Green Notes 2019 Obligations and Contracts

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

do. (Art. 1156, Civil Code)

ELEMENTS DEFINITION
Juridical Tie or Legal Binds the parties to the
Tie (vinculum juris) obligation, and which may
arise from law, or by the
bilateral or unilateral acts of
persons
An Active Subject Known as the obligee or
creditor, who has the power to
demand the prestation
A Passive Subject Known as the obligor or
debtor, against whom the
obligation is juridically
demandable
An Object The fact, prestation or service
which constitutes the object
of the obligation.

NOTE: In some cases, form is necessary for an obligation

to be valid.

The subjects may be individual persons or juridical

persons. They do not have to be determined during the act
of constituting the obligation for as long as they could be
determinable in some manner later on. When either
subject cannot be determined, the obligatory tie can have
no effect.

EFFICIENT CAUSE
The legal tie (vinculum juris), is the vinculum, which may
either be a relation established:
1. By law;
2. By bilateral acts, or
3. By unilateral acts.

REQUISITES OF PRESTATION
a. It must be possible, physically and juridically;
b. It must be determinate, or at least, determinable
according to pre-established elements or
criteria; and
c. It must have a possible equivalent in money.

It is a generally established principle that the prestation

should be susceptible of pecuniary value. However, the
prestation need not be of an economic character to have
pecuniary value.

1. Represents an exclusively private interest;

2. Creates ties which are, by nature, transitory
because obligations are extinguished; and

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3. Involves the power to make the juridical tie
defective in case of non-fulfillment through
satisfaction of the debtor s propert .
QUASI-CONTRACT
A quasi-contract is a juridical relation which arises from
certain lawful (distinguishes it from crime), voluntary
(distinguishes it from quasi-delict), and unilateral acts, to
the end that no one may be unjustly enriched or benefited
at the expense of another. (Art. 2142, Civil Code)
An obligation may arise from a quasi-contract even if there
was no unjust enrichment (i.e. negotiorum gestio).
If a liability arises from acts or omissions punished by law,
the act cannot give rise to obligations from quasi-
contracts because the same may only arise from lawful
acts.
In quasi-contracts, no express consent is given by the
party. Instead, the consent needed in a contract is
provided by law through presumption (presumptive
consent). Presumptive consent gives rise to multiple
juridical relations resulting in obligations for delivery of
the thing and rendering of service. (Perez v. Palomar, 1903)
NOTE: A quasi-contract is not an implied contract because
in the former, there is no meeting of the minds.
The most important of these juridical relations which are
recognized and regulated by the Civil Code are:
1. Negotiorum gestio (unauthorized management);
and
2. Solutio indebiti (undue payment).
NEGOTIORUM GESTIO
Negotiorum gestio is the juridical relation which arises
whenever a person voluntarily takes charge of the agency
or management of the business or property of another
without any power or authority from the latter. (Art. 2144,
Civil Code)
Once a gestor or officious manager has assumed the
agency or management of the business or property, he
shall be obliged to continue such agency or management
until the termination of the affair and its incidents,
exercising such rights and complying with such obligations
as provided for in the Code (Arts. 2144-2152, Civil Code).
Consequently, he shall also be liable for any damages that
may be suffered by the owner through his fault or
negligence.
When the owner of the property or business was neglected
or abandoned, he is impliedly giving his consent that
another may take care of his property or business.
A negotorium gestor is to be considered as a trustee of an
implied trust for the benefit of the person from whom the
property comes from. (Hermanos v. Orense, 1914)
Subsequent ratification by the owner in giving his approval
and consent produces the effect of an express agency and
so purifies the contract of the flaws (i.e. without consent
of the owner) it contained at the time it was executed.
(Hermanos v. Orense, 1914)
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SOLUTIO INDEBITI
Solutio indebiti is the juridical relation which arises
whenever a person unduly delivers a thing through
mistake to another who has no right to demand it. (Art.
2154, Civil Code)
Once delivery has been made, the person to whom the
delivery is unduly made shall have the obligation to return
the property delivered or the money paid. (Art. 1254, Civil
Code)
For the rule on solutio indebiti to apply, the following
requisites must concur:
1. The person who paid was under no obligation to
do so; and
2. Such payment was made by reason of an
essential mistake of fact. (Andres v.
Manufacturers Hanover & Trust Corp., 1989)
ACTS AND OMISSIONS PUNISHED BY LAW
General Rule: Every person liable for a felony is also civilly
liable. (Art. 100, RPC)
Exception: No civil liability in offenses and special crimes
as there is no private offended party. (i.e. treason,
rebellion, illegal possession of firearms and gambling)
NOTE: A person who is not criminally liable may still be
civilly liable.
The basis of civil liability arising from a criminal act arises
from the duty of everybody making good the damages he
may occasion another by his acts, whenever these are
contrary to law, whether or not he was aware of what he
was doing.
Civil liability arising from a crime includes:
1. Restitution;
2. Reparation of the damage caused; and
3. Indemnification for consequential damages. (Art.
104, RPC)
RULES ON THE ENFORCEMENT OF CIVIL LIABILITY
ARISING FROM CRIMINAL OFFENSES
1. When a criminal action is instituted, the civil
action for the recovery of civil liability arising
from the offense charged is impliedly instituted
with the criminal action, unless the offended
party:
a. Expressly waives the civil action;
b. Reserves his right to institute it
separately; or
c. Instituted the civil action prior to the
criminal action.
2. In B.P. 22 cases, there can be no reservation of
the right to institute a separate civil action.
However, the rules do not preclude a waiver or a
prior institution of the same.
3. In cases provided in Arts. 31, 32, 33 and 2177 of
the Civil Code, an independent civil action
entirely separate and distinct from the criminal
action, may be brought by the injured party
during the pendency of the criminal case.
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As a rule, however, no person can recover
damages twice for the same act or omission
charged in the criminal action. (Art. 2177,
Civil Code, People v. Consing, Jr., 2003)
4. Criminal and civil actions may be instituted
separately, but after the criminal action has been
commenced, the civil action cannot be instituted
until final judgment has been rendered in the
criminal action;
The rule that the civil action cannot be
instituted until final judgment has been
rendered in the criminal action does not
apply to independent civil actions.
The period of prescription shall be
suspended during the period within which
the civil action cannot be instituted or is
suspended.
The suspension of the period of prescription
does not apply to independent civil actions
since they can be instituted separately.
5. If the civil action has been filed ahead of the
criminal action, the civil action shall be
suspended at whatever stage before final
judgment, until final judgment in the criminal
case has been rendered.
6. If no final judgment has been rendered in the
civil action, the civil and criminal action may be
consolidated upon application with the court
trying the criminal action.
7. Extinction of the penal action does not carry
with it extinction of the civil liability, unless
extinction proceeds from a declaration in a final
judgment that the fact from which the civil
liability might arise did not exist.
8. A final judgment rendered in a civil action
absolving the defendant from civil liability is no
bar to a criminal action.
9. A petition for suspension of the criminal action
based upon the pendency of a prejudicial
question in a civil action may be filed in the same
criminal action, as long the following elements
are present:
a. There is a previously instituted civil
action which involves an issue similar
or intimately related to the issue raised
in the subsequent criminal action; and
b. The resolution of such issue
determines whether or not the
criminal action may proceed.
10. No counterclaim, cross-claim or third-party
complaint may be filed by the accused in the
criminal case. Any cause of action which could
have been the subject thereof may be litigated in
a separate civil action. (Sec. 1(a), Rule 111, Rules of
Court)
For civil liability to attach there must be conviction. Also, if
civil liability is to attach, restitution is always available. This
is under the context that the civil action was not filed
separately.
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QUASI-DELICTS (CULPA AQUILIANA)
Quasi-delict or tort refers to all of those obligations which
do not arise from law, contracts, quasi-contracts, or
criminal offenses.
Quasi-delict is defined as the fault or negligence of a
person, who, by his act or omission, connected or
unconnected with, but independent from, any contractual
relation, causes damage to another person. (Art. 2176, Civil
Code)
Quasi-delict include acts which are criminal in character
or in violation of the penal law, whether voluntary or
negligent provided that the offended party is not allowed,
if he is actually charged also criminally, to recover
damages on both scores, and would be entitled in such
eventuality only to the bigger award of the two, assuming
the awards made in the two cases vary. (Elcano v. Hill, 1977)
Negligence is the failure to observe for the protection of
the interests of another person, that degree of care,
precaution and vigilance which the surrounding
circumstances reasonably impose.
The test by which to determine the existence or
negligence in a particular case may be stated as
follows: Did the defendant in doing the alleged negligent
act use that reasonable care and caution which an ordinary
person would have used in the same situation? If not, then
he is guilty of negligence. (Picart v. Smith, 1918)
A negligent act gives rise to at least two separate and
independent liabilities:
1. Culpa criminal
Civil liability arising from crime
2. Culpa aquiliana
Liability arising from civil negligence
Failure of the plaintiff to reserve in the criminal case his
right to file a separate civil action is not fatal to the civil
action after acquittal of the accused. A person, while not
criminally liable, may still be civilly liable. There is no need
to make a reservation to file a civil action in the criminal
case, as the civil action is based on culpa aquiliana.
PERSONS WHO MAY BE LIABLE
1. The person directly responsible for the damage
incurred;
2. The father and, in case of his death or incapacity,
the mother, with respect to damages caused by
the minor children who live in their company;
3. Guardians, with respect to damages caused by
the minors or incapacitated persons who are
under their authority and live in their company;
4. The owners and managers of an establishment or
enterprise, with respect to damages caused by
their employees in the service of the branches in
which the latter are employed or on the occasion
of their functions;
5. Employers, with respect to 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;
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6. The State, when it acts through a special agent; damages to the injured
but not when the damage has been caused by the party and, thus, the
official to whom the task done properly pertains, liability for damages is
in which case what is provided in Article 2176 absolute.
shall be applicable; and Includes all acts in which
7. Teachers or heads of establishments of arts and Punished only if there is a
any kind of fault or
trades, with respect to damages caused by their law clearly covering them.
negligence intervenes.
pupils and students or apprentices, so long as Proof of fault or
they remain in their custody. (Art. 2180, Civil negligence need be only Proof of guilt must be
Code) by preponderance of the beyond reasonable doubt.
evidence.
NOTE: The responsibility of the abovementioned persons Can never be
or entities shall cease if they can prove that they have Can be compromised.
compromised.
observed all the diligence of a good father of a family to
prevent the damage. (Art. 2180, Civil Code) The mere fact that a person is bound to another by
contract does not relieve him from extra-contractual
REQUISITES liability to such person. When such a contractual relation
1. There exists a wrongful act or omission exists, the obligor may break the contract under such
imputable to the defendant by reason of his fault conditions that the same act which constitutes a breach of
or negligence; contract would have constituted the source of an extra-
2. There exists a damage or injury, which must be contractual obligation had no contract existed between
proved by the person claiming recovery; and the parties. (Cangco v. MRR, 1918)
3. There must be a direct casual connection or a
relation of cause and effect between the fault or A person who is at fault or negligent may be held liable for
negligence and the damage or injury, or that the more than one civil obligation because the sources of civil
fault or negligence be the cause of the damage or obligations are not mutually exclusive from each other.
injury. Since one may be held liable for more than one civil
obligation, there can be different causes of action.
DOCTRINE OF PROXIMATE CAUSE However, the plaintiff cannot recover damages twice for
Proximate cause is such adequate and efficient cause as, in the same act or omission from the defendant.
the natural order of events, and under the particular
circumstances surrounding the case, would necessarily
produce the damages or injury complained of.

DISTINCTIONS OF QUASI-DELICTS FROM KINDS OF PRESTATIONS IN OBLIGATIONS

OTHER LIABILITIES 1. To give
2. To do
CULPA CONTRACTUAL CULPA AQUILIANA
3. Not to do.
There is already an
It is the breach itself
obligation which exists
which gives rise to the REQUISITES OF PRESTATION
prior to or even without a
obligation. 1. It must be possible, physically and juridically;
breach.
2. It must be determinate, or at least, determinable
FRAUD NEGLIGENCE according to pre-established elements or
criteria; and
It involves willfulness or It involves the failure to
3. It must have a possible equivalent in money.
deliberate intent to cause exercise the diligence
damage or injury to required by law or the
another. want of care as required OBLIGATIONS TO GIVE
by the circumstances. An obligation to give may be either:
1. A specific or determinate object or thing, or
QUASI-DELICT CRIMES 2. A generic or indeterminate object or thing.
Only of private concern. Affects public interest.
Governed by the Civil Governed by the Revised In obligations to give, the obligee or creditor has a right to
Code. Penal Code. the following from the time the obligation to deliver it
arises:
Criminal intent is not Criminal intent is
1. The thing which is the object of the obligation;
necessary for the necessary for the existence
and
existence of civil liability. of criminal liability.
2. The fruits thereof. (Art. 1164, Civil Code)
Indemnifies or merely
Punishes or corrects the
repairs the damages
criminal act. In determining when the obligation to deliver the thing and
incurred.
the fruits arise, we must look at the nature of the
There is only one liability: There are two liabilities:
obligation. In case of obligations arising from:
civil. criminal and civil.
1. Law, quasi-contracts, delicts, quasi delicts, the
Every quasi-delict gives Not all crimes give rise to obligation to deliver arises from the time
rise to liability for civil liability.

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designated by the provisions of the Civil Code or
of special laws creating or regulating them;
2. Contracts, the general rule is that the obligation
to deliver arises from the moment of the
perfection of the contract (Art. 1537, Civil Code).
If a contrary stipulation was agreed upon, such
stipulation shall govern.
In case of obligations with a term or period,
the obligation to deliver arises from the time
the term or period arrives.
When the law requires a different standard
of care, or if the parties stipulate another
standard of care, such degree of care shall
prevail.
3. Deliver all accessions and accessories of the
thing, even though they may not have been
mentioned (Art. 1166, Civil Code);
Exception: When there is a stipulation that
the accessions and accessories need not be
delivered.

NOTE: Although the creditor acquires a right to the fruits ACCESSIONS ACCESSORIES
of the thing from the time the obligation to deliver it arises, All of those things
he does not acquire any real right over it until the same has All of those things
which have for their
been delivered to him. which are produced by
object the
the thing which is the
embellishment, use or
DISTINCTIONS OF PERSONAL RIGHT object of the obligation
preservation of another
AND REAL RIGHT as well as all of those
thing which is more
PERSONAL RIGHT REAL RIGHT which are naturally or
important and to which
artificially attached
A right pertaining to a they are not
A right pertaining to a thereto. (Art. 440, Civil
person over a specific incorporated or
person to demand from Code)
thing, without a passive attached.
another, as a definite
subject individually
passive subject, the
determined against whom 4. Liability for damages in case of breach of the
fulfillment of a prestation
such right may be obligation by reason of delay, fraud, negligence
to give, to do or not to do.
personally enforced. or contravention of the tenor thereof. (Art. 1170,
Enforceable only against a Civil Code)
Enforceable against the
definite person or group Exception: This liability does not arise if the
whole world (jus in re).
of person (jus ad rem). breach is due to a fortuitous event. (Art. 1174,
Example: The right of a Civil Code)
creditor to demand from Exception to the exception: If the obligor
Example: The right of
the debtor the delivery of delays, or has promised to deliver the same
ownership, possession,
the object of the thing to two or more persons who do not
usufruct or easement.
obligation after the have the same interest, he shall be
perfection of the contract. responsible for any fortuitous event until he
had effected the delivery. (Art. 1165(3), Civil
In obligations to give, the creditor merely has a personal Code)
right against the debtor the right to ask for delivery of
the thing and the fruits thereof. Once the thing and the REMEDIES OF A CREDITOR IN DETERMINATE
fruits are delivered, he then acquires a real right over
OBLIGATIONS
them.
1. Demand specific performance (Art. 1165, Civil
Code);
Delivery may be actual or constructive. Actual delivery is
The debtor cannot compel the creditor to
where physically, the property changes hands.
receive a different thing, although the latter
Constructive delivery is where the physical transfer is
may be of the same value as, or more
implied.
valuable than that which is due. (Art. 1244,
Civil Code)
OBLIGATION TO GIVE A SPECIFIC OR DETERMINATE
The debtor cannot plead pecuniary
THING
impossibility of performance in complying
A thing is determinate when it is particularly designated or
with his obligation. Mere pecuniary inability
physically segregated from all others of the same class.
does not discharge the obligation, nor does
(Art. 1460(1), Civil Code)
it constitute any defense to a decree of
specific performance. (Art. 1246, Civil Code)
OBLIGATIONS OF DEBTOR IN DETERMINATE
2. Demand rescission or cancellation, in some
OBLIGATIONS
cases;
1. Perform the obligation specifically;
3. Recover damages, with or without either of the
He must deliver the thing or object which is
first two.
particularly designated or physically
Delay, fraud, negligence or contravention of
segregated from all others of the same class.
the tenor of the obligation constitutes a
A thing of superior or inferior quality cannot
breach. (Arts. 1165(1) and 1170, Civil Code)
be delivered. (Art. 1244, Civil Code)
2. Take care of the thing with the proper diligence
NOTE: These remedies are not incompatible with each
of a good father of a family (Art. 1163, Civil Code);
other; hence, it may be filed at the same time.

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by its own confined to that of

OBLIGATION TO GIVE A GENERIC OR individuality. its nature.
INDETERMINATE THING As to Diligence of a
A thing is generic or indeterminate when the object is Diligence good father of
designated merely by its class or genus without any Required the family is
particular designation or physical segregation from all required of the No standard of
others of the same class. debtor, unless care is required.
otherwise
OBLIGATIONS OF DEBTOR IN GENERIC OBLIGATIONS stipulated by
1. Deliver a thing which is neither of superior nor law or contract.
inferior quality (Art. 1246, Civil Code); As to Delivery All the
No such delivery
The creditor cannot likewise demand a of Accessories accessions and
of accessions and
thing of superior quality. and accessories
accessories is
In the determination of the quality of the Accessions must be
required.
thing to be delivered, the purpose of the delivered.
obligation and other circumstances shall be As to Liability The debtor
taken into consideration. (Art. 1246, Civil of Debtor in cannot be held
Code) case of liable if the
2. Liability for damages in case of breach of the Fortuitous breach is
obligation by reason of delay, fraud, negligence Event caused by a
fortuitous
or contravention of the tenor thereof. (Art. 1170, The debtor is still
event, unless
Civil Code) liable even if the
the obligor is
Includes the obligation to reimburse all breach is caused
already in delay
expenses incurred by the creditor where by a fortuitous
or has promised
the latter avails himself of the right to ask a event.
to deliver the
third person to perform the obligation at the
same thing to
expense of the debtor. (Art. 1165(2), Civil
two or more
Code)
persons who do
The rule that the obligation is extinguished
not have the
in case of loss or destruction of the thing
same interest.
through a fortuitous event shall not apply
As to Remedy The creditor has a
(Art. 1263, Civil Code). This is based on the The creditor
of Creditor right to
maxim that genus never perishes. has a right to
performance, but
specific
not specific
REMEDIES OF A CREDITOR IN GENERIC OBLIGATIONS performance.
performance.
1. Demand performance of the obligation (Art.
1165, Civil Code);
OBLIGATIONS TO DO
The difference of this remedy from specific
Obligations to do are positive personal obligations.
performance in determinate obligations to
give is that the creditor cannot compel
REMEDIES OF A CREDITOR IN OBLIGATIONS TO DO
specific performance, but instead, he may
If the debtor fails to do that which he has obligated himself
ask for delivery of a thing or object
to do:
belonging to the class or genus stipulated
1. Performance of the obligation (Specific
which must be neither of superior nor
Performance); or
inferior quality. (Art. 1246, Civil Code)
2. Ask that the obligation be complied with at the
2. Ask that the obligation be complied with at the
expense of the debtor (Equivalent Performance);
expense of the debtor (Art. 1165, Civil Code);
and
This remedy is availed of if the debtor
3. Recover damages in both cases. (Art. 1170, Civil
refuses or is unable to comply with his
Code)
obligation.
3. Recover damages for breach of the obligation.
NOTE: Where the prestation consists of an act where the
Delay, fraud, negligence or contravention of
personal and special qualification of the debtor is the
the tenor of the obligation constitutes a
principal motive for the establishment of the obligation
breach. (Arts. 1165(1) and 1170, Civil Code) (ex. talent and prestige of the artist), then the right of the
creditor to have the prestation executed at the expense of
POINT OF SPECIFIC OR another cannot be availed of. Instead, the only remedy is
GENERIC OR
COMPARISO DETERMINAT to proceed against the debtor for damages.
INDETERMINAT
N E
E OBLIGATIONS
OBLIGATIONS If the debtor performs the obligation, but in contravention
As to Object The object is a of the tenor thereof:
The object is one
concrete, 1. Have the obligation performed or executed at
whose
particularized the expense of the debtor (Art. 1167(1), Civil Code);
determination is
thing, indicated or

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2. Ask that what has been poorly done be undone,
if possible (Art. 1167(2), Civil Code); and
3. Recover damages in both cases. (Art. 1170, Civil
Code)
If what has been done cannot be undone, then the remedy
is to recover damages.
The requisites for mora solvendi are the following:
1. The obligation is demandable and already
liquidated;
2. There is non-performance;
3. A demand is made by the creditor, unless the
demand is not required; and
4. The demand is for the obligation that is due.

OBLIGATIONS NOT TO DO The demand by the creditor may be judicial or

Obligations not to do are negative personal obligations. extrajudicial. There is a judicial demand if the creditor files
The object of the obligation is fulfilled or realized so long a complaint against the debtor, and there is an
as that which is forbidden is not done by the debtor. extrajudicial demand if the creditor demands fulfillment of
the obligation either orally or in writing.
In obligations not to do, delay is impossible unlike positive
obligations. This is so because in negative obligations, the WHEN DEMAND IS NOT NECESSARY
obligation is either fulfilled or not fulfilled. 1. When the law so provides;
2. When the obligation expressly so provides;
REMEDIES OF A CREDITOR IN 3. When time is of the essence;
OBLIGATIONS NOT TO DO When from the nature and the
1. Have it undone at the expense of the debtor (Art. circumstances of the obligation, the
1168, Civil Code), if possible; and designation of the time is a controlling
2. Recover damages. (Art. 1170, Civil Code) motive for the establishment of the
contracts.
If what has been done cannot be undone, then the 4. When demand would be useless, as when the
remedy is to recover damages. obligation has rendered it beyond his power to
perform (Art. 1169(2), Civil Code); or
KINDS OF BREACH OF OBLIGATIONS 5. When the debtor expressly acknowledged that
1. Voluntary he is in default.
2. Involuntary
In the above circumstances, the debtor shall be considered
VOLUNTARY INVOLUNTARY in default even without a demand made by the creditor.
The debtor is guilty of
default (mora), fraud MORA ACCIPIENDI
The debtor is unable to The creditor is guilty of default when he unjustifiably
(dolo), or negligence
comply because of a refuses to accept payment or performance at the time said
(culpa), or any manner
fortuitous event. payment or performance can be done. Instances where the
which contravenes the
tenor of the obligation. refusal is justifiable are when the payor has no legal
The debtor is not liable for capacity or that there was an offer to pay the debtor of an
The debtor is liable for obligation other than what has been agreed upon.
damages, subject to
damages. When the creditor is in default, the debtor must either
certain exceptions.
consign the object in court or keep it himself. In the latter
case, due diligence and care should still be exercised, but
VOLUNTARY BREACH THROUGH DEFAULT OR MORA
this time, the debtor does not become liable if the thing
The kinds of breach through default or mora are:
was lost due to a fortuitous event.
1. Mora solvendi
a. Mora solvendi ex re is when the
COMPENSATIO MORAE
obligation is an obligation to give; and
Reciprocal obligations are those which are created or
b. Mora solvendi ex persona is when the
established at the same time, out of the same cause, and
obligation is an obligation to do.
which result in mutual relationships of creditor and debtor
2. Mora accipiendi
between the parties. In these obligations, fulfillment by
3. Compensatio mora
one party depends upon the fulfillment by the other.
NOTE: There can be no mora solvendi in obligations not to
General Rule: Fulfillment should be simultaneous or at the
do, and there can be no mora in natural obligations.
same time.
MORA MORA COMPENSATIO
Exception: Different dates for performance or fulfillment
SOLVENDI ACCIPIENDI MORAE are fixed by the parties.
In a reciprocal
Default on the Default on the obligation In reciprocal obligations, one party incurs in delay from
part of the part of the where both the moment the other party fulfills his obligation, while he
debtor. creditor. parties are in himself does not comply or is not ready to comply with
default. what is incumbent upon him. (Art. 1169(3), Civil Code).
When neither can perform, then there is compensation
MORA SOLVENDI morae.

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As to Status of The contract is

EFFECTS OF DEFAULT Contract The contract is rescissible if there
1. Once there is default, the party in default shall be voidable. is causal fraud or
held liable for damages (Art. 1170, Civil Code). This dolo causante.
liability subsists even if the thing may have been
lost or destroyed through a fortuitous event, as EFFECTS OF FRAUD
long as demand was made before the happening 1. The debtor can be held liable for damages if
of the fortuitous event. there is breach or non-fulfillment of the
2. The debtor can be held liable for damages in the obligation by reason of fraud or dolo. (Art. 1170,
form of interest if the obligation consists in the Civil Code)
payment of a sum of money, and there being no 2. Waiver for a past fraud or fraud that has already
stipulation to the contrary. Art. 2209, Civil Code) been committed is valid. However, a waiver for
future fraud is contrary to law and public policy.
VOLUNTARY BREACH THROUGH (Art. 1171, Civil Code)
FRAUD OR DOLO
Fraud or dolo consists in the conscious and intentional Fraud or dolo is synonymous to bad faith, hence, damages
proposition to evade the normal fulfillment or cannot be recovered when the mistake or errors of
performance of an obligation. judgment was made in good faith.

NOTE: This type of fraud refers to fraud in the VOLUNTARY BREACH THROUGH
performance of a contract. It should not be confused with NEGLIGENCE OR CULPA
fraud in obtaining consent as the latter is a ground for Negligence or culpa consists in the omission of the
annulment. diligence that is required by the nature of the obligation
and corresponds with the circumstances of the person, of
Fraud may be classified as follows: the time and of the place. (Art. 1173, Civil Code)
1. Fraud in obtaining consent; and
a. Causal fraud (dolo causante) The test of negligence may be stated as follows: Did the
b. Incidental fraud (dolo incidente) defendant in doing the alleged negligent act use the
2. Fraud in the performance of a contract. reasonable care and caution which an ordinarily prudent
person would have used in the same situation? If not, then
he is guilty of negligence. (Picart v. Smith, 1918)
POINT OF FRAUD IN FRAUD IN TH
COMPARISON OBTAINING PERFORMANCE General Rule: The diligence of a good father of a family is
CONSENT OF CONTRACT required in the preservation of the thing which is the
As to When Present only object of the obligation. (Art. 1173, Civil Code)
Present at the
Fraud is during the
time of the birth Exception: Another degree of care is required by the law or
Present performance of a
of the the contract in the performance of the obligation. (Art. 1173,
pre-existing
obligation.
obligation. Civil Code)
As to Purpose Employed for
of the purpose of Employed for the POINT OF
DOLO CULPA
Employment securing the purpose of COMPARISON
of Fraud consent of the evading the As to There is Although
other party to normal fulfillment Existence of deliberate voluntary, there is
enter into the of an obligation. Deliberate intent to cause no deliberate
contract. Intent damage or intent to cause
As to Result or If it is the reason prejudice. damage.
Outcome of for entering As to Liability arising
Results in the
Fraud into the Capability of from dolo Liability due to
nonfulfillment or
Employed contract, Reduction of cannot be culpa may be
breach of the
results in the Liability mitigated or reduced in certain
obligation.
vitiation of reduced by the cases.
consent. courts.
As to Remedy The creditor or As to Waiver Waiver of future
of Creditor innocent party of Future negligence is
has a right to The creditor has a Fraud allowed, unless
annul the right to recover the nature of the
contract if fraud damages. obligation and
is causal, or has Waiver of future
public policy
a right to fraud is void.
should require
recover extraordinary
damages, if it is diligence (i.e.
incidental. common
carriers).

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selection and and

The kinds of breach through negligence or culpa are: and supervision of supervision of
1. Culpa contractual supervision employees is employees is
2. Culpa aquiliana of available as a not available
3. Culpa criminal employees defense. as a defense.
is not
Culpa contractual available as
Contractual negligence or culpa contractual is the fault or a defense.
negligence of the debtor by virtue of which he is unable to
perform his obligation arising from a pre-existing EFFECTS OF NEGLIGENCE
contract, because of the omission of the diligence which is 1. If the defendant s negligence was the proximate
required. cause of the injury, he shall be liable for damages.
This liability subsists even if the debtor has
Culpa aquiliana been acquitted in a criminal action charging
Civil negligence (tort or quasi-delict) or culpa aquiliana is him with a criminal offense based on his
the fault or negligence of a person, who, because of the negligent act or omission. (San Pedro Bus
omission of the diligence which required, causes damage Lines v. Navarro, 1954)
to another. 2. If the plaintiff s negligence was contributory, the
immediate and proximate cause of the injury
Culpa criminal being the defendant s lack of due care, the
Criminal negligence or culpa criminal is that which results plaintiff may recover damages, but the courts
in the commission of a crime or delict. shall mitigate the same.
3. When the plaintiff s own negligence was the
POINT OF CULPA immediate and proximate cause of his injury, he
CULPA CULPA cannot recover damages. (Art. 2179, Civil Code)
COMPARIS CONTRAC-
AQUILIANA CRIMINAL
ON TUAL
Liability arising from negligence in the performance of
As to Kind Negligence is Negligence is
every kind of obligation may be regulated by the courts
of Negligence direct, direct,
is merely substantive substantive (Art. 1172, Civil Code). The court may take into
Negligence consideration the good or bad faith of the debtor or the
incidental. and and
conduct of the creditor when the damage was incurred.
independent. independent.
As to
If the debtor acted in good faith, he shall be liable only for
Existence natural and probable consequences of the breach of the
A pre- There may or No pre-
of Pre- obligation and which the parties have foreseen or could
existing may not be a existing
existing reasonably foreseen at the time of the constitution of the
contractual pre-existing contractual
Contract obligation. (Art. 2207, Civil Code)
relation contractual relation
exists. relation. exists.
When negligence shows bad faith, the rules on fraud or
dolo shall govern (Art. 1173(1), Civil Code). In other words,
As to The source The source of when the negligent act or omission of the debtor is so
The source of
Source of of the obligation gross that it amounts to a wanton attitude on his part, the
the obligation
Obligation obligation is is the laws governing the liability of a debtor in case of fraud shall
is the
the breach defendant s apply.
commission
or non- negligent act
of the crime.
fulfillment. or omission. VOLUNTARY BREACH THROUGH CONTRAVENTION OF
As to Proof of the THE TENOR OF THE OBLIGATION
Requireme existence of Every debtor who fails in the performance of his
nt of Proof the contract The accused obligations is bound to indemnify the creditor of the
of Breach and of its Proof of the is presumed damages caused thereby. (Art. 1170, Civil Code)
breach or negligence of innocent until
non- the defendant his guilt is The phrase in an manner contravene the tenor of the
fulfillment is required. proven by the obligation includes not only any illicit act which impairs
is required prosecution. the strict and faithful fulfillment of the obligation, but also
for every kind of defective performance. (Arrieta v. National
recovery. Rice and Corn Corp., 1964)
As to The proof The proof
The proof
Degree of needed is needed is FORTUITOUS EVENTS
needed is
Proof prepondera proof beyond A fortuitous event is an event which could not be foreseen,
preponderanc
Required nce of reasonable or which, though foreseen, was inevitable. This includes
e of evidence.
evidence. doubt. acts of God or those which are absolutel independent of
As to The defense The defense The defense human intervention (e.g. rains, typhoons, floods,
Defenses of diligence of diligence in of diligence in earthquakes), or force majeure or events which arise from
Available in the the selection the selection

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Green Notes 2019
legitimate or illegitimate acts of persons other than the
debtor (e.g. riots, wars, robbery).
The requisites for one to be considered a fortuitous event
are:
1. The event must be independent of the will of the
debtor;
2. The event must be either unforeseeable or
inevitable;
3. The event must be of such a character as to
render it impossible for the debtor to fulfill his
obligation in a normal manner; and
4. The debtor must be free of participation in, or
aggravation of the injury to the creditor.
NOTE: The presence of either the element of
unforeseeability or inevitability is sufficient to classify the
event as fortuitous in character.
EFFECTS OF A FORTUITOUS EVENT
General Rule: The debtor is exempt from liability if he is
unable to comply with his obligation by reason of a
fortuitous event.
NOTE: The fortuitous event must be the proximate and
sole cause for the debtor to be free from liability. (Tan
Chiong v. Inchausti & Co., 1912)
Exceptions:
1. When expressly declared by law;
2. When expressly declared by stipulation or
contract;
3. When the nature of the obligation requires the
assumption of risk (Art. 1174 and 1262, Civil Code);
4. When the object of the obligation is lost and the
loss is due partly to the fault of the debtor;
5. When the object of the obligation is lost and the
loss occurs after the debtor has incurred in delay;
6. When the debtor promised to deliver the same
thing to two or more persons who do not have the
same interest (Art. 1165 and 1262, Civil Code);
7. When the obligation to deliver arises from a
criminal offense (Art. 1268, Civil Code); and
8. When the obligation is generic (Art. 1263, Civil
Code).
Assumption of risk ordinarily requires knowledge and
appreciation of the risk and a voluntary choice to
encounter it.
If there is a combination of a fortuitous event and
negligence on the part of the debtor in a determinate
obligation, the following rules apply:
1. If the fortuitous event was the proximate cause,
the obligation is extinguished.
2. If the negligence was the proximate cause, the
obligation is not extinguished.
USURIOUS TRANSACTIONS
Usury is defined as contracting for or receiving something
in excess of the amount allowed by law for the loan or
forbearance of money, goods or chattels. (Tolentino v.
Gonzales, 1927)
Lasallian Commission on Bar Operations
Obligations and Contracts
Under the Usury Law (Act No. 2655), no person shall receive
a rate of interest higher than 12% per annum or the
maximum rate prescribed by the Monetary Board for a
loan secured by a real estate mortgage. However, Central
Bank Circular No. 905 suspended the effectivity of the
Usury Law.
The present rate of interest for the loan or forbearance of
any money, goods or credits and the rate allowed in
judgments, in the absence of an express contract as to
such rate of interest, is 6% per annum. (Circular No. 799)
The two kinds of interest are:
1. Moratory interest
Interest given for compensation or use of
money.
2. Compensatory interest
Interest given by way of damages.
RULES ON THE EXTINGUISHMENT OF INTERESTS
AND PRIOR INSTALLMENTS
1. If the debtor is issued a receipt by the creditor and
on the face of the receipt it is shown that the
principal has been paid without any reservation
with respect to the interest, there arises a
disputable presumption that the interest has also
been paid.
2. If the debtor is issued a receipt by the creditor
acknowledging payment of a latter installment of
a specified debt without any reservation with
respect to prior installments, there arises a
disputable presumption that such prior
installments have been paid. (Art. 1176, Civil Code)
REMEDIES OF A CREDITOR TO PROTECT CREDITS
The remedies of a creditor for the enforcement and
protection of his right against the debtor are as follows:
1. Exact payment;
2. Exhaust debtor s properties, except for those
exempted by law from execution.
3. Be subrogated to all of the rights and actions of
the debtor save those which are purely personal
or inherent in his person (accion subrogatoria);
and
4. Impugn all the acts of the debtor which may have
been done to defraud him (accion pauliana).
Subrogatory action or accion subrogatoria is the right
granted by law to the creditor to exercise all of the rights
and bring all of the actions which the debtor may have
against third persons.
In order to be subrogated to the rights of the debtor, the
following conditions must be present:
1. The debtor must be indebted to the creditor;
2. The creditor must be prejudiced by the inaction
or failure of the debtor to proceed against the
third person; and
3. The creditor must have first pursued or
exhausted all the properties of the debtor which
are not exempted from execution.
NOTE: In accion subrogatoria, the creditor merely acts in
the name and for the account of the debtor after
142
Green Notes 2019 Obligations and Contracts

exhausting all of the assets of the latter, hence, this is

different from legal or conventional subrogation. The
latter involves a change of creditors, while the former does
not.
Accion pauliana is the right of the creditor to impugn the
acts of the debtor, which has defrauded or prejudiced him,
by means of a rescissory action. (Art. 1177, Civil Code)
Accion subrogatoria and accion pauliana are subsidiary in
character. In other words, they can only be availed of in
the absence of any other legal remedy to obtain reparation
for the injury.
TRANSMISSIBILITY OF RIGHTS
General Rule: Rights of obligations or rights which are
acquired by virtue of an obligation are transmissible in
character.
Exceptions:
1. The obligation is purely personal;
2. The contract provides otherwise;
3. The law provides otherwise.
A condition is defined a future and uncertain fact or event,
or a past but uncertain event, upon which an obligation is
subordinated or made to depend.
A condition can never be valid or void because it is merely
an event. More correctly, a condition may be unlawful
which makes the obligation void or inexistent.
A conditional obligation is one whose effectivity is
subordinated to the fulfillment or nonfulfillment of a
future and uncertain fact or event, or a past but uncertain
event.
NOTE: A past but uncertain event means the future
knowledge or proof of a past event. The obligation arises,
not when the event happened or the fact came into
existence, which would be in the past, but when the proof
of such fact or event is presented, which would be in the
future.

When the debtor binds himself to pay when his means

NOTE: Intransmissibility by contractual stipulation must
be clearly established or inferable from the provisions of
the contract itself. (Estate of Hernandez v. Luzon Surety,
Co., 1956)
permit him to do so, the obligation shall be deemed to be
one with a period, subject to the provisions of Art. 1197 of
the Civil Code and not the rules on conditional obligations.
Consequently, the court shall determine the period which
may have been contemplated by the parties.

1. Pure and conditional obligations CLASSIFICATION OF CONDITIONS

2. Obligations with a period 1. Suspensive or resolutory
3. Alternative obligations 2. Potestative, casual or mixed
4. Joint and solidary obligations 3. Possible or impossible
5. Divisible and indivisible obligations 4. Positive or negative
6. Obligations with a penal clause 5. Divisible or indivisible
6. Express or implied

OVERVIEW OF KINDS OF CONDITIONS

A pure obligation is one whose effectivity or
KIND CHARACTERISTICS
extinguishment does not depend upon the fulfillment or
Suspensive The happening of condition or
nonfulfillment of a condition or upon the expiration of a
event gives rise to the obligation or
term or period, and which, as a consequence is
acquisition of rights.
demandable at once. (Art. 1179, Civil Code)
Resolutory The happening of condition or
The immediate demandability of a pure obligation must event extinguishes obligations
not lead to absurd interpretations which would literally and/or rights.
require the debtor to comply immediately with his Potestative The happening or performance
obligation. depends upon the will of a party.

Although the creditor can demand the performance of the Purely potestative:
obligation immediately, the quality or immediate If performance
demandability is not infringed or violated when a depends upon the
reasonable period is granted for performance. sole will of the
Ex. when the creditor grants the debtor a debtor, the obligation
reasonable period of grace within which to is void.
pay his indebtedness arising out of a simple If the performance
and unconditional promissory note depends upon the
sole will of the
When a period was originally agreed upon but is creditor, the
subsequently cancelled by mutual agreement of the obligation is valid.
parties, then the obligation must be considered as pure.

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Casual The happening or fulfillment of non-performance of the obligation;

depends on chance or will of third
person.
Mixed Fulfillment depends partly on
chance or the will of third person
and partly on the will of one party.
Possible By its very nature, it can be fulfilled
or it is not against the law, public
policy or good customs.
Impossible By its nature, it cannot be realized
or it is against law, public policy or
good customs.
Positive Something is to be done or an act
shall be performed.
Negative It is required that something will
not be done or an act will be
omitted.
Divisible It can be partially complied with.
Indivisible It is not susceptible of partial
compliance and must always be
wholly complied with.
There are two or more conditions
Conjunctive
that must all be complied with.
Alternative There are two or more conditions
but compliance or the happening of
one is sufficient
Express The condition is stated either orally
or in writing.
Implied The condition is not stated but is
deemed attached
SUSPENSIVE CONDITIONS
A suspensive condition (condition precedent) is a future and
uncertain event, the happening or fulfillment of which will
give rise to the obligation or the acquisition of a right.
When the obligation depends upon a suspensive condition,
the acquisition of rights by the creditor is subordinated to
the fulfillment of the event which constitutes the
condition. In other words, the birth or effectivity of the
obligation is suspended until the happening or fulfillment
of the event which constitutes the condition. The
obligation of the debtor to comply with the prestation is
likewise suspended.
3. To demand security if the debtor becomes
insolvent;
4. To compel the acknowledgment of the debtor s
signature on a private document or the
execution of the proper public documents for
registration so as to affect third persons;
5. To register the deeds of sale or mortgages
evidencing the contract;
6. To set aside fraudulent alienations made by the
debtor; and
7. To interrupt the period of prescription, by
actions against adverse possessors of the things
which are objects of the obligation.
NOTE: No preference of credit is granted to the creditor
as the rules only allow the bringing of proper actions for
the preservation of the creditor s rights.
Constructive fulfillment of suspensive conditions
Constructive or presumed fulfillment is when the debtor
voluntarily prevents the fulfillment of a condition which
would entitle the creditor to exact performance from the
debtor. (Taylor v. Uy Tieng, 1922)
For the doctrine of constructive fulfillment to apply, the
following must be present:
1. The debtor has an intent to prevent the
fulfillment of the condition; and
2. The debtor actually and voluntarily prevents the
fulfillment of the condition.
NOTE: This doctrine applies only to suspensive, and not to
resolutory conditions.
RESOLUTORY CONDITIONS
A resolutory condition (condition subsequent) is a future or
uncertain event upon the happening or fulfillment of
which rights are already acquired by virtue of the
obligation are extinguished or lost.
When the obligation is subject to a resolutory condition,
the juridical relation which is established and the rights
acquired as a result of the obligation is subject to the
threat of extinction.

In suspensive conditions, what is acquired by the creditor SUSPENSIVE RESOLUTORY

upon the constitution of the obligation is only a mere hope Before the The birth or The obligation is
or expectancy which is protected by law. (Phil. Long Condition effectivity of the effective
Distance Co. v. Jeturian, 1955) is Fulfilled obligation is immediately after
suspended and its establishment
Before the condition is fulfilled, the creditor is accorded by rights are not yet or constitution
the law the right to avail of all remedies for the protection acquired; hence no and rights arising
or preservation of his right. The debtor, on the other hand, demand can be therefrom are
may recover what he has paid by mistake during the made by the immediately
creditor but certain vested in the
pendency of the condition. (Art. 1188, Civil Code)
remedies may be creditor; hence a
availed by him. demand can
The actions available to the creditor for the preservation
already be made.
of his rights are the following:
1. To enjoin or restrain acts of alienation or After the The obligation
The obligation
destruction by the debtor himself or third Condition arises or becomes
and the rights
persons; is Fulfilled effective; hence
arising therefrom
2. To prevent concealment of the debtor s rights arising out of
is extinguished.
properties which constitute the guaranty in case the obligation are

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acquired and a When the fulfillment of the condition depends upon

demand can chance and/or the will of a third person, the obligation
already be made by and such condition is valid. This is because the fulfillment
the creditor. of the condition to which it is subject depends upon the
If the No juridical The juridical will of others.
Condition relation is created. relation is
is Not consolidated and MIXED CONDITIONS
Fulfilled the rights become A mixed condition is one whose fulfillment depends jointly
absolute. upon the will of either one of the parties to the obligation
and upon chance and/or the will of a third person.
POTESTATIVE CONDITIONS
A potestative or facultative condition is one whose When the fulfillment of the condition depends:
fulfillment depends exclusively upon the will of either one 1. Partly upon the will of a party to the obligation;
of the parties to the obligation. and
2. Partly upon chance and/or the will of a third
There is a distinction between the effect of a potestative person, the obligation and such condition is
condition whose fulfillment: valid.
1. Depends on the exclusive will of the debtor; or
2. Depends on the exclusive will of the creditor. NOTE: If the fulfillment of the condition depends not only
upon the will of the debtor but also upon the concurrence
Suspensive Resolutory of other factors, the condition is mixed, hence valid. If it
Potestative on depends exclusively upon the will of the debtor and it is a
the part of the Void. Valid. suspensive condition, it is void.
debtor
POTESTATIV CASUAL MIXED
Potestative on
E
the part of the Valid. Valid.
As to Partly
creditor
Where it upon the
is will of a
A suspensive potestative condition dependent upon the
Dependen party to
exclusive will of the debtor is void because the obligation Exclusivel
t the
would be illusory. Furthermore, it would be in The exclusive y upon
obligatio
contravention of the principle that the validity and will of either chance
n and
fulfillment of contracts cannot be left to the will of one of one of the and/or
partly
the contracting parties. (Art. 1308, Civil Code) parties to the the will of
upon
obligation. a third
chance
A suspensive potestative condition dependent upon the person.
and/or
exclusive will of the debtor is valid because the creditor is
the will of
naturally interested in the fulfillment of the condition
a third
since only by such fulfillment can the obligation become
person.
effected. Furthermore, the prohibition directed against
As to If suspensive
potestative conditions extends only to those potestative to
Validity and
the debtor. (Art. 1182, Civil Code)
dependent on
the:
NOTE: The rule that the conditional obligation shall be void
1. Debtor, it
does not apply to a pre-existing obligation. It is only
is void.
applicable to an obligation which depends for its
2. Creditor,
perfection upon a condition which is potestative to the It is valid. It is valid.
it is valid.
debtor. (Trillana v. Quezon Colleges, 1953)
If resolutory
Although Art. 1182 is applicable only to suspensive
and
conditions, it is made to apply to resolutory potestative
dependent on
conditions dependent upon the exclusive will of the
the debtor, it
debtor. This is because the debtor is naturally interested
is valid.
in the fulfillment of the resolutory condition since it is only
by such fulfillment that he can reacquire rights which have
POSSIBLE CONDITIONS
already been vested in the creditor upon the constitution
A condition is possible when it is capable of realization not
of the obligation.
only according to its nature, but also according to the law,
good customs and public policy.
CASUAL CONDITIONS
A casual condition is one whose fulfillment depends
IMPOSSIBLE CONDITIONS
exclusively upon:
Art. 1183 of the Civil Code speaks of both impossible and
1. Chance; and/or
illegal conditions.
2. The will of a third person.

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A condition is impossible when it is illogical or is not 1. The time 1. The time

capable of realization either according to its nature or expires; or indicated has
according to law, good customs or public policy. 2. It becomes elapsed; or
indubitable 2. It has become
A condition is illegal if it is contrary to good customs or that the event evident that
public policy, or when it is prohibited by law. will not take the event
place. (Art. cannot occur.
The impossibility or illegality of the condition must exist at 1184, Civil (Art. 1185(1),
the time of the creation of the obligation for the following Code) Civil Code)
rules to apply. If No Time The court, taking into consideration the
has been intention of the parties and the nature of
General Rule: Obligations which depend upon impossible Fixed the obligation, shall determine the
or illegal conditions are void. period. (Art. 1185(2), Civil Code)

Exceptions: RETROACTIVE EFFECT OF CONDITIONAL

1. If the obligation is a pre-existing obligation, and OBLIGATIONS
therefore, does not depend upon the fulfillment The rules for obligations with suspensive conditions are
of the condition for its perfection, then only the the following:
condition is void, but not the obligation. 1. Once the condition is fulfilled, the right of the
2. If the obligation is divisible, that part which is not creditor is perfected and becomes effective and
affected by the impossible or illegal condition demandable. Its effects retroact to the moment
shall be valid. (Art. 1183, Civil Code) when the essential elements which gave birth to
3. If the condition is not to do an impossible thing, the obligation have taken place, and not to the
then it shall be considered as not having been moment when the condition was fulfilled. (Art.
agreed upon (Art. 1183, Civil Code). Thus, the 1187, Civil Code)
condition is disregarded but the obligation
remains. NOTE: The principle of retroactivity can apply only to
The obligation becomes pure, and consensual contracts which are perfected by mere
therefore, immediately demandable. consent, and not to real contracts which can only be
4. If the condition is not to do an illegal thing, then perfected by delivery.
both the condition and the obligation are valid.
2. For the fruits and interests during the pendency
POSSIBLE IMPOSSIBLE of the condition in obligations to give:
As a It is valid. It is void. a. In unilateral obligations, the debtor
General gets the fruits and interests unless the
Rule person constituting the same has a
Exceptions 1. Pre-existing contrary intent.
obligations; b. In reciprocal obligations, the fruits and
2. Divisible interest during the pendency of the
obligations; condition is deemed to have been
3. Negative mutually compensated.
None. impossible 3. In obligations to do or not to do, it is the courts
conditions; which will determine in each case the retroactive
and effect of the condition that has been complied
4. Negative with. It may retroact to the very moment the
illegal obligation was constituted or only to a specific
conditions. date before fulfillment, or it can have no
retroactive effect at all.
POSITIVE CONDITIONS
Positive conditions are those that involves the The rules for obligations with resolutory conditions are the
performance of an act or the fulfillment of an event. following:
1. In obligations to give, upon the fulfillment of the
NEGATIVE CONDITIONS resolutory condition, the parties shall return to
Negative conditions are those that involves the each other what they have received and the
nonperformance of an act or the nonfulfillment of an fruits thereof. This applies whether the
event. obligation is unilateral or reciprocal.
2. The person who has the obligation to return has
the right to demand reimbursement for all
POSITIVE NEGATIVE
expenses which he may have incurred in the
As to That some event That some event
production, gathering, and preservation of the
Condition will happen at a will not happen at a
said fruits.
Involved determinate time. determinate time.
3. In obligations to do or not to do, it is the courts
As to The obligation is The obligation which will determine in each case the retroactive
Effects extinguished becomes effective effect of the condition that has been complied
when: when:

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with, as in the case of suspensive conditions. NOTE: The rules on loss, deterioration or improvement
only applies to conditional obligations, whether suspensive
EFFECT OF LOSS, DETERIORATION OR IMPROVEMENT or resolutory, to give a determinate thing.
A thing is lost when:
1. It perishes; EFFECT OF BREACH BY EITHER PARTY
2. It goes out of commerce; or As a rule, the power to rescind obligations is implied in
3. It disappears in such a way that the existence is reciprocal ones, in case one of the parties fails to comply
unknown or it cannot be recovered. (Art. 1189(2), with what is incumbent upon him. (Art. 1191, Civil Code)
Civil Code)
Reciprocal obligations are those which are created or
A thing has deteriorated when the value thereof is reduced established at the same time, out of the same cause, and
or is impaired. which result in mutual relationships of creditor and debtor
between the parties.
Loss
With the fault of the Without the fault of the The characteristics of rescission under Art. 1191 of the Civil
debtor debtor Code are:
The obligation is 1. It exists only in reciprocal obligations. (Art. 1191,
The obligation is Civil Code)
converted into one of
extinguished. 2. It can be demanded only if the plaintiff is ready,
indemnity for damages.
Deterioration willing, and able to comply with his own
obligation, and the other is not.
With the fault of the Without the fault of the
3. The right to rescind is not absolute.
debtor debtor
The creditor may either The rules on rescission under Art. 1191 are the following:
bring an action for: 1. The right to rescind or resolve the reciprocal
1. Rescission with The impairment is to be obligation is a right which belongs to the injured
damages; or borne by the creditor. party alone. (Mateos v. Lopez, 1906)
2. Specific performance
NOTE: The right to rescind under Art. 1191
with damages. cannot be applied to those which are
Improvement governed by a particular or special law. (e.g.
At the expense of the contracts of partnership as governed by the
By nature or by time
debtor law on partnership, sales of personal
The debtor shall have no property by installments as governed by the
The improvement shall
other right other than Recto Law, or sales of real property by
inure to the benefit of the
that granted to a installments as governed by the Maceda
creditor.
usufructuary. Law)
2. It is the judgment of the court and not the mere
The loss may be partial, in which case the following rules will of the injured party which produces the
shall apply: rescission of the obligation. (Ocejo, Perez & Co. v.
1. If the partial loss is one that would amount to a International Banking Corp., 1918)
loss important enough to be considered a Exception: Where the contract itself
complete loss, then the rules on loss shall apply. contains a provision that the obligation may
2. If the partial loss is one that would be merely be cancelled or extinguished by the injured
considered a deterioration of the thing, then the party in case of breach, judicial action is no
rules on deterioration shall apply. longer necessary. (Hanlon v. Hausermann
and Beam, 1920)
If the improvement is made at the expense of the debtor, NOTE: In the case of UP v. De Los Angeles
the following rules will apply: (1970), the Court ruled that the law does
1. The debtor shall have no other right other than not require that the contracting party
that granted to a usufructuary. who believes itself injured must first file
2. The debtor cannot ask for reimbursement for the suit and wait for a judgment before taking
expenses incurred for useful improvements. extrajudicial steps to protect its interest. A
3. The debtor cannot ask for reimbursement for party who deems the contract violated
expenses incurred for luxurious improvements, may consider the contract rescinded, but
however, he has a right to remove such it does so at its own risk. Only the final
improvements, provided it is possible to do so judgment of the court will conclusively and
without damage to the thing or property (Art. finally settle whether the unilateral
579, Civil Code). He may also set off the rescission was correct.
improvements he may have made on the
property against any damage to the same (Art. 3. The court, instead of rescinding the obligation,
580, Civil Code). may instead fix a period within which the debtor
4. The debtor may ask reimbursement for is given a chance to comply with what is
necessary expenses. incumbent upon him.
4. Rescission is allowed only where the breach

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complained of is substantial to defeat the object Exerts an influence upon

of the parties in entering into the agreement. It the time of the Exerts an influence upon
will not be granted where the breach is slight or demandability or the very existence of the
casual. (Delta Motor Corp. v. Gentino, 1989) extinguishment of the obligation itself.
5. As a rule, the injured party may elect between obligation.
specific performance with damages, or It does not have any
rescission with damages. The said remedies are retroactive effect, unless
alternative, and not cumulative. Hence, the It has retroactive effects.
there is an agreement to
injured party cannot seek both. (San Juan v. the contrary.
Cotay, 1913) When left exclusively to
6. If the injured party has chosen specific When left exclusively to
the will of the debtor, the
performance or fulfillment and such fulfillment the will of the debtor, the
very existence of the
becomes impossible, he can still seek the obligation is not affected.
obligation is affected.
rescission or resolution of the obligation. (Art.
1191(2), Civil Code) CLASSIFICATION OF TERMS OR PERIODS
7. If the court orders the rescission, the parties 1. Suspensive or resolutory
must be placed as far as practicable in their 2. Legal, conventional or judicial
original situation. (Po Pauco v. Singuenza, 1926) 3. Definite or indefinite
8. The decree of rescission shall be without
prejudice to the rights of third persons who have OVERVIEW OF KINDS OF PERIODS
acquired the thing in good faith and in KIND NATURE
accordance with the law on mortgage. In such
Suspensive (ex Suspends the demandability of the
case, the only remedy of the injured party is to obligation up to the period agreed
die)
proceed against the party responsible for the upon.
transfer or conveyance for damages. (Art. 1385,
Resolutory (in Obligation is immediately effective
Civil Code) and demandable but will be
diem)
9. If the third person had acquired the thing in bad extinguished when the period
faith, the injured party can still go after the arrives.
property or against the third person himself for
Legal Fixed by the law itself
damages, if for any reason the property can no
Conventional Agreed upon by the parties
longer be recovered.
Judicial Fixed by the Court
EFFECT OF BREACH BY BOTH PARTIES Definite Exact date is specified.
1. The liability of the first infractor shall be equally Indefinite The date is not fixed. When an
tempered by the courts. event which is certain to happen is
2. If it cannot be determined which of the parties specified although the exact date is
first violated the contract, then the contract is unknown.
deemed extinguished and each shall be his own
damages. (Art. 1192, Civil Code) SUSPENSIVE TERM/PERIOD
A period is suspensive when the obligation becomes
demandable only upon:
1. The arrival of a day certain; or
2. The expiration of the term. (Art. 1193, Civil Code)
Obligations with a period are those whose demandability
or extinguishment is subject to the expiration of a term or A day certain is understood to be that which must
period. necessarily come, although it may not be known when.
(Art. 1193, Civil Code)
A term or period is an interval of time, which, exerting
influence on an obligation as a consequence of a juridical What is suspended is not the acquisition of the right or the
act, either suspends its demandability or produces its effectivity of the obligation but merely its demandability.
extinguishment. In other words, the obligation itself becomes effective
upon its constitution or establishment, but once the term
TERM OR PERIOD CONDITION or period expires, it becomes demandable.
Refers to an interval of Refers to a fact or event
time which is future and which is future and RESOLUTORY TERM/PERIOD
certain. uncertain. A period is resolutory, when the obligation is demandable
An interval of time which at once, although it is terminated upon:
A future and uncertain
must necessarily come, 1. The arrival of a day certain ; or
fact or event which may
although it may not be 2. The expiration of the term. (Art. 1193, Civil Code)
or may not happen.
known when.
Always refers to the LEGAL PERIOD
May refer to the past.
future. A period is legal when it is granted by law.

CONVENTIONAL PERIOD

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A period is conventional when it is stipulated by the The debtor shall have no

The improvement shall
parties. other right other than
inure to the benefit of the
that granted to a
creditor.
JUDICIAL PERIOD usufructuary.
A period is judicial when it is fixed by a competent court in
accordance with the causes expressly recognized by law. EFFECT OF ADVANCED PAYMENT OR DELIVERY
Once fixed, the period can no longer be judicially changed. General Rule: If the debtor, being unaware of the period or
(Art. 1197, Civil Code) believing that the obligation has become due and
demandable, paid or delivered anything before the arrival
DEFINITE PERIOD or expiration of the period, he may recover what he has
A period is definite when the date or time is known paid or delivered with fruits and interest.
beforehand.
Exception: The payment or delivery was made:
INDEFINITE PERIOD 1. Voluntarily;
A period is indefinite when it can only be determined by an 2. With knowledge of the period; or
event which must necessarily come to pass, although it 3. With knowledge that the obligation has not yet
may not be known when. become due and demandable.

EFFECT OF A FORTUITOUS EVENT In cases where the exception applies, the debtor shall have
In obligations with a term or period, any stipulation in the no right of recovery whatsoever.
contract to the effect that in case of a fortuitous event, the
contract shall be deemed suspended during the term or BENEFIT OF TERM OR PERIOD
period, does not mean that the happening of the fortuitous General Rule: When a period is designated for the
event shall stop the running of the term or period agreed performance or fulfillment of an obligation, it is presumed
upon. to have been established for the benefit of both creditor
and the debtor. (Art. 1196, Civil Code.
The only effect of a fortuitous event in such obligations is
that the contracting parties are relieved from the Exception: If it is proved from the tenor of the obligation
fulfillment of their respective obligations during the term or from other circumstances that the period or term has
or period. (Victorias Planters v. Victorias Milling Co., 1955) been established:
1. In favor of the creditor: he may demand
FORTUITOUS EVENTS FORTUITOUS EVENTS fulfillment or performance of the obligation at
IN CONDITIONAL IN OBLIGATIONS WITH any time, but the debtor cannot compel him to
OBLIGATIONS A PERIOD accept payment before the expiration of the
Generally, the obligation period.
The obligation is never
is extinguished. However, 2. In favor of the debtor:
extinguished, but is
this is subject to certain a. He may oppose any premature demand
merely suspended.
exceptions. on the part of the creditor for
performance of the obligation; or
EFFECT OF LOSS, DETERIORATION OR IMPROVEMENT b. He may renounce the benefit of the
The loss, deterioration or improvement of the object in an period by performing his obligation in
obligation with a period shall be governed by the same advance.
rules in conditional obligations.
The court may fix the term in the following instances:
LOSS 1. If the obligation does not fix a period, but from
With the fault of the Without the fault of the its nature and circumstances it can be inferred
debtor debtor that a period was intended by the parties;
2. If the duration of the period depends upon the
The obligation is
The obligation is will of the debtor (Art. 1197, Civil Code) and
converted into one of
extinguished. 3. If the debtor binds himself to pay when his
indemnity for damages.
means permit him to do so. (Art. 1180, Civil Code);
DETERIORATION
and
With the fault of the Without the fault of the 4. When specific periods are provided for in the
debtor debtor law.
The creditor may either
bring an action for: NOTE: The effect of a potestative period is different from
1. Rescission with The impairment is to be that of a potestative condition. The latter cannot be left to
damages; or borne by the creditor. the will of the debtor because it affects the very existence
2. Specific performance of the obligation itself. The former, on the other hand, can
with damages. be left to the will of the debtor since what is merely
IMPROVEMENT delegated to him is the power to determine when the
At the expense of the obligation shall be fulfilled. However, in order to prevent
By nature or by time
debtor the obligation from being ineffective by nonfulfillment, the
courts must fix a period.

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prestations will be performed. (Art. 1199, Civil

The mere silence of the obligation with regard to the term Code)
or period of its fulfillment does not necessarily mean that Exception: When the right has been
the courts are empowered to fix the duration thereof. The expressly granted to the creditor or a third
rule that the courts can fix the period cannot be applied to: person.
1. Contracts for services in which no period was 2. The debtor cannot chose those prestations or
fixed by the parties, since the period of undertakings which are impossible, unlawful, or
employment is understood to be implicitly fixed which could not have been the object of the
in the absence of an express stipulation; and obligation. (Art. 1200, Civil Code)
2. Pure obligations. Prestations which could not have been the
object of the obligation refer to those
It is only after the duration has been fixed by a proper undertakings which are not included among
court or by the parties themselves that an action for the those which the debtor may select, or to
fulfillment or performance of the obligation can be those which, by reason of accident or some
maintained (Eleizegui v. Manila Lawn Tennis Club, 1903). other cause, have acquired a new character
This is because since there is no period, there can be no distinct or different from that contemplated
possibility of breach or failure to perform the obligation. by the parties.
3. When only one prestation is practicable, the
The complainant need not expressly ask the court to fix debtor loses his right of choice and the
the duration of the period. As long as it is alleged that a obligation loses its alternative character. It thus
contract was entered into imposing an obligation in favor becomes a simple obligation. (Art. 1202, Civil
of another, and that the performance was left to the will of Code)
the debtor, then the rule can apply. (Schenker v. Gemperle, 4. The right of choice, whether exercised by the
1962) debtor, the creditor, or third person, must be
communicated to the other party. (Art. 1201, Civil
An action to ask the court to fix the duration of the period Code)
may prescribe like an ordinary civil action. (Gonzales v. No form is required.
Jose, 1938) Only from the time it is communicated will
the choice produce effect.
EXTINGUISHMENT OF DEBTOR S RIGHT TO Consent or concurrence by the notified
MAKE USE OF THE PERIOD party is not necessary for the choice to
1. When after the obligation has been contracted, produce effect.
he becomes insolvent, unless he gives a guaranty 5. Once the choice is made, the obligation ceases to
or security for the debt; be alternative, hence becomes binding on the
No judicial declaration of insolvency is person making it. (Art. 1201, Civil Code)
required. No renunciation can be made once a choice
2. When he does not furnish the creditor the has been made.
guaranties or securities which has promised; 6. When the debtor s right of choice is rendered
3. When by his own acts he has impaired said ineffective or impossible through the creditor s
guaranties or securities after their fault, the debtor may bring an action to rescind
establishment, and when through a fortuitous the contract with damages. (Art. 1203, Civil Code)
event they disappear, unless he immediately
gives new ones equally satisfactory; EFFECTS OF LOSS OF OBJECTS OF OBLIGATION
When the impairment was without his fault,
he shall retain his right to make use of the The effect upon the obligation if one, some or all of the
period. things which are alternatively the objects of the obligation
4. When the debtor violates any undertaking, in have been lost or cannot be complied with differs and
consideration of which the creditor agreed to depends on who has the right of choice.
the period; or CHOICE BELONGS TO THE DEBTOR
5. When the debtor attempts to abscond.
Circumstance Effect
When through fortuitous The obligation ceases to
When the debtor s right to make use of the period is lost,
event or through the be alternative (Article
the obligation becomes immediately demandable.
debtor s acts, there is 1202)
only one prestation left
When the choice of the Debtor has the remedy of
debtor is limited through resolution (Article 1191)
An obligation is alternative when it comprehends several the creditor s own acts plus damages (Article
objects or prestations which are due, but it may be 1203)
complied with by the delivery or performance of only one
of them. When all the things are Creditor can sue for
lost due to the debtor s damages (Article 1204)
THE FOLLOWING RULES SHALL APPLY IN fault
ALTERNATIVE OBLIGATIONS: When some things are Debtor can choose from
1. The debtor has the right to choose which of the lost due to the debtor s what s left

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fault but there are still be liable for the loss or deterioration of the
some things remaining substitute on account of his delay, negligence or
When all the things are Obligation is fraud.
lost due to a fortuitous extinguished ALTERNATIVE FACULTATIVE
event Various objects are due. Only one object is due.
When all but one of the Creditor can sue for Another object or
things are lost due to a damages Payment or performance prestation may be
fortuitous event and the of one is sufficient. delivered or performed in
last object is lost through substitution.
the debtor s fault The right of choice may
The right of choice
When all but one of the Obligation is pertain to the debtor,
pertains only to the
things are lost through extinguished creditor, or a third
debtor.
the debtor s own acts and person.
the last object is lost The loss or impossibility The loss or impossibility
through a fortuitous of all the objects or of the object or prestation
event prestations without the without the fault of the
CHOICE BELONGS TO THE CREDITOR fault of the debtor is debtor is sufficient to
Circumstance Effect necessary to extinguish extinguish the obligation.
When one or some of the Creditor chooses from the obligation.
objects are lost through the remainder The loss of the object
The loss of any of the
fortuitous events which the debtor may
objects which are
When one or some of the Creditor may choose deliver in substitution
alternatively due before
objects are lost due to the from the remainder or before the substitution is
the choice is made may
debtor s fault get the value of any of the effected does not make
make the debtor liable.
objects lost plus damages the debtor liable.
in either case
When all of the things are Creditor can get the
lost due to the debtor s value of any of the
fault objects lost plus damages
When some are lost Creditor chooses from A joint obligation is an obligation where there is a
through the debtor s fault the remainder concurrence of several creditors, or of several debtors, or
of several creditors and debtors, by virtue of which each of
When all the objects are Obligation is
the creditors have a right to demand, and each of the
lost due to a fortuitous extinguished
debtors is bound to render compliance with his
event
proportionate part of the prestation.
When all the objects are Obligation is
lost due to the creditor s extinguished
fault General Rule: When there is concurrence of several
creditors and/or of several debtors in one and the same
obligation, the obligation is presumed to be joint.

Exceptions:
1. When the obligation expressly states that there
is solidarity;
An obligation is facultative when it comprehends only one
The words solidar , jointl or severall ,
object or prestation which is due, but it may be complied
or other analogous terms may be employed.
with by the delivery of another object or the performance
2. When the law requires solidarity;
of another prestation in substitution. (Art. 1206, Civil Code)
3. When the nature of the obligation requires
solidarity.
The following rules shall apply in facultative obligations:
1. It is only the debtor who is empowered to make
JOINT DIVISIBLE OBLIGATIONS
the substitution.
Corollary to the above rule is the rule on joint divisible
2. In order to bind the creditor, the fact of
obligations. In the absence of any law or stipulation to the
substitution must be communicated to him.
contrary, the credit or debt is presumed to be divided into
3. Once communicated, the obligation ceases to be
as many shares as there are creditors and debtors, the
facultative and hence becomes simple.
credits and debts being considered distinct from one
another.
EFFECTS OF LOSS OF SUBSTITUTE
1. Before the substitution is made by the debtor,
NOTE: Joint and divisible obligations shall be subject to the
the loss or deterioration of the thing intended as
rule on multiplicity of suits. (Art. 1208, Civil Code)
substitute does not make him liable.
This rule stands, whatever may be the cause
Joint divisible obligations presuppose that a joint creditor
of the loss or deterioration of the thing,
cannot act in representation of the others, and neither can
whether with or without the debtor s fault.
a joint debtor be compelled to answer for the liability of
2. Once the substitution has been made and
others. As such:
communicated to the creditor, the debtor shall

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1. The liability arising from any breach by one of the

debtors will be borne by him alone (M lle L d. INDIVISIBILITY SOLIDARITY
v. Sarile, 1955); Refers to the legal tie or
2. Any defense which is purely personal to each of Refers to the prestation.
vinculum of the parties.
the debtors may be availed of by him alone; and Plurality of subjects is not Plurality of subjects is
3. Any payment by one of the debtors will not required. indispensable.
suspend the running of the prescriptive period In case of breach, the
against the other unpaid debtors (Agoncillo v. obligation is converted In case of breach, the
Javier, 1918). into a joint obligation for solidarity still remains.
damages.
JOINT INDIVISIBLE OBLIGATIONS
If the division is impossible, then the obligation shall be Examples:
considered as joint and indivisible. Joint indivisible Joint divisible A and B are jointly liable to X for
obligations refer to the joint character with respect to the P100.
parties, and indivisible character with respect to the Joint indivisible A and B are jointly liable to X
fulfillment of the obligation. As such: for a car.
1. If there are two or more debtors, the fulfillment Solidary divisible A or B are solidarily liable to
of or compliance with the obligation requires the X for P100.
concurrence of all the debtors, although each for Solidary indivisible A or B are solidarily liable to
his own share. (Art. 1209, Civil Code) X for a car.
2. If there are two or more creditors, the
concurrence or collective act of all the creditors,
JOINT SOLIDARY
although each for his own share, is also
Each of the creditors is
necessary for the enforcement of the obligation.
entitled to demand the Any of the creditors may
payment of only a demand the payment of
Although the there is a separate and distinct identity of
proportionate part of the the entire credit.
each of the parties to the obligation, the obligation, being
credit.
indivisible, is not susceptible of partial fulfillment.
Each of the debtors is
Any of the debtors may be
The act of a joint creditor which would ordinarily interrupt liable for the payment of
held liable for payment of
the period of prescription would not be valid because the only a proportionate part
the entire debt.
indivisible character of the obligation requires collective of the debt.
action. Hence, if a claim is made by one creditor against a
debtor, the latter cannot pay to the creditor alone; KINDS OF SOLIDARITY
payment must be made to all. (Art. 1209, Civil Code) 1. Active solidarity
2. Passive solidarity
EFFECT OF BREACH 3. Mixed solidarity
If one of the joint debtors fails to comply with his
undertaking, the obligation can no longer be fulfilled or ACTIVE SOLIDARITY
performed. Consequently, the debtor/s who failed to Active solidarity, or solidarity among creditors, is when a
comply with what is incumbent upon him shall be liable for tie or vinculum exists among several creditors of one and
damages. the same obligation. Each of them, in relation to his co-
creditors, possesses the character of creditor only with
The debtor/s who may have been ready to fulfill their part respect to his share in the obligation. As to the debtors,
of the obligation shall not contribute to the indemnity each creditor represents all the other creditors.
beyond the corresponding portion of the price of the thing
or of the value of the service in which the obligation The effect of active solidarity is the creation of a mutual
consists. (Art. 1224, Civil Code) agency among the solidary creditors which empowers
each creditor to exercise all the right which corresponds
EFFECT OF INSOLVENCY OF DEBTOR to the other creditors.
If one of the debtors become insolvent, the others shall not
be liable for his share. (Art. 1209, Civil Code) PASSIVE SOLIDARITY
Passive solidarity, or solidarity among debtors, is when a
tie or vinculum exists among several debtors of one and
the same obligation. Each of them, in relation to his co-
debtors, possesses the character of debtor only with
A solidary obligation is an obligation where there is a respect to his share in the obligation. As to the creditors,
concurrence of several creditors, or of several debtors, or each debtor represents all the other debtors.
of several creditors and several debtors, by virtue of which
each of the creditors has a right to demand, and each of The effect of passive solidarity is the liability of each debtor
the debtors is bound to render, entire compliance with the for the payment of the entire obligation, with the
prestation. consequent right to demand reimbursement from the
others for their corresponding shares once payment has
Indivisibility does not necessarily give rise to solidarity. been made.
Nor does solidarity immediately give rise to indivisibility.

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Passive solidarity differs from a solidary guaranty or of the principle of mutual representation
suretyship. While a surety is also a person who binds existing among the creditors.
himself solidarily with the principal debtor and becomes The prejudiced creditors may demand
liable to the creditor for the entire obligation, both have payment for damages from the guilty
distinguishing characteristics. creditor.
3. Solidary creditor cannot assign his rights to a
POINT OF SOLIDARY SURETY third person without the consent of the other
COMPARISON DEBTOR co-creditors. This presupposes mutual
As to Extent of Liable for the confidence arising out of the mutual agency
Liability payment of his Only liable for created among the creditors. (Art. 1213, Civil
co-debtor s the payment of Code)
debt and for his the principal If an assignment of rights is made to another
share of the debtor s debt. co-creditor and even without the consent of
debt. the other creditors, then there would be no
As to Right to If the entire violation of this rule.
Demand If the entire amount is paid, Any assignment of rights made to a third
Reimbursement amount is paid, he has a right to person without the required consent would
he has a right to demand be ineffective, and the assignor may be held
demand reimbursement liable for damages to his co-creditors.
reimbursement from the 4. Any solidary creditor may demand the payment
from his co- principal debtor or performance from one, some or all of the
debtors for their of the entire debtors. The debtor to whom the demand was
respective amount. made shall then make the payment only to the
shares. creditor who made the demand and to no other.
However, if no demand was made, the debtor
As to Effect of An extension of may pay any of the solidary creditors. (Art. 1214,
Extension of time granted by Civil Code)
Time the creditor to 5. Novation, compensation, confusion or remission
one of the An extension of of the debt, made by any of the solidary creditors
solidary debtors time granted to or with any of the solidary debtors, shall
without the the principal extinguish the obligation. The creditor who may
knowledge or debtor would have executed any of these acts shall be liable to
consent of the release the the others for their corresponding share. (Art.
other debtors surety from the 1215, Civil Code)
would not obligation. This is without prejudice to the provision of
release the Art. 1219 of the Civil Code.
latter from their 6. Payment of the entire amount to one, some or all
obligation. of the solidary creditors extinguishes the
obligation. This, however, creates a consequent
MIXED SOLIDARITY obligation on the collecting creditor to render an
1. Mixed solidarity is when there are several account to his co-creditors. Failure to do so shall
debtors and several creditors of one and the make him liable.
same obligation, and each of them possesses the 7. Since any one of the debtors can be held liable
character of debtor or creditor only with respect for the entire debt, the creditor may proceed
to his share in the obligation. As to the other against any one, some or all of them
contracting party, each of them represents all simultaneously. (Art. 1216, Civil Code)
the others. 8. If the debt has not been fully collected, demand
can still be made or directed against the others.
RULES IN SOLIDARY OBLIGATIONS (Art. 1216, Civil Code)

As to the solidary creditors: As to the solidary debtors:

1. Solidarity may still exist although the creditors
and the debtors are not bound in the same
manner and by the same periods and conditions.
(Art. 1211, Civil Code)
2. As a consequence of the relationship of mutual
agency among the solidary creditors, each one of
them may do whatever may be useful or
beneficial to the others, but not anything which
may be prejudicial to the latter. (Art. 1212, Civil
Code)
If a prejudicial act was performed by a
creditor, then such will be binding as far as
the debtor/s are concerned. This is because
1. Once payment is made by one of the solidary
debtors of the entire obligation, the debtor who
pays shall have a right to claim from his co-
debtors the share which corresponds to them,
with interest for payment already made. (Art.
1217(2), Civil Code)
This right shall not be available to a debtor
who pays only after the obligation has
prescribed or has become illegal. (Art. 1218,
Civil Code)
Interest shall be computed from the time
payment was made. However, if payment
was made before the debt became due, no

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interest during the intervening period may
be demanded (Art. 1217(2), Civil Code) and
interest shall be computed from the time
the debt became due.
2. Before payment is actually made, the solidary
debtor already has a right to demand
reimbursement from his co-debtors, however,
this right is merely contingent and conditional.
Only once payment has actually been made will
this right become real and existing. A new
obligation is then created among the paying
debtor and the other co-debtors.
3. The loss or impossibility of the thing or
prestation shall be governed by the following
rules:
a. If without the fault of the debtors, then
the obligation is extinguished.
b. If with the fault of one, some or all of
the debtors, the obligation is
converted into one of indemnity for
damages, but the solidary character of
the obligation remains. The creditor
can proceed against the debtors for
payment, without prejudice to the
subsequent right of action of the
debtor/s who paid to proceed against
the guilty debtor.
c. If it is due to a fortuitous event and
after the debtors has already incurred
in delay, the obligation becomes on of
indemnity for damages, but the
solidary character remains. The
creditor can proceed against the
debtors for payment, without
prejudice to the subsequent right of
action of the debtor/s who paid to
proceed against the guilty debtor.
DEFENSES OF A SOLIDARY DEBTOR
The creditor/s may proceed against any of the solidary
debtors or all of them simultaneously for the payment of
the obligation, but whether only or all of the debtors are
sued jointly, any solidary debtor may interpose against the
claim of the creditor/s any of the following defenses:
1. Defenses derived from the very nature of the
obligation;
Examples: Payment or performance, res
judicata, or prescription.
2. Defenses personal to him or pertaining to his
own share;
Examples: Minority or insanity.
3. Defenses personal to others, but only as regards
that part of the debt which the latter are
responsible. (Art. 1222, Civil Code)
This is merely a partial defense.
Example: The minority of the children who
are co-debtors, with respect to a demand
made against the mother. (Inchausti & Co. v.
Yulo, 1914)
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Obligations and Contracts
Divisible obligations are those which have for their object
a prestation which is susceptible of partial performance
without the essence of the obligation being changed.
General Rule: The creditor cannot be compelled to
partially receive the prestation in which the obligation
consists and neither may the debtor be required to make
partial payments.
Exceptions:
(1) When there is an express stipulation to the
contrary;
(2) When the different prestations constituting the
objects of the obligation are subject to different
terms and conditions; and
(3) When the obligation is partly liquidated and
partly unliquidated.
Indivisible obligations are those which have for their object
a prestation which is not susceptible of partial
performance, because, otherwise, the essence of the
obligation will be changed.
NOTE: The divisibility of an obligation differs from the
divisibility of the thing or prestation. The former refers to
the performance of the prestation, while the latter refers
to the prestation itself.
A thing is indivisible when, if separated into parts, its
essence is changed or its value is decreased
disproportionately. On the other hand, a thing is divisible
when, if separated into parts, its essence is not change or
its value is not decreased disproportionately because each
of the parts are analogous to each other and to the thing
itself.
EFFECT OF DIVISIBLE OR INDIVISIBLE OBLIGATIONS
Where there is only one creditor and only one debtor, the
divisibility or indivisibility is of little significance. (Art. 1223,
Civil Code)
General Rule: The creditor cannot be compelled to
partially receive the prestation in which the obligation
consists and neither may the debtor be required to make
partial payments.
Exceptions:
1. When there is an express stipulation to the
contrary;
2. When the different prestations constituting the
objects of the obligation are subject to different
terms and conditions; and
3. When the obligation is partly liquidated and
partly unliquidated.
Where there is a plurality of debtors and creditors, the
effect of the divisible or indivisible character of the
obligation shall depend on whether the obligation is joint
or solidary.
1. If it is solidary, the provisions of Arts. 1211-1222 of
the Civil Code are applicable;
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2. If it is joint and divisible, the provision of Art. to pay a stipulated indemnity or perform a stipulated
1208 of the Civil Code is applicable; and prestation. It is a coercive means to obtain compliance
3. If it is joint and indivisible, the provisions of Arts. from the debtor.
1209 and 1224 of the Civil Code are applicable.
PENALTY CONDITION
In joint indivisible obligations, the obligation can be It is an obligation,
enforced only by proceeding against all the debtors (Art. It is not an obligation.
although accessory.
1209, Civil Code). If anyone of the debtors should fail or It may become
refuse to comply with the obligation, it is converted into demandable in default of
one of indemnity for damages (Art. 1224, Civil Code). The It is never demandable.
the unperformed
debtors who may have been ready to comply shall, principal obligation.
however, not contribute to the indemnity beyond the
corresponding portion of the price of the thing or value of PURPOSE OF PENALTY
the service in which the obligation consists. 1. To insure performance of the obligation;
2. To substitute for damages in case of breach of
DETERMINATION OF DIVISIBILITY OR INDIVISIBILITY the principal obligation; (Art. 1224(1), Civil Code)
The test of divisibility is whether the obligation is and
susceptible of partial compliance or not. (Art. 1225, Civil 3. To punish the debtor in case of breach of the
Code) principal obligation.

DIVISBLE INDIVISIBLE KINDS OF PENALTY

The prestation is The prestation is not
susceptible of partial susceptible of partial
compliance compliance.
General Rule: The divisibility or indivisibility of the
prestation depends on whether it is susceptible of partial
compliance.
Exceptions: The thing shall be considered indivisible, even
if by nature it is divisible, when:
1. It is provided by law; or
2. It is intended by the parties. (Art. 1225(1), Civil
Code)
Obligations that are deemed indivisible are:
1. Obligations to give definite things;
2. Those not capable of partial performance;
3. Those considered indivisible if so provided by
law;
4. Those considered indivisible if intended by the
parties. (Art. 1225, Civil Code)
Obligations that are deemed divisible are:
1. When the object of the obligation is the
execution of a certain number of days of work;
2. When the object of the obligation is the
accomplishment of work by metrical units;
3. When the purpose of the obligation is to pay a
certain amount in installments (Soriano v. Ubat,
1961);
4. Those susceptible of partial performance. (Art.
1225, Civil Code)
An obligation with a penal clause is one to which an
accessory undertaking is attached for the purpose of
insuring its performance, and where in case of breach, the
debtor is bound to pay a stipulated indemnity or perform
a stipulated prestation.
A penal clause is an accessory obligation attached to the
principal obligation by virtue of which the debtor is bound
1. Legal or conventional
It is legal when constituted by law; and it is
conventional when constituted by the
parties.
2. Compensatory or punitive
It is compensatory when it is established for
the purpose of indemnifying the damages
suffered by the creditor in case of breach;
and it is punitive when it is established for
the purpose of punishing the debtor in case
of breach.
3. Subsidiary or joint
It is subsidiary when only the penalty may
be demanded in case of breach; and it is
joint when the injured party may demand
the enforcement of both the penalty and the
principal obligation.
EFFECT OF PENALTY
Proof of actual damages is not necessary in order that the
stipulated penalty may be demanded.
General Rule: The penalty, as fixed by the contracting
parties, takes the place of indemnity for damages and for
the payment of interest in the case of breach of the
obligation. (Art. 1226, Civil Code)
Exceptions:
1. There is an express stipulation to the effect that
damages or interest may still be recovered,
despite the presence of the penalty clause;
2. The debtor refuses to pay the penalty imposed in
the obligation;
3. The debtor is guilty of fraud or dolo in the
fulfillment of the obligation. (Bachrach Motor Co.
v. Espiritu, 1928)
The penalty is generally not demandable as it can be
enforced only upon the breach or nonfulfillment of the
principal obligation by the debtor (Art. 1226(2), Civil Code).
Furthermore, in order to be demandable, it must not be
contrary to law, morals, good customs, public order or
public policy. (Yu Tek & Co. v. Gonzales, 1915)

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Payment means not only the delivery of money but also the
LIMITATION UPON RIGHT OF DEBTOR performance, in any other manner, of an obligation. (Art.
General Rule: The debtor cannot exempt himself from the 1232, Civil Code)
performance of the principal obligation by paying the
stipulated penalty. HOW MADE
OBLIGATION OBLIGATION OBLIGATION
Exception: The right has been expressly reserved for him. TO GIVE TO DO NOT TO DO
(Art. 1227, Civil Code) By completely
By complete By completely
refraining from
delivery of the rendering the
LIMITATION UPON RIGHT OF CREDITOR doing that
thing which the service which
General Rule: The creditor cannot demand the fulfillment which the
debtor the debtor had
of the principal obligation and the satisfaction of the debtor had
obligated obligated
stipulated penalty at the same time. (Art. 1227, Civil Code) obligated
himself to himself to
himself not to
deliver. render.
Exception: do.
1. The right has been clearly granted to him.
2. If he chooses to demand the fulfillment of the Exceptions:
obligation but the performance thereof becomes 1. When the obligation has been substantially
impossible, he may demand the satisfaction of performed in good faith (Art. 1234, Civil Code);
the penalty. (Art. 1227, Civil Code) The debtor may recover as though there has
3. If there was fault on the part of the debtor. (Art. been a strict and complete fulfillment, less
1226(2), Civil Code) damages suffered by the creditor.
2. When the creditor accepts the performance
If the creditor chooses to demand the satisfaction of the despite knowing its incompleteness or
penalty, he cannot afterwards demand the fulfillment of irregularity, and without expressing any protest
the obligation. or objection (Art. 1235, Civil Code);
3. When there is a stipulation allowing partial
NOTE: While the right of the debtor to pay the penalty performance;
instead of performing the obligation must be expressly 4. When the different prestations are subject to
granted to him, the right of the creditor to demand the different conditions or different terms;
satisfaction of the penalty and the performance of the 5. When a debt is in part liquidated and in part
obligation need only be clearly granted to him. unliquidated;
6. When work is to be done by parts (Art. 1720, Civil
WHEN PENALTY MAY BE REDUCED BY THE COURT Code)
1. If the principal obligation was partly complied
with; PAYMENT OR PERFORMANCE BY THIRD PERSON
2. The principal obligation has been irregularly
complied with; and The following may pay or perform the obligation, and
3. The penalty is iniquitous or unconscionable even which will result in the extinguishment of the said
if there has been no performance. (Art. 1229, Civil obligation:
Code) 1. The debtor or his legal representative; and
2. Any third person.
EFFECT OF NULLITY OF OBLIGATION OR PENALTY
If the principal obligation is void, then the penal clause NOTE: The rules on payment by a third person does not
shall also be void. On the other hand, if the penal clause is apply to a third person who pays the redemption price in
void, the validity of the principal obligation is not affected. sales with right of repurchase (pacto de retro) since a
(Art. 1230, Civil Code) vendor a retro is not a debtor within the meaning of the
law. (Gonzaga v. Garcia, 1914)

General Rule: The creditor is not bound to accept payment

Obligations are extinguished by: (NoCoReMePaLo)
1. Payment or performance;
2. Loss of the thing due;
3. Condonation or remission of the debt;
4. Confusion or merger of the rights of creditor and
debtor;
5. Compensation; or
6. Novation. (Art. 1231, Civil Code)
or performance by third person.
Exceptions:
1. When the third person has an interest in the
fulfillment of the obligation (i.e. joint debtor,
guarantor or surety) (Art. 1236(1), Civil Code); or
2. When there is a stipulation to the contrary. (Art.
1236(1), Civil Code)
If a third person pays with the knowledge and consent of
the debtor:
1. He can recover from the debtor the entire
amount which he has paid (Art. 1236(2), Civil
Code); and

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2. He is subrogated to all of the rights of the Refers to a person authorized by the

creditor (Art. 1302(2), Civil Code) creditor or by law.
This includes not only the right which the
creditor may have exercised against the Exceptions:
debtor, but also those against third persons. 1. Payment was made to a third person and the
(Art. 1302, Civil Code) same redounded to the benefit of the creditor
(Art. 1241(2), Civil Code); or
If a third person pays without the knowledge and consent 2. Payment was made to the possessor of the credit
of the debtor: in good faith (Art. 1242, Civil Code).
1. He can recover only insofar as the payment has
been beneficial to the debtor (Art. 1236(2), Civil Payment made to a person who is incapacitated to
Code); administer his property shall be valid only if:
In order that the rights of the payor may be 1. If he has kept the amount or thing paid or
subject to this limitation, the debtor must delivered; or
oppose the payment before or at the same 2. The payment has been beneficial to him. (Art.
time it was made, and not subsequent 1241, Civil Code)
thereto. (RFC v. CA, 1954)
2. The payor cannot compel the creditor to Payment to a third person is valid only insofar as it has
subrogate him in his rights. (Art. 1237, Civil Code) redounded to the benefit of the creditor. As a general rule,
there must be conclusive proof of the benefit to the
SUBROGATION BENEFICIAL creditor (Panganiban v. Cuevas, 1907). However, there are
REIMBURSEMENT certain exceptions:
A right available to the 1. If after the payment, the third person acquires
third person or payor, A simple personal action the creditor s rights;
whereby he is entitled, available to a third person 2. If the creditor ratifies the payment to the third
not only to demand or payor against the person; or
reimbursement from the debtor to recover from 3. B the creditor s conduct, the debtor has been
debtor, but also to the latter what he has paid led to believe that the third person had authority
exercise all the rights insofar as the payment to receive the payment. (Art. 1241, Civil Code)
which the creditor could has been beneficial to the
have against the debtor said debtor. PAYMENT AFTER JUDICIAL ORDER OF RETENTION
and third persons. If the debtor pays the creditor after he has been judicially
ordered to retain the debt, such payment shall not be valid.
If no reimbursement is intended by the third person, then (Art. 1243, Civil Code)
the presumption arises that such payment is a donation.
Therefore, the debtor s consent is necessar (Art. 1238, Consequently, after the debtor has received a notice of
Civil Code), as in the case of the donee in ordinary attachment or garnishment, payment can no longer be
donations. made to the creditor since the credit has already been
1. Once consent is secured, the rules on ordinary attached to satisfy a judgment in favor of another person.
donations will apply.
2. If consent is not secured, the rules in Arts. 1236 WHAT MUST BE PAID
and 1237 shall apply. (Art. 1238, Civil Code) OBLIGATIONS TO GIVE OBLIGATIONS TO DO
A SPECIFIC THING OR NOT TO DO A
CAPACITY TO MAKE PAYMENT SPECIFIC SERVICE
The person who pays the obligation should have the The specific thing must be
necessary legal capacity to effect such payment, such as delivered, and a thing
The specific service must
the free disposal of the thing due and the capacity to which is different from
be done or not done, and
alienate it. The absence of one or the other will affect the that which is due cannot
the debtor cannot
validity of the payment. (Art. 1239, Civil Code) be delivered although it
substitute it by another
may be of the same value
act or forbearance.
If payment was accepted despite the absence of the or even more valuable
capacity of the payor to make such payment, the same may than the thing due.
still be annulled by a proper action in court at the instance The debtor cannot be compelled to accept the delivery
of the payor or his legal representative, unless it falls of the thing or the substitution of the act or
within the exception provided in Art. 1427 of the Civil Code. forbearance. However, if he accepts the same, it shall
be considered as a fulfillment or performance of the
TO WHOM PAYMENT SHOULD BE MADE obligation
General Rule: Payment should be made to the following
persons, otherwise, the same shall be void: OBLIGATIONS TO GIVE OBLIGATIONS TO DO
1. The person in whose favor the obligation has A GENERIC THING OR NOT TO DO A
been constituted; GENERIC SERVICE
2. His successor in interest; or The creditor cannot demand a thing of best quality;
3. Any person authorized to receive it. (Art. 1240, neither can the debtor deliver a thing of the worst
Civil Code) quality. The obligation can only be fulfilled by the

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delivery of a thing which is neither of superior nor
inferior quality. (Art. 1246, Civil Code)
Dation in payment or dación en pago is the transmission of
ownership of a thing by the debtor to the creditor as an
accepted equivalent of the performance of the obligation.
If the creditor and debtor enter into an agreement by
virtue of which a certain property is alienated by the
debtor to the creditor as equivalent of the performance of
the obligation, then the law on sales shall govern. (Art. 1245,
Civil Code)
This is an exception to the rule that the creditor cannot be
compelled to receive a thing which is different from that
which is due although it may be of the same value or even
more valuable than the thing due.
LEGAL TENDER
In monetary obligations, payment shall be made in the
currency stipulated. If it is not possible to pay in the
currency stipulated or there is no stipulation regarding the
currency in which payment shall be made, then the
payment shall be made in legal tender of the Philippines.
(Art. 1249, Civil Code)
Legal tender refers to such currency which may be used
for the payment of all debts, whether public or private.
Under Philippine law, all notes and coins issued by the
Central Bank constitutes legal tender. (Sec. 54, R.A. 265; Sec.
1, R.A. 529)
If a negotiable instrument (i.e. check) is accepted by the
creditor, there is only provisional effect. There is payment
only when:
1. They have been encashed (Golez v. Camara, 1957);
or
2. When it has been impaired through the fault of
the creditor (Compania General v. Molina, 1905).
NOTE: The acceptance of a check implies an undertaking
of due diligence in presenting it for payment, and if he
from whom it is received sustains loss by want of such
diligence, it will be held to operate as actual payment of
the debt or obligation for which it was given. Thus, if no
presentment is made at all, the drawer cannot be held
liable irrespective of loss or injury unless presentment is
otherwise excused. (Papa v. A.V. Valencia, 1998)
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. (Art. 1250, Civil Code)
Extraordinary inflation or deflation is that which is unusual
or beyond the common fluctuation in the value of the
currency, which the parties could not have reasonably
foreseen or which was manifestly beyond their
contemplation at the time when the obligation was
established.
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Obligations and Contracts
The requisites for one to be considered as extraordinary
inflation or deflation are the following:
1. There must be decrease or increase in the
purchasing power of the currency which is
unusual or beyond the common fluctuation in
the value of said currency; and
2. Such decrease or increase could not have been
reasonably foreseen or was manifestly beyond
the contemplation of the parties at the time of
the establishment of the obligation.
PLACE OF PAYMENT
General Rule: In the place designated in the obligation.
(Art. 1251, Civil Code)
Exceptions: If no stipulation has been made:
1. If the obligation is to deliver a determinate thing,
at the place where the thing might be at the time
the obligation was constituted;
2. In any other case, at the domicile of the debtor
If he changes his domicile in bad faith or if
he has already incurred in delay, then
additional expenses shall be borne by him.
(Art. 1251, Civil Code)
FORMS OF PAYMENT
1. Application of payments;
2. Dation in payment;
3. Cession or assignment in favor of creditors; and
4. Tender of payment and consignation.
APPLICATION OF PAYMENT
Application of payment is the designation of the debt to
which the payment must be applied when the debtor has
several obligations of the same kind in favor of the
creditor.
For application of payment to be made use of, the following
requisites must be present:
1. There must be only one debtor and only one
creditor;
2. There must be two or more debts of the same
kind;
3. All of the debts must be due; and
Exception: When there is a stipulation to the
contrary or when the application of
payment is made by the party for whose
benefit the term or period has been
constituted.
4. The amount paid by the debtor must not be
sufficient to cover the total amount of all the
debts. (Art. 1252, Civil Code)
General Rule: It is the debtor who is given the right to
select which of his debts he is paying.
Exceptions:
1. The debtor fails to exercise such right at the time
payment is made;
2. A proposal of an application of payment was
made by the creditor through a receipt and the
debtor accepts the same;
Exception: It was made through mistake,
force, intimidation, undue influence or
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fraud, in which case the application shall be or relative financial

invalidated. insolvency. incapacity.
3. If there was a valid prior agreement; As to What is What is delivered
4. If the debtor chooses to apply payment to the Delivered by by the debtor is
principal instead of the interests, the creditor What is ceded is
the Debtor merely a thing to
the universality
can impugn the same. (Art. 1253, Civil Code) be considered as
of all of his
the equivalent of
If no application of payment was made or when no property.
the performance
application of payment can be made in accordance with of the obligation.
the rules previously stated, then the most onerous to the As to Effect The payment
debtor between debts which are not of the same burden extinguishes the
shall be satisfied first. In determining which debt is more The effect is obligation to the
onerous, the following rules shall apply: merely to extent of the
1. Where there are various debts which are due and release the value of the thing
were incurred at different dates, the oldest are debtor for the delivered, unless
more onerous (PNB v. Veraguth, 1927); net proceeds of by the silence of
2. Where one debt bears the interest and the other the things ceded the parties, it is
does not, even if the latter was incurred at an or assigns, implied that the
earlier date, the first is more onerous (Menzi & unless there is a delivery is
Co. v. Quing Chuan, 1939); contrary considered as
3. Where two debts bear interest, the debt with a intention. equivalent to the
higher rate of interest is more onerous; performance of
4. Where one debt is secured and the other is not, the obligation.
the first is more onerous (Sanz v. Lavin, 1906);
5. Where the debtor is bound as principal in one
obligation and as guarantor or surety in another,
the former is more onerous;
6. When the debtor is bound as a solidary debtor in
one obligation and as the sole debtor in another, Tender of payment consists in the manifestation made by
the former is more onerous; the debtor to the creditor of his decision to comply
7. Within a solidary obligation, the share which immediately with his obligation.
corresponds to the solidary debtor would be
most onerous; Consignation refers to the deposit of the object of the
8. Where one obligation is for indemnity and the obligation in a competent court in accordance with the
other is by way of penalty, the former is more rules prescribed by law after refusal or inability of the
onerous; creditor to accept the tender of payment. (Limkako v.
9. Where one debt is liquidated and the other is not, Teodoro, 1943)
the former is more onerous.
TENDER CONSIGNATION
If the debts are of the same nature and burden, then the The antecedent of The principal act which
payment shall be applied to all of them pro rata or consignation or the will produce the effects of
proportionately. (Art. 1254(2), Civil Code) preparatory act. payment of the obligation.
Extrajudicial. Judicial.

Tender of payment, if made by means of a check, is valid if

Cession or assignment is a special form of payment the creditor makes no prompt objection, but such practice
whereby the debtor abandons all of his property for the does not estop the latter demanding payment in cash.
benefit of his creditors in order that from the proceeds (Desbarats v. Vda. de Laureano, 1966)
thereof the latter may obtain payment of their credits.
As a rule, tender of payment is necessary for a valid
In order that the debtor can avail of this form of payment, consignation. Except when circumstances exist which
the following requisites must concur: make tender impossible or inadvisable (See Art. 1256)
1. Plurality of debts;
2. Partial or relative insolvency of the debtor; and In order that consignation may be effective, the debtor
3. Acceptance of the cession by the creditors. must show the following:
1. That there was a debt due;
POINT OF PAYMENT BY DATION IN 2. A valid prior tender was made and that the
COMPARISON CESSION PAYMENT consignation before the court is due to the
following circumstances;
As to Number There must be a There may be
a. The creditor is absent or unknown, or
of Creditors plurality of only one
creditors. creditor. does not appear at the place of
payment;
As to Solvency The debtor need
The debtor is in b. The creditor to whom tender of
of Debtor not necessarily
a state of partial payment was made refused to accept
be in a state of

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it;
c. He was incapacitated;
d. Several persons claimed to be entitled
to receive the amount due;
e. The title of the obligation has been lost;
3. That the previous notice of the consignation had
been given to the person interested in the
performance of the obligation;
4. That the amount due was placed at the disposal
of the court; and
5. After the consignation had been made, the
person interested was notified thereof. (De Leon
v. Syjuco, 1951)
Only the first notice of consignation must be made by the
debtor; while the second notice may be given by the court.
(Soco v. Militante, 1983)
Consignation is completed at the time the creditor accepts
the same without objections, or if he objects, at the time
the court declares that it has been validly made in
accordance with law. The consignation, however, has a
retroactive effect, and the payment is deemed to have
been made at the time of the deposit of the thing in court
or when it was placed at the disposal of the judicial
authority.
The following effects arise as of the time when the thing
was placed at the disposal of the court:
1. The debtor is released in the same manner as if
he had performed the obligation at the time of
the consignation.
2. The accrual of interest on the obligation is
suspended from the moment of consignation.
3. The deterioration or loss of thing or amount
consigned occurring without fault of the debtor
must be borne by the creditor because the risks
of the thing are transferred to the creditor from
the moment of the deposit.
4. Any increment or increase in value of the thing
after the consignation inures to the benefit of the
creditor.
When the debtor withdraws the thing and thereby revokes
the consignation, he must bear all the expenses incurred
because of the consignation.
If the creditor authorizes the debtor to withdraw the
object of the obligation, there is a revival of the obligation
and the relationship of debtor and creditor is restored to
the condition in which it was before the consignation. But
third persons, solidary co-debtors, guarantors and
sureties who were benefited by the consignation, are not
prejudiced by the revival of the obligation between debtor
and creditor.
The revival presupposes that the creditor accepted the
object of the obligation delivered to the court before he
consented to its withdrawal.
If the withdrawal was done before the acceptance of the
creditor or before the court judicially declares a valid
consignation, then the withdrawal is done as a matter of
right and does not extinguish the obligation. Thus, if there
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Obligations and Contracts
was no extinguishment, then the obligation could be
revived.
Loss of the thing due means that the thing which
constitutes the object of the obligation perishes, or goes
out of commerce, or disappears in such a way that its
existence is unknown or cannot be recovered. (Art. 1189(2),
Civil Code)
The term loss in this part of the code embraces all causes
which may render impossible the performance of the
prestations impossibility of performance.
If the impossibility already existed when the contract was
made, the result is not extinguishment but inefficacy of the
obligation under Arts. 1348 and 1493 and Civil Code. As
such, the contract is considered void.
The impossibility of performance must be subsequent to
the execution of the contract in order to extinguish the
obligation.
The intention of the parties should govern, and if it appears
that the service turns out to be so difficult as to have been
beyond their contemplation, it would be doing violence to
that intention to hold the obligor still responsible. In such
cases, the court is authorized to release the debtor from
his obligation in whole or in part. (Art. 1267, Civil Code)
In order for an event to be considered as one that falls
under Art. 1267, the following must be present:
1. The event or change in circumstances could not
have been foreseen at the time of the execution
of the contract;
2. It makes the performance of the contract
extremely difficult but not impossible (i.e. A
manifest disequilibrium in the prestations, such
that one party would be placed at a disadvantage
by the unforeseen event.);
3. The event must not be due to the act of any of
the parties; and
4. The contract is for a future prestation.
If the contract is of immediate fulfillment, the gross
inequality of the reciprocal prestations may involve lesion
or want of cause.
Unforeseen difficulties are not grounds for reneging upon
a contract. (Laguna Tayabas Bus Co. v. Manabat, 1974)
Difficulty of service authorizes the release of the obligor
but does not authorize the courts to remake, modify or
revise the contract stipulated with the force of law, so as
to substitute its own terms for those covenanted by the
parties themselves. (Occena v. Jabson, 1976)
Rebus sic stantibus is another mode of extinguishing
obligations. (See Art. 1267)
Ordinarily, partial loss does not extinguish the obligation;
the thing should be delivered to the creditor in its impaired
condition, without any liability for damages on the part of
the debtor. But if the portion that is loss is of such an
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extent or nature that the obligation would not have been
constituted without it, then the obligation is extinguished.
The burden of proving the loss of a thing in the possession
of the debtor rests upon the latter.
General Rule: If the thing is lost or destroyed through a
fortuitous event, the debtor cannot be held responsible
and the obligation is extinguished. (Art. 1262, Civil Code)
Exceptions:
1. When otherwise provided by law (Art. 1174 and
1262, Civil Code);
2. When otherwise stipulated by the parties;
3. When the nature of the obligation requires the
assumption of risk (Art. 1262, Civil Code);
4. When the loss of the thing due is partly to the
fault of the debtor (Tan Chiong San v. Inchauti &
Co., 1912);
5. When the loss of the thing occurs after the
debtor has incurred in delay (Art. 1262(1), Civil
Code);
6. When the debtor promised to deliver the same
thing to two or more persons who do not have
the same interest (Art. 1165(3), Civil Code);
7. When the obligation to deliver arises from a
criminal offense (Art. 1268, Civil Code); and
8. When the obligation is generic (Art. 1263, Civil
Code).
EFFECT OF IMPOSSIBILITY
In obligations to give a generic thing, the general rule is
that the legal or physical impossibility does not extinguish
the obligation.
Exceptions:
1. If the generic thing is delimited; or
2. If the generic thing has already been segregated
or set aside, in which case, it has become
specific. (Art. 1263, Civil Code)
In obligations to give a specific thing, the obligation shall
be extinguished if the thing was lost or destroyed without
the fault of the debtor, and he has not incurred in delay.
However, the obligation will be converted into one of
indemnity for damages.
In obligations to do or not to do, the legal or physical
impossibility of the prestation without the fault of the
debtor shall release him from his obligation. (Art. 1266, Civil
Code)
NOTE: This does not apply to a surety upon a bail bond
because the article speaks of a relation between a debtor
and creditor, which does not exist in the case of a surety
upon a bail bond, on one hand, and the State, on the other.
(People v. Franklin, 1971)
If the obligation is subjectively impossible (for the debtor
himself) but is not objectively impossible (for all others),
then the extinguishment of the obligation will remain
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unless personal considerations are involved. (Reyes v.
Caltex, 1949)
Remission is an act of liberality, by virtue of which, without
receiving any equivalent, the creditor renounces the
enforcement of the obligation, which is extinguished in its
entirety or that part or aspect of the same to which the
remission refers.
The essential requisites of remission are the following:
1. There must be an agreement;
This is necessary since acceptance is
required.
2. The parties must be capacitated and must
consent;
3. There must be a subject matter or object of the
remission;
4. The cause or consideration must be liberality;
5. The obligation remitted must have been
demandable at the time of the remission;
6. The remission must not be inofficious; and
7. The formalities of a donation are required in the
case of an express remission. (Art. 1270, Civil
Code)
Remission requires acceptance by the obligor but there is
nothing that can prevent a creditor from making a
unilateral renunciation of his right, abandoning his credit,
and thereby extinguishing it. Such unilateral renunciation
by the creditor is expressly allowed by Art. 6 of the Civil
Code.
KINDS OF REMISSION
1. Express or implied
2. Total or partial
3. Inter vivos or mortis causa
If a remission is expressly made, it must be accepted and it
must comply with the forms of donations, to wit:
1. The donation of a movable may be made orally or
in writing;
2. An oral donation requires the simultaneous
delivery of the thing or of the document
representing the right donated;
3. If the value of the personal property donated
exceeds five thousand pesos, the donation and
the acceptance shall be made in writing,
otherwise, the donation shall be void;
4. In order that the donation of an immovable may
be valid, it must be made in a public document,
specifying therein the property donated and the
value of the charges which the donee must
satisfy.
5. The acceptance may be made in the same deed
of donation or in a separate public document,
but it shall not take effect unless it is done during
the lifetime of the donor.
6. The debtor must accept the donation personally,
or through an authorized person with a special
power for the purpose, or with a general and
sufficient power; otherwise, the donation shall
be void. (Art. 745, Civil Code)
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7. If the acceptance is made in a separate
instrument, the donor shall be notified thereof in
an authentic form, and this step shall be noted in
both instruments. (Art. 749, Civil Code)
8. The provision of Art. 750 of the Civil Code
notwithstanding, no person may give or receive,
by way of donation, more than he may give or
receive by will.
The donation shall be inofficious in all that
it may exceed this limitation.
In case of an implied remission, the following rules shall
apply:
1. 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.
NOTE: Unless it may be proved that the
creditor intended otherwise, the voluntary
delivery of the first original copy of a public
document does not imply a remission
because there is always a copy in the
archives which can be used to prove the
credit.
2. In order to nullify this waiver it should be
claimed to be inofficious;
3. The debtor and his heirs may uphold it by
proving that the delivery of the document was
made in virtue of payment of the debt (Art. 1271,
Civil Code);
4. Whenever the private document in which the
debt appears is found in the possession of the
debtor, it shall be presumed that the creditor
delivered it voluntarily, unless the contrary is
proved (Art. 1272, Civil Code);
5. In case of joint obligations, possession by one of
the debtors of the credit only presumes that the
remission was done to the portion of his
obligation;
6. In case of solidary obligation, possession by one
of the debtors of the credit presumes that the
remission was done in total.
If a remission is impliedly made, then it is tantamount to a
waiver.
When the creditor grants a release to his debtor by mistake
and the latter accepts it also in error, there is no
extinguishment of the obligation, unless the creditor later
shows that he later intends to forego with the debt,
because there is unjust enrichment under Art. 22 and the
provisions of solutio indebiti.
EFFECT OF REMISSION
Remission extinguished the obligation in its entirety or in
the part or aspect thereof to which the remission refers.
If the obligation is joint, the remission can only affect the
share of the creditor who makes the remission and the
corresponding share of the debtor in whose favor the
remission is made (Art. 1208, Civil Code). If the obligation is
solidary, the provisions of Arts. 1215, 1219 and 1220 of the
Civil Code shall govern.
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If the remission refers to the principal obligation, all the
accessory obligations are extinguished. However, if the
remission refers to the accessory obligations, the principal
obligation continues to subsist. (Art. 1273, Civil Code)
Confusion is the meeting in one person of the qualities of
the creditor and debtor with respect to the same
obligation.
Confusion or merger of rights extinguishes the obligation
because the creditor himself becomes his own debtor;
therefore, it would be absurd if the creditor would sue
himself.
Confusion or merger of rights can happen by operation of
law or voluntary agreement (i.e. merger agreements) of the
parties.
The following requisites must be present for there to be a
confusion of rights which will result in the extinguishment
of the obligation:
1. The merger of the characters of creditor and
debtor must be in the same person (Art. 1278,
Civil Code);
2. It must take place in the person of either the
principal creditor or the principal debtor (Art.
1276, Civil Code); and
3. It must be complete and definite (Testate Estate
of Mota v. Serra, 1925).
If the debtor acquires rights from the creditor, but not
from the particular obligation in question, there will be no
merger.
The usual causes of confusion or merger are succession
(compulsory, testate, intestate), donation, or negotiation
of negotiable instrument.
Confusion or merger of rights is always total because of
the impossibility of a partial confusion or merger in the
characters of the debtor and creditor; but the effect as to
the extinguishment may be partial.
EFFECTS OF MERGER
1. The principal obligation and the accessory
obligation will be extinguished (Art. 1276, Civil
Code);
2. It does not extinguish a joint obligation as
regards the share corresponding to the creditor
or debtor in whom the two characters concur
(Art. 1277, Civil Code);
If the merger was constituted by agreement, the same may
be revoked by the presence of any of the causes for the
rescission, annulment, nullity or inexistence of contracts
or by some special cause such as redemption.
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or controversy, commenced by third persons

and communicated in due time to the debtor
(Art. 1270, Civil Code);
Compensation is a mode of extinguishing to the 6. The compensation must not be prohibited by
concurrent amount, the obligation of those persons who law. (Art. 1287, Civil Code)
in their own right are reciprocally debtors and creditors of
each other. (Francia v. IAC, 1988) Even though the creditors and debtors are not aware of
the compensation, automatic compensation may take
It is the offsetting of two obligations which are reciprocally place for as long as all the requisites are present.
extinguished if they are of equal value, or extinguished to (Mindanao v. CA, 1982)
the concurrent amount if of different values.
If the principal debtor has a credit against the creditor,
COMPENSATION PAYMENT which can be compensated, it would mean extinguishment
Takes effect by operation of Takes effect by the acts of the guaranteed debt, either totally or partially. This
law or by acts of the parties of the parties. extinguishment benefits the guarantor, for he can be held
Capacity to give and to Capacity to give and liable only to the same extent as the debtor.
acquire is not necessary. acquire is necessary.
Where one of the debts consists in civil liability arising
Generally, it is complete from a penal offense, compensation would be improper
Generally, it is partial.
and indivisible. and inadvisable because the satisfaction of such obligation
is imperative.
COMPENSATION CONFUSION Arts. 1287 and 1288 of the Civil Code are cases of facultative
There must be two persons, There is only one compensation, and legal compensation is not allowed
who, in their own right, are person in whom is when there is conventional or facultative compensation.
creditors and debtors of merged the qualities of
each other. creditor and debtor.
VOLUNTARY COMPENSATION
There must be at least two There is only one As to voluntary compensation, the parties may agree upon
obligations. obligation. the compensation of the two obligations even if the debts
are not yet due. (Art. 1282, Civil Code)
COMPENSATION COUNTERCLAIM
The two debts must consist For voluntary compensation, the following requisites must
in money, or if the things be present:
No such requirement is 1. That the parties should have the capacity to
due are fungibles, they must
necessary. dispose of the credits which they compensate;
be of the same kind and
quality. and
2. That the extinguishment of the obligations arises
The debts must be No such requirement is
from their wills and not from law.
liquidated. necessary.
Compensation need not be A counterclaim must be JUDICIAL COMPENSATION
pleaded. pleaded to be effectual. In judicial compensation, what is set off against the other
party is a counterclaim. The counterclaim, however, must
KINDS OF COMPENSATION be pleaded in order to be effectual. (Yap Unki v. Cha Japco,
1. Legal, voluntary or judicial 1952)
2. Total or partial
Judicial compensation takes place upon final judgment.
LEGAL COMPENSATION
Legal compensation takes place automatically when the COMPENSATION IN RESCISSIBLE OR
following requisites are present: VOIDABLE DEBTS
1. That each one of the obligors be bound Rescissible or voidable obligations are considered valid
principally, and that he be at the same time a until rescinded or voided; hence, compensation is allowed.
principal creditor of the other;
2. That both debts consist in a sum of money, or if As long as the action for rescission or annulment is not
the things due are consumable, they be of the exercised, or is renounced, or if the debt or debts are
same kind, and also of the same quality if the ratified, the obligation or obligations are susceptible of
latter has been stated; compensation.
The things due must be fungible, or things
which can be substituted for each other. But DEBTS WHICH CANNOT BE COMPENSATED
there can be no compensation when the 1. Debts arising from contracts of depositum (Art.
obligations refer to determinate or specific 1287, Civil Code);
things. 2. Debts arising from contracts of commodatum
3. That the two debts be due; (Art. Art. 1287, Civil Code);
4. That they be liquidated and demandable; 3. Claims for support due by gratuitous title (Art.
5. That over neither of them there be any retention 1287, Civil Code);

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4. Obligations arising from criminal offenses (Art. Exception: The compensation was made with the consent
1288, Civil Code); and of the debtor; hence, the consent operates as a waiver of
While the criminal cannot claim the rights to compensation.
compensation, the victim may do so.
5. Certain obligations in favor of the government, Exception to the exception: When at the time he gave his
such as taxes, fees, duties and others of a similar consent, he reserved his right to the compensation.
nature.
Art. 1285 of the Civil Code speaks of three cases where an
General Rule: In spite of the silence of the law, it is assignment is made:
generally understood that obligations (i.e. taxes, fees, 1. The assignment is made with the consent of the
duties and similar forced contributions) in favor of the debtor;
government cannot be extinguished by compensation 2. The assignment is made with the knowledge but
because they are obligations of public interest, and cannot without the consent of the debtor;
be governed by the civil rules on obligations. 3. The assignment was made without the
knowledge of the debtor.
Exception: But when the debt in favor of the government is
purely contractual, there is no reason why compensation WITHOUT
cannot take place because of the system of government WITH KNOWLEDGE
KNOWLEDGE
finance. WITH WITHOUT
CONSENT CONSENT Compensation
Exception to the Exception: Compensation is not allowed if General Rule: can be set up as a
the mutual obligation does not pertain to the same Compensation defense for all
department or agency of the government. cannot be set Compensation debts maturing
up because the can be set up prior to the
EFFECT OF COMPENSATION consent regarding debts debtor s
Compensation extinguishes both debts to the extent that amounts to a previous to the knowledge of the
the amount of one is covered by the amount of the other. waiver. cession or assignment,
(Art. 1290, Civil Code) assignment. whether the
Exception: The debts matured
There is total compensation when the amounts of both right to before or after
debts are equal. There is partial compensation when the compensation the assignment).
amounts are different. was reserved.
Accessory obligations are also extinguished along with the
For an assignment made with the knowledge but without
principal obligations since the former subordinates the
the consent of the debtor, the assignment cannot take
latter.
effect unless he is properly notified thereof. Hence, the
following rules shall apply:
When compensation takes place, its effects arise on the
1. If the notification preceded the assignment, the
very day on which all its requisites concur. When used as a
effects of the assignment are produced from the
defense, it retroacts to the day when its requisites are
time it is made, and not the time of notification.
fulfilled. (BPI v. CA, et al., 1996) 2. If the notification and the assignment are made
simultaneously, the effects of the assignment are
RENUNCIATION OF COMPENSATION produced on the same day.
Compensation can be renounced, either at the time an 3. If the notification is given after the assignment
obligation is contracted or afterwards. Compensation was made, then the assignment is considered
rests upon a positive right, and a unilateral declaration of made without the knowledge and consent of the
the debtor would be sufficient renunciation. debtor.
The rule on assignments made without the
Renunciation can be expressed or implied. The following
knowledge of the debtor shall apply. (Art.
are examples of implied renunciation:
1285, Civil Code)
1. By not setting compensation in the litigation;
2. By consenting to the assignment of credit under
Art. 1285 of Civil Code; and
3. By paying the debt voluntarily, with knowledge
that it has been extinguished by compensation. Novation is the substitution or change of an obligation by
another, resulting in its extinguishment or modification,
EFFECT OF ASSIGNMENT OF RIGHTS either:
General Rule: If after compensation has taken place one of 1. By changing the object or principal conditions;
the extinguished debts is assigned to a stranger, ordinarily 2. By substituting the person of the debtor; or
this would be a useless act since there is nothing more to 3. By subrogating a third person in the rights of the
assign. The defense of compensation could then be set up. creditor. (Art. 1291, Civil Code)

Novation is the only mode whereby an obligation is

extinguished and a new obligation is created to take its

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place. As compared to other modes of extinguishment,
novation does not operate as an absolute extinction but
only as a relative extinction.
The distinguishing characteristic of novation is that
although it extinguishes the obligation, it also gives birth
to another obligation. However, unlike the others, as a
mode, of extinguishment, it is relative in character, not
absolute.
A compromise is a form of novation. The difference is that
a compromise has some judicial participation. However,
the effect of compromise is the same as novation.
REQUISITES OF NOVATION
In order to extinguish one obligation by the creation of
another, the following requisites must concur (Zapanta v.
De Rotaeche, 1912):
1. There must be a previous valid obligation
If the old obligation was void or was
annulled, there can be no novation.
However, an exception is when the
annulment may be claimed only by the
debtor or when the ratification validates
acts which are voidable. (Art. 1298, Civil
Code)
2. There must be an agreement of the parties to the
new obligation
3. The old obligation must be extinguished
There can only be novation in if there is an
express stipulation in the new agreement,
or an implication from the incompatibility
between the old and new contracts. (NPC v.
Dayrit, 1983)
4. The new obligation must be valid. (Zapanta v. De
Rotaeche, 1912)
If the new obligation is not entirely void, but
only voidable, the novation becomes
effective. But if the action to annul is
brought, and the obligation is set aside, it
will be deemed as if there had been no
novation, and the original obligation
subsists, unless the parties intended to
definitely extinguish it at all events.
KINDS OF NOVATION
1. Objective, subjective or mixed
2. Express or implied
3. Extinctive or modificatory
Novation is objective is there is a change in the cause,
object or condition of the obligation; and subjective when
there is a substitution of the person of the debtor or to the
subrogation of a third person in the rights of the creditor.
On the other hand, mixed novation refers to a combination
of subjective and objective novation.
Novation is express when it is expressed in unequivocal
terms, and implied when the old and the new obligations
are incompatible with each other on every point. (Art. 1292,
Civil Code)
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Novation is total or extinctive when there is absolute
extinguishment, and partial or modificatory when the old
obligation is merely modified.
OBJECTIVE NOVATION
Objective novation may be effected by:
1. Changing the cause of the obligation;
2. Changing the object of the obligation;
3. Changing the principal or essential conditions of
the obligation. (Art. 1291, Civil Code)
SUBJECTIVE NOVATION
Subjective novation consists of the substitution of a new
debtor in the place of the original debtor, or to the
subrogation of a third person in the rights of the creditor.
(Art. 1291, Civil Code)
NOVATION BY SUBSTITION OF DEBTOR
Novation by substitution of the debtor has two forms:
1. Substitution by expromisión; and
a. Substitution with the knowledge and
consent of the old debtor
b. Substitution without the knowledge or
against the will of the old debtor
2. Substitution by delegación.
Expromisión is when the substitution is effected with the
consent of the creditor at the instance of the new debtor
even without the knowledge or against the will of the old
debtor. For substitution to be considered as expromisión,
the following requisites must concur:
1. The initiative for the substitution comes from
the new debtor; and
2. The creditor must give his consent.
It is not enough to extend the juridical relation to a third
person; it is necessary that the old debtor be released
from the obligation, and the third person take his place in
the relation. Without such release, there is no novation;
the third person who has assumed the obligation of the
debtor merely becomes a co-debtor or a surety.
(Cochingyan v. R & B Surety, 1987)
Delegación is when the substitution is effected without the
consent of the creditor at the instance of the old debtor
with the concurrence of the new debtor. For substitution
to be considered as delegación, the following requisites
must concur:
1. The initiative for the substitution comes from
the old debtor;
2. The creditor consents; and
3. The creditor must accept the substitution.
EXPROMISION DELEGACION
The initiative does not
come from the old debtor The initiative comes from
and it may even be made the old debtor.
without his knowledge.
The consent of the new debtor and the creditor are
required.
The consent of the creditor to the substitution may be
expressed or implied; and need not to be given
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simultaneously, for as long as it is given one way or

another.
The following rules shall apply in expromisión:
1. If substitution was effected with the knowledge
and consent of the old debtor but payment was
made without his knowledge and consent, the
new debtor is entitled to reimbursement of the
entire amount paid (Art. 1236, Civil Code) and he
will be subrogated to the rights of the creditor
(Art. 1300, Civil Code).
2. If substitution and payment was effected
without the knowledge and consent of the old
debtor, the new debtor can demand
reimbursement only insofar as the payment has
been beneficial to the old debtor, and he will
have no right to subrogation. (Art. 1237, Civil
Code)
3. If substitution was effected with the knowledge
and consent of the old debtor, the new debtor s
insolvency or nonfulfillment of the obligation
shall not revive the original debtor s liabilit to
the creditor. (Art. 1294, Civil Code)
NOVATION BY SUBSTITUTION OF CREDITOR
Novation by subrogating a third person in the rights of the
creditor is called subrogation. This involves two forms:
1. Conventional subrogation; and
2. Legal subrogation.
Conventional subrogation is that which takes place by the
agreement of the old creditor, the third person
substituting the old creditor, and the debtor.
Conventional subrogation must be clearly established in
order that it may take effect. As such, there must be an
agreement of all the parties with respect to the
subrogation.
The requisites for conventional subrogation are as follows:
1. There must be consent of the old creditor;
2. There must be consent of the third person who
is subrogated to the rights of the old creditor;
and
3. There must be consent of the debtor. (Art. 1301,
Civil Code)

The following rules shall apply in delegación: POINT OF CONVENTIONAL ASSIGNMENT

(1) The new debtor can demand reimbursement COMPARISON SUBROGATION OF RIGHTS
from the old debtor of the entire amount paid As to Governed by
(Art. 1236, Civil Code), and the former can compel Governed by Arts.
Governing Arts. 1624-1627
the creditor to subrogate him in all his rights. 1300-1304 of the
Law of the Civil
(Art. 1300, Civil Code) Civil Code.
Code.
(2) If the new debtor becomes insolvent or he As to
cannot fulfill the obligation, the creditor s right The debtor s The debtor s
Requirement
of action against the old debtor can no longer be consent is consent is not
D b
revived. (Art. 1295, Civil Code) required. required.
Consent
Exceptions: It has the effect
As to Effects
a. When the insolvency of the new debtor of transmitting
was already existing and of public It has the effect of the right of the
knowledge at the time the old debtor extinguishing the creditor to
delegated his debt; and obligation and another person
b. When the insolvency was already giving rise to a without
existing and known to the old debtor new one. modifying or
when he delegated his debt. extinguishing
the obligation.
EFFECT OF NOVATION Defects or vices in Defects or vices
As to Curing
When the principal obligation is extinguished as a the original in the original
of Defects or
consequence of novation, the accessory obligations may obligation are obligation are
Vices
subsist only insofar as they may benefit third persons who cured. not cured.
did not give their consent. (Art. 1296, Civil Code)
As to When The effect, as
does Effect far as the
General Rule: If the old obligation was subject to a The effect arises
Takes Place debtor is
suspensive or resolutory condition, the new obligation from the moment
concerned,
shall be subjected to the same condition and the latter s of novation or
arises from the
efficacy shall depend upon the happening of the condition. subrogation.
moment of
(Art. 1299, Civil Code) notification.

Exception: Unless there is a stipulation to the contrary. Legal subrogation is that which takes place without
agreement of the parties, but by operation of law. (Art.
If the old obligation was conditional, the fulfillment or non- 1302, Civil Code)
fulfillment of the condition affects the subsequent
obligation. Hence, if the old obligation did not arise
General Rule: Legal subrogation is not presumed.
because of the nonfulfillment of the suspensive condition,
or if it ceases to be effective because of the fulfillment of
Exceptions:
the resolutory condition, then the old obligation becomes
1. When a creditor pays another creditor who is
a void obligation. As such, no novation can take place.
preferred, even without the debtor s knowledge;

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Green Notes 2019
This should be understood in connection
with the rules on preference of credits. (Art.
1236, Civil Code)
2. When a third person, not interested in the
obligation, pays with the express or tacit
approval of the debtor; and
When payment was made without the
knowledge or consent of the debtor, he is
entitled to demand reimbursement only to
the extent that the debtor has been
benefited by the payment, and without the
right to be subrogated in the rights of the
creditor. (Wilson v. Berkenkotter, 1953)
3. When, even without the knowledge of the
debtor, a person interested in the fulfillment of
the obligation pays, without prejudice to the
effects of confusion as to the latter s share. (Art.
1302, Civil Code)
A person interested in the fulfillment of the
obligation can onl refer to a co-debtor, a
guarantor, the owner of the thing which is
given as security, or one who has a real right
over the thing which is the object of the
obligation.
OTHER MODES OF EXTINGUISHING OBLIGATIONS
1. Prescription
2. Death
Death extinguishes obligations which are of
purely personal character, apart from it
extinctive effect in some contracts, such as
partnership and agency.
3. Renunciation by the creditor
RENUNCIATION REMISSION
Renunciation is a
refusal by the
Remission is in
creditor to enforce
the nature of a
his claim with the
donation.
intention of
waiving it.
4. Compromise
5. Fulfillment of the resolutory condition or arrival
of the resolutory period
6. Rescission of contracts
7. Change in the civil status
8. Abandonment
There are special cases (i.e. abandonment of
interest in a party wall under Art. 662 of the
Civil Code) of extinguishment of obligations
by abandonment of the thing charged with
the obligation.
9. Mutual dissent
Contracts can be terminated by mutual
agreement of the parties, express or
implied. Hence, since mutual agreement can
create a contract, mutual disagreement by
the parties can cause its extinguishment.
(Saura v. DBP, 1972)
10. Insolvency
An obligation is not extinguished by the
insolvency of the debtor, unless it has been
judicially declared and a discharge has been
given to him.
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Annulment cannot be a mode of extinguishment because
there was no obligation to begin with.
A contract is a meeting of minds between two persons
whereby one binds himself, with respect to the other, to
give something or to render some service. (Art. 1305, Civil
Code)
The Code defines contract restrictively by giving emphasis
on the obligatory concept of contracts. The definition
seems to be limited to cases where one party binds himself
to perform a prestation in favor of another, excluding
cases of reciprocal prestations.
Dation in payment is not a contract because a contract is
a source of obligation and dation in payment does not
create an obligation.
A meeting of the minds does not necessarily give rise to a
contract, while a contract necessarily implies that there
was a meeting of the minds.
Auto contracts are contracts where a person, in his
capacity as representative of another, contracts with
himself, or as a representative of two different persons, he
brings about a contract between his principals by
contracting with himself.
Auto contracts, under our law, are generally accepted
because a contract requires two parties (not two persons)
and two declarations of will (not two wills).
Elements of contracts may be classified as:
1. Essential
Those without which there can be no
contract.
2. Natural
Elements which are derived from the nature
of the contract and ordinarily accompany
the same. They are presumed by law,
although they can be excluded by the
contracting parties if they so desire.
3. Accidental
Those which exist only when the parties
expressly provide for them for the purpose
of limiting or modifying the normal effects
of the contract (i.e. conditions, terms and
modes).
CHARACTERISTICS OR PRINCIPLES OF CONTRACTS
1. Obligatory force
2. Consensuality
3. Autonomy
4. Mutuality
5. Relativity
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OBLIGATORY FORCE OF CONTRACTS
Obligations arising from contracts have the force of law
between the contracting parties and should be complied
with in good faith. (Art. 1159, Civil Code)
The contract must bind both contracting parties; its
validity or compliance cannot be left to the will of one of
them. (Art. 1308, Civil Code)
Contracts are perfected by mere consent, and from that
moment the parties are bound not only to the fulfillment
of what has been expressly stipulated but also to all the
consequences which, according to their nature, may be in
keeping with good faith, usage and law. (Art. 1315, Civil
Code)
Contracts shall be obligatory, in whatever form they may
have been entered into, provided all the essential
requisites for their validity are present. However, when
the law requires that a contract be in some form in order
that it may be valid or enforceable, or that a contract be
proved in a certain way, that requirement is absolute and
indispensable. In such cases, the right of the parties
stated in the following article cannot be exercised. (Art.
1356, Civil Code)
Obligatory refers to that all contracts, once perfected,
shall be of obligatory force upon both of the contracting
parties. Consequently, the parties are bound, not only of
the fulfillment of what has been expressly stipulated, but
also to all of the consequences thereof.
Perfection of a contract presupposes the validity of a
contract.
CONSENSUALITY OF CONTRACTS
Contracts are perfected by mere consent, and from that
moment the parties are bound not only to the fulfillment
of what has been expressly stipulated but also to all the
consequences which, according to their nature, may be in
keeping with good faith, usage and law. (Art. 1315, Civil
Code)
There are cases in which one party has already a prepared
form of a contract, containing the stipulations he desires,
and he simply asks the other party to agree to them if he
wants to enter into the contract. This is called a contract
of adhesion. The party who adheres to the said contract is
in reality free to reject it entirely; if he adheres, he gives
his consent.
AUTONOMY OF CONTRACTS
The contracting parties may establish such stipulations,
clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals,
good customs, public order, or public policy. (Art. 1306,
Civil Code)
The limitations on the freedom to contract are that it must
not be:
1. Contrary to law;
The law which the terms of a contract must
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not contravene are those which expressly
declare their obligatory character, or which
are prohibitive, or which express
fundamental principles of justice which
cannot be overlooked by the contracting
parties, or which impose essential requisites
without which the contract cannot exist.
(Lakas ng Manggagawang Bayan v. Abiera,
1970)
2. Contrary to morals or good customs;
Morals may be considered as meaning good
customs; or those generally accepted
principles of morality which have received
some kind of social and practical
confirmation.
3. Contrary to public order or public policy;
The Constitution is controlling in
determining what public order and policy
dictates.
Public order represents the public, social,
and legal interest in private law, that which
is permanent and essential in institutions,
which, even if favoring some individual to
whom the right pertains, cannot be left to
his own will.
Among those that may not be the subject
matter of contracts are certain rights of
individuals, which the law and public policy
have deemed wise to exclude from the
commerce of man. Among these are the
political rights conferred upon citizens.
(Saura v. Sindico, 1960)
The condition prohibiting to sell to third
parties is contrary to public policy because
the same virtually amounts to a perpetual
restriction on the right of ownership the
right to freely dispose his properties. (Leal v.
IAC, 1987)
Compromise agreements are contracts whereby the
parties, by making reciprocal concessions, avoid a
litigation or put an end to one already commenced. Such
agreements are considered as a consensual contract,
hence, becomes binding and becomes the source of the
rights and obligations of the parties thereto. (Santos
Ventura Hocorma Foundation v. Santos, 2004)
To have the force of res judicata, the compromise
agreement must be approved by final order of the court.
(National Commercial Bank of Saudi Arabia v. CA, 2005)
MUTUALITY OF CONTRACTS
The contracts must bind both contracting parties; its
validity or compliance cannot be left to the will of one of
them. (Art. 1308, Civil Code)
The determination of the validity or fulfillment of a
contract may be left to the will of a third person, and
whose decision shall not be binding until the same has
been known to each of the contracting parties. (Art. 1309
and 1310, Civil Code)
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NOTE: If the determination is evidently inequitable, it shall
not have any obligatory effect upon the contracting
parties.
The validity or fulfillment of a contract can be left to
chance. (Art. 1308, Civil Code)
The mutuality of a contract does not only refer to the
validity but also to the compliance or fulfillment of the
contract.
There must be mutuality between the parties based on
their essential equality, to which is repugnant to have one
party bound by the contract leaving the other free
therefrom. The ultimate purpose is to render void a
contract containing a condition which makes its fulfillment
dependent exclusively upon the uncontrolled will of one of
the contracting parties.
RELATIVITY OF CONTRACTS
General Rule: A contract can only bind the parties who had
entered into it, or their successors who have assumed
their personality or their juridical position, and that as a
consequence, such contract can neither favor nor
prejudice a third person.
NOTE: Since a contract does not produce any effect
against third persons, such third person has no legal
capacity to challenge its validity. Hence, even if a contract
is voidable, a third person cannot assert the voidable
character of the contract. (Wolfson v. Estate of Martinez,
1911)
Exceptions:
1. Where the obligations arising from the contract
are not transmissible by their nature, by
stipulation, or by provision of law. (Art. 1311, Civil
Code)
2. Where there is a stipulation pour autrui or a
stipulation in favor of a third person. (Art. 1311,
Civil Code)
3. Where a third person induces another to violate
his contract. (Art. 1314, Civil Code)
4. Where, in some cases, third persons may be
adversely affected by a contract where they did
not participate. (Art. 1313, 2150 and 2151, Civil
Code)
5. Where the law authorizes the creditor to sue on
a contract entered into by his debtor (accion
directa).
There is a difference between being bound and being
benefited by a contract. Being bound means the party has
no choice to be related to the contract while being
benefited means that the party may choose not to be
related to the contract.
The fairest test to determine whether the interest of a
third person in a contract is a stipulation pour autrui or
merely an incidental interest, is to rely upon the intention
of the parties as disclosed by the contract. (Bonifacio
Brother v. Mora, 1967)
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The requisites for a valid stipulation pour autrui are:
1. There must be a stipulation in favor of a third
person;
2. The application in favor of a third person should
be a part, not the whole, of the contract;
3. The favorable stipulation should not be
conditioned or compensated by any kind of
obligation whatever; and
4. Neither of the contracting parties bears the legal
representation or authorization of third party.
(Florentino v. Encarnacion, 1977)
A third person acquires a right to the prestation only when
this is in accordance with the intention of the contracting
parties. (Bank of America v. IAC, 1986)
A party who has not taken part in the contract cannot sue
or be sued for performance or for cancellation thereof,
unless he shows that he has a real interest affected
thereby. (Marimperio v. CA, 1987)
BREACH OF CONTRACT
A breach of contract is the failure, without legal reason, to
comply with the terms of the contract. (Sps. Omengan v.
PNB, 2007)
1. Preparation
The parties have not arrived at any definite
agreement, although there may have been a
preliminary offer or bargaining.
2. Perfection
The parties have come to an agreement, the
elements of definite subject matter and
valid cause having been accepted by mutual
consent.
NOTE: A contract of option is considered as
a perfect contract since there is an accepted
unilateral promise to buy or to sell a
determinate thing for a price certain, and
that such promise is supported by a
consideration distinct from the price (Art.
1479(2), Civil Code). The giving of earnest
money in a contract of sale, which is
considered as part of the price, as likewise
considered as a perfected contract. (Art.
1482, Civil Code)
3. Consummation
The terms of the contract are performed,
and the contract may be said to have been
fully executed.
NOMINATE AND INNOMINATE CONTRACTS
Nominate contracts are those which have their own
distinctive individuality and are regulated by special
provisions of the law. These include sales, barter or
exchange, lease, partnership, agency, etc.
Innominate contracts, on the other hand, are those which
lack individuality and are not regulated by special
provisions of law.
The four kinds of innominate contracts are:
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1. Do ut des I give that you may give;
2. Do ut facias I give that you may do;
3. Facio ut des I do that you may give;
4. Facio ut facias I do that you may do.
OTHER GENERAL RULES ON CONTRACTS
1. A third person who comes into the possession of
an object of the contract creating a real right will
have to be bound by such right, subject to the
provisions of the Mortgage Law and the Land
Registration Law. (Art. 1312, Civil Code)
2. Although a third party cannot ask for the
annulment pursuant to the principle of relativity
of contracts, an exception is made to the
creditor of a contracting party. In such cases, the
creditor must prove that a contract was entered
into with an intention to defraud him. (Art. 1313,
Civil Code)
3. Any third person who induces another to violate
his contract shall be liable for damages to the
other contracting party. (Art. 1314, Civil Code)
4. No person may enter into a contract in the name
of another unless he has been duly authorized by
the latter, or unless he has by law a right to
represent him. (Art. 1317, Civil Code)
If such person enters into a contract
whether or not he has been authorized to do
so, and if he has acted beyond the scope of
his powers, then the contract is
unenforceable. (Art. 1403, Civil Code)
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. (Art.
1318, Civil Code)
The essential elements of a contract determine the validity
of a contract.
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. (Art. 1319(1), Civil Code)
The essence of consent is the conformity of the parties on
the terms of the contract, the acceptance by one of the
offer made by the other; it is the concurrence of the minds
of the parties on the object and the cause which shall
constitute the contract.
Elements of consent:
1. There must be two or more parties;
2. The parties must have legal capacity to contract;
3. There must be no vitiation of consent;
4. There must be no conflict between what was
expressly declared and what was really intended;
Otherwise, the remedy would be
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reformation.
5. The intent must be declared properly.
An offer is a unilateral proposition which one party makes
to the other for the celebration of a contract.
Requisites of a valid offer:
1. It must be definite
The offer must be definite, so that upon
acceptance an agreement can be reached
on the whole contract. The offer, however,
may be indeterminate in certain respects
which the offeror leaves to the
determination of the other party.
2. It must be complete
The offer must be complete, indicating with
sufficient clearness the kind of contract
intended and definitely stating the essential
and non-essential conditions of the
proposed contract desired by the offeror.
3. It must be intentional.
An offer without seriousness, made in such
a manner that the other party would not fail
to notice such lack of seriousness, is
absolutely without juridical effects and
cannot give rise to a contract.
A business advertisement of things for sale may or may not
constitute a definite offer. It is not a definite offer when
the object is not determinate.
For there to be a meeting of the minds, the offer must be
certain and the acceptance, unqualified and absolute. If
the acceptance is qualified, this merely constitutes a
counter-offer.
An offer made through an agent is accepted from the time
acceptance is communicated to him. (Art. 1322, Civil Code)
As a rule, an acceptance made by letter or telegram does
not bind the offeror except from the time it came to his
knowledge (cognition theory). The contract, in such a case,
is presumed to have been entered into in the place where
the offer was made. (Art. 1319(2), Civil Code)
NOTE: Knowledge may be actual or constructive.
In commercial law, the cognition theory is known as the
Theory of Manifestation. Under this theory, offer and
acceptance takes effect only from the time knowledge is
acquired by the person to whom it is directed. If during
intervening time, the offer or acceptance is extinguished
by death or insanity, such offer or acceptance has no more
effect.
An acceptance may be express or implied. (Art. 1320, Civil
Code)
An accepted unilateral promise to buy or to sell a
determinate thing for a price certain is binding upon the
promisor if the promise is supported by a consideration
distinct from the price. (Art. 1326, Civil Code)
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A reservation to reject the bid of an bidder does not A withdrawn acceptance cancels or nullifies the same and
make it obligatory for a government agency to award its as a result, does not create any legal effect.
contract to the lowest bidder. (C&C Commercial Corp. v.
Menor, 1983)

WHEN OFFER BECOMES INEFFECTIVE

1. Upon the death, civil interdiction, insanity or
insolvency of either party before acceptance is
conveyed (Art. 1323, Civil Code);
2. When the offeree expressly or impliedly rejects
the offer;
3. When the offer is accepted with a qualification
or condition;
4. When before acceptance is communicated, the
subject matter has become illegal or impossible;
5. When the period of time given to the offeree
within which he must signify his acceptance has
already lapsed;
6. When the offer is revoked in due time or before
the offerer has learned of its acceptance by the
offeree. (Laudico v. Arias, 1922)
WITHDRAWAL OF OFFER
Since the contract is perfected only from the time the
acceptance is known to the offeror, it is clear that said
offeror may withdraw his offer at any time before he learns
of the acceptance, even if such acceptance has already
been made, but not made known to him.
The following cannot give consent to a contract:
1. Unemancipated minors;
Minors who have not been emancipated by
marriage, attainment of the age of majority,
or by parental or judicial authority. (Art.
1397, Civil Code)
2. Insane or demented persons; and
Exception: Unless they acted during a lucid
interval.
No court declaration of insanity is required.
Proof that the person was insane at the time
of contracting is sufficient.
Even if a person had already been declared
as insane, it does not necessarily mean that
at the time of contracting, said person was
still insane.
Includes those in the state of drunkenness
or those under a hypnotic spell.
3. Deaf-mutes who do not know how to write.
If he does not know how to write but he
knows how to read, then he should be
considered capacitated.

Although the offeror may be held liable for damages
because of abuse of right, however, the withdrawal of the
offer will cause it to cease in law. Hence, notwithstanding
a subsequent acceptance, there will be no contract
because there can be no concurrence of wills.
Because the law incapacitates them to give their consent
to a contract, the only by which any of them can enter into
a contract is to act through a parent or guardian. If this
requirement is not complied with, the result is a voidable
contract.

A letter of acceptance may still be withdrawn or revoked
as long as the letter of withdrawal was received before the
letter of acceptance.
OPTION CONTRACT
General Rule: If the offeror has allowed the offeree a
certain period to accept, the offer may be withdrawn at
any time before acceptance by communicating such
withdrawal.
Exception: When the option is founded upon a
consideration, which consists of something paid or
promised, no withdrawal can be made. (Art. 1324, Civil
Code)
If only one of the contracting parties is incapacitated to
give his consent, the contract is voidable (Art. 1390(1), Civil
Code). If both of them are incapacitated to give their
consent, the contract is unenforceable. (Art. 1403(3), Civil
Code)
There are people who are specially disqualified by law to
enter into certain transactions. These include:
1. A husband and a wife cannot sell or donate to
each other. (Art. 134 and 1490, Civil Code)
2. Insolvents before they are discharged cannot
make payment.
3. Persons disqualified because of a fiduciary
relationship. (Art. 1491, Civil Code)

NOTE: Consideration does not necessarily have to be INCAPACITATED PERSONS SPECIALLY

money. PERSONS DISQUALIFIED
Restrains the exercise of Restrains the very right
Since an option is by itself a contract, it is not perfected the right to contract. itself.
unless there is a meeting of the minds on the option. Thus, If only one party is
an offer to grant an option, even if founded upon a distinct incapacitated, the
cause or consideration, may itself be withdrawn before the contract is voidable. If
The contract is void.
acceptance of the offer of an option. both parties are
incapacitated, the
WITHRAWAL OF ACCEPTANCE contract is unenforceable.
The acceptance may be revoked before it comes to the
knowledge of the offeror because in such case there is still CAUSES OF VITIATED CONSENT
no meeting of the minds. 1. Mistake (or error)
2. Fraud (or deceit)

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3. Violence As a rule, a mistake of fact vitiates consent and hence, the

4. Intimidation
5. Undue influence
NOTE: Mistake and fraud result in defects of the intellect,
while the others result in defects in the will.
The presence of vitiated consent must be proven by clear
and convincing evidence, and not merely by
preponderance of evidence. (Centenera v. Palicio, 1915)
MISTAKE
Mistake may be defined not only as the wrong conception
of a thing, but also as the lack of knowledge with respect
to a thing.
For mistake to vitiate consent, the following requisites
must concur:
1. The error must be substantial regarding:
a. The object of the contract;
b. The conditions which principally
moved or induced one of the parties
(error in quality or quantity);
c. The identity or qualifications, but only
if such was the principal cause of the
contract.
The error is substantial if because of it, the
party gave his consent.
2. The error must be excusable;
It must not be caused by negligence.
3. The error must be a mistake of fact, and not of
law. (De Luna v. Linatoc, 1942)
contract becomes voidable.
MISTAKE OF LAW
There is a mistake of law when one or both of the
contracting parties arrive at an erroneous conclusion
regarding the interpretation of a question of law or the
legal effects of a certain act or transaction.
General Rule: While a mistake of fact renders the contract
voidable, a mistake of law will not. As a rule, ignorance of
the law excuses no one from compliance therewith. (De
Luna v. Linotoc, 1942)
Exception: Mutual error as to the effect of the agreement
when the real purpose of the parties is frustrated, may
vitiate consent. (Art. 1334, Civil Code)
FRAUD
Fraud which will render a contract voidable refers to those
insidious words or machinations employed by one of the
contracting parties in order to induce the other to enter
into a contract, which, without them, he would not have
agreed to. (Art. 1338, Civil Code)
The kinds of fraud are:
1. Fraud in the perfection of a contract (Art. 1338,
Civil Code)
a. Dolo causante
b. Dolo incidente
2. Fraud in the performance of an obligation (Art.
1170, Civil Code)

An error as to personal motive does not vitiate consent. NOTE: Fraud under Art. 1338 of the Civil Code must not be
confused with fraud under Arts. 1170-1171 of the Civil Code.
The natural presumption is that one always acts with due
care and signs with full knowledge of all the contents of a
FRAUD UNDER ART. FRAUD UNDER ART. 1170
document. This is true even if the mind of the party signing
1338
was confused at the time of signing, as long as he still knew
Employed by a party to
what he was doing. (Abaya v. Standard Vacuum Oil Co., Employed by the obligor
the contract in securing
1957) in the performance of a
the consent of the other
pre-existing obligation.
party.
Exception: When one of the parties is unable to read or
Present in the
understand the contract and mistake or fraud is alleged, Present in the perfection
performance of an
the person enforcing the contract must show that the of the contract.
obligation.
terms thereof have been fully explained to the former. (Art.
1332, Civil Code)
Fraud in the perfection of the contract may be subdivided
into dolo causante and dolo incidente.
There is no mistake if the party had knowledge of the
1. Dolo causante (causal fraud) refers to those
doubt, contingency or risk affecting the object of the
deceptions or misrepresentations of a serious
contract. (Art. 1333, Civil Code)
character employed by one party and without
which the other party would not have entered
NOTE: This is true in contracts which are aleatory in
into the contract.
nature.
2. Dolo incidente (incidental fraud) refers to those
Kinds of mistakes:
deceptions or misrepresentations which are not
1. Mistake of fact
serious in character and without which the other
2. Mistake of law
party would still have entered into the contract.
MISTAKE OF FACT
POINT OF DOLO DOLO
There is a mistake of fact when one or both of the
COMPARISON CAUSANTE INCIDENTE
contracting parties believe that a fact exists when in reality
it does not, or that such fact does not exist when in reality As to Serious in Not serious in
it does. Character character. character.

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As to It is the cause upon the person or property of his spouse, descendants or

Inducement of which induces It is not the ascendants, to give his consent. (Art. 1335(2), Civil Code)
the Other the party upon cause for
Party whom it is inducing a party For intimidation to vitiate consent, the following requisites
employed in in entering into must concur:
entering into the the contract. 1. There is a reasonable and well-grounded fear on
contract. the part of the person compelled to give his
As to Effect It renders the consent;
It renders the party who 2. The evil must be imminent and grave;
contract employed it 3. The evil must be unjust;
voidable. liable for 4. It must be upon his person, property, or upon the
damages. person or property of his spouse, descendants,
or ascendants;
For fraud to vitiate consent, the following requisites must 5. It must have been the reason why the contract
concur: was entered into.
1. The fraud must have been employed by one of
the contracting parties; The threat or intimidation, in order to vitiate consent,
2. It must have been material and serious; must be actual, serious and possible of realization, and that
3. It must have induced the other party to enter the actor can and still will carry out his threat.
into the contract; and
4. It should not have been employed by both of the A threat to enforce one s claim through competent
contracting parties or by third persons. (Art. authority, if just and legal, does not vitiate consent. (Art.
1344, Civil Code) 1336, Civil Code)

The rules on fraud are as follows: Whether the fear is reasonable and well-grounded or
1. Failure to disclose facts (concealment), when whether the evil is imminent and grave depends upon
there is a duty to reveal them, as when the many circumstances, including the age, condition, and sex
parties are bound by confidential relations, of the person concerned. (Art. 1335(3), Civil Code)
constitutes fraud. (Art. 1339, Civil Code)
2. The usual exaggerations in trade, when the other VIOLENCE INTIMIDATION
party had an opportunity to know the facts, are External. Internal.
not in themselves fraudulent. (Art. 1340, Civil Influences the operation
Code) of the will, inhibiting it in
Prevents the expression
3. A mere expression of an opinion does not signify such a way that the
of the will substituting it
fraud, unless made by an expert and the other expression thereof is
with a material act
part has relied on the former s special apparently that of a
dictated by another.
knowledge. (Art. 1341, Civil Code) person who has freely
4. Misrepresentations by a third person does not given his consent.
vitiate consent, unless such misrepresentation Physical compulsion. Moral compulsion.
has created substantial mistake and the same is It can be employed by a third person who is not a party
mutual. (Art. 1342, Civil Code) to the contract.
5. A misrepresentation in good faith is not fraud.
(Art. 1343, Civil Code) UNDUE INFLUENCE
There is undue influence when a person takes improper
VIOLENCE advantage of his power over the will of another, depriving
Duress is that degree of constraint or danger either the latter of a reasonable freedom of choice. (Art. 1337, Civil
actually inflicted (violence) or threatened and impending Code)
(intimidation), sufficient to overcome the mind and will of
a person of ordinary firmness. Even if it can be established that person entered into a
contract through the importunity or persuasion of another
There is violence, when in order to wrest consent, serious against his better judgment, if the deprivation of his free
or irresistible force is employed. (Art. 1335(1), Civil Code) agency is not proved, there is no undue influence which
will invalidate the contract. (Martinez v. Hong Kong and
For violence to vitiate consent, the following requisites Shanghai Bank, 1910)
must concur:
1. The force must be serious or irresistible; and NOTE: There must be undue influence, not mere due
2. It must have been the reason why the contract influence.
was entered into.
For undue influence to vitiate consent, the following
INTIMIDATION requisites must concur:
There is intimidation when one of the contracting parties 1. There is improper advantage;
is compelled by a reasonable and well-grounded fear of an 2. There is power over the will of another;
imminent and grave evil upon his person or property, or 3. There is deprivation of the latter s will of a
reasonable freedom of choice.

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Circumstances to be considered in determining whether

there is undue influence is the confidential, family,
spiritual and other relations between the parties, mental The object of a contract is the thing, right or service which
weakness, ignorance, and financial distress. (Art. 1337, Civil is the subject matter of the obligation which is created or
Code) established.

UNDUE INFLUENCE INTIMIDATION
There must be an
unlawful or unjust act
There need not be an
which is threatened and
unjust or unlawful act.
which causes consent to
be given.
There is a simulated contract when there is an outward
declaration of a will different from the will of the parties,
the false appearance was intended by mutual agreement,
and the purpose is to deceive third persons.
There are two kinds of simulated contracts:
1. Absolutely simulated
2. Relatively simulated
The simulation is absolute (fictitious contract) when there
is a colorable contract but it has no substance as the
contracting parties do not intent to be bound by the
contract at all.
The simulation is relative (disguised contract) when the
contracting parties state a false cause in the contract to
conceal their true agreement.
ABSOLUTELY RELATIVELY
SIMULATED SIMULATED
It binds the parties and
the parties may recover
from each other what
they may have given
under the contract.
NOTE: However, for it to
It renders the contract
be binding and
void.
enforceable, it must not
prejudice third persons
and it must not be
intended for any purpose
contrary to law, morals
good customs, public
order or public policy.
(Valerio v. Refresca, 2006)
The object of the contract and the object of the obligation
created thereby are identical.
As a general rule, all things or services may be the object
of contracts. It is, however, essential that the following
requisites must concur:
1. The object must be within the commerce of man
(Art. 1347, Civil Code)
2. It must be transmissible
3. It must be licit, or not contrary to law, morals,
good customs, public policy, or public order (Art.
1347, Civil Code)
4. It must be possible
5. It must be determinate as to its kind or
determinable without the need of a new contract
or agreement.
Impossibility may be:
1. Because of the nature of the transaction or
because of the law;
2. Absolute (objectively impossible)
No one can do it.
3. Relative (subjectively impossible)
A particular debtor cannot comply.
Mere convenience, unexpected impediments, or increased
expenses is a mere difficulty, and not constitute
impossibility. (Art. 1348, Civil Code)
The following cannot be the object of contracts:
1. Things which are outside the commerce of men;
2. Intransmissible rights;
3. Future inheritance, except in cases expressly
authorized by law; (Art. 1347(1), Civil Code)
4. Services which are contrary to law, morals, good
customs, public order or public policy;
5. Impossible things or services; (Art. 1348(3), Civil
Code) and
6. Objects which are not possible of determination
as to their kind. (Art. 1349, Civil Code)
Future things may be the object of the contract (Art. 1347,
Civil Code). Future inheritance, however, cannot be the
subject of a contract except in the case of marriage
settlements (Art. 130, Civil Code) or partitions of property
inter vivos by the deceased (Art. 1080, Civil Code).

The primary consideration in determining the true nature

of a contract is the intention of the parties. Such intention
is determined from the express terms of the agreement as Cause is the wh of the contract or the essential reason
well as from their contemporaneous and subsequent acts. which moves the contracting parties to enter into the
(Tating v. Marcella, 2007) contract.

Cause must be distinguished from motive. The motive of

the parties to a contract is that which impels one to a sale
or purchase, and are not always the consideration of the

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contract as the term understood in law. (De Jesus v. G. the celebration of the contract
Urrutia & Co., 1916) 2. The cause should be licit or lawful
3. The cause should be true
CAUSE MOTIVE
The direct or most If the contract has no cause, or even if it has, if the cause
The indirect or remote should be illicit or unlawful, the rule is that it shall not
proximate reason of a
reason of a contract. produce any effect whatsoever and it shall be inexistent or
contract.
The psychological or void from the beginning (Art. 1352, Civil Code). The same is
The objective or juridical true if the cause stated is false, unless it can be proved that
purely personal reason for
reason of a contract. the contract is, in reality, founded upon another cause
a contract.
The cause of each which is true and lawful. (Art. 1353, Civil Code)
The motives differ for
contract is always the
each contracting party. If the cause is illegal, the following rules apply:
same.
It is always known. It may be unknown. 1. If one party is innocent, he cannot be compelled
The legality or illegality of The legality or illegality of to perform his obligation, and he may recover
the cause will affect the the motives will not affect what he has already given. (Art. 1411, Civil Code)
existence or validity of the the existence or validity of 2. If both parties are guilty, in general, neither can
contract. the contract. sue the other. However, certain exceptions exist.
(Art. 1414 and 1416, Civil Code)
NOTE: Motive, however, becomes causa when it
predetermines the purpose of the contract.
The presence of motive does not cure the absence of
cause.
General Rule: Contracts shall be obligatory, in whatever
form they may have been entered into, provided all of the
General Rule: The motive of the party does not affect the essential requisites for their validity are present. (Art. 1356,
validity or existence of a contract.
Civil Code)

Exceptions: Exceptions:
1. When the motive of a debtor in alienating 1. When the law requires that the contract must be
property is to defraud his creditors; in a certain form in order to be valid; and
2. When the motive of a person in giving his 2. When the law requires that the contract must be
consent is to avoid a threatened injury; in a certain form in order to be enforceable. (Art.
3. When the motive of a person induced him to act 1356, Civil Code)
on the basis of fraud or misrepresentation by the
other party.
FORMALITIES FOR VALIDITY
Contracts for which the law prescribes certain forms for
CAUSE OF CONTRACTS OBJECT OF CONTRACTS their validity may be classified as follows:
The prestation or promise 1. Those which must appear in writing
of a thing or service by the The thing or service itself. 2. Those which must appear in a public document
other. 3. Those which must be registered

There are three classifications of contracts as to cause: CONTRACT FORMALITY REQUIRED

1. Onerous Donation of Real Property It must be in public
The cause is, for each contracting party, the (Art. 749, Civil Code) instrument
prestation or promise of a thing or service Donation of Personal Must be in writing
by the other. Property exceeding
2. Remuneratory P5,000 (Art. 748, Civil
The cause is the past service or benefit Code)
which by itself is a recoverable debt. Stipulation that interest Must be in writing
3. Gratuitous should be paid on loans
The cause is the mere liberality of the (Art. 1958, Civil Code)
benefactor. Agency to Sell Land (Art. Must be in writing
1874, Civil Code)
In accessory contracts, the rule is that the cause thereof is
Partnership where real Must be in writing
identical with that of the principal contract. (China
property is contributed
Banking Corporation v. Lichauco, 1924) (Art. 1773, Civil Code)
Partnership where real A signed inventory must
A moral obligation may be the cause of a civil obligation.
property is contributed be attached to the public
(Villaroel v. Estrada, 1940)
(Art. 1773, Civil Code) instrument that
evidences the partnership
In order that there will be a sufficient cause upon which a
contract
contract may be founded, the following requisites must
An agreement limiting the Must be in writing
concur:
diligence of common
1. The cause should be in existence at the time of

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carrier over goods to less
than extraordinary
diligence (Art. 1744, Civil
Code)
Contract of Antichresis The principal amount and
(Art. 2134, Civil Code) the interest to be paid
must be in writing
FORMALITIES FOR ENFORCEABILITY
There are also certain contracts which are unenforceable
by action, unless:
1. They are in writing and properly subscribed; or
2. They are evidenced by some note or
memorandum, which must also be in writing and
properly subscribed.
NOTE: These contracts are governed by the Statute of
Frauds. (Art. 1403, Civil Code)
The following principles shall apply with regard to the rule
on the formalities of a contract:
1. Arts. 1357 and 1358 do not require the execution
of the contract either in a public or in a private
document in order to validate or enforce it but
only to insure its efficacy. (Doliendo v. Depino,
1909)
2. Even when not reduced to the required form, it
is still valid and binding as far as the contracting
parties are concerned. (Solis v. Barroso, 1928)
3. From the moment one of the contracting parties
invokes the provisions of Arts. 1357 and 1358 by
means of proper action, the effect is to place the
existence of the contract in issue, which must be
resolved by the ordinary rules of evidence. (Peyer
v. Peyer, 1946)
4. Art. 1357 does not require that the action to
compel the execution of the necessary
document must precede the action upon the
contract. Both actions may be exercised
simultaneously. (Art. 1357, Civil Code)
5. Although the provisions of Arts. 1357 and 1358 do
not operate against the validity of the contract
nor the validity of the acts performed, yet from
the moment these provisions are invoked, the
execution of the required documents must
precede the determination of the other
obligations derived from the contract. (Manalo v.
De Mesa, 1913)
REFORMATION OF INSTRUMENTS
When the true intention of the parties to a perfected and
valid contract are not expressed in the instrument
purporting to embody their agreement by reason of
mistake, fraud, inequitable conduct or accident, one of the
parties may ask for the reformation of the instrument so
that such true intention may be expressed. (Art. 1359(1),
Civil Code)
In order that there can be a reformation of the instrument,
the following requisites must concur:
1. There must be a meeting of the minds;
2. The true intention is not expressed in the
instrument;
3. Such failure to express their true intention is due
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Obligations and Contracts
to mistake, fraud, inequitable conduct or
accident;
4. There must be clear and convincing proof
thereof (Mondragon v. Santos, 1950);
5. It must be brought within the proper
prescriptive period; and
6. The document must not refer to a simple
unconditional donation inter vivos, or to wills, or
to a contract where the real agreement is void.
(Art. 1366, Civil Code)
Where the complaint fails to allege that the instrument to
be reformed does not express the real agreement or
intention of the parties, no cause of action is stated therein
since such allegation is essential. It is important to allege
that the reformation is to make the instrument conform to
the real intention of the parties. (Garcia v. Bisaya, 1955)
Upon reformation of an instrument, the general rule is that
it relates back to, and takes effect from the time of its
original execution, especially as between the parties.
REFORMATION ANNULMENT
There is a valid existing
contract between the There is a defective
parties, and only the contract since there has
document does not been no meeting of the
correctly express the minds due to vitiated
terms of their true consent.
agreement.
Reformation is proper in the following instances:
1. When there is a mutual mistake of the parties
which causes the failure of the instrument to
disclose their real agreement. (Art. 1361, Civil
Code)
2. If one party was mistaken and the other acted
fraudulently or inequitably in such a way that the
instrument does not show their true intention,
the former may ask for reformation. (Art. 1362,
Civil Code)
3. 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. (Art. 1363, Civil Code)
4. When through 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. (Art. 1364, Civil Code)
5. If two parties agree upon the mortgage or pledge
of real or personal property, but the instrument
states that the property is sold absolutely or with
a right of repurchase. (Art. 1365, Civil Code)
Reformation is not proper in the following instances:
1. When the instrument is a simple donation inter
vivos wherein no condition is imposed.
2. When the instrument is a will.
3. When the real agreement is void. (Art. 1366, Civil
Code)
4. When one of the parties has brought an action to
enforce the instrument, he cannot subsequently
ask for its reformation. (Art. 1367, Civil Code)
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settled in favor of the greatest reciprocity of

Those who may ask for the reformation of an instrument
are:
1. Either party to the contract or his successors in
interest, if the mistake was mutual;
2. The injured party, or his heirs and assigns. (Art.
1368, Civil Code)
INTERPRETATION OF CONTRACTS
Intention cannot prevail over the clear and express terms
of a contract. Intent is to be reduced from the language
employed by the parties, and the terms of the contract,
when unambiguous, are conclusive in the absence of proof
of mistake or fraud the question being not that the
intention was, but what is expressed in the language used.
Moreover, in order to judge the intention of the
contracting parties, their contemporaneous and
subsequent acts shall be principally considered. (Republic
v. Castellvi, 1974)
General Rule: Documents are interpreted in the precise
terms in which they are expressed.
interests.
9. 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.
(Art. 1378, Civil Code)
10. When an instrument consists partly of written
words and partly of a printed form, and the two
are inconsistent, the former controls the latter.
11. Evidence of persons skilled in deciphering the
characters, or who understood the language, is
admissible to declare the characters or the
meaning of the language.
12. When an instrument is equally susceptible of two
interpretations, one in favor of a natural right
and the other against it, the former is to be
adopted.
13. An instrument may be construed according to
usage, in order to determine its true character.

Exception: The courts, in the exercise of their sound

1. Rescissible contracts
discretion, may admit direct and simultaneous
2. Voidable contracts
circumstantial evidence necessary for the interpretation
3. Unenforceable contracts
with the purpose of making the true intention of the
4. Void contracts
parties prevail. (Alonza v. Orillenedo, 1940)
NOTE: The abovementioned contracts are arranged in the
The other rules on the interpretation of contracts are as
order of decreasing validity.
follows:
1. 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
In a rescissible contract, all the essential requisites of a
intended to agree. (Art. 1372, Civil Code)
2. If some stipulation of any contract should admit contract exist and the contract is valid, but by reason of
of several meanings, it shall be understood as injury or damage to either of the contracting parties or to
third persons, it may be rescinded.
bearing that import which is most adequate to
render it effectual. (Art. 1373, Civil Code)
Characteristics of rescissible contracts:
3. The contract should be read in its entirety to give
1. Their defect consists in the injury or damage either to
effect to all. (North Negros Sugar Co. v. Compania
one of the contracting parties or to third persons;
Gen. de Tabacos, 1957)
2. Before rescission, they are valid;
4. Words which may have different significations
3. They can only be attacked directly, and not
shall be understood in that which is most in
collaterally;
keeping with the nature and object of the
4. They only be attacked either by a contracting party or
contract. (Art. 1375, Civil Code)
by a third person who is injured or defrauded;
5. The language of a writing is to be interpreted
5. They are susceptible of convalidation only by
according to the legal meaning it bears in the
prescription, and not by ratification.
place of its execution, unless the parties
intended otherwise. (Art. 1376, Civil Code)
Rescission is a remedy granted by law to the contracting
6. The interpretation of obscure words or
parties, and even to third persons, to secure the reparation
stipulations in a contract shall not favor the party
of damages caused to them by a contract, by means of the
who caused the obscurity. (Art. 1377, Civil Code)
restoration of things to their condition prior to the
NOTE: A contract of adhesion is construed
celebration of the contract. (Art. 1385, Civil Code)
strictly against the one who drew its terms.
(Eastern Shipping v. Margarine-Verkaufs-
A judicial action for rescission of a contract is not
Union, 1979)
necessary where the contract provides that it may be
7. When it is absolutely impossible to settle doubts revoked and cancelled for violation of any of its term and
by the rules established in the preceding articles,
conditions.
and the doubts refer to incidental circumstances
of a gratuitous contract, the least transmission of
Rescission is not a principal remedy; it is only subsidiary
rights and interests shall prevail.
and may only be availed of by the injured party if it has no
8. If the contract is onerous, the doubt shall be

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other legal means of seeking redress or reparation for the required, otherwise, the contract is
damages caused. (Art. 1383, Civil Code) unenforceable whether there is lesion or
not.
For there to be rescission, the following requisites must b. For acts of administration, if with court
concur: approval, the contract is valid, regardless
1. There must be at the beginning either a valid or of lesion; and if without court approval,
voidable contract; the contract is rescissible if lesion is
2. There is an economic or financial prejudice to a more than 1/4th.
contracting party or a third person; CONTRACTS IN BEHALF OF ABSENTEES
3. There must be mutual restitution. Provision
Those agreed upon in representation of absentees, if
Rescission of rescissible contracts must be distinguished the latter suffer the lesion stated in the preceding
from rescission or resolution of reciprocal obligations number. (Art. 1381(2), Civil Code)
under Art. 1191. Rules Applicable
The rules for contracts in behalf of ward shall apply.
POINT OF RESCISSION RESOLUTION CONTRACTS IN FRAUD OF CREDITORS
COMPARISON (Art. 1381) (Art. 1191) Provision
As to Who may May be Those undertaken in fraud of creditors when the latter
Avail Such demanded by a cannot in any other manner collect the claims due
May be
Remedy party to the them. (Art. 1381(3), Civil Code)
demanded only
contract or a
by a party to the
third person
contract. Rules Applicable
prejudiced by
1. The action to rescind contracts in fraud of
the contract.
creditors is also called accion pauliana.
As to Grounds The instances Non-
2. Requisites before accion pauliana can be brought:
under Arts. 1381 performance is
a. There is an existing debt due the creditor
and 1382 are the the only ground
prior to the alienation;
grounds to ask for the right of
b. The debtor made an alienation to a third
for rescission. rescission.
person;
As to The courts The courts may c. or made in bad faith;
Authority of cannot grant a grant a term d. The creditor has no other legal remedy to
Courts to period or term within which the satisfy his claim; and
Grant Period within which to party/parties e. The third person who received the property
or Term comply. should comply. conveyed, if it is by onerous title, has been an
As to Kind of Any contract, accomplice in the fraud.
Contract whether Only reciprocal CONTRACTS REFERRING TO THINGS UNDER
which may be unilateral or contracts may be LITIGATION
Rescinded or reciprocal, may resolved. Provision
Resolved be rescinded. Those which refer to things under litigation if they have
been entered into by the defendant without the
The following contracts are rescissible: knowledge and approval of the litigants or of competent
1. Contracts in behalf of ward judicial authority. (Art. 1381(4), Civil Code)
2. Contracts in behalf of absentees Rules Applicable
3. Contracts in fraud of creditors 1. The property is said to be in litigation after the
4. Contracts referring to things under litigation defendant has received the service of summons.
5. Contracts by an insolvent 2. To protect himself, the plaintiff must register his
6. Other rescissible contracts claim in the registry of property, pending litigation,
if the suit is about real property.
CONTRACTS IN BEHALF OF WARD NOTE: A notice of lis pendens gives
Provision notice to everyone.
Those which are entered into by guardians whenever 3. If personal property is involved, the property may
the wards whom they represent suffer lesion by more be levied upon by a writ of preliminary attachment.
than 1/4th of the value of the things which are the object 4. In this rule, the purpose is to secure the possible
thereof. (Art. 1381(1), Civil Code) effectivity of a claim. Under the rule on contracts
Rules Applicable in fraud of creditors, the purpose is to guarantee an
1. Lesion is the damage or injury to the party asking existing credit.
for the rescission (disparity between the price and CONTRACTS BY INSOLVENT
the value). Provision
2. Mere inadequacy of price is not a sufficient Payments made in a state of insolvency for obligations
ground. to whose fulfillment the debtor could not be compelled
3. The following are the effect of contracts entered at the time they were effected, are also rescissible. (Art.
into in behalf of ward: 1382, Civil Code)
a. For acts of ownership, court approval is Rules Applicable

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1. In order that the payment can be rescinded, it is
indispensable that:
a. The debtor-payer is insolvent (no judicial
declaration necessary);
b. The debt was not yet due and demandable.
2. If the debt was already due, owing and enforceable,
the transaction is not rescindable despite the
debtor being in a state of insolvency.
OTHER RESCISSIBLE CONTRACTS
Provision
All other contracts specially declared by law to be
subject to rescission. (Art. 1381(5), Civil Code)
Rules Applicable
Other rescissible contracts are those contemplated in
Arts. 1098, 1189, 1526, 1534, 1539, 1542, 1556, 1560, 1567,
and 1659 of the Civil Code.
PARTIES WHO MAY INSTITUTE ACTION
1. The person who is prejudiced;
2. Their representatives;
3. Their heirs; and
4. Their creditors by virtue of the subrogatory
action under Art. 1177 of the Civil Code.
EXTENT OF RESCISSION
Rescission does not necessarily have to be total in
character. It may also be partial. Consequently, the rules
provide that rescission shall be only to the extent
necessary to cover the damages caused. (Art. 1384, Civil
Code)
NOTE: Only the creditor who asked for rescission will
benefit, and not the other creditors.
Complete rescission will not be allowed if it is not justified
by the circumstances. Insofar as it is not rescinded, the
alienation is valid.
EFFECTS OF RESCISSION
Before an action for rescission can be brought, the
following requisites must concur:
1. Plaintiff must be able to return what has been
received;
2. The thing which is the object of the contract is
not in the legal possession of third persons in
good faith;
NOTE: Good faith without legal possession
is not sufficient.
3. There is no other legal remedy; and
4. The action must be brought within the proper
prescriptive period.
What must be returned in rescinding a contract are:
1. The object of the contract with its fruits; and
2. The price with its interest. (Art. 1385, Civil Code)
PRESUMPTIONS OF FRAUD
In order that a contract in fraud of creditors may be
rescinded, the existence may either be duly proved in
accordance with the ordinary rules of evidence, or may be
presumed in accordance with Art. 1387 of the Civil Code.
The rules on presumptions of fraud are as follows:
1. Gratuitous alienations are presumed fraudulent
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when the debtor did not reserve sufficient
property to pay all the debts contracted before
the donation.
When donations were made before the
debts were incurred, the presumption does
not arise.
However, under the doctrine of anticipatory
fraud, rescission may prosper if it can be
shown that the donation had been
deliberately made beforehand to avoid the
payment of debts still to be contracted.
2. Onerous alienations are presumed fraudulent
when made by persons:
a. Against whom some judgment has
been rendered in any instance; or
b. Against whom some writ of attachment
has been issued. (Art. 1387, Civil Code)
BADGES OF FRAUD
The creditor need not rely on the presumptions of fraud in
order to rescind a contract. He may, by relying on the
ordinary rules of evidence, prove the existence of the
same.
The test as to whether or not a conveyance is fraudulent:
Does it prejudice the rights of creditors? (Ayles v. Reyes,
1911)
NOTE: This test does not apply to third persons who
acquired the object in good faith. In such cases, the
contract or conveyance is not rescissible.
In determining whether or not certain transfers or
conveyances are fraudulent, the following circumstances
have been denominated by the courts as badges of fraud
(Oria v. McMicking, 1912):
1. The fact that the cause or consideration of the
conveyance is inadequate.
2. A transfer made by a debtor after suit has been
begun and while it is pending against him.
3. A sale on credit by an insolvent debtor.
4. Evidence of large indebtedness or complete
insolvency.
5. The transfer of all or nearly all of his property by
a debtor, especially when he is insolvent or
greatly embarrassed financially.
6. The fact that the transfer is made between father
and son, when there are present others of the
above circumstances.
7. The failure of the vendee to take exclusive
possession of all the property.
SUBSEQUENT TRANSFERS
If the first transferee is in good faith, the good or bad faith
of the next is not important.
If the first transferee is in bad faith, the next is liable only
if he is also in bad faith. (Art. 1388, Civil Code)
PRESCRIPTIVE PERIOD
General Rule: The prescriptive period for rescission is four
(4) years from the date the contract was entered into.
Exceptions:
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1. For persons under guardianship, the period is PARTIES WHO MAY INSTITUTE ACTION
counted from the termination of incapacity; 1. A party who has an interest in the contract; or
2. For absentees, the period is counted from the 2. The victim who is not a party responsible for the
time the domicile is known (Art. 1389, Civil Code); vice or defect. (Art. 1397, Civil Code)
3. For those in fraud of creditors, contracts
referring to things under litigation, and The creditors of the victim cannot ask for annulment for
contracts by an insolvent, the period is counted they are not bound by the contract.
from the time of the discovery of fraud.
EFFECTS OF ANNULMENT
1. If the contract has not yet been consummated.
The contracting parties shall be released from
the obligations arising therefrom.
Voidable contracts are those in which all of the essential 2. If already consummated, the rules provided for
elements for validity are present, although the element of in Arts. 1398-1402 of the Civil Code shall govern.
consent is vitiated either by lack of legal capacity of one of 3. Upon annulment, if the prestation consisted in
the contracting parties, or by mistake, violence, obligations to give, there shall be mutual
intimidation, undue influence, or fraud. (Art. 1390, Civil restitution of the subject matter of the contract
Code) with their fruits, and the price with its interest,
except in cases provided by law.
The most essential feature of a voidable contract is that it 4. If the prestation consisted in obligations to do or
is binding until it is annulled by a competent court. not to do, there will have to be an apportionment
of damages based on the value of such prestation
Characteristics of voidable contracts: with corresponding interests. (Art. 1398, Civil
1. Their defect consists in the vitiation of consent Code)
of one of the contracting parties. 5. When the defect of the contracts consists in the
2. They are binding until they are annulled by a incapacity of one of the contracting parties, the
competent court. (Art. 1390, Civil Code) incapacitated person shall not be obliged to
3. They are susceptible of convalidation by make any restitution except insofar as he has
ratification or by prescription. (Art. 1390-1396, benefited by the thing or price received by him.
Civil Code) (Art. 1426, Civil Code)
4. Their defect or voidable character cannot be 6. When the person obliged to return the thing
invoked by third persons. (Art. 1397, Civil Code) cannot do so because the thing has been lost
through his fault, he shall return the fruits
RESCISSIBLE VOIDABLE CONTRACTS received and the value of the thing at the time of
CONTRACTS the loss, with interest from the same date (Art.
The basis is vitiated 1400, Civil Code)
The basis is lesion
consent or incapacity to 7. However, if the person entitled to institute the
(damage).
consent. proceedings lost the thing through his fault,
Defect is external or Defect is intrinsic (in the there can be no annulment.
intrinsic. meeting of the minds).
Action is subsidiary. Action is principal. MODES WHERE ACTION TO ANNUL MAY BE
This is a remedy. This is a sanction. EXTINGUISHED
Private interest governs. Public interest governs. 1. Prescription;
Equity predominates. Law predominates. 2. Ratification; and
The plaintiff must be a 3. Loss of the thing which is the object of the
The plaintiff may be a contract through the fraud or fault of the person
party to the contract who
party to the contract or a who is entitled to institute the action.
is bound principally or
third person.
subsidiarily.
There must be damage to Damage to the plaintiff is PRESCRIPTIVE PERIOD
the plaintiff. immaterial. An action for annulment must be brought within four (4)
If plaintiff is indemnified, years, which is counted from the following periods:
Indemnity is no bar to the 1. From the time the defect of the consent ceases,
rescission cannot
action. in cases of intimidation, violence or undue
prosper.
This is compatible with influence;
the perfect validity of the A defect is presupposed. 2. From the time of the discovery of the same, in
contract. case of mistake or fraud.
To prevent rescission, 3. From the time the guardianship ceases, for
To prevent annulment, contracts entered into by minors or other
ratification is not
ratification is required. incapacitated persons. (Art. 1391, Civil Code)
required.

The following are grounds for annulment: RATIFICATION

1. Incapacity to consent Besides prescription, the action for annulment of a
2. Vitiated consent voidable contract may also be extinguished by ratification.
(Art. 1392, Civil Code)

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UNENFORCEABLE RESCISSIBLE
Ratification or confirmation requires the concurrence of CONTRACTS CONTRACTS
the following requisites: It can be enforced by
1. The contract must be tainted with a vice which It cannot be enforced by a
court action, unless it is
is susceptible of being cured; proper action in court.
rescinded.
2. The person ratifying must be entitled to do so It is susceptible of It is not susceptible of
under the law; ratification. ratification.
3. It should be effected with knowledge of the vice It may be assailed by third
or defect of the contract; It cannot be assailed by
parties who are
4. The cause of the nullity or defect should have third parties.
prejudiced.
already disappeared; and
5. The ratification must have been made expressly
UNENFORCEABLE VOIDABLE CONTRACTS
or by an act implying a waiver of the action to
CONTRACTS
annul.
It can be enforced by
It cannot be enforced by a
court action, unless it is
Mere lapse of time does not legalize a voidable contract proper action in court.
annulled.
(Tipton v. Velasco, 1906), but remaining silent for a certain
period of time ratifies such contract (Fabie v. Yulo, 1913).
The following contracts are unenforceable:
Ratification may be effected by the guardian of the 1. Unauthorized contracts
2. Contracts infringing the Statute of Frauds
incapacitated person. (Art. 1394, Civil Code)
3. Contracts where both parties are incapacitated
Ratification can be made by the injured party himself, as
long he is capacitated, or has become capacitated. UNAUTHORIZED CONTRACTS
Ratification does not require the conformity of the Provision
contracting party who has no right to bring the action for Those entered into in the name of another person by
annulment. (Art. 1396, Civil Code) one who has been given no authority or legal
representation, or who has acted beyond his powers.
When ratified, the action to annul is extinguished (Art. (Art. 1403(1), Civil Code)
1392, Civil Code), hence, the contract becomes valid Rules Applicable
(Gutierrez v. Orense, 1914). Furthermore, the contract is 1. Refers to contracts entered into the name of
cleansed of its defect/s from the beginning (Art. 1396, Civil another person by one who has been given no
Code). authority, or who has acted beyond the scope of his
authority.
Once ratification has taken place, annulment based on the 2. Such contracts shall be governed by Art. 1317 and
original defects cannot prosper; the rights of innocent principles of agency in Title X of the Code. (Art.
third persons, however, must not be prejudiced. 1404, Civil Code)
3. It may be ratified by the person in whose behalf it
has been executed, before it is revoked by the other
contracting party. (Art. 1371, Civil Code)
CONTRACTS INFRINGING THE STATUTE OF
Unenforceable contracts are those which cannot be FRAUDS
enforce by a proper action in court, unless they are
Provision
ratified, because either they are entered into without or in
Those that do not comply with the Statute of Frauds as
excess of authority or they do not comply with the Statute
set forth in this number. In the following cases an
of Frauds, or both of the contracting parts do not possess
agreement hereafter made shall be unenforceable by
the required legal capacity. (Art. 1403, Civil Code)
action, unless the same, or some note or memorandum,
thereof, be in writing, and subscribed by the party
The three (3) classes of unenforceable contract are:
charged, or by his agent; evidence, therefore, of the
1. Contracts entered into without or in excess of
agreement cannot be received without the writing, or a
authority;
secondary evidence of its contents:
2. Contracts which do not comply with the Statute
1. An agreement that by its terms is not to be
of Frauds; and
performed within a year from the making thereof;
3. Those where both contracting parties are legally
2. A special promise to answer for the debt, default,
incapacitated.
or miscarriage of another;
3. An agreement made in consideration of marriage,
The characteristics of unenforceable contracts are:
other than a mutual promise to marry;
1. They cannot be enforced by a proper action in
4. An agreement for the sale of goods, chattels or
court.
things in action, at a price not less than five
2. They are susceptible of ratification. (Art. 1403,
hundred pesos, unless the buyer accept and
Civil Code)
receive part of such goods and chattels, or the
3. They cannot be assailed by third persons. (Art.
evidences, or some of them, of such things in
1408, Civil Code)
action or pay at the time some part of the purchase
money; but when a sale is made by auction and

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entry is made by the auctioneer in his sales book, 1. File a motion to dismiss (Rule 16, Rules of Court);
at the time of the sale, of the amount and kind of 2. Plead the Statute of Frauds as an affirmative defense
property sold, terms of sale, price, names of the (Sec. 6, Rule 6, Rules of Court); or
purchasers and person on whose account the sale 3. Make a timely objection in the course of trial. (Art.
is made, it is a sufficient memorandum; 1405, Civil Code)
5. An agreement of the leasing for a longer period
than one year, or for the sale of real property or of
an interest therein;
6. A representation as to the credit of a third person.
(Art. 1403(2), Civil Code) A void or inexistent contract is one which lacks absolutely
Rules Applicable either in fact or in law one or some of the elements which
1. This rule shall apply only to executory contracts are essential for its validity.
(contracts where no performance has yet been
made) and not partially or completely executed VOID CONTRACTS INEXISTENT
(consummated contracts). CONTRACTS
2. Oral or parol evidence may be introduced to prove All of the requisites of a
partial performance. contract are present, but
3. This rule shall not be applicable when the action is the cause, object or
neither for damages because of the violation of an purpose is contrary to One, some or all of those
agreement nor the specific performance of said law, morals, good requisites which are
agreement. customs, public order or essential for validity are
4. The enumeration under Art. 1401(2) of the Civil public policy, or the absolutely lacking.
Code is exclusive. contract itself is
5. The defense of the Statute of Frauds may be waived prohibited or declared by
by: law to be void.
a. Failure to timely object to the presentation The principle of pari The principle of pari
of oral evidence to prove the oral delicto applies. delicto does not apply.
agreement; or Does not produce legal
Produces legal effects.
b. Acceptance of the benefits under them. effects.
6. It is a personal defense, hence, an agreement
infringing it cannot be assailed by third persons. The characteristics of void or inexistent contracts are:
7. Contracts infringing the Statute of Frauds are not 1. As a general rule, they produce no legal effects
void, but merely unenforceable. whatsoever in accordance with the principle quod
8. It is a rule of exclusion. nullum est nullum producit effectum.
9. It does not determine the credibility or the weight 2. They are not susceptible of ratification. (Art. 1409,
of evidence. It merely concerns itself with the Civil Code)
admissibility. 3. The right to set up the defense of inexistence or
10. It does not apply if it is claimed that the contract absolute nullity cannot be waived or renounced.
does not express the true agreement of the parties. 4. The action or defense for the declaration of their
As long as the true or real agreement is not covered inexistence or absolute nullity is imprescriptible. (Art.
by the Statute of Frauds, it is provable by oral 1410, Civil Code)
evidence. 5. The inexistence or absolute nullity of a contract
11. When a contract is enforceable under this rule, and cannot be invoked by a person whose interests are
a public document is necessary for its registration not directly affected. (Art. 1421, Civil Code)
in the Registry of Deeds, the parties may avail
themselves of the right under Art. 1357. (Art. 1406, VOID CONTRACTS RESCISSIBLE
Civil Code) CONTRACTS
CONTRACTS WHERE BOTH PARTIES ARE It produces no effect even
INCAPACITATED It is valid, unless it is
if it is not set aside by a
rescinded.
Provision direct action.
Those where both parties are incapable of giving The defect consists in
The defect consists in
consent to a contract. (Art. 1403(3), Civil Code) absolute lack in fact or in
lesion or damage to one of
Rules Applicable law of one or some of the
the contracting parties or
1. Express or implied ratification by the parent, or essential elements of a
to third persons.
guardian, as the case may be, of one of the contract.
contracting parties shall give the contract the The nullity or inexistence
The rescissible character
same effect as if only one of them were of the contract is based on
is based on equity.
incapacitated. (Art. 1407(1), Civil Code) the law.
2. If ratification is made by the parents or guardians, Affects public interest. Affects private interest.
as the case may be, of both contracting parties, the The action for declaration
The action for rescission
contract shall be validated from the inception. (Art. of the nullity or
of a contract is
1407(2), Civil Code) inexistence of a contract
prescriptible.
is imprescriptible.
When a court action is filed, the party must:

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The nullity or inexistence The rescissible character If the contract is indivisible, the whole contract is void
of a contract cannot be of a contract may be even if only some terms are illegal. If the contract is
assailed by third persons. assailed by third persons. divisible, the legal terms may be enforced if the same can
be separated from the illegal terms. (Art. 1420, Civil Code)
VOID CONTRACTS VOIDABLE CONTRACTS
It produces no effect even NOTE: The person who wants to enforce a contract must
if it is not set aside by a It is valid, unless annulled. show how much of the cause is legal; otherwise, if partly
direct action. legal and partly illegal, it will result in the contract being
It is not susceptible of It is susceptible of considered as wholly void. (Lichauco v. Martinez, 1906)
ratification. ratification.
The action for declaration A contract which is the direct result of a previous illegal
The action for the contract, is also void and inexistent. (Art. 1422, Civil Code)
of the nullity or
annulment of a contract is
inexistence of a contract
prescriptible. PRINCIPLE OF IN PARI DELICTO
is imprescriptible.
The defense of absolute The principle of in pari delicto is that when the defect of a
nullity or inexistence is The defense of void contract consists in the illegality of the cause or
available to third persons annulability is not object of the contract, and both parties are at fault or in
whose interests are available to third persons. pari delicto, the law refuses them any remedy.
directly affected.
When only one party as at fault, it must be distinguished
VOID CONTRACTS UNENFORCEABLE whether the contract has already been executed or is
merely executory.
CONTRACTS
1. When already executed, the guilty party is barred
There is actually a
from recovering what he has given to the other
There is in reality no contract which cannot be
party by reason of the contract. The innocent
contract at all. enforced by a court
party, in return, may demand what he has given.
action, unless it is ratified.
(Art. 1411 and 1412, Civil Code)
It is not susceptible of It is susceptible of
2. When merely executory, neither of the contracting
ratification. ratification.
parties can demand for the fulfillment of the
It can be assailed by third obligation nor be compelled to comply with such
It cannot be assailed by
persons whose interests obligation. This is because the contract cannot
third persons.
are directly affected. produce any legal effect whatsoever.
The following contracts are void or inexistent: There are, however, exceptions to the principle of in pari
1. Those whose cause, object or purpose is contrary delicto in which case payment may be demanded or what
to law, morals, good customs, public order or has been paid or delivered may be recovered:
public policy; 1. Payment of usurious interest. (Art. 1413, Civil Code)
2. Those which are absolutely simulated or 2. Payment of money or delivery of property for an
fictitious; illegal purpose, where the party who paid or
3. Those whose cause or object did not exist at the delivered repudiates the contract before the
time of the transaction; purpose has been accomplished, or before any
4. Those whose object is outside the commerce of
damage has been caused to a third person. (Art.
men;
1414, Civil Code)
5. Those which contemplate an impossible service;
3. Payment of money or delivery of property by an
6. Those where the intention of the parties relative
incapacitated person. (Art. 1415, Civil Code)
to the principal object of the contract cannot be
4. Agreement or contract which is not illegal per se
ascertained;
but is merely prohibited by law, and the
7. Those expressly prohibited or declared void by
prohibition is designed for the protection of the
law. (Art. 1409, Civil Code)
plaintiff. (Art. 1416, Civil Code)
NOTE: Nos. 1, 4, 5, 6 and 7 refer to void contracts, while
CONTRACTS THAT CONTRACTS THAT ARE
Nos. 2 and 3 refer to inexistent contracts.
ARE ILLEGAL MERELY PROHIBITED
PER SE
EFFECTS OF INEXISTENT CONTRACTS
Such contracts cannot produce any legal effect Forbidden because of Forbidden because of
whatsoever in accordance with the principle quod nullum public interest. private interests.
est nullum producit effectum. Recovery is not Recovery is permitted,
permitted. provided that:
1. The contract is not
EFFECTS OF VOID CONTRACTS
Nullity of contracts due to illegal cause or object, when illegal per se;
executed (and not merely executory), will produce the 2. The prohibition is
effect of barring any action by a guilty party to recover designed for the
protection of the
what he has already given under the contract. (Arts. 1411
plaintiff;
and 1412, Civil Code)
3. Public policy would be

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enhanced by allowing
recovery.

5. Payment of any amount in excess of the maximum

price of any article or commodity fixed by law. (Art.
1417, Civil Code)
6. Contract whereby a laborer undertakes to work
longer than the maximum number of hours fixed
by law. (Art. 1418, Civil Code)
7. Contract whereby a laborer accepts a wage lower
than the minimum wage fixed by law. (Art. 1419,
Civil Code)

IMPRESCRIBILITY OF ACTION OR DEFENSE

Because of the fact that the defect of void or inexistent
contracts is of a more or less permanent character, mere
lapse of time cannot give efficacy to such contract.
(Eugenio v. Perdido, 1955)

The principle of imprescriptibility is applicable not only to

the action for the declaration of the inexistence or
absolute nullity of the contract but also to the defense.
(Art. 1410, Civil Code)

While it is true that the action to annul a void or inexistent

contract does not prescribe; it may, nonetheless be barred
by laches. (Buenaventura v. CA, 1992)

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