Professional Documents
Culture Documents
Obligations and Contracts
Obligations and Contracts
I. Introduction to Law
(e) (e) Obligations with a Penal Cause
1. 1. With accessory undertaking in case of breach
of obligation
a. a. To insure performance
b. b. To liquidate the amount of damage to be
awarded
c. c. To punish the obligor in case of breach
2. 2. No need to prove actual damage
3. 3. Shall substitute for damages and interest,
except
a. a. When there is stipulation to the contrary
b. b. When obligor is sued for refusal to pay
agreed penalty
c. c. When obligor is guilty of fraud
4. 4. When court may reduce penalty
a. a. If principal obligation partly complied with
b. b. If principal obligation irregularly complied
with
c. c. If penalty is iniquitous or unconscionable
Weeks 5 to 7 - Extinguishments of Obligations
Modes of Extinguishing Obligations
1. Payment or performance
2. Loss of the thing due
3. Condonation or remission
4. Confusion or merger of the rights of creditor and debtor
5. Compensation
6. Novation
7. Death of a party in personal obligation
8. Annulment or Rescission of contract
9. Arrival of Resolutory period or fulfillment of resolutory conditon
10. Impossibility of fulfillment
11. Prescription
I. Payment
(a) (a) General Provisions Payment
(i) (i) Complete Delivery of money,
performance of obligation
(ii) (ii) If substantially performed in good
faith, obligor may recover as though
there had been complete fulfillment
less damages
(iii) (iii) Third party cannot compel
creditor to accept payment or
performance, except
a. a. When there is stipulation
to the contrary
b. b. When third person has an
interest in the fulfillment of
obligation
(iv)(iv) Rights available to third party who
pays:
a. a. If payment made with the
consent of the debtor
i. i. Recover from debtor
the entire amount
ii. ii. Subrogated to all the
rights of creditor
b. b. If payment made without
the knowledge or against the will
of debtor, he can recover only
insofar as payment has been
beneficial to the debtor
(v) (v) To whom payment must be made
(1240)
a. a. To the person in whose
favor obligation has been
constituted
b. b. His Successor in interest
c. c. Any person authorized to
receive it
d. d. Third person provided it
has redounded to benefit of
creditor. (1241, 1242)
Presumption of benefit in the
following case:
If after payment, third person
acquires creditor’s rights
If creditor ratifies payment to third
party
If creditor’s conduct let debtor to
believe that the third person had authority to
receive payment
e. e. Possessor of the credit
(vi)(vi) Payment must be in Legal Tender
a. a. Foreign currency may be
used as currency of contract
b. b. Promissory notes, bills of
exchange, checks not legal
tender. They produce effect of
legal tender only when encashed
or impaired thru the fault of
creditor (1249)
c. c. In case of extraordinary
inflation or deflation, the basis is
the value of currency at the time
obligation is established. (1250)
(b) (b) Applications of Payments
1. 1. The right belongs to the
debtor, but if he does not exercise it,
creditor may do it
2. 2. If creditor issues a receipt
designating the debt to be applied,
debtor can accept or reject
3. 3. Where neither debtor nor
creditor made a choice, it shall be
applied on the debt which is most
onerous
a. a. Older debts more onerous
than newer ones
b. b. One bearing interest more
onerous than one that is not
c. c. Secured debt more
onerous than unsecured
d. d. Debt as principal more
onerous than debt as guarantor
e. e. Solidary obligation more
onerous than sole debtor
4. 4. If similar nature and burden,
payment shall be applied
proportionately
(c) (c) Payment by Cession
Assignment or abandonment of all the
properties of the debtor for the benefit of his creditors
in order that the latter may sell same and apply
proceeds thereof to
1. 1. Cession does not make the
creditors owners of the property
2. 2. Unless stipulation to contrary,
debtor still required to pay balance
3. 3. Requires two or more
creditors, debtors insolvent, cession
accepted by creditors
(d) (d) Dacion en pago
Dation in payment is the transmission of the
ownership of a thing by the debtor to the creditor as
an accepted equivalent of the performance of an
obligation.
Governed by law on sales
1. 1. Difference between Dacion
and Cession
a. a. Dacion usually only one
creditor
b. b. Dacion does not require
insolvency
c. c. Dacion does not involve all
the property of debtor
d. d. Dacion makes creditor
owner of the property
e. e. Dacion is a novation
(e) (e) Tender of Payment and Consignation
Tender of payment – The act of the debtor of
offering to the creditor the thing or amount due
Consignation – Deposit of the object or the
amount due with the proper court after refusal or
inability of the creditor to accept the tender of payment
1. 1. Requisites of Consignation
a. a. Debt Due
b. b. Tender of payment by
debtor and refusal by creditor to
accept it without justifiable
reason
c. c. Previous notice of the
consignation had been given to
persons interested in fulfillment
of obligation
d. d. Thing or amount due has
been deposited with judicial
authority
e. e. Subsequent notice of
consignation to interested parties
2. 2. Exception to requirement for
tender of payment:
a. a. When creditor is absent or
unknown or does not appear at
place of payment
b. b. When he is incapacitated
to receive payment
c. c. When he refuses to give
receipt, without just cause
d. d. When two or more persons
claim same right to collect
e. e. When title of the obligation
has been lost
3. 3. Expenses of consignation for
Creditor’s account
a. a. If creditor allows debtor to withdraw the consignation, creditor
lose preference over the thing. Co-debtor, guarantors, sureties shall
be released.
II. Loss of the Thing Due
(a) (a) Lost – when perished, go out of commerce, or
disappear in such a way that its existence unknown or
cannot be recovered
Or becomes legally or physically impossible to perform, or
so difficult as to be manifestly beyond the contemplation
of the parties
(b) (b) The obligation to deliver specific thing is
extinguished if
1. 1. Without the fault of debtor, and
2. 2. Debtor not in delay
(c) (c) No person shall be responsible for fortuitous events,
except:
1. 1. Where expressly specified by law or stipulated
in contract
2. 2. When nature of the obligation requires
assumption of risk
3. 3. When debtor is at fault, partly
4. 4. When debtor incurs delay
5. 5. When debtor promises to deliver same thing
to two or more persons
6. 6. When obligation to deliver arises from
criminal offense
7. 7. When obligation is generic
(d) (d) In case of partial loss the court shall determine
whether it is so important as to extinguish the obligation
(e) (e) In case lost when the thing is in the possession of
debtor, presumption is it is his fault
Except earthquake, flood, storm or other
natural calamity
(f) (f) Creditor shall have right to go against any third
person responsible for the loss.
III. III. Condonation or Remission of Debt
g. h. Act of liberality by virtue of which creditor
abandons his right
Gratuitous
Accepted by debtor
Obligation must be demandable
Parties must be capacitated
Donation not inofficious
Forms in express condonation
h. i. Implied remission
- - Delivery of private document evidencing
credit
- - If thing pledge is found in the possession
of debtor or owner of thing
- - Renunciation of principal extinguish
accessory obligation
IV. Confusion or Merger of Rights
Creditor and Debtor merged in the same
person
1. 1. Between principal debtor and principal
creditor
2. 2. Complete and definite merger
a. a. Merger of debtor and creditor benefits the
guarantor
b. b. Extinguish only the portion of the joint
obligation corresponding to the creditor and debtor
merged
c. c. Merger of one solidary debtor with creditor
extinguishes obligation
V. Compensation
a. a. Persons who in their own rights are debtors and
creditors of each other extinguishes the debts to the
concurrent amount
b. b. Guarantor can set up compensation of what
principal debtor may owe creditor
c. c. Compensation may be total or partial
d. d. Parties may agree to compensate debts not yet due
e. e. When one or both debts are rescissible or voidable,
they may be compensated before they are judicially
rescinded or avoided
f. f. Requisites of legal compensation (by operation of
law ):
1. 1. Parties are principal creditors and debtors
of each other
2. 2. Both debts consist in sum of money or
consumable of same kind and quality
3. 3. Both debts are due and demandable
4. 4. Two debts are liquidated (amount is
certain)
5. 5. No retention or controversy commenced by
3rd party
b. g. Compensation after assignment
i.
Assignment made with consent of debtor
Debtor cannot set up compensation against
previous creditor
ii.
Assignment with knowledge but without consent
Debtor can set up compensation for debts
before the notification
Debtor cannot set up compensation with
respect to debts which matured after notification
iii.
Assignment without knowledge of debtor
Debtor can set up compensation for debts
maturing before he learned of assignment
c. h. Compensation cannot take place in following case:
i. Debts
from Contracts of Depositum (A person receives a
thing belonging to another for safekeeping and of
returning the same; not bank deposits)
ii. Debts
from Commodatum (One person delivers to another
something for him to use and return it)
iii. Claims
for support due by gratuitous title
iv. Debts
from Criminal offense
v. Taxes
VI. Novation – extinction of an obligation through the creation of
a new one which substitutes it
a. a. Requisites:
i. Previous valid obligation
ii. Agreement to enter new obligation
iii. Extinguishments of old
iv. Creation of new valid obligation
b. b. Must be declared in unequivocal terms
c. c. Or incompatible on every point – Test: Whether
old and new contract can stand together each having
its own independent existence
d. d. Substitution of Debtor
i. Expromision – Without the
knowledge or consent of debtor, at the instance
of the new debtor
1. 1. Payment by new debtor gives him
right to beneficial reimbursment
2. 2. Insolvency or non fulfillment of
obligation by new debtor will not give rise
to liability of old debtor
ii. Delegacion – Substitution made at
the instance of old debtor
3. 1. Payment by new debtor entitles him
to reimbursement and subrogation
4. 2. Non fulfillment of obligation by new
debtor will not give rise to liability of old
debtor
5. 3. Insolvency of new debtor will revive
action against old debtor if insolvency was
already existing and of public knowledge,
or known to the debtor when he delegated
his debt
e. e. If new obligation is void, the original one shall
subsists
f. f. If original obligation is void, novation is void;
except when annulment may be claimed only by
debtor or when voidable acts have been ratified
g. g. Subrogation – Substitution of Debtor
i. Conventional – By express
agreement of the old creditor, debtor and the
new creditor
ii. Legal –Without agreement, by
operation of law
1. 1. When creditor pays another creditor
who is preferred, even without the debtor’s
knowledge
2. 2. When a third person, not interested
in the obligation, pays with the express or
tacit approval of debtor
3. 3. When a third person interested in
the fulfillment of obligation pays, even
without the knowledge of debtor
Definition of a Contract
A meeting of the minds
Between two persons
Whereby one binds himself, with respect to the other
To give something or to render some service
Different phases or stages in the life of a contract
1. 1. Preparation – Preliminary to formation
2. 2. Perfection – birth of the contract
3. 3. Consummation - fulfillment
Essential characteristics of Contracts
1. 1. Obligatory force – must be complied with in good faith
2. 2. Autonomy – parties are free to enter such stipulations,
clauses, terms and conditions
– – Clauses and condtions must not be contrary to:
LAW
Morals
Good Customs
Public Order
Public Policy
3. 3. Mutuality – contract must bind both parties
Determination can be left to third party, whose decision
shall be binding only when communicated to both parties
Unless such determination be evidently inequitable
4. 4. Relativity – takes effect only bet parties, their assigns and
heirs
Stipulation pour autrui accepted by third party
Where third persons comes into possesion of the object of
contract creating real rights
Where contract is to defraud a third person
Where third person induces a contracting party to violate his
contract
a. a.
Different Classes of Contracts
According to perfection
– – Consensual – Perfected by mere agreement of the parties
– – Real – Requires not only consent, but also the delivery of
the object
According to form
– – Common – Do not require particular form
– – Formal – Those which require particular form, like
donation, mortgage
According to nature of vinculum
– – Unilateral – Obligation of one party only
– – Bilateral – Reciprocal obligations for both parties
According to cause
– – Onerous – Giving of an equivalent or compensation
– – Gratuitous – Given without compensation, just pure
liberality
Elements of Consent
1. Absolute
– Contracting parties do not intend to be bound
by the contract at all
– –Void
2. Relative
– Contracting parties conceal their true
intentions
– Real agreement binding on the parties if it does
not prejudice third person
Objects
Cause
Form
Reformation
When the true intention of the parties are not expressed in the
instrument, one of the party may ask for the instrument to be
changed so that true intention may be expressed.
Requisities
Must be a meeting of the minds of the parties
True intention is not expressed in the instrument
Failure due to mistake, fraud, inequitable conduct or
accident
What may be reformed
Mutual mistake of parties cause failure to disclose real
agreements
One party mistaken and the other acted fraudulently
or inequitably
One party was mistaken and the other knew that
instrument did not state real agreement, yet concealed it
Ignorance, lack of skill,, negligence or bad faith on the
part of person drafting it
Where parties agree on mortgage, but instrument states
property is sold absolutely or with right to repurchase
o o What may not be reformed
o o Simple Donations with no condition
o o Wills
o o Those where real agreement is void
Defective Contracts
o o As to defect
o o Rescissible - Injury or damage
o o Voidable - Vitiation of consent or legal capacity
o o Unenforceable - In excess of authority or do not
complyy with S of Fraud
o o Void - Lack of an element of a valid contract
o o As to effect
o o Rescissible and Voidable - Valid until annulled
o o Unenforceable - Cannot be enforced by action in
court
o o Void - No legal effects at all
o o As to parties who can file action
o o Rescissible and Void – May be attack directly By
contracting parties or by third parties
o o Voidable and Unenforceable - Cannot be
attacked by third persons
Resolution (Rescission of reciprocal obligation
Rescissible Contracts
Guardian who represent ward, lession of more than ¼
of the value of the thing
In representation of absentee, lession of ¼
In fraud of creditor who is unable to collect
Things under litigation, entered into by defendant
without approval of litigants and court
Payment made in state of insolvency where debt not
yet due
Voidable Contracts
Where one party is incapable of giving consent to a contract
Where the consent is vitiated by mistake, violence,
intimidation, fraud, undue influence
Convalidation
Prescription (Four years)
From time incapacity ceases
From discovery of such fraud or mistake
Ratification or confirmation
Loss of the thing by thru the fault of the person who has right
to annul
Effects of annulment of Voidable Contract
– – If not consummated, then parties are released from obligation
– – If consummated, parties are to restore to each other what they
have given, with fruits and interests, plus damages
– – If to do or not to do, there will be apportionment of damages
– –Incapacitated party not obliged to make restitution except for
what he was benefited
Unenforceable Contracts
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
Those not complying with Statute of Frauds.
Statute of Fraud
– –Purpose is to prevent fraud, not to aid the commission of
fraud
– – Basic and fundamental principles
Applies only to executory contracts
Cannot apply if action is not for damage bec of violation
of agreement or for specific performance
Exclusive
May be waived
Personal defense
Contracts are not void
Rule of exclusion
Concerns admissibility of evidence, not credibility
Does not apply if action is to claim reformation
– – Following must be in writing or in some notes or memorandum:
– – Agreement not to be performed within a year from the
making thereof
– – A special promise to answer for debt, defaults or
miscarriage of another
– – Agreement in consideration of marriage
– – Sales of goods, chattels, things above P500
– – Lease of more than one year
– –Representation as to credit of another
Void Contracts
– – No concurrence of offer/acceptance
– – Cause, object, purpose contrary to law, morals, good customs,
public order, or public policy
– – Absolutely simulated or fictitious
– – Cause or object did not exist at the time of the transaction
– – Object outside commerce of men
– – Impossible service
– – Intention of the parties relative to principal object cannot be
ascretained
– – Prohibited or declared void by law
Estoppel
Estoppel in pais - by one’s conduct or acts, representatioons,
admissions or silence, culpable negligience induces another to
believe certain facts to exist and such other rightfully relies and
acts on such belief.
Estoppel by Deed - A party to a deed, are precluded from
aasserting against the other party to the deed any right or title in
derogation of the deed, or from denying any material fact asserted
therein.
Estoppel by Record - A party precluded from denying the
truth of matters set forth in a record, whether judicial or
legislative.
Estoppel by Laches
Estoppel by Laches
Failure or neglect to enforce a right for an
Unreasonable and unexplained length of time
Despite knowledge or notice
EXTINCTIVE PRESCRIPTION
(Arts. 1139-1155)
40 days Redhibitory action based on defects
of animals.
6 months (a) (a) Action for reduction of price for
rescission in case of breach of sale of
real estate, either with a statement
of its area at a certain price for a
unit of measure or number.
(b) (b) Action for warranty against
hidden defects of thing sold.
1 year (a) (a) Action by husband against wife
to impugn child’s legitimacy if
husband is in the same place as
wife.
(b) (b) Action for revocation of donation
for acts of ingratitude.
(c) (c) Action for forcible entry or
unlawful detainer.
(d) (d) Action for defamation.
(e) (e) Action for rescission or for
damages if immovable sold is
encumbered with non-apparent
burden or servitude.
2 years Action to impugn child’s legitimacy if
husband is in the Philippines but
not in same place as wife.
3 years Action to impugn child’s legitimacy if
husband is abroad.
4 years (a) (a) Action for revocation or
reduction of donation based on
supervening birth, appearance or
adoption of a child.
(b) (b) Action for revocation of donation
based on fulfillment of condition.
(c) (c) Action for recovery of movable
(replevin) if possessor is in good
faith.
(d) (d) Action upon injury to rights of
plaintiff.
(e) (e) Action upon a quasi-delict.
(f) (f) Action for rescission of
rescissible contracts.
(g) (g) Action for annulment of voidable
contracts.
5 years (a) (a) Action for legal separation.
(b) (b) Action for annulment of marriage
based on
1. Lack of parental consent.
2. Fraud.
3. Force, intimidation or undue
influence.
4. Physical incapacity and afflicted with
a sexuality transmissible
disease.
(c) (c) Action to claim legitimacy if child
should die during minority or in
state of insanity.
(d) (d) Action for declaration of
incapacity of heir.
(e) (e) Action for warranty of solvency of
debtor if credit is assigned to co-heir
during partition.
(f) (f) All other actions whose periods
are not fixed by law.
6 years (a) (a) Action upon oral contract.
(b) (b) Action upon a quasi-contract.
8 years Action for recovery of movables
(replevin) if possessor is in bad faith.
10 years (a) (a) Action for recovery of possession
of immovables (accion publiciana) if
real right of possession is lost.
(b) (b) Action for recovery of ownership
of immovables (accion
reinvindicatoria) if possessor is in
good faith.
(c) (c) Action upon a mortgage contract.
(d) (d) Action upon a written contract.
(e) (e) Action upon an obligation
created by law.
(f) (f) Action upon a judgment.
Lifetime (a) (a) Action to claim legitimacy.
(b) (b) Action to obtain declaration of
illegitimate filiation.