REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS
RFBT1-Obligation and Contracts
LECTURE NOTES
OBLIGATION
OBLIGATION – originate from the latin word obligatio, means
tying or binding.
Civil obligations - is a juridical necessity to give, to do or
not to do. It give a right of action to compel their
performance
 Juridical necessity to give, to do or not to do (1156)
 Right of action to compel their performance
 Right to enforce the obligation against the obligor in a
court of law in case of breach
ELEMENTS:
1. Active subject (obligee/creditor/lender/plaintiff/he who
has the right ) – the one in whose favor the obligation is
constituted
2. Passive subject - obligor/debtor/borrower/defendant/he
who has the obligation) – the one who has the duty of
giving, doing or not doing
3. Object – prestation; the conduct which has to be
observed by the debtor/obligor
4. Vinculum Juris/ juridical tie /legal tie/ causa/ causa
debendi/ causa obligations – This arise form law,
contract, quasi contract, delict and quasi delict.
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. (Art. 1423)
 Based on equity and natural law
 Duty not to recover what has voluntary been paid
although payment was no longer required.
 Basic understanding of right and wrong based on an
understanding of a right and wrong.
 Based on conscience
Illustration of Natural obligation
 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.
(1424)
 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. (1425)
 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. (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, 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. (1427)
 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.
(1428)
 When a testate or intestate heir voluntarily pays a debt
of the decedent exceeding the value of the property
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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. (1429)
 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. (1430)
Sources of obligation (1157)
1. Law (obligation ex lege)– Not presumed (1158)
a. Law
- Taxes, duty of husband and wife to support family,
minimum wage, workmen compensation act.
b. Quasi contract (obligation ex quasi contractu)
(Chapter 1, Title XVII) – juridical relation resulting
from lawful, voluntary and unilateral act to the
end that no one shall be unjustly enriched or
benefited at the expense of another.
Rule: No meeting of the mind hence consent of the
parties is not required. It is quasi contract not an
implied contract.
1. Nominate quasi contract
a. Solutio indebiti – Something is received
when there is no right to demand it, and it
was unduly delivered thru mistake, the
recipient has the duty to return it.
b. Negotiorum gestio – When a person
voluntary takes charge of another’s
abandoned business or property without the
owner’s authority where reimbursement
must be made for necessary and useful
expenses.
Requisites:
a.) Property or business is abandoned or
neglected
b.) The manager is unauthorized (express or
implied)
c.) The unauthorized manger voluntary take
charge the abandoned property.
2. Innominate quasi contract
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.
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.
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
RFBT1
 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. 2172. The right of every possessor in good
faith to reimbursement for necessary and useful
expenses is governed by article 546.
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, anyone 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.
c. Delict (obligation ex maleficio or delicto)
Governing rules:
1. Pertinent provisions of the RPC and other penal
laws subject to Art 2177 Civil Code.
 Art 100, RPC – Every person criminally liable
for a felony is also civilly liable
2. Chapter 2, Preliminary title, on Human Relations
( Civil Code )
3. Title 18 of Book IV of the Civil Code – on
damages
Civil liability arising from crime includes:
1. Restitution – The thing itself must be returned or
restored.
2. Reparation - The court shall determine the
amount of damage, taking into consideration the
price of the thing, whenever possible, and its
special sentimental value to the injured party
3. Indemnification - Indemnification for
consequential damages shall include not only
those caused the injured party, but also those
suffered by his family or by a third person by
reason of the crime.
Effect of acquittal in criminal case:
 when acquittal is due to reasonable doubt – no
civil liability
 when acquittal is due to exempting
circumstances – there is civil liability
 when there is preponderance of evidence – there
is civil liability
d. Quasi delict (obligation ex quasi maleficio or quasi
delicto) (Chapter 2, Title XVII and special law) – Act
or omission causes damage to another, there being
fault or negligence, is obliged to pay for the damage
done there being no pre existing contractual relation
between the parties.
Elements:
a) There must be fault or negligence attributable to
the person charged
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b) There must be damage or injury
c) There must be a direct relation of cause and
effect between the fault or negligence on the one
hand and the damage or injury on the other
hand ( proximate cause )
 Culpa aquiliana (not synonymous with tort)
Obligation expressly arising from Quasi delict
1. The father and, in case of his death or
incapacity, the mother, are responsible for the
damages caused by the minor children who live
in their company.
2. Guardians are liable for damages caused by the
minors or incapacitated persons who are under
their authority and live in their company.
3. The owners and managers of an establishment or
enterprise are likewise responsible for damages
caused by their employees in the service of the
branches in which the latter are employed or on
the occasion of their functions.
4. Employers shall be liable for the damages caused
by their employees and household helpers acting
within the scope of their assigned tasks, even
though the former are not engaged in any
business or industry.
5. The State is responsible when it acts through a
special agent; but not when the damage has
been caused by the official to whom the task
done properly pertains.
6. Teachers or heads of establishments of arts and
trades shall be liable for damages caused by
their pupils and students or apprentices, so long
as they remain in their custody.
 The possessor of an animal or whoever may
make use of the same is responsible for the
damage which it may cause, although it may
escape or be lost. This responsibility shall cease
only in case the damage should come from force
majeure or from the fault of the person who has
suffered damage. (2183)

2. Contract (obligation ex contractus) – Meeting of mind
between two (2) person whereby one binds himself with
respect to another to give something or render some
service. (1306) It has a force of law between the
contracting party and must be complied with n good faith
(1159)
Kinds of obligation according to subject matter
1. Real obligation
a. Specific or determinate object – particularly
designated or physically segregated from all
others of the same class.
Loss of the object without fault of debtor –
obligation extinguish
b. Generic or indeterminate – Thing refers to a
class, to a genus and cannot be pointed out with
particularity.
Loss of the object without fault of the debtor –
Obligation remain. Genus nunquam perit
(Generic never perishes)
2. Personal obligation
a. Positive personal obligation (to do)
b. Negative personal obligation (not to do)
Duty of debtor to deliver specific thing
1. Preserve the thing (1163)
Rule: Diligence of good father of a family (ordinary
diligence)
Except:
a. Law (ex: common carrier)
b. Stipulation
2. Deliver the fruits (1164)
 Natural fruit – Spontaneous product of the soil, and
the young and other products of animals. (No human
intervention)
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  Industrial fruit - Produce by lands of any kind
through cultivation or labor. FRAUD NEGLIGENCE
 Civil fruit – Rents of building, price of lease of lands
There is deliberate There is no deliberate intent to
and other property and the amount of perpetual or
intent to cause cause damage.
life annuities or other similar income.
damage.
Liability cannot be Liability may be mitigated.
Rule: The creditor has the right to the fruits of the thing
mitigated.
from the time the thing to deliver arises.
Waiver for future Waiver for future negligence may
Exception: Obligation to deliver the fruits arises from:
fraud is void. be allowed in certain cases:
a. Suspensive condition – fulfillment of the condition
a) gross – can never be excused
b. Suspensive period – arrival of the period
in advance; against public
c. Arise from law, quasi contract, delict, quasi delict –
policy
provision of law
b) simple – may be excused in
3. Deliver of accessions and accessories (1166)
certain cases
 Accessions - fruits of a thing/ addition/ improvement
upon a thing. (i.e. House/trees on a land)
 Accessories – thing joined with the principal for III. Delay (mora)
embellishment, better use or completion (i.e. Key of a. Ordinary delay – Failure to pay on the period
house, bracelet of a watch) fixed by the parties without demand judicial or
4. Deliver the thing itself extrajudicial
 Actual b. Legal delay – Failure to pay after demand by the
 Constructive creditor (judicial/extrajudicial)
a. Traditio symbolica – delivery of key 1. Mora solvendi - Delay of debtor
b. Traditio brevi manu – A possessor of a thing not 1.1 Mora solvendi ex re – Debtor delay/default
as an owner, becomes the possessor as owner in real obligation
(i.e. Lessor sells the thing leased to the lessee) 1.2 Mora solvendi ex persona – Debtor
c. Taditio longa manu – mere consent or delay/default in personal obligation
agreement of the parties. (pointing out the 2. Mora accipiendi – – default on part of creditor;
object) Creditor is guilty of default when he
d. Traditio constitutum possessorium – A possessor unjustifiably refuses to accept payment or
of a thing as an owner retains possession no performance at the time
longer as an owner, but in some other capacity. payment/performance can be done
This is the opposite of tradition brevi manu. (i.e. 3. Compensatio morae – both parties (debtor and
A possessor vendor stay as tenant on the creditor) are in default (in reciprocal
vendee) obligations); the effect: is as if there is no
e. Execution of a public instrument
Elements of legal delay:
Rule: (1) The obligation must be due, enforceable and already
a. Before delivery of the thing – Creditor has personal liquidated or determinate in amount
right (jus in personam or jus ad rem). (1164) (2) There must be non-performance
b. Creditor acquires real right (jus in re) only at the (3) There must be a demand, unless demand is not
time of delivery. required

5. Damages in case of breach Effects of legal delay:

With the fault of the debtor (1170)
I. Fraud (dolo)
a. Dolo causante - (consent is defective –
voidable)
b. Dolo incidente (fraud in performance –
damages)
Period
a. Future fraud – Responsibility arising from
fraud is demandable in all obligation. Any
waiver of an action for future fraud is void.
(1171) same rule in case of negligence which
shows bad faith. (1173)
b. Past fraud – can be waive
II. Negligence (culpa) – Omission of diligence
required by the nature of the obligation and
corresponds with circumstances of the person,
time and place. (1173) It is also demandable in
every kind of obligation but such liability may be
regulated by the courts according to the
circumstances. (1172)
a. Culpa contractual – performance of the
contract
b. Culpa criminal – Result from criminal act
c. Culpa aquiliana – No pre existing contract
Degree of Culpa under the Roman Law are as follows:
1.) Culpa lata – grave negligence
2.) Culpa levis – ordinary negligence
3.) Culpa levissima – slight negligence
FRAUD DISTINGUISHED FROM NEGLIGENCE
a. if determinate thing - debtor bears risk of loss (even
when there is fortuitous event)
b. debtor liable for damages/interest
c. resolution (Art 1170, in proper cases)
Rule: No demand (judicial or extrajudicial) no delay
(1169)
Exception:
1. Law
2. Stipulation
3. Time is of the essence
4. Demand would be useless
5. Performance of one party in case of reciprocal
obligation
IV. Contravention of tenor of obligation
Without the fault of the debtor
Requisites of fortuitous event (Nakpil & Sons vs. CA):
1. The cause of the breach of the obligation must be
independent of the will of the debtor
2. The event must be either unforeseeable or
unavoidable
3. The event must be such as to render it impossible for
the debtor to fulfill his obligation in a normal manner
4. The debtor must be free from any participation in, or
aggravation of injury to the creditor
Rule: Not liable in case of Fortuitous event (1174)
Exception:
1. Law
a. Delay

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 b. Promised to deliver the same thing to 2 or property right has been invaded. (Damages awarded to
more person who do not have the same vindicate a right)
interest 4. Temperate – More than nominal but less than actual.
c. Lost of generic thing Awarded when some pecuniary loss have been suffered
d. Obligation arising from crime but its amount can not, from the nature of the case be
2. Stipulation proved with certainty. (Exact amount of damage cannot
3. Assumption of risk be ascertained)
5. Actual or compensatory – value of loss suffered but also
Duty of debtor (Generic thing) include profits which the creditor failed to obtain.
1. Deliver the thing based on quality intended by the Pecuniary loss must be duly proved.
parties. 6. Liquidated – those agreed upon by the parties to a
2. Damages in case of breach contract to be paid in case of breach.(Damage
predetermined before hand)
Duty of debtor to do (Positive personal obligation)
 If a person obliged to do something fails to do it, the  Usurious transaction shall be governed by special law.
same shall be executed at his cost. (1175)
This same rule shall be observed if he does it in  Presumption (1176)
contravention of the tenor of the obligation. a. Receipt of principal without reservation as to interest
Furthermore, it may be decreed that what has been - interest is already paid
poorly done be undone. (1167) b. Receipt of a later installment of debt without
reservation as to prior installment – later installment
Duty of debtor not to do (Positive personal obligation) have been paid.
 When the obligation consists in not doing, and the
obligor does what has been forbidden him, it shall REMEDIES OF CREDITORS - generally transmissible
also be undone at his expense. (1168) (except: law, stipulation, personal obligation):
1. Exact performance - specific, substitute, equivalent
3 kinds of Performance: 2. Attach and execute debtor's property which is not
1. SPECIFIC PERFORMANCE - performance of the exempt (art 2236)
prestation itself 3. Accion subrogatoria - Exercise all rights and actions
2. SUBSTITUTE PERFORMANCE - someone else performs except those inherent in the person (parental
or something else is performed at the expense of debtor authority, hold office, carry out agency
3. EQUIVALENT PERFORMANCE - damages Requisites:
a. Creditor must have right of return against debtor
Real Obligations to do b. The debt is due and demandable
Remedies Obligation (Personal c. There is a failure of the debtor to collect his own
Obligation) debt from 3rd persons either through malice or
Sp Gene To do Not to do negligence
eci ric d. Debtor's assets are insufficient
fic e. The right of account is not purely personal
SPECIFIC undo the 4. Accion pauliana - (impugn or rescind acts or
PERFORMANCE Y Y NO things contracts done by the debtor to defraud the
already creditors.
done Requisites:
EQUIVALENT Can only a. There is a credit in favor of plaintiff
PERFORMANCE Y Y be Y b. The debtor has performed an act subsequent to
demande the contract, giving advantage to other persons
d if c. The creditor is prejudiced by the debtor's act
obligatio which are in favor of 3rd parties and rescission
n is not will benefit the creditor
very d. The creditor has no other legal remedy
personal e. The debtor's acts are fraudulent
SUBSTITUTE Undo the
 All right by virtue of obligation are transmissible (1178)
PERFORMANCE N Y Y things
Exception: Law and stipulation
already
done at Primary classification of obligation under the civil
debtor's Code
expense 1. Pure –without condition and period
RESCISSION/  Immediately demandable
CANCELLATION Y Y Y 2. Conditional
a.) effect
Damages (MENTAL)  Suspensive – give rise to obligation
1. Moral – Include physical suffering, mental anguish,  Resolutory – extinguish the obligation
fright, serious anxiety, besmirched reputation, wounded b.) Form
feelings, moral shock, social humiliation and similar  Express – clearly stated
injury.  Implied – merely inferred
2. Exemplary or corrective – imposed by way of example or c.) Possibility
correction for the public good. It may be awarded if the  Possible – capable of fulfillment
defendant acted in a wanton, fraudulent, reckless,  Impossible (1183)
oppressive or malevolent manner. (bad faith). a. Physically impossible – Nature of the thing
3. Nominal – Adjudicated in order that a right of the b. Legally impossible – contrary to law, moral, good
plaintiff, which has been violated or invaded by the customs, public order or public policy
defendant, may be vindicated or recognized and not for d.) Cause or origin
the purpose of indemnifying the plaintiff for any loss  Potestatiive - depend upon will of one of the
suffered by him. Awarded in every case where any contracting parties (debtor/creditor) (1182)

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  Casual – depend upon chance or will of a third a. First infractor shall be equitably tempered.
person b. If cannot determined the first infractor –
 Mixed – partly upon chance and partly upon will Obligation extinguish and each shall bear own
of third person damages.
e.) Mode
 Positive – performance Art. 1189. When the conditions have been imposed
 Negative – omission with the intention of suspending the efficacy of an
f.) Numbers obligation to give, the following rules shall be
 Conjunctive – several conditions, all must be observed in case of the improvement, loss or
complied with deterioration of the thing during the pendency of the
 Disjunctive – several conditions, one or some condition:
must be complied with (1) If the thing is lost without the fault of the
g.) Divisibility debtor, the obligation shall be extinguished;
 Divisible – susceptible of partial performance (2) If the thing is lost through the fault of the
 Indivisible – not susceptible of partial debtor, he shall be obliged to pay damages; it is
performance understood that the thing is lost when it perishes, or
goes out of commerce, or disappears in such a way
Conditional obligation that its existence is unknown or it cannot be
 Future and uncertain event or past event unknown to recovered;
parties (1179) (3) When the thing deteriorates without the fault
 Resolutory condition immediately demandable of the debtor, the impairment is to be borne by the
 When the debtor binds himself to pay when his creditor;
means permit him to do so, the obligation shall be (4) If it deteriorates through the fault of the
deemed to be one with a period. (1180) debtor, the creditor may choose between the
 Acquisition or extinguishment of obligation depend rescission of the obligation and its fulfillment, with
upon the happening of the condition (1181) indemnity for damages in either case;
 Positive condition + determinate time = extinguish (5) If the thing is improved by its nature, or by
as soon as the time expire or become indubitable time, the improvement shall inure to the benefit of
that the event will not take place (1184) the creditor;
 Negative condition + determinate time = Effective (6) If it is improved at the expense of the
form the time indicated elapsed or evident that event debtor, he shall have no other right than that
cannot occur. (1185) granted to the usufructuary.
 Constructive fulfillment - The condition shall be
deemed fulfilled when the obligor voluntarily 3. With a period - Future and certain. If uncertain it is
prevents its fulfillment. (1186) conditional. (1193)
 Retroactivity of the conditional obligation. (1187) a.) Effect
a. Reciprocal – fruit and interest deemed mutually 1. Suspensive (Ex die) – arrival- give rise to
compensated obligation. Before arrival of the period no right to
b. Unilateral – Debtor appropriate the fruits an demand. (1193)
interest except Nature and circumstances of  Payment before arrival of the period
obligation the intention of the person constituting (Payment made by mistake), the debtor is
the same was different. unaware of the period – may recover with
c. Obligation to do or not to do – court shall the fruits and interests. (1195)
determine the retroactivity.  Loss, deterioration, improvement before
 Before condition is fulfilled (1188) arrival of the period. Apply Art 1189.
c. Creditor bring action for the preservation of 2. Resolutory (In diem) – arrival- extinguish the
his right obligation. The obligation is immediately
d. Debtor may recover payment by mistake demandable.
 Loss, deterioration, improvement before condition is b.) Source
fulfilled 1. Legal – provided by law
2. Conventional/voluntary – by agreement
Without fault With fault 3. Judicial – fixed by the court
(Debtor) (Debtor) c.) Definiteness
Loss Extinguish Damages 1. Definite – fixed or known when it will come
Deterioration Impairment borne Rescission or 2. Indefinite – not fixed or not known when it will
by the creditor fulfillment + come.
damages
General Rule: The court is not authorized to fix a period:
Nature or Time Expense of the (Reason: The court cannot make a contract for the
debtor parties)
Improvement Benefit of the Right only of a Exception: Court authorizes to fix the period. (1197)
creditor usufruct a.) No period fixed but period was intended (nature and
 Condition for purpose of extinguishing obligation circumstances)
(resolutory) – return to each other what they have b.) Period depend upon the sole will of the debtor.
received. In case of loss, deterioration or
improvement – same rule above to the party bound  Court shall determine such period as probably
to return (1190) contemplated by the parties. Once fixed by the
 Power to rescind is implied in reciprocal obligation in courts, the period cannot change by them. (by the
case one of the obligor should not comply with what court not party)
is incumbent upon him. (1191)
a. Injured party may choose fulfillment or General Rule:
Rescission + damages. Whenever period is designated, it is presumed for the
b. Court decree the rescission unless there is just benefit of both creditor and debtor except when
cause authorizing the fixing of a period. expressly provided otherwise. (1196)
 Both parties committed a breach(1192) Hence, neither the creditor can demand performance nor
the debtor pay before arrival of the period.

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Exception:
The debtor shall lose every right to make use of the
period: (1198) Hence, immediately demandable.
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.
4. Alternative obligation
a. Simple – only one prestation is due
b. Compound
1. Conjunctive – Several prestation and all are due
2. Distributive – 2 or more prestation is due
a. Alternative – several prestation are due but
performance of one is sufficient.
b. Facultative – Only one is due but debtor may
substitute
Gen rule: Right of choice belong to the debtor (1200)
except when expressly grated to the creditor.
(4) if all is lost due to fortuitous event, obligation is
extinguished
(5) if all is lost due to creditor's fault, the obligation
is extinguished
Summary: Rule on loss
1. Debtor choice – Last item lost
2. Creditor’s choice - Any item lost through the fault of the
debtor
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;
(2) If the loss of one of the things occurs through the fault
of the debtor, the creditor may claim any of those
subsisting, or the price of that which, through the fault
of the former, has disappeared, with a right to
damages;
(3) If all the things are lost through the fault of the debtor,
the choice by the creditor shall fall upon the price of
any one of them, also with indemnity for damages.
The same rules shall be applied to obligations to do or not to
do in case one, some or all of the prestations should become
impossible. (1136a)

Limitation on the right of choice: 5. Facultative - When only one prestation has been agreed
a. Impossible upon, but the obligor may render another in substitution
b. Unlawful (1206)
c. Not the object of obligation Before substitution
d. Only one is practicable (1202). In this case the  Loss of the object without fault – not liable
debtor loss the right of choice and the alternative  Loss of the object with fault of the debtor - Liable
obligation is converted into a simple obligation.
 Loss/deterioration of the substitute with or without
 Choice produces no effect except from the time it fault of the debtor – Not liable
has been communicated. (1201)
 Communication of choice convert alternative After substitution
obligation to a simple obligation. (1205)  Loss of the object with or without fault – not liable
 Creditor fault , the debtor cannot make a choice =  Loss of the substitute with fault – liable
rescind the contract + damages (1203)  Loss of the substitute without fault – not liable
 All object loss – Debtor is liable for damages (last
object) Rule:
 Right of choice always to debtor
Right of choice: General rule: right of choice belongs to  Only one prestation is due but the debtor may
debtor substitute
a. The choice is with debtor
(1) If only 1 is left either because of fortuitous DISTINCTIONS BETWEEN ALTERNATIVE AND
events or due to debtor's acts, perform what is FACULTATIVE OBLIGATIONS
left. The effect is that the debtor loses the right ALTERNATIVE FACULTATIVE
of choice a) Various things are due a) Only one thing is due but
(2) if the choice is limited because of the creditor's but the giving a substitute may be given
acts, the debtor has the right of resolution and principally of one is to render
damages sufficient payment/fulfillment easy
(3) if all are lost due to debtor, the creditor is b) If one of prestations is b) If principal obligations is
entitled to damages illegal, others may be void and there is no
(4) if some are lost, the debtor can choose from the valid but obligation necessity of giving the
remaining remains substitute; nullity of P
carries with it nullity of S
b. The choice is with creditor c) If it is impossible to give c) If it is impossible to
(1) if one or some are lost due to fortuitous event, all except one, the last one give the principal, the
the creditor chooses the remainder must still be given substitute does not
(2) if one or some is lost because of the fault of have to be given; if it is
debtor, the creditor may choose either the impossible to give the
remainder or the value of any which substitute, the principal
disappeared, and damages in either case must still be given
(3) if all is lost due to the debtor's fault, the creditor d) Right to choose may be d) The right of choice is
may choose the value of any if some is lost due given either to debtor or given only to the debtor
to debtor's fault, the creditor chooses the creditor
remainder

Page 6 of 18 RFBT1
6. Joint /Solidary
a.) Individual – one debtor and one creditor
b.) Collective – Two or more debtor and two or more
creditor
1. Joint – 2or more debt/credit as there are
debtor/creditor (mancomunada,
mancomunadamente, pro rata, proportionately,
We promise to pay signed by 2 or more person)
2. Solidary - Each debtor/creditor is bound to
pay/right to demand payment the entire
compliance of the obligation ( Joint and/or
severally, solidaria, in solidum, juntos o
separademente, Individually and/or collectively,
I promise to pay signed by 2 or more persons,
each will pay the whole value)
Gen Rule: Joint obligation
Exception:
a. Law
b. Stipulation
c. Nature of obligation requires solidarity (real
solidarity)
Solidarity imposed by law (under the New Civil Code)
1. 2 or more heirs take possession of the estate - loss or
destruction of a thing devised or bequeathed, even
though only one of them should have been negligent.
(Art. 927)
2. Death or injury is due to the negligence of a fellow
worker, the latter and the employer shall be solidarily
liable for compensation. (Art. 1712)
3. The collapse of building or structure within fifteen years
(15) from completion of the structure, the engineer or
architect who supervises the construction shall be
solidarily liable with the contractor. (Art 1723)
4. Any wrongful act or omission of any partner acting in the
ordinary course of the business of the partnership or
with the authority of co-partners, loss or injury is caused
to any person. (Art. 1822 and 1824
5. Partner received money or property from 3rd person and
misapplies it or Partnership receives money or property
of a 3rd person and such property was misapplied by any
partner while in partnership custody. (Art 1823 and
1824)
6. Even when the agent has exceeded his authority, the
principal is solidarily liable with the agent if the former
allowed the latter to act as though he had full powers.
(Art. 1911)
7. Two or more persons have appointed an agent for a
common transaction or undertaking, - Liable to the
agent for all the consequences of the agency. (Art. 1915)
8. Two or more bailees (Commodatum) to whom a thing is
loaned in the same contract (1945)
9. The responsibility of two or more officious managers
(negotiorum gestio) shall be solidary, unless the
management was assumed to save the thing or business
from imminent danger. (Art. 2146)
10. The owner and his driver in a motor vehicle mishaps, if
the former, who was in the vehicle, could have, by the
use of the due diligence, prevented the misfortune. (Art.
2184)
11. The responsibility of two or more persons who are liable
for quasi-delict. (Art. 2194)
Solidarity under special Law (related law only)
1. Liability of directors for watered stocks. (Sec. 65, BP
68)
2. When the director or trustee who willfully and knowingly
vote for or assent to patently unlawful acts of the
corporation or who are guilty of gross negligence or bad
faith in directing the affairs of the corporation or acquire
any personal or pecuniary interest in conflict with their
duty (Sec 31 BP 68)
3. Workmen compensation act
4. Where an instrument containing the word "I promise to
pay" is signed by two or more persons, they are deemed
Page 7 of 18
to be jointly and severally liable thereon. (Sec 17, g, Act
2031)
5. Joint payees or joint indorsees who indorse are deemed
to indorse jointly and severally. (Sec 68, Act 2031)
Kinds of solidarity
1. Parties bound
a. Passive solidarity – Debtor
b. Active solidarity – Creditor
c. Mixed solidarity – both creditor and debtor
2. Source
a. Conventional – by agreement
b. Legal solidarity – imposed by law
c. Real solidarity – nature of the obligation
3. Legal tie
a. Uniform – bound by the same stipulation
b. Non-uniform or varied – not subject to the same
stipulation
Invisibility vs solidarity
1. Prestation vs. juridical tie or legal tie
2. Debtor guilty of breach is only liable vs. all debtor
are liable
3. Exist even only 1 debtor and 1 creditor vs. at least 2
debtor/creditor
4. Other debtor not liable in case of insolvency of one
debtor vs. other debtor are proportionately liable
Solidarity creditor
 Can do useful to but not prejudicial to other solidary
creditor
 Cannot assign without the consent of the other
solidary creditor
 Novation, compensation, confusion or remission by
solidary creditor extinguish the obligation but liable
to the other solidary creditor
 Debtor may pay any one of the solidary creditor.
Except when one of the solidary creditor demand
judicial or extrajudicial payment must be made to
him.
Solidary debtor
 Creditor can proceed to any solidary debtor as long
as the debt has not been fully collected
 Payment by one of solidary debtor extinguishes the
obligation. If 2 or more debtor offers, the creditor
may choose which offer to accept.
 Solidary debtor who pay, may claim from his co-
debtor + interest from the date of payment (except
when not yet due, no interest for intervening
period)
 Insolvency of one of solidary debtor – to be borne by
all his co-debtor in proportion to the debt of each.
Payment by solidary debtor after the obligation has
prescribed or become illegal – Not entitled to
reimbursement.
 Remission made by the creditor of the share of one
of the solidary debtor – Does not release such
solidary debtor toward other co-debtor when the
debt was totally paid before remission.
 Remission of whole obligation obtained by one of the
solidary debtors – not entitled for reimbursement
 Loss without fault of any debtor– obligation
extinguished
 Loss with fault of any debtor – All debtor are liable
without prejudice to the action against guilty or
negligent debtor.
 Loss due to fortuitous event after delay by any of
the solidary debtor – same all debtor are liable.
 Claim for Compensation under Workmen’s
compensation law. (Sec 2, workmen compensation
law)
 Article 19, 20, 21, 22 of the Civil code (Human
relations)
Defense of solidary debtor
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 a. Nature of the obligation – payment , fraud,
prescription, remission, illegality, absence of
consideration, res judicata, non performance of
suspensive condition
b. Those personal to him - incapacity, mistake,
violence, minority. (personal or complete defense)
c. Those personal to the other.
7. Divisible – Capable of partial fulfillment
8. Indivisible – Not capable of partial fulfillment
Kinds of division
a. Qualitative division – based on quality
b. Quantitative division – based on quantity
c. Ideal or intellectual division – exist only in mind of
the parties
Kinds of indivisibility
a. Legal indivisibility – by law
b. Conventional indivisibility - by agreement
c. Absolute or natural indivisibility – nature of the
object/prestation
 Divisibility or indivisibility is determined by the
purpose or intention of the parties not the possibility
or impossibility of partial performance. (except of
nature indivisibility)
 Divisible or indivisible refer to the object of he
obligation not on the cause or legal tie.
 Joint indivisible obligation give rise to indemnity for
damages – one debtor does not comply with his
undertaking.
a. Effect – Obligation is converted into one for
damages. Specific performance or rescission is
not a remedy because the other debtors are
willing to fulfill.
 Obligation to give definite thing and not susceptible
of partial performance – Indivisible
 Object the execution of a certain number of days of
work – Divisible
 Accomplishment of work by metrical units or
analogous things
 Nature are susceptible of partial performance –
Divisible
 Obligation not to do – Determined by the character
of the prestation in each particular case.
9. Obligation with a penal clause – Penalty shall substitute
the indemnity for damages and the payment of interests
in case of non-compliance (absence of agreement).
a. Principal
b. Accessory
Kinds of penal clause
a. Origin
1.) Legal penal clause - by law
2.) Conventional penal clause – by agreement
b. Purpose
1.) Compensatory penal clause – take the place of
damages (1226)
2.) Punitive penal clause – imposed as punishment for
breach
c. Demandability or effect
1.) Subsidiary or alternative penal clause - only penal
clause can be enforce.
2.) Joint or cumulative – both principal and penal clause
can be enforce
1. The penal clause shall substitute the indemnity for
damages and the payment of interest in case of non
compliance. (1226) However, Penalty may be
enforced only when it is demandable.
2. Proof of actual damages suffered by the creditor not
necessary to enforce the penalty. (1228)
However damages shall be paid
a. There is stipulation
b. Obligor refuses to pay the penalty
c. Guilty of fraud in the fulfillment of the obligation.
Page 8 of 18
3. Debtor cannot exempt himself from performance and
to pay only the penalty (except when expressly
granted to him). Neither can the creditor demand the
fulfillment of the obligation and the satisfaction of
the penalty at the same time, unless this right has
been clearly granted him. (1227) However, if
creditor choose performance but become impossible
without his fault, the penalty may be imposed.
Causes for reduction of penalty:
a. Principal obligation has been partly or irregularly
complied with;
b. Penalty is iniquitous or unconscionable
 Nullity of the penal clause does not carry of the
principal obligation but the nullity of the principal
carries with that of the penal clause. (Rule:
Accessory follows the principal)
Extinguishment of Obligation
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 extinguishing an obligation
a. Annulment
b. Rescission
c. Fulfillment of a resolutory condition
d. Prescription
e. Arrival of resolutory period
f. Death of the party
g. Mutual desistance/withdrawal
h. Compromise
i. Impossibility of performance
j. Happening of a fortuitous event
1. Payment or performance – not only delivery of money
but also the performance in any other manner of an
obligation. (1232)
Gen rule: There must be total performance. Partial or
irregular performance does not extinguish obligation.
(1233)
Exception:
a. Substantial performance in good faith. (1234)
Requisites of Substantial Performance
1. Attempt in Good Faith to perform without willful
or intentional departure
2. Deviation is slight
3. Omission/Defect is technical or unimportant
4. Must not be so material that intention of parties
is not attained
Effect of Substantial performance in good faith
1. Obligor may recover as though there has been
strict and complete fulfillment, less damages
suffered by the obligee
2. Right to rescind cannot be used for slight breach
b. Creditor accepts performance knowing its
incompleteness or irregularity without expression of
protest. (principle of estoppels)(1235)
 Creditor may refuse to accept payment
1. Payment by 3rd person
2. Partial performance
3. When the debtor has no capacity to alienate or
free disposal of the thing
 General rule: Creditor not bound to accept
performance by 3rd person. (1236) The creditor is
bound to accept payment only by:
1. Debtor
RFBT1
 2. Has interest in the performance of obligation
(guarantor, surety)
3. 3rd person if there is stipulation.
But the payment in any case valid if the creditor accepts.
The option to accept is granted to the creditor.

 Payment by 3rd person to creditor may recover to

the debtor
a.) With knowledge of the debtor – right of
reimbursement (amount paid, not amount of
debt) + subrogation (acquire all the right of the
creditor) (1236 par 2)
b.) Without knowledge/against the will of the debtor
– only benefit to the debtor. 3rd person cannot
compel the creditor to subrogate in his rights
such as those arising from mortgage, guaranty
or penalty. (1237)
c.) No recovery - Payment by 3rd person who does
not intend to be reimburse is deemed donation
which requires debtor’s consent.

 Payment by one who does not have free disposal of

the thing due and capacity to alienate – Not valid
without prejudice to natural obligation. (1239)
 Payment must be to the person in whose favor the
obligation has been constituted. (creditor , creditor
successor in interest, any person authorized to
receive payment) (1240)
a. 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.
b. Payment to 3rd person shall also be valid insofar
as it has redounded to the benefit of the
creditor. (1241)

Payment to 3rd person : Presumed that it redounded to

the benefit of the creditor:
a. 3rd person acquires the creditor’s right (subrogation)
b. Creditor ratifies the payment to the 3rd person
(ratification)
c. Creditors' led to believe that the 3 rd person had
authority to receive the payment (Estoppels)
 Payment made in good faith to any person in
possession of the credit shall release the debtor.
(1242)
Requisites:
1. Payment by debtor must be made in good faith
2. Creditor must be in possession of the credit &
not merely the evidence of indebtedness
 Payment made to the creditor by the debtor after the
latter has been judicially ordered to retain the debt
shall not be valid. (1243)
 Debtor cannot compel the creditor to receive a
different one although of the same value or more
valuable than that which is due. (1244)
 Obligation to do or not to do, an act or forbearance
cannot be substituted by another act or forbearance
against the obligee’s will. (1242 par 2)
 Obligation to deliver an indeterminate or generic
thing whose quality and circumstances have not
been stated. (1246)
a. Creditor cannot demand a thing of superior
quality.
b. Debtor cannot deliver a thing of inferior quality.
 Extrajudicial expense – account of the debtor
 Judicial expense – The Rules of court apply. Judicial
expense is shouldered by the losing party.

Place of payment (1251)

1. Place designated in the obligation
2. No express stipulation
a. Determinate thing – Place where the thing was,
at the perfection of the contract
b. Generic thing – domicile of the debtor.

Page 9 of 18 RFBT1
 Gen Rule: The creditor cannot be compelled to receive
partial performance. Neither may the debtor be required
to make partial payment.(1248)
Exception:
1. Express stipulation
2. Debt is part liquidated and in part unliquidated.
3. Different prestation are subject to different terms or
conditions which affect some of them.
 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. (1249)
 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.
 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(1250)
Nota Bene:
Section 52. Legal Tender Power. - All notes and coins
issued by the Bangko Sentral shall be fully guaranteed by
the Government of the Republic of the Philippines and shall
be legal tender in the Philippines for all debts, both public
and private: Provided, however, That, unless otherwise
fixed by the Monetary Board, coins shall be legal tender
in amounts not exceeding Fifty pesos (P50.00) for
denominations of Twenty-five centavos and above, and in
amounts not exceeding Twenty pesos (P20.00) for
denominations of Ten centavos or less. (R.A. 7653)
Hence, Philippine currency notes have no limit to their legal
tender power. However, pursuant to BSP Circular No. 537,
Series 2006 (Dated: July 18, 2006), coins in denomination of
1-,5- and 10-piso shall be legal tender in amounts not
exceeding P1,000.00 while coins in denomination of 1-,5-
and 10- and 25 sentimo shall be legal tender in amounts
not exceeding P100.00.
Special forms of payment
a. Dation in payment / Adjudication or dacion en pago
– governed by law on sales
 Property is alienated to the creditor in
satisfaction of debt in money
b. Application of payment
1. One debtor and one creditor
2. Two or more debts
3. Debt must be of the same kind
4. The payment for the debt applied must be due
5. Payment must not sufficient to cover all the
debts
Note: Not really a special form of payment
 Debtor has the 1st choice – must indicate at the
time of payment
 If the debtor does not apply, the creditor may
make the designation. Specify in the receipt
which debt is being paid
 In the absence of above, debt which is most
onerous to the debtor
 If the same nature and burden – applied to all of
them proportionately.
 Payment applies to interest, then to principal.
c. Payment by cession
1. Two or more creditors
2. Debtor must be partially insolvent
3. Assignment/cession must be accepted by the
creditors.
Page 10 of 18
d. Tender of payment (extrajudicial) and consignation
(judicial) – Creditor refuse to accept payment
without just cause
 Must comply with the rules on payment (must be
total)
 Unconditional and total
 Actual. Manifestation of a desire or intention to
pay is enough.
 The debtor must show possession of the thing at
the time of the offer (tender).
 Before creditor accepts the consignation or
before judicial declaration, the debtor may
withdraw the thing deposited.
 Should the creditor authorize to withdraw the
thing consigned – He lose every preference over
the thing (co-debtor, guarantors and sureties are
released)
Tender of payment alone cannot extinguish valid
debt. However, consignation alone when allowed
extinguished obligation.
Requisites:
1. Existence of valid debt which is due and
demandable
2. Tender of payment by the debtor
3. Refusal without justifiable reason by the creditor
to accept it.
4. Previous notice of consignation to persons
interested in the fulfillment of the obligation.
(guarantor, mortgagee, solidary debtors, solidary
creditors).
5. Consignation of the thing
6. Subsequent notice of consignation to in
interested parties.
When tender of payment not required
1. Creditor is absent or unknown or does not
appear in the place of payment
2. Creditor is incapacitated at the time of payment
3. Creditor refuse to give receipt without just cause
4. Two or more person claim the same right to
collect
5. Title of the obligation has been lost
Dation in payment vs. Payment by cession
1. One creditor vs. several creditor
2. Debtor not insolvent vs. debtor insolvent
3. Not all property of the debtor vs. all property of
the debtor
4. Creditor become the owner vs. creditor acquire
only the right to dispose the thing and apply the
proceeds to their credit proportionately.
5. Act of novation vs. not act of novation
2. Loss of determinate thing
Kinds of loss
a. Physical loss – perishes
b. Legal loss – goes out of commerce
c. Civil loss – thing disappears in a such way that its
existence is unknown.
Loss of a thing due
1. Obligation to give specific thing
a. Total loss
1. Loss with the fault of the debtor – (Liable)
2. Loss without the fault of the debtor -
Fortuitous event (not liable)
Exception:
1. Law
a. Delay
b. Promised to deliver the same thing to
2 or more person who do not have
the same interest
c. Lost of generic thing
RFBT1
 d. Obligation to deliver a specific thing
arises from crime. (1268)
2. Stipulation
3. Assumption of risk
b. Partial loss – Court shall determine under the
circumstances (importance of the partial loss of
the object) whether partial loss is as to be
equivalent to a complete or total loss. (i.e.
Broken leg - horse for race or horse to be
slaughtered)
2. Obligation to do
 The debtor in obligations to do shall also be
released when the prestation becomes legally or
physically impossible without the fault of the
obligor. (1266)
a. Impossibility at the beginning - void
b. Impossibility after the constitution of the
obligation
 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. (1267)
Kinds of impossibility
 Physical impossibility – (Accident/death)
 Legal impossibility – Ordinance declaring an area
residential zone (i.e. obligation to construct
commercial building; Lawyer appointed as judge)
General rule: When a thing is loss in possession of the
debtor it is presumed that it was loss due to his fault. (1265)
Exception:
1. Earthquake
2. Flood
3. Storm
4. Other natural calamity
 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. (1269)
3. Condonation/remission of debt - 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 (1270)
Kinds of remission
a. Extent
1. Complete – cover the entire obligation
2. Partial – Not cover the entire obligation
b. Form
1. Express – verbal or in writing
2. Implied – Inferred from conduct
Voluntary delivery of private document
evidencing the credit by the creditor to the
debtor (Art 1271)
c. Date of effectivity
1. Intervivos – take effect during lifetime of the
donor
2. Mortis cause – effective upon death of the donor
 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. (1271)
 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
Page 11 of 18
voluntarily, unless the contrary is proved. (1272)
 The renunciation of the principal debt shall
extinguish the accessory obligations; but the waiver
of the latter shall leave the former in force. (1273)
(accessory follows the principal)
 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. (1274)
4. Merger/confusion – The character of creditor and debtor
are merged in the same person. (1275)
 Merger which takes place in the person of the
principal debtor or creditor benefits the guarantors.
(principal obligation is extinguish as well as
accessory obligation) Confusion which takes place in
the person of any of the latter does not extinguish
the obligation. (Only accessory obligation is
extinguished) (1276)
 Confusion does not extinguish a joint obligation
except as regards the share corresponding to the
creditor or debtor in whom the two characters
concur. (1277)
5. Compensation - When two person, in their own right,
are creditors and debtors of each other, (1278)
Confusion vs. Compensation
1. Only one person who is a debtor and creditor of
himself vs. two person involved, each of whom is a
debtor and a creditor of the other
2. Only one obligation vs. 2 obligation
3. Impossiblity of payment vs. indirect payment
Kinds of compensation
1. Effect or extent
a. Total – Both obligation are of the same amount
b. Partial – Two obligation are of different amount
2. Cause or origin
a. Legal – Takes place by operation of law
b. Voluntary – by agreement
c. Judicial – takes place by order from a court in a
litigation.
d. Facultative – can be set up only by one of the
parties.
Art. 1279. In order that compensation may be proper, it is
necessary: (Legal compensation)
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. (1196)
 The parties may agree upon the compensation of debts
which are not yet due.(1282)
 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. (1283)
 When one or both debts are rescissible or voidable, they
may be compensated against each other before they are
judicially rescinded or avoided. (1284)
 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
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 gave his consent, that he reserved his right to the
compensation. (1285)
 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. (1198a)
 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. (1286)
 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. (1289)
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.
(1200a)
Art. 1288. Neither shall there be compensation if one of the
debts consists in civil liability arising from a penal offense.
(n)
6. Novation – 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. (1291)
 Test: Is the old and new obligation having an
independent existence. Positive - compatible (No
novation); Negative – incompatible - Novation.
 Conventional subrogation be clearly establish (1300)
and it requires the consent of the original parties and
of the third person. (1301)
 Legal subrogation is not presumed except in cases
provided for by law. (1300)
 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. (1296)
 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. (1297)
 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. (1298)
 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. (1299)
 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. (1303)
 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. (1304)

Kinds of novation
1. Origin
a. Legal – operation of law
b. Conventional – agreement of the parties
2. How it s constituted
a. Express – Declared in unequivocal term
b. Implied – Old and new obligation are essentially
incompatible with each other
3. Extent or effect
a. Total or extinctive – Old obligation is completely
extinguished
b. Partial or modificatory – Old obligation is merely
modified
4. Subject
a. Real or objective – Object or principal condition
are changed
b. Personal or subjective – person of the debtor is
substituted/ or when a third person is
subrogated in the right of the creditor.
1. Substitution – Person of the debtor is
substituted
1.1.Expromision – 3rd person on his own
initiative and without the knowledge or
against the will of the original debtor
assumes the latter’s obligation with the
consent of the creditor. (Only the
consent of the creditor and 3rd person is
made)
1.2.Delegacion – Creditor accepts a third
person to take the place of the debtor at
the instance of the latter. It requires that
the old debtor be release from the old
obligation. (all parties, old debtor, new
debtor and the creditor must agree)
2. Subrogation – Third person is subrogated in Art. 1302. It is presumed that there is legal
the rights of the creditor. subrogation:
c. Mixed – Combination of real and personal (1) When a creditor pays another creditor who is
novation. preferred, even without the debtor's knowledge;
(2) When a third person, not interested in the obligation,
 Novation is never presumed. pays with the express or tacit approval of the debtor;
(3) When, even without the knowledge of the debtor, a

Page 12 of 18 RFBT1
 person interested in the fulfillment of the obligation a. Law
pays, without prejudice to the effects of confusion as to b. Moral
the latter's share. (1210a) c. Good custom
d. Public order
CONTRACTS e. Public policy
2. Mutuality of contract - contract must bind both
Contract - meeting of minds between two persons whereby contracting parties; its validity or compliance cannot be
one binds himself, with respect to the other, to give left to the will of one of them (1308). The principle is
something or to render some service. based on the essential equality of the parties.
 The determination of the performance may be left to
Kinds of contract a third person, whose decision shall not be binding
1. Formation or perfection until it has been made known to both contracting
a. Consensual – perfected by mere consent (1315) parties. (1309)
b. Real – perfected by delivery (i.e. depositum, pledge,  The determination shall not be obligatory if it is
commodatum) (1316) evidently inequitable. In such case, the courts shall
c. Formal or solemn (i.e. Interest must be in writing decide what is equitable under the circumstances
(1956); Contribution of immovable property must be (1310)
in a public instrument, donation of personal property 3. Relativity of contract - Contracts take effect only
where the value exceed P5,000 must be in writing; between the parties, their assigns and heirs (1311)
Donation of immovable property must be in a public Exception:
instrument, Sale of land or interest therein, the a. Where the obligations arising from contract are not
authority of the agent must be in writing) transmissible by nature (personal qualification is
2. Cause or equivalence of value of prestation involved), by stipulation or by provision of law
a. Onerous – equivalent value of prestation (Agency, partnership, commodatum).
b. Gratuitous or lucrative – no equivalent prestation b. Stipulation in favor of third person (stipulation pour
c. Remunerative - the prestation is the benefit or autrui) (1311 par 2)
service that had been rendered previously. If a contract should contain some stipulation in favor
3. Importance or dependence of one upon another: of a third person, he may demand its fulfillment
a. Principal – can stand alone provided he communicated his acceptance to the
b. Accessory – depend upon the existence of another obligor before its revocation. A mere incidental
contract benefit or interest of a person is not sufficient. The
c. Preparatory – not considered the contract as an end contracting parties must have clearly and
by itself but as a mean for entering in future deliberately conferred a favor upon a third person
transaction or contract. c. Contract creating real right (1312)
4. Parties obligated d. Contact entered into to defraud the creditors. (1313)
a. Unilateral – only one party has obligation e. Contract which have been violated thru the
b. Bilateral – both party has obligation inducement of 3rd person (1314)
5. Name or designation
a. Nominate – has a name given by law Elements of a Contract
b. Innominate – no name given by law 1. Essential elements
1. Do ut des (I give that you may give) no longer a. Common (Consent, Object, Cause)
innominate. This is now called Barter b. Special
2. Do ut facias (I give that you may do) 1.) Form – formalities in solemn contract, deliver in
3. Facio ut des (I do that you may give) real contract, registration to bind third person
4. Facio ut facias (I do that you may do) (Real estate mortgage, chattel mortgage)
6. Risk of fulfillment
a. Commutative – real fulfillment, equivalent value are Solemn contract
given (Consent, Object, Cause + Execution of
b. Aleatory – fulfillment depend upon chance. formalities)
7. Time of performance or fulfillment a. Stipulation of interest = writing.
a. Executed – prestation are already complied with b. Contribution of immovable property in
b. Executory – prestations are to be complied with in partnership = inventory of such property +
the future public instrument
8. According to number of person who participated in the c. Donation of personal property where the
drafting of the contract value exceed P5,000 = in writing
a. Ordinary - d. Donation as well as acceptance of real
b. Contract of adhesion – Where the terms and property = Public instrument.
condition of the contract is already drafted by one e. Will = writing + formalities prescribed by
party. The other party only signifies his consent by law.
signing the contract. f. Agent authority in case of sale of immovable
property in behalf of the principal = writing
Stages of contract
1. Preparation (Negotiation, conception or Generacion) Real Contract
– steps taken by the parties leading to the perfection (Consent, Object, Cause + Delivery)
of the contract. a. Deposit
2. Perfection (or birth) – Come to a definite agreement b. Pledge
or meeting of the mind upon the object and the c. Commodatum
cause. 2.) Subject matter
3. Consummation (death or termination) – parties have Real estate Real property No delivery
performed their respective obiigation mortgage
Chattel mortgage Personal No delivery
Characteristics of contract property
1. Freedom of contract - contracting parties may establish Pledge Personal Delivery
such stipulations, clauses, terms and conditions as they property
may deem convenient (1306) Antichresis Real property Delivery
Limitation:

Page 13 of 18 RFBT1
 3.) Consideration or cause – Sale (price);
Commodatum (liberality)
2. Natural elements – presumed to exist in certain
contracts
a. Warranty against eviction
b. Warranty against hidden defect
3. Accidental elements (by stipulation) – Exist only when
they are expressly provide by the parties. (i.e.
Conditions, period, interest, penalty, place of payment)

Art. 1318. There is no contract unless the following

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

CONSENT (1319)

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.
1. Theory of cognition – The acceptance is considered to
effectively bind the offeror only from the time it came to
his knowledge. (Civil code)
2. Theory of manifestation – The contract is perfected at
the moment when the acceptance is declared or made by
the offeree. (Code of commerce)

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

Art. 1321. The person making the offer may fix the time, OPTION PERIOD (1324)
place, and manner of acceptance, all of which must be Art. 1324. When the offerer has allowed the offeree a certain
complied with. period to accept, the offer may be withdrawn at any time
Art. 1322. An offer made through an agent is accepted from before acceptance by communicating such withdrawal,
the time acceptance is communicated to him. (n) except when the option is founded upon a consideration, as
Art. 1323. An offer becomes ineffective upon the death, civil something paid or promised. (n)
interdiction, insanity, or insolvency of either party before
acceptance is conveyed.
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.
Art. 1327. The following cannot give consent to a contract:
(7) Unemancipated minors;
(8) Insane or demented persons, and deaf-mutes who do
not know how to write. (1263a)
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. (n)

Vices of Consent
1. Error or mistake
 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

Page 14 of 18 RFBT1
 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.(1331)
 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. (1332)
 There is no mistake if the party alleging it knew the
doubt, contingency or risk affecting the object of the
contract. (1333)
 Mutual error as to the legal effect of an agreement
when the real purpose of the parties is frustrated,
may vitiate consent. (1334)
2. Violence - when in order to wrest consent, serious or
irresistible force is employed. (1335)
3. 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. (1335)
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.
4. Undue influence - when a person takes improper
advantage of his power over the will of another,
depriving the latter of a reasonable freedom of choice.
The following circumstances shall be considered: the
confidential, family, spiritual and other relations between
the parties, or the fact that the person alleged to have
been unduly influenced was suffering from mental
weakness, or was ignorant or in financial distress.
(1337)
5. 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.
 Failure to disclose facts, when there is a duty to
reveal them, as when the parties are bound by
confidential relations, constitutes fraud. (1339)
 The usual exaggerations in trade, when the other
party had an opportunity to know the facts, are not
in themselves fraudulent. (1340)
 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. (1341)
 Misrepresentation by a third person does not vitiate
consent, unless such misrepresentation has created
substantial mistake and the same is mutual. (1342)
 Misrepresentation made in good faith is not
fraudulent but may constitute error. (1343)
 In order that fraud may make a contract voidable, it
should be serious and should not have been
employed by both contracting parties. (1344)
Incidental fraud only obliges the person employing it to
pay damages.
Employed by Employed by 3rd
one of the person
contracting
party
Violence Voidable Voidable
Intimidation Voidable Voidable
Fraud without Voidable Valid, unless it
connivance/ result to substantial
knowledge by the mistake and the
party benefited by same is mutual. It
the fraud can be annulled on
Page 15 of 18
the ground of
mistake
Fraud with Voidable Voidable. As if
connivance/ exercised by the
knowledge by the party benefited by
party benefited by the fraud.
the fraud
Undue influence Voidable Valid
Absolute Relative simulated
simulated or
fictitious contract
The parties do not The parties conceal their true
intend to be bound agreement. (1345)
at all. (1345)
VOID When it does not prejudice a third
(1346) 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. (1346)
OBJECT OF CONTRACTS
 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. (1347)
 Impossible things or services cannot be the object of
contracts. (1348)
 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. (1349)
CAUSE OF CONTRACTS
 To be a valid cause, it must be lawful, true and real,
definite or determinate as to its kind and possible.
 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. (1350)
 The particular motives of the parties in entering into a
contract are different from the cause thereof. (1351)
 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. (1352)
 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.
(1353)
 Although the cause is not stated in the contract, it is
presumed that it exists and is lawful, unless the debtor
proves the contrary. (1354)
 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. (1355)
FORM OF CONTRACTS
 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
RFBT1
 and indispensable. In such cases, the right of the parties
stated in the following article cannot be exercised.
(1356)
 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. (1357)
 The following must appear in a public document: (1358)
(1) Acts and contracts which have for their object the
creation, transmission, modification or
extinguishment of real rights over immovable
property; sales of real property or of an interest
therein a governed by articles 1403, No. 2, and
1405;
(2) The cession, repudiation or renunciation of
hereditary rights or of those of the conjugal
partnership of gains;
(3) The power to administer property, or any other
power which has for its object an act appearing or
which should appear in a public document, or should
prejudice a third person;
(4) The cession of actions or rights proceeding from an
act appearing in a public document.
All other contracts where the amount involved
exceeds five hundred pesos must appear in
writing, even a private one. But sales of goods, chattels
or things in action are governed by articles, 1403, No. 2
and 1405. (1280a)
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. 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.
 Reformation can be avail only of the innocent party.
 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. (1368)
 When reformation proper
a. Mutual mistake of the parties causes the failure of
the instrument to disclose their real agreement
(1361)
b. One party was mistaken and the other acted
fraudulently or inequitably in such a way that the
instrument does not show their true intention.
(1362)
c. 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. (1363)
d. 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. (1364)
e. 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
Page 16 of 18
repurchase. (1365)
 When one of the parties has brought an action to
enforce the instrument, he cannot subsequently ask
for its reformation. (1367)
 The procedure for the reformation of instrument shall
be governed by rules of court. (1369)
INTERPRETATION OF CONTRACTS
 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. (1370)
If the words appear to be contrary to the evident
intention of the parties, the latter shall prevail over the
former.
 In order to judge the intention of the contracting parties,
their contemporaneous and subsequent acts shall be
principally considered. (1371)
 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. (1372)
 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.
(1373)
 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. (1374)
 Words which may have different significations shall be
understood in that which is most in keeping with the
nature and object of the contract. (1375)
 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. (1376)
 The interpretation of obscure words or stipulations
in a contract shall not favor the party who caused
the obscurity. (1377)
 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. (1378)
 The principles of interpretation stated in Rule 123 of
the Rules of Court shall likewise be observed in the
construction of contracts. (1379)
DEFECTIVE CONTRACTS
1. Rescissible contract – Rescissible contract is valid until
rescinded. It is allowed by reason of injury or damage
to one parties or to a third person.
The following contracts are rescissible: (1381)
a. 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;
 Not applicable when approved by court (1386)
 Prescriptive period: Four years from the
termination of incapacity
b. Those agreed upon in representation of absentees, if
the latter suffer the lesion stated in the preceding
number;
 Not applicable when approved by court (1386)
 Prescriptive period: Four years from the date the
domicile of the absentee is known.
c. Those undertaken in fraud of creditors when the
latter cannot in any other manner collect the claims
due them;
 The action to claim rescission must be
commenced within four years (1389)
 Alienation which are presumed to have been
RFBT1
 entered into in fraud of creditors
a. Gratuitous title - donor did not reserve
sufficient property to pay all debts contracted
before the donation.
b. Onerous title - 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.
Note: The design to defraud creditors may be
proved in any other manner recognized by the
law of evidence. (1387)
 Whoever acquires in bad faith the things
alienated in fraud of creditors, shall indemnify
the latter for damages suffered by them on
account of the alienation, whenever, due to any
cause, it should be impossible for him to return
them.
If there are two or more alienations, the first
acquirer shall be liable first, and so on
successively. (1388)
d. 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;
 The action to claim rescission must be
commenced within four years (1389)
e. All other contracts specially declared by law to be
subject to rescission.
 The action to claim rescission must be commenced
within four years (1389)
Limitation on the exercise of rescission
1. Contracts can be rescinded only in cases provided by law
2. Being a subsidiary action, it can be exercised only when
there is no other legal means to obtain reparation for the
same. (1383)
3. Can be exercised only to the extent necessary to cover
the damages caused. (1384)
4. 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 (mutual restitution).
Hence, it can be demanded only if the one claiming
rescission can return whatever he may be obliged to
restore.
5. It cannot be availed 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 (1385)
6. The action for rescission has not been prescribed.
2. Voidable Contract – The consent is defective by reason
of incapacity of one party or vices of consent. It is valid
until annulled.
The following contracts are voidable or annullable, even
though there may have been no damage to the
contracting parties: (1390)
a. Those where one of the parties is incapable of
giving consent to a contract;
b. 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.
Grounds Prescriptive period
Intimidation, violence or 4 years from the time the
undue influence defect of the consent
ceases
Mistake or fraud 4 years from the time of
the discovery* of the
same
minors or other 4 years from the time the
Page 17 of 18
incapacitated persons guardianship ceases
*Note: If there is registration of the property, count from the
date of registration.
 Ratification extinguishes the action to annul avoidable
contract. (1392)
 Express ratification – Done in writing or orally
 Tacit ratification - 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. (1393)
 Ratification may be effected by the guardian of the
incapacitated person. (1394)
 Ratification does not require the conformity of the
contracting party who has no right to bring the action for
annulment. (1395)
 Ratification cleanses the contract from all its defects
from the moment it was constituted. (1396).
 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. (1397)
 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. (1398)
 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.
(1399)
 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. (1400)
 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 (1401)
 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.(1402)
3. Unenforceable contract – Contract that cannot be
enforce unless ratified.
The following contracts are unenforceable, unless they
are ratified: (1403)
(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:
(a) An agreement that by its terms is not to be
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 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 (personal property), 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.
 Statutes of fraud is no longer applicable when:
a. There is total or partial performance (Partially or
totally executed)
b. Failure to object to the presentation of oral
evidence to prove the contract.
 Cannot be assailed by third person (1408)
 Effect of ratification by parents or guardian (1407)
a. Only one party – Voidable contract
b. Both parties- valid
 When the agreement is not illegal per se but is
merely prohibited, and the prohibition by the law is
designated for the protection of the plaintiff, he may,
if public policy is thereby enhanced, recover what he
has paid or delivered. (1416)
 When the price of any article or commodity is
determined by statute, or by authority of law, any
person paying any amount in excess of the
maximum price allowed may recover such excess.
(1417)
 When the law fixes, or authorizes the fixing of the
maximum number of hours of labor, and a contract
is entered into whereby a laborer undertakes to work
longer than the maximum thus fixed, he may
demand additional compensation for service
rendered beyond the time limit. (1418)
 When the law sets, or authorizes the setting of a
minimum wage for laborers, and a contract is agreed
upon by which a laborer accepts a lower wage, he
shall be entitled to recover the deficiency. (1419)
 In case of a divisible contract, if the illegal terms can
be separated from the legal ones, the latter may be
enforced. (1420)
 The defense of illegality of contract is not available to
third persons whose interests are not directly
affected. (1421)
 A contract which is the direct result of a previous
illegal contract is also void and inexistent. (1422)

4. Void contract – contract that never exist in the eyes of

law. It has no effect at all and cannot be ratified.

The following contracts are inexistent and void from the

beginning: (1409)
(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.

Rules in determining contracts void

1. Absence of any of essential requites of contract
(Consent, Object or Cause)
2. Contract that are prohibited by law. (i.e Sale
between husband and wife, donation between
husband and wife)
 The action or defense for the declaration of the
inexistence of a contract does not prescribe. (1410)
 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.
(1413)
 Where one of the parties to an illegal contract is
incapable of giving consent, the courts may, if the
interest of justice so demands allows recovery of
money or property delivered by the incapacitated
person. (1415)

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