parties can increase the interest of a loan agreement at will

*CONTRACTS OF ADHESION
 A type of contract wherein a party, usually a corporation, prepares the stipulations in a contract while
the other party merely affixes his or her signature or adhesion thereto. These are binding as ordinary
contracts
 Generally these are valid, and there must be a showing that it is highly inequitable for such contract
to be invalidated.

*DETERMINATION OF PERFORMANCE: THIRD PERSON


 Requisites to be binding:
1. The decision to let a third person determine the performance of a contract must be
communicated to all the parties.
2. The determination must not destroy the mutuality of contracts.
3. The determination must not be evidently inequitable, otherwise the court will decide what is
equitable.

Art. 1311. Contracts take effect only between the parties, their assigns and heirs,
except in case where the rights and obligations arising from the contract are not
transmissible by their nature, or by stipulation or by provision of law. The heir is
not liable beyond the value of the property he received from the decedent.
If a contract should contain some stipulation in favor of a third person, he
may demand its fulfillment provided he communicated his acceptance to the
obligor before its revocation. A mere incidental benefit or interest of a person is
not sufficient. The contracting parties must have clearly and deliberately conferred
a favor upon a third person.

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

Art. 1313. Creditors are protected in cases of contracts intended to defraud them.

4. RELATIVITY
 Generally, contracts take effect only between the immediate parties, and cannot favour or prejudice a
third person, even if such person is aware of the contract and have acted with knowledge thereof. This
relativity of contracts extends to the parties’ assigns and heirs—and thus the transfer of action from
one person to another is effected by operation of law, under certain conditions.
- The parties’ assigns and heirs are always parties to a contract, except in three
circumstances:
a. When the nature of the contract makes its obligations non-transmissible
- Usually where acts stipulated in a contract require the special knowledge, genius, skill,
taste, ability, experience, judgment, discretion, integrity or other personal qualification of
one or both parties, it is personal in nature, and thus non-transmissible, or

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OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

- When the contract is of such character that it may not be performed well by the
promissor’s personal representative (then the obligation is discharged by the death of the
promissory)
b. When there is a stipulation that the obligations are non-transmissible
c. When the law provides for non-transmission (e.g. a lease, the lessee cannot assign the lease
without the consent of the lessor; in a contract of voluntary deposit, the depositary cannot
deposit the thing to a third person unless there is a stipulation to the contrary)

Exceptions to the relativity rule:


 STIPULATIONS POUR ATRUI
- A third party may enforce a contract which has been made for his or her benefit although
he or she is not a party to such contract. Requisites:
a. A stipulation in favour of a third person—it is unnecessary that such person be
named in the contract
b. Such stipulation is only a part of the contract
c. The contracting parties must have clearly and deliberately conferred a favour
upon the third person, and not a mere incidental benefit or interest
d. Neither of the contracting parties bears the legal representation of the third party
e. The favoured party must have communicated his or her acceptance of the
stipulation to the obligor before the revocation—it is not necessary, as a general
rule, for the third party to make a formal acceptance prior to the bringing of the
suit. The assent of the beneficiary shall be presumed, and the commencement of
an action to enforce a promise is sufficient as an acceptance.

 A person who came into a possession of a contract involving real rights—for example, lease of real
estate binds a subsequent buyer

 Creditors—a contract shall be rescissible if it is undertaken in fraud of creditors and the latter cannot
in any other manner collect the claim due them. Even if the creditor is not a party to the contract, he
or she is given legal personality in law to terminate the contract

 A third person who induces another to violate a contract


- Requires malice. If persuasion be used for the indirect purpose of injuring the plaintiff, or
benefiting the defendant at the expense of the plaintiff, it is a malicious act, which in the
law is a wrongful act and from which an actionable act of injury may issue. Malice must
be shown to exist
- However no liability exists where the third party was acting in the lawful exercise of some
right

Art. 1315. Contracts are perfected by mere consent, and from that moment the
parties are bound not only to the fulfillment of what has been expressly stipulated
but also to all the consequences which, according to their nature, may be in
keeping with good faith, usage and law.

Art. 1316. Real contracts, such as deposit, pledge and Commodatum, are not
perfected until the delivery of the object of the obligation.

PERFECTION OF CONTRACTS
 General rule: Contracts are perfected by consent. Exceptions: Real contracts, as well as a deposit,
pledge, and commodatum, for example, are not perfected until the delivery of the object.
- A deposit is constituted the moment a person receives a thing belonging to another with
the obligation of safely keeping it and of returning the same.
- A pledge is constituted by the owner of the object to be pledged to secure a loan.

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OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

- A bailee in commodatum acquires the use of the thing, but not its fruits; delivery of the
thing is essential here.

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

CONTRACTS OF AGENCY
 A person binds himself or herself to render some service to do something in representation or in
behalf of the other, with the consent or the authority of the other.
- General rule: Principal of the agent must comply with all the obligations which the agent
may have contracted within the scope of authority, except when the agent has exceeded
his or her power. In this case however the principal may ratify the obligation whether
expressly or tacitly, before it is revoked by the other contracting party.
- Even if the agent exceeded authority, the principal is solidarily liable with the agent if the
former allowed the latter to act as though the agent had full powers.

ESSENTIAL REQUISITES OF CONTRACTS

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


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

 Absence of any one of these requisites creates an inexistent contract, where the rule on pari delicto
cannot apply. An inexistent contract, being void, should be distinguished from a void, ostensible
contract where the requisites may be present but violative of the law, and where pari delicto applies.

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.

Art. 1320. An acceptance may be express or implied.

FIRST REQUISITE: CONSENT


 Concurrence of the wills of the offeror and the acceptor as to the thing and cause which constitutes the
contract. Consent has two essential elements:
a. Offer
- A manifestation of willingness to enter into a bargain, with the intention of making the
other party understand that his or her assent to the bargain is invited, and will conclude
such bargain
- Formally initiates a negotiation. An example is an imperfect promise (policitacion) which
is merely an offer
- The withdrawal of an offer is effective by constructive notice, such as by its mailing and
not necessarily when the offeree

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OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

b. Acceptance
- Perfects a contract through a concurrence of will on the part of both of the parties
- Except where a formal acceptance is so required, although the acceptance must be
affirmatively and clearly made and must be evidenced by some acts or conduct
communicated to the offeror, the acceptance may be made in an informal manner
- Must be unconditional and identical to the terms of the offer. If it is not, it is merely a
counter-offer. A condition imposed on a perfection of a contract results to a failure of the
contract, while conditions merely imposed on the performance of the obligation merely
gives the other party options or remedies to protect interests.

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

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

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

Art. 1324. When the offerer has allowed the offeree a certain period to accept, the
offer may be withdrawn at any time before acceptance by communicating such
withdrawal, except when the option is founded upon a consideration, as
something paid or promised.

Art. 1325. Unless it appears otherwise, business advertisements of things for sale
are not definite offers, but mere invitations to make an offer.
Art. 1326. Advertisements for bidders are simply invitations to make proposals,
and the advertiser is not bound to accept the highest or lowest bidder, unless the
contrary appears.

EFFECTIVE OFFER INEFFECTIVE / NOT AN OFFER


 An offer which complies with the time, place,  An offer accepted before either party has died,
and manner of acceptance made by the offerer. become insane, insolvent, or subjected to civil
However such offer which fails to comply may interdiction. “Accepted” means that the offer
still be ratified by the offeree has come to the actual knowledge of the offeror
 Offer communicated to an agent who acts with  Business advertisements with incomplete terms
the consent or authority of the principal  Advertisements to bidders
 Business advertisements of an object certain,
with concrete terms and conditions
OFFERS AS OPTION CONTRACTS: WHEN IS A WITHDRAWAL VALID?
OPTION—a contract granting a privilege to buy or sell at a determined price within an agreed time. It
exists as a privilege only on the part of the buyer. The consideration in an option contract may be
anything of value, such as transmissible rights.
- The option money in an option contract is different from earnest money which is
considered as part of the price in a contract of sale and can be proof of the perfection of
the contract
Rules:
1. If the period is not founded upon a consideration, the offeror can still withdraw the offer before it
is accepted, or if acceptance has been made, before such acceptance is made known to the offeree
2. If the period is founded upon a consideration, it would be a breach of contract to withdraw the
offer during the agreed period, and the offeror would be liable for damages

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OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

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


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

Art. 1328. Contracts entered into during a lucid interval are valid. Contracts
agreed to in a state of drunkenness or during a hypnotic spell are voidable.

Art. 1329. The incapacity declared in Article 1327 is subject to the modifications
determined by law, and is understood to be without prejudice to special
disqualifications established in the laws.

Art. 1330. A contract where consent is given through mistake, violence,


intimidation, undue influence, or fraud is voidable.

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.

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.

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

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

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.

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.

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

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Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

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.

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.

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.

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

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.

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

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

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.

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.

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.

NATURE OF CONTRACTS ACCORDING TO DEFECTIVE CONSENT

DEFECTIVE CONSENT / VOID & INEXISTENT CONTRACTS


1. Consent given through  Illustrative case is Marubeni Corporation v. Lirag where an
undue influence which agreement obtained through the influence of executive public
is contrary to public officials was deemed as a null and void contract.
policy
2. Absolute simulated  An absolute simulated contract “exists” when the parties do not
contracts intend to be bound at all, and the contract is not intended to either
produce legal effects or in any way alter the juridical position of the
parties

DEFECTIVE CONSENT/ VOIDABLE CONTRACTS


 Any contract entered by a minor below 21 is annullable but only at

58
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

1. Consent given by the instance of the minor. When such contract has been annulled by
unemancipated minors the minor when he/she comes of age, the other capacitated party
and insane or can be restituted, however, to the extent the then-minor was
demented persons who benefited.
also do not know how  Similarly , any contract with the consent of an insane person is
to read or write annullable also at the instance of the insane party. It is essential to
prove the insanity of the party at the time of contract perfection.
Atty. Mel says the law Such insanity must have a direct bearing on the agreement.
here contemplates  Any contract entered during a lucid interval of the sane person is
“passive also valid.
misrepresentation” on the
part of the minors, and
not active commitment of
fraud, which can be a
basis for damages
 Mere drunkenness is not enough. Intoxication must be of such a
2. Consent given in a character as to perpetuate an undue advantage over the drunken
state of drunkenness person:
or during a hypnotic a. When it appears the drunkenness has been brought about by
spell the opposite party
b. When a fraudulent advantage has been taken of it
c. The drunkenness was so complete to deprive the other person
of his reason of an agreeing in mind
a. The mistake must refer to the following:
3. Consent given through - The substance of the thing which is the object of the
a) mistake, b) violence, contract
c) intimidation, d) - Conditions which have principally moved one or both
undue influence, or e) of the parties to enter into the contract
fraud. - Mistakes of identity only when the identity is the
principal cause of the contract
- A mutual error which refers to the legal effect of an
agreement where the real purpose of the parties is
frustrated
 There is no mistake if the party alleging it harboured doubts about
the object but still risked consenting to the contract
 When a person 1) is unable to read or consents to a contract in a
language he/she does not understand, and 2) alleges fraud or
mistake on the other party, the other party must prove that the
contract was explained according to the true intentions of the
parties

b. Violence refers to serious or irrestible force employed.


c. Intimidation refers to a reasonable or well-grounded fear of an
imminent and grave evil on the person or property of the party
or his/her spouse, ascendants, or descendants. Requisites:
- Intimidation must be the determining cause of the
contract or must have caused the consent to be given
- Threatened act is unjust or unlawful
- Threat is real, tangible, direct, serious—there is a
disproportion between the evil and the resistance
people can offer
- The intimidation produces a well-grounded (i.e., not a
general or imaginary) fear from the fact that the person
from whom it comes from has the necessary means or

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OBLIGATIONS AND CONTRACTS:
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Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

ability to inflict the injury


 Mere threat to bring a good faith or lawful action does not amount
to duress.
 Third parties who may use violence or intimidation can also bring
forth a case for annulment of the contract.

d. Undue influence occurs when a person takes improper


advantage of his power over the will of the other. It can be
determined by looking at the confidential, spiritual, or familial
relations between the parties, or one of the parties’ mental
weakness, ignorance, or financial distress.
- Solicitation, importunity, argument, and persuasion are
due influence and do not vitiate consent

e. Fraud is committed through insidious words or machinations


designed to make a false representation of a material fact in
order to induce another to act thereon to his or her injury. It
must be serious and should not have been contracted by both
of the parties.
 Fraud exists when:
- A party who has a duty to disclose facts fails to reveal
them to the other contracting party, with whom he has
confidential relations
- When the expression of opinion of an expert has been
relied on by one of the parties
- A misrepresentation by a third person has created
substantial mistake and the same is mutual between
the two parties.
4. Relative simulation of  A relative simulation of contract may exist to conceal the parties’
contract true agreement. It binds the parties to their real agreement only
when the simulation does not prejudice a third person and when it
is not intended for any purpose contrary to law, morals, good
custom, public policy, and public order.

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.

Art. 1348. Impossible things or services cannot be the object of contracts.

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.

SECOND REQUISITE: OBJECT OF CONTRACTS


 Atty. Mel said that the minimum requirement for an object is that it be determinable and generic

60
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

CAN BE AN OBJECT CANNOT BE AN OBJECT


 Things that are included in the commerce of  Future inheritance (except in cases expressly
humans, including future things provided by law)
- E.g., in a contract of sale, things of - Future inheritance is any property or right
potential existence may be the object, not in existence or incapable of
provided that that the expectancy is determination at the time of the contract,
deemed subject to the condition that that a person may in the future acquire by
such thing will come to existence succession
 Transmissible rights  Impossible things or services
 Services which are not contrary to law, morals,  Indeterminable things or services as to their
good customs, public order or public policy kind
 Determinate objects whose quantity can be
determined without the need of a new contract

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.

THIRD REQUISITE: CAUSE OF CONTRACTS


 The cause of a contract is the essential or more proximate purpose which the contracting parties have
in view at the time of entering the contract. It may or may not be tangible, and can take different
forms—a prestation, a giving of a sum of money, an expectation or profits.

KINDS OF CONTRACTS ACCORDING TO CAUSE


1. Onerous contract: for each contracting party, the cause is a prestation or promise of a thing or
service by the other. In reciprocal contracts the obligation or promise of each party is the
consideration for that of the other
2. Renumeratory contract: the cause is the service or benefit which is renumerated (paid for with
money)
3. Contracts of pure beneficence: mere liberality of the donor is the cause of the contract. It does not
involve any material thing, but involves only the generosity of the benefactor.

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

CAUSE VERSUS MOTIVE


 Cause is the essential reason for a contract. Motive is the particular reason for a contracting party
which does not affect the other party and which does not preclude the existence of a different
consideration.
 General rule: the motivation of the parties is independent from the cause of the contract. The motive
of a party does not affect the validity of the party. Exception: When the realization of such motive has
been made a condition (often an implied condition) upon which the contract is made to depend; when
the motive predetermines the purpose of the contract.

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.

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.

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Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

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.

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.

NATURE OF CONTRACTS ACCORDING TO DEFECTIVE CAUSE

VOID Proviso to render VALID


1. Contracts without cause, or with unlawful None
cause—contrary to law, morals, good customs,
public order, or public policy
- Although a cause is not stated in the
contracts, the presumption is that it
exists and is lawful, unless the debtor
proves the contrary
2. Statement of a false cause If it should be proved that the false cause is
founded upon another cause which is true and
lawful; if it is a relatively simulated contract
3. A lesion or inadequacy of cause that is a) Mere inadequacy of cause shall not invalidate
specified in law or b) concurs with fraud, a contract. A valuable consideration, however
mistake, or undue influence small or nominal, if given or stipulated in
good faith, in the absence of fraud, is
sufficient (Penaco v. Rava)

FORMS OF CONTRACTS

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.
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.

Art. 1357. If the law requires a document or other special form, as in the acts and
contracts enumerated in the following article, the contracting parties may compel
each other to observe that form, once the contract has been perfected. This right
may be exercised simultaneously with the action upon the contract.

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


(1) Acts and contracts which have for their object the creation,
transmission, modification or extinguishment of real rights over immovable
property; sales of real property or of an interest therein 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;

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Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

(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.

WHEN IS FORM ESSENTIAL IN A CONTRACT?


 General rule: As long as the essential requisites in a contract are present, a contract binds the parties
no matter what form they may have been entered. Exceptions:
a. When the law requires that the contract be in some form to be valid
- Donations of immovable property
- Interest payments
b. When the law requires that the contract be in some form to be enforceable
- That the contact be proved by some writing, as in those covered by the Statute of Frauds
c. When the law requires that the contract be in some form for greater efficacy or to bind third
persons
- Contracts which require a public instrument (see Article 1358). The failure to put in a
public or private document these transactions will not render the agreement invalid. In
this sense, Article 1358 is merely directory. The actions outlined therein are still
enforceable by action or suit even though they are not in a public instrument.
- Parties in contracts which require this form have a specific right exclusive to them: they
may compel each other to observe that form once the contract has been perfected, and
this is a right which may be exercised simultaneously with the action upon the contract

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.

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

REFORMATION
 Connotes a valid written contract, because a contract not written cannot be reformed.
 Presupposes a meeting of the minds, only that the instrument does not refer to the true intention of
the parties by reason of mistake, fraud, inequitable conduct, or accident.
- However, if such fraud, inequitable conduct, mistake, or accident prevented a meeting of
the minds, the remedy is annulment of the contract, not reformation
 Thus, the determination whether a contract may be reformed is a two-step process:
a. It must be shown that the instrument embodying the contract does not reveal the true intention of
the parties
b. The existence of a real and an actual contract must be shown.
 Basis of reformation is equity. The courts by reformation do not attempt to make a new contract for
the parties, but tries to make the instrument express their real agreement. The rationale for such
doctrine is that it would be unjust and inequitable to allow the enforcement of a written instrument
which does not reflect the parties’ meeting of the minds.

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Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

 Burden of proof is upon the party who insists the party should be reformed based on some legal
ground. It is also a right in personam.
 Prescriptive period is within ten years from the time the cause of action accrues. (The action may also
be barred by laches.) The cause of action accrues upon:
- the knowledge of the ground for reformation, or
- from the date of the execution of the instrument embodying the contract if the causes for
reformation were already known at the time of the execution of the contract
 The action for reformation is called a special civil action for declaratory relief under the Rules of
Court, and its purpose is to secure an authoritative statement of the rights and obligations of the
parties for their guidance in the enforcement thereof

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.

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.

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.

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.

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

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.

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

WHEN IS REFORMATION PROPER?

PROPER 1. THERE IS A MISTAKE.


a. There is a mutual mistake of the parties which involves factual matters
(generally).
- To prove that the mistake was mutual and involved factual matters which
caused the failure of the expression of the parties’ true intent, more than a
mere preponderance of evidence is required.
- There may be no need for reformation even though there was mistake
when the parties executed the contract according to their true intent
without need of court intervention (Atilano v. Atilano)
b. One party is mistaken, and the other acted fraudulently or inequitably in such
a way to conceal the parties’ true intention

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Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

c. One party is mistaken, and the other knew or believed that the instrument did
not state their real agreement
d. The clerk, typist, or person drafting the instrument commits an error through
negligence, lack of skill, ignorance, or bad faith
2. IT IS A MORTAGE OF REAL OR PERSONAL PROPERTY, but the instrument
says it is an absolute sale with a right of repurchase.
IMPROPER 1. Simple donations inter vivos where no condition is imposed
- These donations are acts of liberality, and do not involve any meeting of
the minds (there is no negotiation or agreement)
2. Wills
- Similar to simple donations
3. When the real agreement is void
4. When the party seeking reformation has already brought an action to enforce the
instrument
- Such party is stopped already

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.

WHO MAY ORDER REFORMATION?


1. In mutual mistake: either party or their successors in interest
2. Not mutual mistake: upon petition of the injured party, his/her heirs or assigns

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

INTERPRETATION OF CONTRACTS

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

INTERPRETATION REFORMATION
 The act of making intelligible what was before  A remedy in equity where a written instrument
not understood, ambiguous or not obvious is made or construed as to express or conform
 The determination of the meaning attached to to the real intention of the parties
the words written or spoken which make the
contract

 General rule: The intention of the parties is reflected from the wordings of the contract, and therefore
the literal stipulations shall control. Exception: When the wording is ambiguous, apply the rules in
statutory construction and those outlined in this chapter.
 Sir Mel’s summary of rules—how to discern intention, in order of applicability:
1. Examine the text. If it is unclear...
2. Consider the context. Context can be ascertained from the following:
a. The prior, contemporaneous, and subsequent acts of the parties
b. Applying ejusdem generis and noscitur a sociis
c. Examining the nature of the contract

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Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

d. Customs and usage (but only to fill omissions)


e. Contra proferentem
f. Applying the gratuitous and onerous rule
 Relevant cases:
- Santi v. CA: The stipulation “said period of the lease being extendable for another period
of twenty years” means clearly that the lessor’s intention is not to automatically extend
the lease contract but to give her time to ponder and think whether to extend the lease.
- Fernandez v. CA: The Court said that the interpretation of the phrase “renewable for
another ten years at the option of both parties under such terms, conditions, and rental
reasonable at that time” is that the plaintiff cannot renew the lease by a unilateral act of
exercising his option.
- Universal Textile Mills Inc. v. National Labor Relations Commission: The interpretation
or construction of a contract does not include its modification or the creation of a new
one. It must be construed and enforced according to the terms employed, and a court has
no right to interpret the agreement as meaning something different from what the parties
intended to be expressed by the language they saw fit to employ.

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

- Pingol v. CA: The Court deemed a contract as one of absolute sale, and not a contract to
sell, by looking at the contemporaneous and subsequent acts of the vendee. Pursuant to
the deed of sale, the vendor delivered actual and constructive possession of the property
to the vendee, who occupied and took such possession, constructed a building thereon,
among others. These are demonstrative acts that the vendor recognized the vendee as the
absolute owner of the property sold.
- Rapanut v. CA: The Court decided that the phrase “...payable in monthly instalments of
P500 with an interest of 10% per annum on the remaining balance until the full amount
is paid” means that the 10% interest on the balance is added to whatever remains of the
principal whenever an instalment is paid (petitioner’s interpretation), and not that the
10% interest must be paid every year (respondent’s interpretation). The Court observed
that the respondent accepted the payments petitioner religiously made for four years
without objection.
- Javier v. CA: Where the parties to a contract have given it a practical construction by
their conduct as by acts in partial performance, such construction may be considered by
the court in construing the contract, determining its meaning and ascertaining the
mutual intention of the parties at the time of contracting.
- Carceller v. CA: Analysis and construction, however, should not be limited to the words
in the contract. The reasonableness of the result obtained should also be considered. In
contractual relations, the Court allows the parties reasonable leeway on the terms of their
agreement, and that contracts should not be interpreted in a harsh and inequituous way.
- Gonzales v. Previsora Filipina: The import of a word ultimatedly depends upon the
consideration of the entire provision, its nature, the object and the consequences that
would follow it from construing it one way or the other. Thus if a provision demands a
mandatory application, the word “may” be construed as “shall.”

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.

NOSCITUUR A SOCIIS
 General and unlimited terms are restrained and limited by particular terms that follow.

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Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

EJUSDEM GENERIS
 A general term joined with a specific one will be deemed to include only things that are like, of the
same genus, as the specific one.

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.

- Lao Lim v. CA: The Court interpreted a contract to mean that there is a renewal of the
lease every three years and that a 20% increase of rentals will only take effect if the
parties decide to renew the lease, because a contrary interpretation will result in a
situation where the continuation and the effectivity of the contract will depend only upon
the will of the lessee, in violation of Article 1308 of the Civil Code. The compromise
agreement should be understood as bearing that import which is most adequate to render
it effectual.
- Caltex v. Intermediate Appellate Court: Provisions in a contract must be given a
construction as will give effect to them. If it were the intention of the parties to limit the
respondent’s obligation to P4M they should have stated so, and there would have been no
need to qualify the statement of said amount with the clause “as of June 1980 plus any
applicable charges on the overdue account,” among others.
- Ridjo Tape and Chemical Corporation v. CA: Construction in terms of a contract which
would amount to impairment or loss of right is not favoured; conservation and
preservation, not waiver, abandonment, or forfeiture of a right, is the rule.

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.

 The various provisions of a contract must be read as a whole and not in isolation. Each provision
must be related to each other in order to clearly now the total import and application of the law, and
so that a harmonious whole can be attained.
- Ruiz v. Sheriff of Manila: The clause “failure to pay two successive monthly
amortizations will cause the loan to be automatically die and payable in its entirety.
Notwithstanding the foregoing, this loan shall not run for more than five years” is not
self-conflicting, according to the Court. It means that while monthly amortizations could
be as little as P300, the loan should be paid anyway in five years; and that failure to pay
two successive amortizations would render the entire loan due and payable. Thus, if there
is default committed for twelve months, any foreclosure of a mortgage is not premature.
- Fernandez v. CA: The important task in contract interpretation is always the
ascertainment of the intention of the parties through looking to the words they used to
project the intention of their contract—all the words, and not just a particular word or
two, and words in context and not words standing alone.
- China Banking Corp v. CA: Mortgages given to secure future advancements or loans are
valid and legal contracts, and amounts named as consideration in said contracts do not
limit the amount for which the mortgage may stand as security, if from the four corners of
the instrument the intent to secure future and other indebtedness can be gathered.

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.

- Pasay City Government v. Court of First Instance of Manila: The Court interpreted the
words “in proportion” to mean that the parties to a compromise contemplated a divisible
obligation.

67
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

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.

 It is important to note that usage or custom will only be admissible if a contract’s provisions are
doubtful. An express contract embodying in clear and positive terms the intention of the parties
cannot be varied nor contradicted by evidence of usage or custom. A written and express contract
cannot be controlled, varied, or contradicted by usage or custom.

Art. 1377. The interpretation of obscure words or stipulations in a contract shall


not favor the party who caused the obscurity.

CONTRA PROFERENTEM
 Means “against the proferrer.” If there is an ambiguity in a document and all the other methods of
construction have failed to resolve so that there are two alternative meanings to certain words, the
Court may construe the words against the party who put forward the document, and give effect to the
meaning more favourable to the other party
 Based on the maxim verba accipiuntur fortius contra proferentem: a contract is interpreted against
the person who wrote it.

Art. 1378. When it is absolutely impossible to settle doubts by the rules


established in the preceding articles, and the doubts refer to incidental
circumstances of a gratuitous contract, the least transmission of rights and
interests shall prevail. If the contract is onerous, the doubt shall be settled in
favor of the greatest reciprocity of interests.
If the doubts are cast upon the principal object of the contract in such a way
that it cannot be known what may have been the intention or will of the parties,
the contract shall be null and void.

 When a contract is gratuitous in nature, the least transmission of rights should prevail.
- Central Philippine University v. CA: Where a donee seeks the execution of a donation
even though such done did not fulfil a condition sought by the donor, because such donor
did not seek the enforcement of the condition for a long time anyway, the Court ruled for
the revocation of the donation.
 When a contract is onerous in nature, doubt shall be settled in favour of the greatest reciprocity of
interests.
- Castelo v. CA: Between two interpretations of a stipulation in a contract—whether during
the period of January 1, 1983 up to June 30, 1983, 12% per annum plus 1% penalty charge
a month was payable on the remaining diminishing balance, or whether during the same
period, only 12% interest was payable while the 1% per month penalty charge would begin
to accrue on any balance remaining unpaid—the Court chose the latter. If the parties
intended the former they would have stated a 24% interest (1% per month = 12% per
year).
- Gaite v. Fonacier: The Court ruled that a provision in a contract transferring Gaite’s
rights to Fonacier in exchange for an amount of money, and where the remaining balance
of the money will be paid “from and out the first letter of credit covering the first
shipment of iron ores and of the first amount derived from the local sale of iron ore”
should be interpreted as providing for a suspensive period, and not a suspensive
condition. The Court ruled that a greater reciprocity of interests obtains if the buyer’s
obligation is deemed to be actually existing, with only its maturity date postponed or
deferred, than if such obligation was viewed as non-binding until the ore was sold.

68
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Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

 When the contract’s principal object is expressed in such a way that the intention of the parties
cannot be known, the contract is null and void.

Art. 1379. The principles of interpretation stated in Rule 123 of the Rules of Court
shall likewise be observed in the construction of contracts.

OTHER PRINCIPLES OF INTERPRETATION


 Interpretation according to legal meaning, unless the parties intended otherwise
 Construction that will give effect to all provisions is favoured
 Particular intent will control a general one that is inconsistent with it
 Interpretation according to the circumstances
 The terms in a contract are presumed to be used in their general acceptation, but if evidence can be
shown that they have a local, technical, or otherwise peculiar signification, then they must be
construed as such accordingly
 Written words control printed
 Experts and interpreters can be presented in court in case the contract cannot be deciphered and such
persons are proved to be skilled in deciphering the characters
 Of two constructions, that sense is to prevail against either party in which he supposed the other
understood it, or that view which is more favourable to the party in whose favour the provision was
made
 Construction in favour of a natural right
 Interpretation according to usage

RESCISSIBLE CONTRACTS

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

Art. 1381. The following contracts are rescissible:


(1) Those which are entered into by guardians whenever the wards whom they
represent suffer lesion by more than one-fourth of the value of the things which
are the object thereof;
(2) Those agreed upon in representation of absentees, if the latter suffer the
lesion stated in the preceding number;
(3) Those undertaken in fraud of creditors when the latter cannot in any other
manner collect the claims due them;
(4) Those which refer to things under litigation if they have been entered into by
the defendant without the knowledge and approval of the litigants or of competent
judicial authority;
(5) All other contracts specially declared by law to be subject to rescission.

Art. 1382. Payments made in a state of insolvency for obligations to whose


fulfillment the debtor could not be compelled at the time they were effected, are
also rescissible.

RESCISSIBLE CONTRACTS
 Valid contracts that can be terminated on legal grounds
 Rescission is principally based on some economic damage (lesion) as a result of the inequitable
conduct by one party

TYPES OF RESCISSIBLE CONTRACTS

69
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

1. Entered by guardians, wherein the ward suffers lesion by more than ¼ of the value of the
property
- Rescission cannot take place however when the contract has been judicially approved
2. Entered by representatives of absentees, wherein the absentee suffers lesion by more than ¼ of
the value of the property
- Rescission cannot take place however when the contract has been judicially approved
3. Those undertaken in fraud of creditors, and which makes collection of the creditors’ claim
impossible
- Bobis v. Provincial Sheriff of Camarines Norte: The fraud is never presumed, but must
be proved by clear preponderance of evidence. It is essential that it be shown that both
contracting parties have acted maliciously and with fraud for the purpose of prejudicing
said creditors, and that the latter are deprived by the transactions of all means by which
they may effect collection of their claims
4. Those which refer to things under litigation, unless it has been entered with the knowledge or
approval of the litigants, or of competent judicial authority
5. Payments made in state of insolvency, for which the debtor cannot be compelled to pay at the
time the obligation was effected
- A state of insolvency occurs when a debtor’s liabilities exceed his/her assets and can
barely pay off his/her debts
6. All others declared by law to be rescissible
- For example, a contract of sale entered in violation of the right to first refusal is
rescissible

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.

SUBSIDIARY NATURE
 Must be the last remedy, of last resort (e.g., an accion pauliana, an action to rescind contracts made
in favour of creditors, and which has the ff. requisites: a) a judgment, b) the issuance of a trial court of
a writ of execution for the satisfaction of the judgment, c) the failure of the sheriff to enforce and
satisfy the judgment of the court.)
 A cause for action in a rescission can only be made in a proper and direct action filed for that purpose,
and not on a mere motion incidental to another case
- Air France v. Court of Appeals: Rescission is a relief which the law grants on the premise
that the contract is valid and for the protection of one of the contracting parties and third
persons from all injury and damage the contract may cause, or to protect some
incompatible and preferential right created by the contract. An action for rescission may
not be raised or set up in a summary proceeding, through a motion, but in an
independent civil action and only after a full-blown trial

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

Art. 1385. Rescission creates the obligation to return the things which were the
object of the contract, together with their fruits, and the price with its interest;
consequently, it can be carried out only when he who demands rescission can
return whatever he may be obliged to restore.
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.
In this case, indemnity for damages may be demanded from the person
causing the loss.

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OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

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

RESTITUTION IN RESCISSION
 In restitution, the parties shall be placed in the same position where they were before they entered the
said contract.
- Possible: When the one who demands rescission can return whatever he/she may be
obliged to restore
- Not possible: a) When the objects cannot be restored, or b)when the objects of the
contract are legally in the possession of a third person who did not act in bad faith.
Damages may be demanded from the person causing the loss, however, in this case. A
person in good faith is one who buys the property of another without notice that some
other person has a right or interest in such a property and pays a full and fair price at the
time of the purchase or before he/she has notice of the claim or interest of some other
person in the property

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.

REBUTTABLE PRESUMPTIONS OF FRAUD RE: RESCISSION


Requisites:
 Alienation by gratuitous title
1. Debts are contracted prior to the donation or alienation by onerous title. Maturity of debts is not a
requirement
2. There is no reservation of sufficient property to pay all debts contracted before the donation or
alienation
 Alienation by onerous title
1. The alienation made during the pendency of a suit presupposes a judgment, or a writ of
attachment
2. The attachment need not refer to the property alienated
3. The attachment need not to have been obtained by the party seeking rescission

- Provincial Sheriff v. Court of Appeals: Art. 1387 does not apply in a case where there has
been no transfer or alienation of property. The Court found in this case that the transfer
of the “Modern Furniture Store” from one person to another referred merely to its
business name and style , and not the store itself or its contents—because the old store
has been razed in a fire, and the new store was built from the capital of the new owner.

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.

71
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Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

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

THIRD PARTY IN BAD FAITH; MORE THAN ONE


 Liability of third party buyer who knew an alienation was made in fraud of creditors:
1. Restitution, if possible
2. If not, damages

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.

PRESCRIPTIVE PERIOD; WHEN IT BEGINS TO RUN


 The action to rescind prescribes in four years
 The period begins to run after the aggrieved party has unsuccessfully exhausted all possible legal
remedies to enforce the obligation or recover losses, and from the time—
1. The incapacity of persons under guardianship terminates, in cases of persons under guardianship
2. The absentee learns of the contract, in cases of absentees
3. The fraud is discovered, for contracts entered in fraud of creditors
4. Of the knowledge of the transaction, for contracts entered with respect to things under litigation
without approval

VOIDABLE CONTRACTS

Art. 1390. The following contracts are voidable or annullable, even though there
may have been no damage to the contracting parties:
(1) Those where one of the parties is incapable of giving consent to a contract;
(2) Those where the consent is vitiated by mistake, violence, intimidation, undue
influence or fraud.
These contracts are binding, unless they are annulled by a proper action in court.
They are susceptible of ratification.

Art. 1391. The action for annulment shall be brought within four years.
This period shall begin:
In cases of intimidation, violence or undue influence, from the time the
defect of the consent ceases.
In case of mistake or fraud, from the time of the discovery of the same.
And when the action refers to contracts entered into by minors or other
incapacitated persons, from the time the guardianship ceases.

VOIDABLE CONTRACTS
 Damage need not exist
 Valid until annulled, unless any defect (enumerated in the grounds below) is cured by ratification,
which can be claimed within four years

GROUND PERIOD BEGINS TO RUN:


1. Incapacitated in giving From the time guardianship ceases
consent
2. Vitiated consent (by  For intimidation, violence or undue influence, from the time
mistake, violence, such defects cease

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Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

intimidation, undue  For mistake of fraud, upon discovery of the same


influence, or fraud

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

Art. 1393. Ratification may be effected expressly or tacitly. It is understood that


there is a tacit ratification if, with knowledge of the reason which renders the
contract voidable and such reason having ceased, the person who has a right to
invoke it should execute an act which necessarily implies an intention to waive his
right.

Art. 1394. Ratification may be effected by the guardian of the incapacitated


person.

Art. 1395. Ratification does not require the conformity of the contracting party
who has no right to bring the action for annulment.

Art. 1396. Ratification cleanses the contract from all its defects from the moment
it was constituted.

RATIFICATION
 May be expressly or tacitly given. Express, e.g.: A writes a letter continuing a lease of contract even
though A’ s consent was vitiated by B. Tacit, e.g.: Instead of a letter, A willingly and continuously pays
the rentals for the subject’s leased premises.
 A unilateral act generally done by the injured party and not by the party causing the injury. The
consent of the injuring party is thus not required
 Can be given by the guardian of an incapacitated person, especially if it will redound to the benefit of
the ward
 The curing effect retroacts to the day when the contract was entered

Art. 1397. The action for the annulment of contracts may be instituted by all who
are thereby obliged principally or subsidiarily. However, persons who are capable
cannot allege the incapacity of those with whom they contracted; nor can those
who exerted intimidation, violence, or undue influence, or employed fraud, or
caused mistake base their action upon these flaws of the contract.

WHO CAN FILE AN ACTION FOR ANNULMENT?


 General rule: Only the aggrieved parties (those obliged principally and subsidiarily, such as heirs) can
file.
- The right to annul and other actions and obligations must have been transmitted to the
heir, or the latter cannot bring an action to annul a contract in representation of the
contracting party who made it
 Exception: When a third person can prove prejudice against him/her, that person may file an action
for annulment. The person must show the detriment which positively would result to him or her from
the contract in which he or she had no intervention. (Ibañez v. Hongkong and Shanghai Bank, etc.)

Art. 1398. An obligation having been annulled, the contracting parties shall restore
to each other the things which have been the subject matter of the contract, with
their fruits, and the price with its interest, except in cases provided by law.
In obligations to render service, the value thereof shall be the basis for
damages.

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OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

Art. 1399. When the defect of the contract consists in the incapacity of one of the
parties, the incapacitated person is not obliged to make any restitution except
insofar as he has been benefited by the thing or price received by him.

Art. 1400. Whenever the person obliged by the decree of annulment to return the
thing can not do so because it has been lost through his fault, he shall return the
fruits received and the value of the thing at the time of the loss, with interest from
the same date.

RESTITUTION
 General rule: After the obligation has been annulled, the parties must restore to each other the things
(or services) that are the subject matter of the contract, plus their fruits and interest except in cases
provided by law
 Exceptions:
1. An incapacitated minor is obliged to make restitution only in so far as he/she has been
benefited
2. When the object has been lost through the fault of one of the parties, he/she shall return the
fruits received, and the value of the thing at the time of the loss, plus interest

Art. 1401. The action for annulment of contracts shall be extinguished when the
thing which is the object thereof is lost through the fraud or fault of the person
who has a right to institute the proceedings.
If the right of action is based upon the incapacity of any one of the
contracting parties, the loss of the thing shall not be an obstacle to the success of
the action, unless said loss took place through the fraud or fault of the plaintiff.

EXTINGUISHMENT OF ACTION FOR ANNULMENT


1. When the injured party loses the object of the obligation through his/her own fault or fraud
2. When the incapacitated party causes the loss of the object. Loss of the thing per se, however, is
not a ground for extinguishment of the action to annul

Art. 1402. As long as one of the contracting parties does not restore what in virtue
of the decree of annulment he is bound to return, the other cannot be compelled to
comply with what is incumbent upon him.

 Exception to this rule applies to incapacitated minors, who may only restitute in so far as they have
been benefited

UNENFORCEABLE CONTRACTS

Art. 1403. The following contracts are unenforceable, unless they are ratified:
(1) Those entered into in the name of another person by one who has been given
no authority or legal representation, or who has acted beyond his powers;
(2) Those that do not comply with the Statute of Frauds as set forth in this
number. In the following cases an agreement hereafter made shall be
unenforceable by action, unless the same, or some note or memorandum, thereof,
be in writing, and subscribed by the party charged, or by his agent; evidence,
therefore, of the agreement cannot be received without the writing, or a
secondary evidence of its contents:

74
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

(a) An agreement that by its terms is not to be performed within a year


from the making thereof;
(b) A special promise to answer for the debt, default, or miscarriage of
another;
(c) An agreement made in consideration of marriage, other than a mutual
promise to marry;
(d) An agreement for the sale of goods, chattels or things in action, at a
price not less than five hundred pesos, unless the buyer accept and receive part of
such goods and chattels, or the evidences, or some of them, of such things in
action or pay at the time some part of the purchase money; but when a sale is
made by auction and entry is made by the auctioneer in his sales book, at the time
of the sale, of the amount and kind of property sold, terms of sale, price, names of
the purchasers and person on whose account the sale is made, it is a sufficient
memorandum;
(e) An agreement of the leasing for a longer period than one year, or for the
sale of real property or of an interest therein;
(f) A representation as to the credit of a third person.
(3) Those where both parties are incapable of giving consent to a contract.

Art. 1404. Unauthorized contracts are governed by Article 1317 and the principles
of agency in Title X of this Book.

Art. 1405. Contracts infringing the Statute of Frauds, referred to in No. 2 of Article
1403, are ratified by the failure to object to the presentation of oral evidence to
prove the same, or by the acceptance of benefit under them.

UNENFORCEABLE CONTRACTS
1. Those entered into in the name of one person by another with no authority therefor, or who acted
in excess of authority

2. Those which do not comply with the Statute of Frauds. This statute mandates that for certain
executor contracts to be enforceable in a court of law, the only evidence that can prove such is a
written proof of the agreement like some notes or memoranda. Why? To prevent perjury.
- The list of contracts that must comply with the statute is exclusive
- Nature of the memo: In Berg v. Magdalena, the Court said no particular form of
language or instrument is necessary to constitute a memo. It may be informal or formal,
and need not be contained in a single document
- In the following cases, a) an agreement or some note or memorandum in writing and b)
the signature of the party charged or his/her agent in such writings are needed.
a. An agreement whose terms dictate that there will be no performance within year of the making
thereof
- Exceptions:
1) Babao v. Perez set down the rule that if there is complete performance within a year by
one of the contracting parties, the contract is taken out of the statute
2) If the contract stipulates that it shall be executed immediately, although it has been reset
to another date so it can be finished beyond one year
b. Guarantor: a special promise to answer for the debt, default, or miscarriage of another
- Within statute: collateral obligation; a third party and a defendant are liable in the same
way, and to do the same thing, one as principal and the other as surety
- Outside statute: original obligation; the third party is primary liable for the payment of
the debt, and the credit was transferred to him/her
c. Agreement made in consideration of marriage

75
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

- Mandatory
- Breach of promise to marry is not actionable
d. An agreement for the sake of goods, etc., at a price higher than P500, unless the buyer accept
and receive part of the goods or pay some part of the purchase money; an auction sale recorded
in the sales book is a sufficient memo
e. Lease agreement for a period more than a year, or for the sale of real property or an interest
therein
- Need not be notarized, for notarization only binds third persons
f. Representation to the credit of a third person
- If made in bad faith, can be a source of damages

The Statute of Frauds is not applicable when:


 The contract has been consummated or there has been partial performance.
- To enforce the rest of the contract (which is presumably made orally), it must be proven
that the agreement relied on is definite, clear, unambiguous and unequivocal, as well
fair, reasonable, and just.
- Oral testimony is admissible, as well as acts indicating partial performance (payment of
taxes, possession, improvements)
 The contract has been ratified through any of the following:
1. Failure to object to the presentation of oral evidence proving the contract
2. Acceptance of benefits under the contract

When may the Statute of Frauds be invoked?


1. Specific performance
2. Violation of contracts

3. Those where both parties are incapable of giving consent


- Effect of ratification by a parent or guardian of one contracting party: the contract is now
voidable.
- Effect of ratification of both parents of both parties: the contract is validated from
inception

Art. 1406. When a contract is enforceable under the Statute of Frauds, and a
public document is necessary for its registration in the Registry of Deeds, the
parties may avail themselves of the right under Article 1357.

 The registration of the property and an action upon a contract can be exercised simultaneously.

Art. 1407. In a contract where both parties are incapable of giving consent,
express or implied ratification by the parent, or guardian, as the case may be, of
one of the contracting parties shall give the contract the same effect as if only one
of them were incapacitated.
If ratification is made by the parents or guardians, as the case may be, of
both contracting parties, the contract shall be validated from the inception.

Art. 1408. Unenforceable contracts cannot be assailed by third persons.

 The contract cannot be executed, anyway.

VOID AND INEXISTENT CONTRACTS

76
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

Art. 1409. The following contracts are inexistent and void from the beginning:
(1) Those whose cause, object or purpose is contrary to law, morals, good
customs, public order or public policy;
(2) Those which are absolutely simulated or fictitious;
(3) Those whose cause or object did not exist at the time of the transaction;
(4) Those whose object is outside the commerce of men;
(5) Those which contemplate an impossible service;
(6) Those where the intention of the parties relative to the principal object of the
contract cannot be ascertained;
(7) Those expressly prohibited or declared void by law.
These contracts cannot be ratified. Neither can the right to set up the
defense of illegality be waived.

Art. 1410. The action or defense for the declaration of the inexistence of a contract
does not prescribe.

Art. 1411. When the nullity proceeds from the illegality of the cause or object of
the contract, and the act constitutes a criminal offense, both parties being in pari
delicto, they shall have no action against each other, and both shall be prosecuted.
Moreover, the provisions of the Penal Code relative to the disposal of effects or
instruments of a crime shall be applicable to the things or the price of the
contract.
This rule shall be applicable when only one of the parties is guilty; but the
innocent one may claim what he has given, and shall not be bound to comply with
his promise.

Art. 1412. If the act in which the unlawful or forbidden cause consists does not
constitute a criminal offense, the following rules shall be observed:
(1) When the fault is on the part of both contracting parties, neither may recover
what he has given by virtue of the contract, or demand the performance of the
other's undertaking;
(2) When only one of the contracting parties is at fault, he cannot recover what he
has given by reason of the contract, or ask for the fulfillment of what has been
promised him. The other, who is not at fault, may demand the return of what he
has given without any obligation to comply his promise.

Art. 1413. Interest paid in excess of the interest allowed by the usury laws may be
recovered by the debtor, with interest thereon from the date of the payment.

Art. 1414. When money is paid or property delivered for an illegal purpose, the
contract may be repudiated by one of the parties before the purpose has been
accomplished, or before any damage has been caused to a third person. In such
case, the courts may, if the public interest will thus be subserved, allow the party
repudiating the contract to recover the money or property.

Art. 1415. Where one of the parties to an illegal contract is incapable of giving
consent, the courts may, if the interest of justice so demands allow recovery of
money or property delivered by the incapacitated person.

77
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

Art. 1416. When the agreement is not illegal per se but is merely prohibited, and
the prohibition by the law is designated for the protection of the plaintiff, he may,
if public policy is thereby enhanced, recover what he has paid or delivered.

VOID CONTRACTS
 Produces no legal effects at all
 Action to declare the contract void is imprescriptible. Even the doctrine of laches cannot apply to
resist an imprescriptible legal right
 Restitution generally applies—if both parties have no fault or are not guilty, the restoration of what
was given by each of them is in order

VOID AND INEXISTENT  Absence of an essential element (consent, cause, object) in a


CONTRACTS contract
1. Those which are  Pari delicto does not apply
simulated of fictitious
2. Those whose cause or Examples:
object did not exist at the  Gardner v. Court of Appeals: A simulated contract purporting to
time of the transaction be a sale of land, but was actually intended to merely protect a
3. Those whose object is party to a joint venture for the cash advances he was to make for a
outside the commerce of realty subdivision the parties wanted to put up, was declared void
men  De Leon v.Court of Appeals: A stipulation in a contract which has
4. Those which contemplate for its consideration the termination of a marriage ,was declared
an impossible service contrary to law and public policy
5. Those where the
intention of the parties
relative to the principal
object of the contract
cannot be ascertained
VOID AND OSTENSIBLE  Elements are complete, but the purpose of the contract is
CONTRACTS ostensible
1. Those whose cause,  Pari delicto applies, subject to exceptions
object, or purpose is
contrary to law, morals, Examples:
good customs, public  Maharlika Publishing Corporation v.Tagle: The bidding and
order, or public policy contract of sale given to a wife of a GSIS official is declared void
2. Those expressly for violating Art. 1491 of the Civil Code prohibiting public officers
prohibited or declared and employees from purchasing property under their
void by law administration in an auction sale
- However, not all  Cui v. Arellano University: A waiver of the right to transfer to
contracts which other schools and a demand for refund if ever a scholar transfers
violate the law is declared void for being against public policy
are void. Only
those which Pari delicto applies:
violate  When the act is a criminal offense, and the nullity of an
mandatory or obligation proceeds from a contract, and both parties are in pari
prohibitory delicto
provisions (Art. - If one party is innocent, such may claim what he/she has
8. Civil Code) are given, and shall not be bound to comply with his/her
void promise. Guilty party is not entitled to anything.

 When the act is not a criminal offense, but both parties are at
fault
- If only one is at fault, the innocent party may demand the

78
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

return of what has been given and is not bound to comply


with his/her promise. Guilty party is not entitled to anything.

Exceptions; where pari delicto may not apply:


The Court may allow a party to recover money or property in the
following cases, when the interest of justice or public interest
demands:
1. If an agreement has been repudiated before it has
accomplished its purpose or before it causes damage to a
third person
2. If the party who gave consent is proven to be incapacitated
3. If the agreement is not illegal per se but merely prohibited,
and the prohibition is designed for the protection of the
plaintiff

Art. 1417. When the price of any article or commodity is determined by statute, or
by authority of law, any person paying any amount in excess of the maximum
price allowed may recover such excess.

Art. 1418. When the law fixes, or authorizes the fixing of the maximum number of
hours of labor, and a contract is entered into whereby a laborer undertakes to
work longer than the maximum thus fixed, he may demand additional
compensation for service rendered beyond the time limit.

Art. 1419. When the law sets, or authorizes the setting of a minimum wage for
laborers, and a contract is agreed upon by which a laborer accepts a lower wage,
he shall be entitled to recover the deficiency.

 Arts. 1418 and 1419 are examples of ostensible contracts where only one of the parties is at fault, and
thus the innocent party has the right to demand what he/she is entitled to receive.

Art. 1420. In case of a divisible contract, if the illegal terms can be separated from
the legal ones, the latter may be enforced.

 A possible exception to the rule that a void contract is void in its whole—if the contract is divisible and
the legal terms can be separated from the illegal ones, the former may be enforced. For example, a
contract of loan is valid even though the collateral is in the nature of a pactum commissorium, which
is void

Art. 1421. The defense of illegality of contract is not available to third persons
whose interests are not directly affected.

WHO CAN ALLEGE THE ILLEGALITY OF A CONTRACT


 Parties to the contract
 Any third party who is directly prejudiced, even if such a person is not a party

Art. 1422. A contract which is the direct result of a previous illegal contract, is also
void and inexistent.

NATURAL OBLIGATIONS

79
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

Art. 1423. Obligations are civil or natural. Civil obligations give a right of action to
compel their performance. Natural obligations, not being based on positive law but
on equity and natural law, do not grant a right of action to enforce their
performance, but after voluntary fulfillment by the obligor, they authorize the
retention of what has been delivered or rendered by reason thereof. Some natural
obligations are set forth in the following articles.

Art. 1424. When a right to sue upon a civil obligation has lapsed by extinctive
prescription, the obligor who voluntarily performs the contract cannot recover
what he has delivered or the value of the service he has rendered.

Art. 1425. When without the knowledge or against the will of the debtor, a third
person pays a debt which the obligor is not legally bound to pay because the
action thereon has prescribed, but the debtor later voluntarily reimburses the
third person, the obligor cannot recover what he has paid.

Art. 1426. When a minor between eighteen and twenty-one years of age who has
entered into a contract without the consent of the parent or guardian, after the
annulment of the contract voluntarily returns the whole thing or price received,
notwithstanding the fact the he has not been benefited thereby, there is no right
to demand the thing or price thus returned.

Art. 1427. When a minor between eighteen and twenty-one years of age, who has
entered into a contract without the consent of the parent or guardian, voluntarily
pays a sum of money or delivers a fungible thing in fulfillment of the obligation,
there shall be no right to recover the same from the obligee who has spent or
consumed it in good faith.

 Minor in the present law is below eighteen years old.

Art. 1428. When, after an action to enforce a civil obligation has failed the
defendant voluntarily performs the obligation, he cannot demand the return of
what he has delivered or the payment of the value of the service he has rendered.

Art. 1429. When a testate or intestate heir voluntarily pays a debt of the decedent
exceeding the value of the property which he received by will or by the law of
intestacy from the estate of the deceased, the payment is valid and cannot be
rescinded by the payer.

Art. 1430. When a will is declared void because it has not been executed in
accordance with the formalities required by law, but one of the intestate heirs,
after the settlement of the debts of the deceased, pays a legacy in compliance with
a clause in the defective will, the payment is effective and irrevocable.

80
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

ESTOPPEL

Art. 1431. Through estoppel an admission or representation is rendered conclusive


upon the person making it, and cannot be denied or disproved as against the
person relying thereon.

 General rule is the one in Art. 1431.


 Exceptions:
1. Estoppel is not applicable against the government suing in its capacity as sovereign or asserting
governmental rights
- It follows that the government cannot be estopped by the mistake and errors of its officers
2. If law and public policy will be violated, there is no estoppel
3. Estoppel does not apply to questions of law, as it applies only to questions of fact
- Kalalo v. Luz: If the act, conduct, or misrepresentation of party sought to be estopped is
due to ignorance founded on an innocent mistake, estoppels will not arise

Art. 1432. The principles of estoppel are hereby adopted insofar as they are not in
conflict with the provisions of this Code, the Code of Commerce, the Rules of Court
and special laws.

Art. 1433. Estoppel may be in pais or by deed.

ESTOPPEL IN PAIS ESTOPPEL BY DEED


 A bar which occurs when one, because of  A bar which precludes one party to a deed
something which he has done or omitted to do. (written agreement) and his privies from
The party is denied the right to plead or prove asserting as against the other party and his
an otherwise important fact. privies any right or title in derogation of the
 Active estoppels; equitable estoppels deed, or from denying the truth of any of the
material facts asserted in it
In Manacling v. Bun, the Court said it is necessary  Passive estoppel
that there be a concurrence of the ff requisites:
a. Conduct amounting to false representation
or concealment of material facts, or at least
false representation to convey the
impression that the facts are otherwise and
inconsistent with those which the party
subsequently attempts to assert
b. Intent, or expectation that this conduct
shall be acted upom
c. Knowledge, actual or constructive, of the
real facts

Art. 1434. When a person who is not the owner of a thing sells or alienates and
delivers it, and later the seller or grantor acquires title thereto, such title passes
by operation of law to the buyer or grantee.

Art. 1435. If a person in representation of another sells or alienates a thing, the


former cannot subsequently set up his own title as against the buyer or grantee.

Art. 1436. A lessee or a bailee is estopped from asserting title to the thing leased
or received, as against the lessor or bailor.

81
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

Art. 1437. When in a contract between third persons concerning immovable


property, one of them is misled by a person with respect to the ownership or real
right over the real estate, the latter is precluded from asserting his legal title or
interest therein, provided all these requisites are present:
(1) There must be fraudulent representation or wrongful concealment of facts
known to the party estopped;
(2) The party precluded must intend that the other should act upon the facts as
misrepresented;
(3) The party misled must have been unaware of the true facts; and
(4) The party defrauded must have acted in accordance with the
misrepresentation.

Art. 1438. One who has allowed another to assume apparent ownership of
personal property for the purpose of making any transfer of it, cannot, if he
received the sum for which a pledge has been constituted, set up his own title to
defeat the pledge of the property, made by the other to a pledgee who received
the same in good faith and for value.

ESTOPPEL IN THE LAW

ACT ESTOPPED WHEN


1. A person who is not the owner of the thing Later the seller, even though not the owner,
sells or alienates and delivers it acquires title to the thing, such title passes by
operation of law to the buyer or grantee
- This means the seller cannot
invoke that he/she is now the
owner
2. A person who is an agent of another sells or The seller tries to set up his/her own title against
alienates a thing the buyer or grantee
- As an agent, the seller does not
have the title to the thing
3. A person is a bailee or a lessee The bailee or or lessee asserts title to the thing
leased or received
- A bailee in commodatum or a
lessee do not own the property but
merely acquires the use of the
thing/ possesses the property
4. A person misled another person with The person tries to assert his or her rights, provided
respect to the ownership of real right over the ff requisites are present:
real estate, in a contract between third a. Fraudulent representation or wrongful
persons concerning immovable property concealment of facts known to the
person estopped
b. Guilty party’s intention that the
innocent party will act upon the
fraudulent facts
c. Innocent party’s unawareness of the
real facts
d. The innocent party acted in accordance
with the misrepresentation
5. A person allowed another to assume The person tries to set up his/her own title to the
apparent ownership of the property, for the property, even after a) such property has been
purpose of making a transfer of such a constituted as a pledge and b) the person has
property received the sum for which a pledge has been

82
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

constituted
- This means that if you authorize
another to possess your property
and even to pledge it for a loan, you
cannot later say the property is
yours (and not the other perspn’s)
and thus cannot be pledged. This
applies moreso if you have received
the benefits arising from the loan
contracted by the person you
authorized to possess/ pledge the
property

Art. 1439. Estoppel is effective only as between the parties thereto or their
successors in interest.

WHO ARE AFFECTED BY ESTOPPEL?


1. Contracting parties
2. Successors-in-interest

TRUSTS

Art. 1440. A person who establishes a trust is called the trustor; one in whom
confidence is reposed as regards property for the benefit of another person is
known as the trustee; and the person for whose benefit the trust has been created
is referred to as the beneficiary.

Art. 1441. Trusts are either express or implied. Express trusts are created by the
intention of the trustor or of the parties. Implied trusts come into being by
operation of law.

Art. 1442. The principles of the general law of trusts, insofar as they are not in
conflict with this Code, the Code of Commerce, the Rules of Court and special laws
are hereby adopted.

 A trust is defined as a right enforceable solely in equity, to the beneficial enjoyment of property, the
legal title of which is vested in another

EXPRESS IMPLIED
 Intention is expressly present; the intent is  Intention is not expressly present, but it is
created by the direct and positive acts of the deducible from the nature of the transaction
parties, some writing or deed or will or words (resulting trust); the law may also induce the
evidencing the intention to create a trust intent in the transaction and thus, this kind of
- No particular form is required for trust works by operation of law (constructive
the words trust)
 Trusts over immovable property cannot be  May be barred by laches
proved by oral evidence  May be proved by oral evidence
1. Resulting trust
Prescription - Intent is presumed to be always
 General rule: the trustee cannot acquire the have been contemplated by the

83
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

thing in trust by prescription. parties


 Exception: Acquisitive prescription may bar - Imprescriptible, as long as the
the action of a beneficiary where: trustee has not repudiated the trust
a. The trustee has performed unequivocal acts 2. Constructive trust
of repudiation - No intention presumed from any of
b. Such acts were made known to the the acts of the parties, but is a mere
beneficiary (cestui que trust) construction of equity
c. The evidence thereon is clear and - Prescription may supervene
conclusive - Substantially an appropriate
remedy against unjust enrichment
Acceptance of the trust  Examples of implied trusts in the provisions
 By the trustee: not necessary, unless the below are not exclusive
appointment of such trustee is material and is  Also, if a trust takes the form of any of the
provided in the instrument constituting the provisions under implied trusts, but there is a
trust. In case the trustee refuses to accept, will, deed, writing, or there are words
however, the Court will appoint a trustee. evidencing the same, it is an express trust
 By the beneficiary: It is necessary. Such
acceptance will be presumed in cases where the
trust imposes no onerous condition to the
beneficiary.

EXPRESS TRUSTS

Art. 1443. No express trusts concerning an immovable or any interest therein may
be proved by parol evidence.

Art. 1444. No particular words are required for the creation of an express trust, it
being sufficient that a trust is clearly intended.

Art. 1445. No trust shall fail because the trustee appointed declines the
designation, unless the contrary should appear in the instrument constituting the
trust.

Art. 1446. Acceptance by the beneficiary is necessary. Nevertheless, if the trust


imposes no onerous condition upon the beneficiary, his acceptance shall be
presumed, if there is no proof to the contrary.

IMPLIED TRUSTS
Art. 1447. The enumeration of the following cases of implied trust does not
exclude others established by the general law of trust, but the limitation laid down
in Article 1442 shall be applicable.

Art. 1448. There is an implied trust when property is sold, and the legal estate is
granted to one party but the price is paid by another for the purpose of having the
beneficial interest of the property. The former is the trustee, while the latter is the
beneficiary. However, if the person to whom the title is conveyed is a child,
legitimate or illegitimate, of the one paying the price of the sale, no trust is
implied by law, it being disputably presumed that there is a gift in favor of the
child.

84
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

Art. 1449. There is also an implied trust when a donation is made to a person but
it appears that although the legal estate is transmitted to the donee, he
nevertheless is either to have no beneficial interest or only a part thereof.

Art. 1450. If the price of a sale of property is loaned or paid by one person for the
benefit of another and the conveyance is made to the lender or payor to secure the
payment of the debt, a trust arises by operation of law in favor of the person to
whom the money is loaned or for whom its is paid. The latter may redeem the
property and compel a conveyance thereof to him.

Art. 1451. When land passes by succession to any person and he causes the legal
title to be put in the name of another, a trust is established by implication of law
for the benefit of the true owner.
Art. 1452. If two or more persons agree to purchase property and by common
consent the legal title is taken in the name of one of them for the benefit of all, a
trust is created by force of law in favor of the others in proportion to the interest
of each.

Art. 1453. When property is conveyed to a person in reliance upon his declared
intention to hold it for, or transfer it to another or the grantor, there is an implied
trust in favor of the person whose benefit is contemplated.

Art. 1454. If an absolute conveyance of property is made in order to secure the


performance of an obligation of the grantor toward the grantee, a trust by virtue
of law is established. If the fulfillment of the obligation is offered by the grantor
when it becomes due, he may demand the reconveyance of the property to him.

Art. 1455. When any trustee, guardian or other person holding a fiduciary
relationship uses trust funds for the purchase of property and causes the
conveyance to be made to him or to a third person, a trust is established by
operation of law in favor of the person to whom the funds belong.

Art. 1456. If property is acquired through mistake or fraud, the person obtaining it
is, by force of law, considered a trustee of an implied trust for the benefit of the
person from whom the property comes.

Art. 1457. An implied trust may be proved by oral evidence.

EXTRA-CONTRACTUAL OBLIGATIONS
QUASI-CONTRACTS

Art. 2142. Certain lawful, voluntary and unilateral acts give rise to the juridical
relation of quasi-contract to the end that no one shall be unjustly enriched or
benefited at the expense of another.

Art. 2143. The provisions for quasi-contracts in this Chapter do not exclude other
quasi-contracts which may come within the purview of the preceding article.

 A quasi-contract is not an implied contract, because there is no meeting of the minds between the
parties.

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OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

 The listing of quasi-contracts here (negotorium gestio, solutio indebiti) is not exclusive.

NEGOTORIUM GESTIO

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. 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.
In the first case, the provisions of Articles 1317, 1403, No. 1, and 1404 regarding
unauthorized contracts shall govern.
In the second case, the rules on agency in Title X of this Book shall be
applicable.

NATURE OF A NEGOTORIUM GESTIO


 It is not undertaken for profit
 Requisites:
a. There is no authorization on the part of the person who takes charge of the agency or
management of the business
b. The property or business is neglected or abandoned
 Circumstances where a negotiorum gestio may arise, according to Sison and Azarraga v. Balgos:
a. The business matter relates to determined things or affairs, and that there be no administrator or
representative of the owner charged with the management thereof
b. The idea of express or tacit mandate on the part of the owner is foreign to all, because very often
the management of a third person is without the owner’s knowledge
c. The actor is inspired by the beneficent idea of averting losses and damages to the owner or to the
interested party

Art. 2145. The officious manager shall perform his duties with all the diligence of a
good father of a family, and pay the damages which through his fault or
negligence may be suffered by the owner of the property or business under
management.
The courts may, however, increase or moderate the indemnity according to
the circumstances of each case.

 Thus, the officious manager cannot say that he is not an authorized manager in order to escape
liability for any damage arising through his/her fault.

Art. 2146. If the officious manager delegates to another person all or some of his
duties, he shall be liable for the acts of the delegate, without prejudice to the
direct obligation of the latter toward the owner of the business.
The responsibility of two or more officious managers shall be solidary,
unless the management was assumed to save the thing or business from imminent
danger.

 General rule: An officious manager is responsible for all the acts of the delegate, and their
responsibility shall be solidary. This is without prejudice to the direct obligation of the delegate
toward the owner of the business.

86
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

 Exception: The responsibility shall not be solidary if the management was assumed to save the thing
or business from imminent danger.

Art. 2147. The officious manager shall be liable for any fortuitous event:
(1) If he undertakes risky operations which the owner was not accustomed to
embark upon;
(2) If he has preferred his own interest to that of the owner;
(3) If he fails to return the property or business after demand by the owner;
(4) If he assumed the management in bad faith.

Art. 2148. Except when the management was assumed to save property or
business from imminent danger, the officious manager shall be liable for
fortuitous events:
(1) If he is manifestly unfit to carry on the management;
(2) If by his intervention he prevented a more competent person from taking up
the management.

Art. 2149. The ratification of the management by the owner of the business
produces the effects of an express agency, even if the business may not have been
successful.

Art. 2150. Although the officious management may not have been expressly
ratified, the owner of the property or business who enjoys the advantages of the
same shall be liable for obligations incurred in his interest, and shall reimburse the
officious manager for the necessary and useful expenses and for the damages
which the latter may have suffered in the performance of his duties.
The same obligation shall be incumbent upon him when the management
had for its purpose the prevention of an imminent and manifest loss, although no
benefit may have been derived.

Art. 2151. Even though the owner did not derive any benefit and there has been no
imminent and manifest danger to the property or business, the owner is liable as
under the first paragraph of the preceding article, provided:
(1) The officious manager has acted in good faith, and
(2) The property or business is intact, ready to be returned to the owner.

Art. 2152. The officious manager is personally liable for contracts which he has
entered into with third persons, even though he acted in the name of the owner,
and there shall be no right of action between the owner and third persons. These
provisions shall not apply:
(1) If the owner has expressly or tacitly ratified the management, or
(2) When the contract refers to things pertaining to the owner of the business.

LIABILITIES OF OFFICIOUS MANAGER AND OWNER

Officious manager is liable: Owner is liable:


 For contracts which he/she has entered 1. When the owner enjoys the advantages of
into with third persons, even though the business, even though he/she has not
he/she acted in the name of the third ratified it
persons - There is a duty to reimburse the
- Unless the owner a) ratifies the officious manager for the damages

87
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

management or b) the contract the latter has suffered by reason of


refers to things pertaining to the necessary expenses
owner of the business 2. When the management has been
 In case of fortuitous event, and— undertaken by the officious manager to
a. If the officious manager undertakes prevent an imminent loss, although there
risky operations the owner did not has been no benefit
usually take 3. When the officious manager acted in good
b. If the officious manager preferred his faith, regardless of benefit or imminent
own interest over the owner’s danger
c. If the officious manager fails to 4. When the property is intact and ready to be
return the property or the business returned to the owner, regardless of benefit
after the owner’s demand or imminent danger
d. If the officious management was
assumed in bad faith
The following also make the officious
manager liable, unless the management
was assumed to save the property from
imminent danger:
e. If the officious manager is manifestly
unfit to carry on the management
f. If because of the officious manager’s
intervention he/she prevented a
more competent person to take up
the management

Art. 2153. The management is extinguished:


(1) When the owner repudiates it or puts an end thereto;
(2) When the officious manager withdraws from the management, subject to the
provisions of Article 2144;
(3) By the death, civil interdiction, insanity or insolvency of the owner or the
officious manager.

EXTINGUISHMENT OF NEGOTORIUM GESTIO


1. Owner repudiates it
- Benedicto v. Board of Administrators: The Court said the authority of the Board of
Administrators created to manage Broadcast City, which was abandoned after the EDSA
revolution, ceased when a reorganized Board of Directors demanded that Broadcast City
be returned to them.
2. Officious manager repudiates it, too. However the officious manager must require the person
concerned or the owner to substitute him/her. He/She cannot withdraw from the business and
not leave a substitute.
3. Death, civil interdiction, insanity, or insolvency of the officious manager

SOLUTIO INDEBITI

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.

Art. 2155. Payment by reason of a mistake in the construction or application of a


doubtful or difficult question of law may come within the scope of the preceding
article.

88
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

 Two requisites:
1. There is no right to collect these excess sums
2. The amounts have been paid by mistake (of fact)
- Exception: A mistake in law may also come under solution indebiti if the mistake is
brought by a doubtful or difficult question of law

Art. 2156. If the payer was in doubt whether the debt was due, he may recover if
he proves that it was not due.

Art. 2157. The responsibility of two or more payees, when there has been payment
of what is not due, is solidary.

Art. 2158. When the property delivered or money paid belongs to a third person,
the payee shall comply with the provisions of article 1984.

Art. 1984. The depositary cannot demand that the depositor prove his ownership of the thing deposited.
Nevertheless, should he discover that the thing has been stolen and who its true owner is, he must
advise the latter of the deposit.
If the owner, in spite of such information, does not claim it within the period of one month, the
depositary shall be relieved of all responsibility by returning the thing deposited to the depositor.
If the depositary has reasonable grounds to believe that the thing has not been lawfully acquired by the
depositor, the former may return the same.

Art. 2159. Whoever in bad faith accepts an undue payment, shall pay legal interest
if a sum of money is involved, or shall be liable for fruits received or which should
have been received if the thing produces fruits.
He shall furthermore be answerable for any loss or impairment of the thing
from any cause, and for damages to the person who delivered the thing, until it is
recovered.

Art. 2160. He who in good faith accepts an undue payment of a thing certain and
determinate shall only be responsible for the impairment or loss of the same or its
accessories and accessions insofar as he has thereby been benefited. If he has
alienated it, he shall return the price or assign the action to collect the sum.

Art. 2161. As regards the reimbursement for improvements and expenses incurred
by him who unduly received the thing, the provisions of Title V of Book II shall
govern.

Art. 546. Necessary expenses shall be refunded to every possessor; but only the possessor in good faith
may retain the thing until he has been reimbursed therefor.
Useful expenses shall be refunded only to the possessor in good faith with the same right of
retention, the person who has defeated him in the possession having the option of refunding the amount
of the expenses or of paying the increase in value which the thing may have acquired by reason thereof.

Art. 547. If the useful improvements can be removed without damage to the principal thing, the possessor
in good faith may remove them, unless the person who recovers the possession exercises the option under
paragraph 2 of the preceding article.

Art. 548. Expenses for pure luxury or mere pleasure shall not be refunded to the possessor in good faith;
but he may remove the ornaments with which he has embellished the principal thing if it suffers no injury
thereby, and if his successor in the possession does not prefer to refund the amount expended.

89
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

Art. 549. The possessor in bad faith shall reimburse the fruits received and those which the legitimate
possessor could have received, and shall have a right only to the expenses mentioned in paragraph 1 of
Article 546 and in Article 443. The expenses incurred in improvements for pure luxury or mere pleasure
shall not be refunded to the possessor in bad faith, but he may remove the objects for which such expenses
have been incurred, provided that the thing suffers no injury thereby, and that the lawful possessor does
not prefer to retain them by paying the value they may have at the time he enters into possession.

Art. 550. The costs of litigation over the property shall be borne by every possessor.

Art. 551. Improvements caused by nature or time shall always insure to the benefit of the person who has
succeeded in recovering possession.

Art. 552. A possessor in good faith shall not be liable for the deterioration or loss of the thing possessed,
except in cases in which it is proved that he has acted with fraudulent intent or negligence, after the
judicial summons.
A possessor in bad faith shall be liable for deterioration or loss in every case, even if caused by a
fortuitous event.

Art. 553. One who recovers possession shall not be obliged to pay for improvements which have ceased to
exist at the time he takes possession of the thing.

Art. 2162. He shall be exempt from the obligation to restore who, believing in
good faith that the payment was being made of a legitimate and subsisting claim,
destroyed the document, or allowed the action to prescribe, or gave up the
pledges, or cancelled the guaranties for his right. He who paid unduly may proceed
only against the true debtor or the guarantors with regard to whom the action is
still effective.

Art. 2163. It is presumed that there was a mistake in the payment if something
which had never been due or had already been paid was delivered; but he from
whom the return is claimed may prove that the delivery was made out of liberality
or for any other just cause.

OTHER QUASI-CONTRACTS

Art. 2164. When, without the knowledge of the person obliged to give support, it
is given by a stranger, the latter shall have a right to claim the same from the
former, unless it appears that he gave it out of piety and without intention of
being repaid.

 The Court discussed the precursor of this article, which was Article 1984 of the Old Civil Code, in
De Marcaida v. Redfern:
- For one to recover under the provisions of Art. 1984, the following must be alleged and
proved: 1) That the support has been furnished a dependent of one bound to give support
but who fails to do so, 2) The support was supplied by a stranger, and 3) The support was
given without the knowledge of the person charged

Art. 2165. When funeral expenses are borne by a third person, without the
knowledge of those relatives who were obliged to give support to the deceased,
said relatives shall reimburse the third person, should the latter claim
reimbursement.

90
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

Art. 2166. When the person obliged to support an orphan, or an insane or other
indigent person unjustly refuses to give support to the latter, any third person
may furnish support to the needy individual, with right of reimbursement from the
person obliged to give support. The provisions of this article apply when the father
or mother of a child under eighteen years of age unjustly refuses to support him.

Art. 2167. When through an accident or other cause a person is injured or


becomes seriously ill, and he is treated or helped while he is not in a condition to
give consent to a contract, he shall be liable to pay for the services of the
physician or other person aiding him, unless the service has been rendered out of
pure generosity.

Art. 2168. When during a fire, flood, storm, or other calamity, property is saved
from destruction by another person without the knowledge of the owner, the
latter is bound to pay the former just compensation.

Art. 2169. When the government, upon the failure of any person to comply with
health or safety regulations concerning property, undertakes to do the necessary
work, even over his objection, he shall be liable to pay the expenses.

Art. 2170. When by accident or other fortuitous event, movables separately


pertaining to two or more persons are commingled or confused, the rules on co-
ownership shall be applicable.

Art. 2171. The rights and obligations of the finder of lost personal property shall
be governed by Articles 719 and 720.

Art. 719. Whoever finds a movable, which is not treasure, must return it to its previous possessor. If the
latter is unknown, the finder shall immediately deposit it with the mayor of the city or municipality where
the finding has taken place.
The finding shall be publicly announced by the mayor for two consecutive weeks in the way he
deems best.
If the movable cannot be kept without deterioration, or without expenses which considerably
diminish its value, it shall be sold at public auction eight days after the publication.
Six months from the publication having elapsed without the owner having appeared, the thing
found, or its value, shall be awarded to the finder. The finder and the owner shall be obliged, as the case
may be, to reimburse the expenses.

Art. 720. If the owner should appear in time, he shall be obliged to pay, as a reward to the finder, one-
tenth of the sum or of the price of the thing found.

Art. 2172. The right of every possessor in good faith to reimbursement for
necessary and useful expenses is governed by Article 546.

Art. 546. Necessary expenses shall be refunded to every possessor; but only the possessor in good faith
may retain the thing until he has been reimbursed therefor.
Useful expenses shall be refunded only to the possessor in good faith with the same right of
retention, the person who has defeated him in the possession having the option of refunding the amount
of the expenses or of paying the increase in value which the thing may have acquired by reason thereof.

91
OBLIGATIONS AND CONTRACTS:
Reviewer, SY 2010-2011
Based on Melencio Sta. Maria’s Obligations and Contracts: Text and Cases (2003)
& class discussions with Atty. Mel Sta. Maria
By Anna Bueno, IA 2014

Art. 2173. When a third person, without the knowledge of the debtor, pays the
debt, the rights of the former are governed by Articles 1236 and 1237.

Art. 2174. When in a small community a nationality of the inhabitants of age


decide upon a measure for protection against lawlessness, fire, flood, storm or
other calamity, any one who objects to the plan and refuses to contribute to the
expenses but is benefited by the project as executed shall be liable to pay his
share of said expenses.

Art. 2175. Any person who is constrained to pay the taxes of another shall be
entitled to reimbursement from the latter.

92