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LESSON 5
EXTINGUISHMENT OF OBLIGATIONS
 Modes of extinguishment of an obligation
Principal mode
1. Payment or performance;
2. Loss of the thing due;
3. Condonation or remission of debt;
4. Confusion or merger;
5. Compensation;
6. Novation (NCC, Art. 1231).
 Other modes
1. Annulment
2. Rescission
3. Fulfillment of Resolutory conditions
4. Prescription (NCC, Art 1231)
Note: the enumeration is not exclusive
 Other causes not expressly mentioned
(Rabuya, 2017)
1. Death - obligations which are of purely
personal character
2. Arrival of resolutory period
3. Mutual dissent
4. Change of civil status
5. Happening of unforeseen events
PAYMENT OR PERFORMANCE
- Payment is the fulfillment of the obligation by the
realization of the purposes for which it was
constituted (Jurado, 2010)
- Payment may consist not only in the delivery of
money but also the giving of a thing (other than
money), the doing of an act, or not doing of an
act (NCC, Art. 1232).
 Characteristics of payment
1. Integrity – The payment of the obligation
must be completely made;
2. Identity – The payment of the obligation must
consist the performance of the very thing
due;
3. Indivisibility – The payment of the obligation
must be in its entirety.
1. Integrity
GR: Payment or performance must be complete (NCC,
Art. 1233).
XPNs:
1) Substantial performance performed in good
faith (NCC, Art. 1234);
2) When the obligee accepts the performance,
knowing its incompleteness or irregularity and
without expressing any protest or objection;
(NCC, Art. 1235); or
3) debt is partly liquidated and partly
unliquidated, but the liquidated part of the
debt must be paid in full.
Substantial Performance Doctrine
- It provides the rule that if a good-faith attempt to
perform does not precisely meet the terms of an
agreement or statutory requirements, the
performance will still be considered complete if
the essential purpose is accomplished (Black’s
Law Dictionary, 2009).
2. Identity of the thing
GR: Thing paid must be the very thing due and cannot
be another thing even if of the same or more quality
and value.
XPNs:
1) Dation in payment;
2) Novation of the obligation; and
3) Obligation is facultative.
NOTE: In an obligation to do or not to do, an act or
forbearance cannot be substituted by another act or
forbearance against the obligee’s will.
3. Indivisibility
GR: Debtor cannot be compelled by the creditor to
perform obligation in parts and neither can the debtor
compel the creditor to accept obligation in parts.
XPNs: When:
1) Partial performance has been agreed upon;
2) Part of the obligation is liquidated and part is
unliquidated; or
3) To require the debtor to perform in full is
impractical.
Acceptance by a creditor of a partial payment NOT an
abandonment of its demand for full payment

When creditors receive partial payment, they are not
ipso facto deemed to have abandoned their prior
demand for full payment.
NOTE: While Art. 1248 of the Civil Code states that
creditors cannot be compelled to accept partial
payments, it does not prohibit them from accepting
such payments (Selegna Management and
Development Corp. v. UCPB, G.R. No. 165662, May
30,2006).
 Person who pays
- The following persons may affect payment and
compel the creditor to accept the payment:
1. Debtor himself;
2. His heirs and assigns;
3. His agents and representatives; or
4. Third persons who have a material interest in
the fulfilment of the obligation ([NCC, Art.
1236(1)].
 PAYMENT MADE BY THIRD PERSONS
GR: The creditor is not bound to accept payment or
performance by a third person.
XPNs:
1) When made by a third person who has
interest in the fulfillment of the obligation;
and
2) Contrary stipulation (NCC, Art. 1236).
NOTE: The rules on payment by a third person (NCC,
Article. 1236 to 1238) cannot be applied to the case
of a third person who pays the redemption price in
sales with right of repurchase. This is so because the
vendor a retro is not a debtor within the meaning of
the law (Jurado, 2010).
 Rights of a third person who made the payment
1. If the payment was made with knowledge and
consent of the debtor:
a. Can recover entire amount paid (absolute
reimbursement); or
b. Can be subrogated to all rights of the creditor
2. If the payment was made without knowledge or
against the will of the debtor – Can recover only
insofar as payment has been beneficial to the
debtor (right of conditional reimbursement).
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NOTE: Payment made by a third person who does
not intend to be reimbursed by the debtor is deemed
to be a donation, which requires the debtor's
consent. But the payment is in any case valid as to the
creditor who has accepted it (NCC, Art. 1238).
 Person to whom payment is made
- Persons entitled to receive the payment:
1. The person in whose favor the obligation has
been constituted;
2. His successor in interest; or
3. Any person authorized to receive it (NCC, Art.
1240).
NOTE: Payment made to one having apparent
authority to receive the money will, as a rule, be
treated as though actual authority had been given for
its receipt. Likewise, if payment is made to one who
by law is authorized to act for the creditor, it will work
a discharge (Sps. Miniano v. Concepcion, G.R. No.
172825, October 11, 2012).
 Payment to an unauthorized person
GR: Payment to an unauthorized person is not valid
payment (NCC, Art. 1241).
XPNs:
1) Payment to an incapacitated person if:
a. He kept the thing delivered; or
b. It has been beneficial to him (NCC, Art. 1241);
2) Payment to a third person insofar as it
redounded to the benefit of the creditor; and
Benefit to the creditor need not be proved:
a. If after the payment, the third person acquires
the creditor’s Rights;
b. If the creditor Ratifies the payment to the
third person; or
c. If by the creditor’s conduct, the debtor has
been led to believe that the third person had
authority to receive the payment (Estoppel)
(NCC, Art. 1241).
3) Payment in good faith to the possessor of credit
(NCC, Art. 1242).
NOTE: Payment made to the creditor by the debtor
after the latter has been judicially ordered to retain
the debt shall not be valid. (NCC, Art. 1243).

 SPECIAL FORMS OF PAYMENT
1. Dation in Payment
Alienation by the debtor of a particular property in
favor of his creditor, with the latter’s consent, for
the satisfaction of the former’s money obligation to
the latter, with the effect of extinguishing the said
money obligation.
2. Application of Payment
Designation of the particular debt being paid by the
debtor who has two or more debts or obligations of
the same kind in favor of the same creditor to
whom the payment is made.
3. Payment by Cession
Debtor cedes his property to his creditors so the
latter may sell the same and the proceeds realized
applied to the debts of the debtor.
4. Tender of Payment
Voluntary act of the debtor whereby he offers to
the creditor for acceptance the immediate
performance of the former’s obligation to the
latter.
5. Consignation
Act of depositing the object of the obligation with
the court or competent authority after the creditor
has unjustifiably refused to accept the same or is
not in a position to accept it due to certain reasons
or circumstances.
A. DATION IN PAYMENT
 (dacionenpago)
- The delivery and transmission of ownership of a
thing by the debtor to the creditor asan accepted
equivalent of the performance of the obligation.
The property given may consist not only of a thing
but also of a real right (Tolentino, 2002)
NOTE: The undertaking partakes of the nature of
sale, that is, the creditor is really buying the thing
or property of the debtor, payment for which is to
be charged against the debtor’s debt. As such, the
essential elements of a contract of sale, namely,
consent, object certain, and cause or
consideration must be present.
o The requisites for dacionenpago are:
1. There must be a performance of the
prestation in lieu of payment (animosolvendi)
which may consist in the delivery of a
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corporeal thing or a real right or a credit
against the third person;
2. There must be some difference between the
prestation due and that which is given in
substitution (aliud pro alio); and
3. There must be an agreement between the
creditor and debtor that the obligation is
immediately extinguished by reason of the
performance of a prestation different from
that due (Caltex Philippines, Inc. v. IAC, G.R.
No. 72703, November 13, 1992)
B. PAYMENT BY CESSION
 Cession
- The assignment or cession contemplated here is
the abandonment of the universality of the
property of the debtor for the benefit of his
creditors in order that such property may be
applied to the payment of the credits.
- The initiative comes from the debtor, but it must
be accepted by the creditors in order to become
effective. A voluntary assignment cannot be
imposed upon a creditor who is not willing to
accept it.
- If the offer is not accepted by the creditors, the
same end may be attained by a proceeding in
insolvency instituted in accordance with
Insolvency Law.
 Circumstances evidencing payment by cession
- Debtor abandons all of his property for the
benefit of his creditors in order that from the
proceeds thereof, the latter may obtain payment
of credits.
DATION IN PAYMENT PAYMENT BY CESSION
Number of Creditors
Maybe one creditor. Plurality of creditors.
Financial condition of the debtor
Not necessarily in state Debtor must be partially
of financial difficulty. or relatively insolvent.
Object
Thing delivered is
Universality or property
considered as
of debtor is what is
equivalent of
ceded.
performance
Extent of the extinguishment
Payment extinguishes Merely releases debtor

obligation to the extent
of the value of the thing for net proceeds of
delivered as agreed things ceded or
upon, proved or implied assigned, unless there is
from the conduct of the contrary intention.
creditor.
Ownership
Ownership is
Ownership is not
transferred to CR upon
transferred.
delivery.
Novation
An act of novation. Not an act of novation
Presumption of insolvency
Does not presuppose
Presupposes insolvency.
insolvency.
C. Tender of payment
- The definitive act of offering to the creditor what
is due him together with the demand that the
creditor accept the same (FEBTC v. Diaz Realty
Inc., G.R. No. 138588, August 23, 2001).
- Tender of payment is the manifestation by
debtors of their desire to comply with or to pay
their obligation (Sps. Benos v. Sps. Lawilao, G.R.
No. 172259, December 5, 2006).
NOTE: If the creditor refuses the tender of payment
without just cause, the debtors are discharged from
the obligation by the consignation of the sum due
(Sps. Benos v. Sps. Lawilao, G.R. No. 172259,
December 5, 2006).
There must be a fusion of intent, ability and capability
to make good such offer, which must be absolute and
must cover the amount due (FEBTC v. Diaz
RealtyInc.,G.R. No. 138588, August 23, 2001).
Tender of payment is a preparatory act which
precedes consignation. The tender of payment by
itself does not cause the extinguishment of the
obligation unless completed by consignation.
(Tolentino, 1991).
D. Consignation
- Act of depositing the object of the obligation
with the court or competent authority after the
creditor has unjustifiably refused to accept the
same or is not in a position to accept it due to
certain reasons or circumstances (Pineda, 2000).
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NOTE: Once the consignation has been duly made, the
debtor may ask the judge to order the cancellation of
the obligation (NCC, Art. 1260).
NOTE: Consignation is necessarily judicial. Art. 1258 of
the CC specifically provides that consignation shall be
made by depositing the thing or things due at the
disposal of judicial authority. The said provision clearly
precludes consignation in venues other than the
courts (Spouses Oscar and Thelma Cacayorin v. Armed
Forces and Police Mutual Benefit Association, Inc.,
G.R. No. 171298, April 15, 2013).
 Effectively of consignation as payment
GR: Consignation shall produce effects of payment
only if there is a valid tender of payment
XPNs: It shall, however, not produce the same effect
in the following cases.
When:
1. Creditor is Absent or unknown, or doesn’t
appear at place of payment;
2. Creditor Refuses to issue a receipt without
just cause;
3. Title of the obligation has been lost;
4. Creditor is Incapacitated to receive payment
at the time it is due; or
5. Two or more persons claim the right to collect
(NCC, Art. 1256).
NOTE: The expenses of consignation, when properly
made, shall be charged against the creditor (NCC, Art.
1259).
 Right of the debtor to withdraw the thing
deposited
- Before the creditor has accepted the
consignation, or before a judicial declaration that
the consignation has been properly made, the
debtor may withdraw the thing or the sum
deposited, allowing the obligation to remain in
force (NCC, Art.1260).
NOTE: If, the consignation having been made, the
creditor should authorize the debtor to withdraw the
same, he shall lose every preference which he may
have over the thing. The co- debtors, guarantors and
sureties shall be released (NCC, Art. 1261).
 Tender of payment v. Consignation
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TENDER OF PAYMENT CONSIGNATION XPNs:

Nature
a. Law provides otherwise (NCC, Art. 1262);
Antecedent of Principal or
consignation or consummating act for b. Nature of the obligation requires the
preliminary act to the the extinguishment of Assumption of risk;
consignation. obligation. c. Stipulation to the contrary;
Effect d. Debtor Contributed to the loss;
It does not by itself It extinguishes the e. Loss of the thing occurs after the debtor
extinguish the obligation when incurred Delay;
obligation. declared valid. f. When debtor Promised to deliver the same
Character thing to two or more persons who do not
Judicial for it requires have the same interest (NCC, Art. 1165);
Extrajudicial. the filing of a complaint g. When the debt or a certain and determinate
in court (Pineda, 2000). thing proceeds from Criminal offence (NCC,
Art. 1268); and
h. When the obligation is Generic (NCC, Art.
LOSS OF THE THING DUE 1263).

- Loss here is not contemplated in its strict and

legal meaning and is not limited to obligations to
give, but extends to those which are personal,
embracing therefore all causes which may render
impossible the performance of the prestation. In
some Codes, this is designated as impossibility of
performance.
NOTE: The impossibility of performance must be
subsequent to the execution of the contract in order
to extinguish the obligation; if the impossibility
already existed when the contract was made, the
result is not extinguishment but inefficacy of the
obligation under NCC, Articles 1348 and 1493.
 When a thing is considered lost
1. It Disappears in such a way that its existence
is unknown;
2. It goes Out of commerce;
3. It Perishes; or
4. Its Existence is unknown or if known, it cannot
be recovered.
 Effect of loss of the thing/object of the obligation
 If the obligation is a:
1. Determinate obligation to give:
o Requisites:
a. The thing lost must be determinate;
b. The thing lost is without fault of the
debtor; and
c. The thing is lost before the debtor has
incurred delay (NCC, Art. 1262)
2. Generic obligation to give
GR: The obligation is not extinguished because a
generic thing never perishes (genus nuungumamperit)
(NCC, Art. 1263)
XPN:
a. In case of generic obligations whose object is
a particular class or group with specific or
determinate qualities (delimited generic
obligation);
b. In case the generic thing has already been
segregated or set aside in which case, it has
become specific.
c. An obligation to do – the obligation is
extinguished when prestation becomes legally
and physically impossible without the fault of
the obligor (NCC, Art. 1266)
 Types of impossibility to perform an obligation to
do
1. Legal impossibility - Act stipulated to be
performed is subsequently prohibited by law.
2. Physical impossibility – Act stipulated could
not be physically performed by the obligor
due to reasons subsequent to the execution
of the contract (Pineda, 2000)
NOTE: The impossibility must be after the constitution
of the obligation. If it was before, there is nothing to
extinguish.

GR: The obligation is extinguished when the object of  Effect of Partial Loss
the obligation is lost or destroyed (NCC, Art. 1262).

1. Due to the fault or negligence of the debtor –
Creditor has the right to demand the
rescission of the obligation or to demand
specific performance, plus, damages, in
either case.
2. Due to fortuitous event:
a. Substantial Loss – Obligation is
extinguished
b. Unsubstantial Loss – The debtor shall
deliver the thing promised in it impaired
condition (NCC, Art. 1264).
 Effect when the thing is lost in the possession of
the debtor
GR: It is presumed that loss is due to debtor’s fault.
The obligation is not extinguished.
XPN: Presumption shall not apply in case loss is due to
earthquake, flood, storm, or other natural calamity
(NCC, Art. 1262).
XPN to the XPN: Debtor still liable even if loss is due
to fortuitous event when;
1. Debtor incurred in delay; or
2. Debtor promised to deliver the thing to two or
more persons with different interest (NCC,
Art. 1165(3)).
 Effect of unforeseen difficulty of fulfillment
- When the service has become, so difficult as to be
manifestly beyond the contemplation of the
parties, the obligor may also be released there
from, in whole or in part (NCC, Art. 1267). The
impossibility of performance of an obligation to
do shall release the obligor.
 Rebus sic stantibus
- A principle in international law which mean than
an agreement is valid only if the same conditions
prevailing at the time of contracting continues to
exist at the time of performance. It is the basis of
the principle of unforeseen difficulty of service
(NCC, Art. 1267).
NOTE: Principle of unforeseen events applies when
the service has become so difficult as to be manifestly
beyond the contemplation of the parties, the obligor
may also be released there from in whole or in part
(NCC, Art. 1267). However, his principle cannot be
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applied absolutely in contractual relations since
parties are presumed to have assumed the risk of
unfavorable developments (Pineda, 2000). This rule
also does not apply to obligations for the payment of
a sum money when there is a change in the value of
the stipulated currency. In such case, Art. 1250 will
apply (Tolentino, 2002).
CONDONATION OR REMISSION OF DEBT
- An act of liberality by virtue of which the creditor,
without receiving any price or equivalent,
renounces the enforcement of the obligation, as
a result of which it is extinguished in its entirety or
in that part or aspect of the same to which the
condonation or remission refers (Pineda, 2000).
 Requisites of condonation
1. Must be Gratuitous;
2. Acceptance by the debtor;
3. Must not be Inofficious;
4. Formalities provided by law on Donations
must be complied with if condonation is
express; and
5. An Existing demandable debt at the time the
remission is made.
NOTE: Remission or condonation of a debt is in reality
a donation (Jurado, 2010).
 Manner and kinds of remission:
1. Total – Refers to the remission of the whole
of the obligation;
2. Partial – Remission of the part of the
obligation: to the amount of indebtedness or
to an accessory obligation only (such as
pledge or interest) or to some other aspect of
the obligation (such as solidary);
3. Inter vivos – Effective during the lifetime of
the creditor;
4. Mortis causa – Effective upon death of the
creditor. In this case, remission must be
contained in a will or testament (Tolentino,
1991)
5. Express – When it is made formally, it should
be in accordance with the forms of ordinary
donations with regard to acceptance, amount
and revocation; and
6. Implied – When it can be inferred from the
acts of the parties.

 Effect of inofficious condonation
- It may be totally revoked or reduced depending
on whatever or not it is totally or only partly
inofficious (Pineda, 200).
- The obligation remitted is considered inofficious if
it impairs the legitime of the compulsory heirs
(NCC, Art. 752).
 Acceptance by the debtor
- The acceptance by the debtor is required. There
can no unilateral condonation. This is because
condonation or remission is an act of liberality. It
is a donation of an existing credit, considered a
property right, in favor of the debtor, it is
required that the debtor gives his consent there
to by making an acceptance. If there is no
acceptance, there is no condonation (Pineda,
2009).
LESSON 6
EXTINGUISHMENT OF OBLIGATIONS
CONDONATION OR REMISSION OF DEBT
- An act of liberality by virtue of which the
creditor, without receiving any price or
equivalent, renounces the enforcement of
the obligation, as a result of which it is
extinguished in its entirety or in that part or
aspect of the same to which the
condonation or remission refers (Pineda,
2000).
 Requisites of condonation
1. Must be Gratuitous;
2. Acceptance by the debtor;
3. Must not be Inofficious;
4. Formalities provided by law on
Donations must be complied with if
condonation is express; and
5. An Existing demandable debt at the
time the remission is made.
NOTE: Remission or condonation of a debt is in
reality a donation (Jurado, 2010).
 Manner and kinds of remission:
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1. Total – Refers to the remission of the
whole of the obligation;
2. Partial – Remission of the part of the
obligation: to the amount of
indebtedness or to an accessory
obligation only (such as pledge or
interest) or to some other aspect of the
obligation (such as solidary);
3. Inter vivos - Effective during the
lifetime of the creditor;
4. Mortis causa - Effective upon death of
the creditor. In this case, the remission
must be contained in a will or
testament (Tolentino,1991)
5. Express – When it is made formally, it
should be in accordance with the forms
of ordinary donations with regard to
acceptance, amount and revocation;
and
6. Implied – When it can be inferred from
the acts of the parties
 Effect of inofficious condonation
- It may be totally revoked or reduced
depending on whether or not it is totally or
only partly inofficious (Pineda, 2000).
- The obligation remitted is considered
inofficious if it impairs the legitime of the
compulsory heirs (NCC,Art. 752).
 Acceptance by the debtor
- The acceptance by the debtor is required.
There can be no unilateral condonation.
This is because condonation or remission is
an act of liberality. It is a donation of an
existing credit, considered a property right,
in favor of the debtor, it is required that
the debtor gives his consent there to by
making an acceptance. If there is no
acceptance, there is no condonation
(Pineda, 2009).
CONFUSION OR MERGER OF RIGHTS
- There is a confusion when there is a meeting in
one person of the qualities of a creditor and
debtor of the same obligation (4 Sanchez Roman
421).
 Effect of confusion or merger of rights

- The creditor and debtor becomes the same
person involving the same obligation. Hence, the
obligation is extinguished (NCC, Art. 1275).
- There can be partial confusion
- It will be definite and complete up to the extent of
the concurrent amount or value, but the
remaining obligation subsists (Pineda, 2000).
 Effect of confusion or merger in relation to the
guarantors
1. Merger which takes place in the person of the
principal debtor or principal creditor benefits
the guarantors. The contract of guaranty is
extinguished;
2. Confusion which takes place in the person of
any of the guarantors does not extinguish the
obligation (NCC, Art. 1276).
 Effect of confusion or merger in one debtor or
creditor in a joint obligation
GR:
Joint obligation is not extinguished since
confusion is not definite and complete with
regard to the entire obligation. A part of the
obligation still remains outstanding.
XPN:
Obligation is extinguished with respect only to
the share corresponding to the debtor or
creditor concerned. In effect, there is only
partial extinguishment of the entire
obligation (NCC, Art. 1277; Pineda, 2000).
 Effect of confusion or merger in one debtor or
creditor in a solidary obligation
- If a solidary debtor had paid the entire obligation,
the obligation is totally extinguished without
prejudice to the rights of the solidary debtor who
paid, to proceed against his solidary co-debtors
for the latter’s individual contribution or liability
(NCC, Art. 1215).
 Revocation of confusion or merger of rights
- If the act which created the confusion is revoked
for some causes such as rescission of contracts, or
nullity of the will or contract, the confusion or
merger is also revoked. The subject obligation is
revived in the same condition as it was before the
confusion.
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NOTE: During such interregnum, the running of the
period of prescription of the obligation is suspended.
(Pineda, 2000)
COMPENSATION
- It is a mode of extinguishing obligations that take
place when two persons, in their own right, are
creditors and debtors of each other (NCC, Art.
1278).
- It is the offsetting of the respective obligation of
two persons who stand as principal creditors and
debtors of each other, with the effect of
extinguishing their obligations to their concurrent
amount.
 Requisites of compensation
- In order that compensation may be proper, it is
necessary that (NCC, Art. 1279):
1. Each one of the obligors must be bound
principally, and that he be at the same time a
principal creditor of the other except
guarantor who may set up compensation as
regards what the creditor may owe the
principal (NCC, Articles. 1279-1280);
2. Both debts consist in sum of money, or if the
things due are consumable, they be of the
same kind and also of the same quality if the
latter has been stated;
3. Both debts are due;
4. Both debts are liquidated and demandable;
5. Neither debt must be retained in a
controversy commenced by third person and
communicated in due time to the debtor
(neither debt is garnished) (NCC, Art. 1279);
and
6. Compensation must not be prohibited by law.
(NCC, Art. 1290).
 Effects of compensation:
1. Both debts are extinguished;
2. Interests stop accruing on the extinguished
obligation or the part extinguished;
3. The period of prescription stops with respect
to the obligation or part extinguished; and
4. All accessory obligations of the principal
obligation which has been extinguished are
also extinguished (4 Salvat 353).
 Debts or obligations not subject to compensation

1. Debts or obligations arising from contracts of
depositum (NCC, Art. 1287);
2. Debts arising from obligations of a depositary;
3. Debts arising from obligations of a bailee in
commodatum;
4. Claims for support due by gratuitous title;
5. Obligations arising from criminal offenses
(NCC,Art. 1288);and
6. Certain obligations in favor of government.
e.g.Taxes, fees, duties, and others of a similar
nature.
There can be no off-setting of taxes against the claims
that the taxpayer may have against the government. A
person cannot refuse to pay a tax on the ground that
the government owes him an amount equal to or
greater than the tax being collected. Internal revenue
taxes cannot be the subject of compensation because
government and taxpayer are not mutually creditors
and debtors of each other. Taxes are not in the nature
of contracts between parties (Francia v. IAC, G.R. No.
L-67649, June 28, 1988).
NOTE: Compensation takes place by operation of
law, even though the debts may be payable at
different places, but there shall be an indemnity for
expenses of exchange or transportation to the place
of payment (NCC, Art. 1286).
 KINDS OF COMPENSATION
1. Legal compensation – by operation of law;
2. Conventional – by agreement of the parties;
3. Judicial (set-off) – by judgment of the court
when there is a counterclaim duly pleaded,
and the compensation decreed; and
4. Facultative – may be claimed or opposed by
one of the parties.
A. Conventional compensation
- It is one that takes place by agreement of the
parties.
o Effectivity of conventional compensation
- For compensation to become effective:
GR.: The mutual debts must be both due (NCC, Art.
1279)
XPN: the parties may agree that their mutual debts be
compensated even if the same are not yet due. (NCC
Art. 1282)
9
B. Facultative compensation
- One of the parties has a choice of claiming or
opposing the compensation but waives his
objection there to such as an obligation of such
party is with a period for his benefit alone and he
renounces the period to make the obligation
become due.
- Facultative compensation is unilateral and does
not require mutual agreement; voluntary or
conventional compensation requires mutual
consent.
e.g. X owes Y P100,000 demandable and due on April
1, 2012. Y owes X P100, 000 demandable and due on
or before April 15, 2012. Y, who was given the benefit
of the term, may claim compensation on April 1, 2012.
On the other hand, X, who demands compensation,
can be properly opposed by Y because Y could not be
made to pay until April 15, 2012.
NOTE: Compensation can be renounced either at the
time an obligation is contracted or afterwards
(Tolentino, 1991). It can be renounced expressly or
impliedly.
NOVATION
- It is the substitution or change of an obligation by
another, resulting in its extinguishment or
modification, either by changing the object or
principal conditions, or by substituting another in
the place of the debtor or by subrogating a third
person to the rights of the creditor
 Requisites of novation
1. Valid Old obligation; XPNs:
a. When the annulment may be claimed only by
the debtor and he consented to the novation;
and
b. When ratification validates acts, which are
voidable.
2. Intent to extinguish or to modify the old obligation
3. Capacity and consent of all the parties to the new
obligation (except in case of expromission where the
old debtor does not participate);
4. Substantial difference of the old and new obligation
– on every point incompatible with each other
(implied novation); and

5. Valid New obligation.
NOTE: If the new obligation is void, the original one
shall subsist as there is no novation. However, even if
the new obligation turns out to be void, the original
obligation does not subsist if the parties clearly
intended that the former relation should be
extinguished in any event (NCC, Art. 1297)., 2000)
 Express novation
- Takes place only when the intention to effect a
novation clearly results from the terms of the
agreement or is shown by a full discharge of the
original debt (Jurado, 2010).
 Implied novation
- It is imperative that the old and new obligations
must be incompatible with each other.
- The test of incompatibility between the old and
the new obligations is to determine whether or
not both of them can stand together, each having
its own independence. If they can stand together,
there is no incompatibility; consequently, there is
no novation. If they cannot stand together, there
is incompatibility; consequently, there is novation
(Borja v. Mariano,G.R. No. L- 44041,October 28,
1938).
NOTE: Novation is never presumed and the animus
novandi (intent to make a new obligation) whether
totally or partially, must appear by express agreement
of the parties or by their acts that are too clear and
unequivocal to be mistaken.
 Two-fold functions of novation
1. It extinguishes the old obligation; and
2. Creates a new obligation in lieu of the old
one.
 Kinds of novation
1. As to essence
a. Objective or real novation – Changing the object or
principal conditions of the obligation (NCC, Art. 1291).
NOTE: In payment of sum of money, the first
obligation is not novated by a second obligation that:
(1) Expressly recognizes the first obligation;
(2)Changes only the terms of payment;
(3)Adds other obligation not incompatible
with the old ones; or
(4) Merely supplements the first one.
10
b. Subjective or personal novation – Change of the
parties.
i. Substituting the person of the debtor
(passive novation) – may be made without the
knowledge of or against the will of the latter,
but not without the consent of the creditor
ii. Delegacion – The substitution is initiated by
the old debtor himself (delegante) by
convincing another person (delegado) to take
his place and to pay his obligation to the
creditor
iii. Expromission – The substitution of the old
debtor by a new debtor is upon the initiative
or proposal of a third person
NOTE: If it is the creditor who initiated the
change of debtor, it is considered
expromission
iv. Subrogating a third person to the rights of the
creditor (active novation)
c. Mixed – Combination of the objective and
subjective novation.
2. As to form of their constitution
a. Express – The parties declared in unequivocal
terms that the obligation is extinguished by
the new obligation.
b. Implied – No express declaration that the old
obligation is extinguished by the new one. The
old and new obligation is incompatible on
every material point (NCC,Art. 1292).
3. As to extent of their effects
a. Total or extinctive – Obligation is originally
extinguished.
NOTE: Four requisites of extinctive novation:
1) A previous valid obligation;
2) An agreement of all parties concerned to a
new contract;
3) The extinguishment of the old obligation; and
4) The birth of a valid new obligation (Iloilo
Traders v. Heirs of Soriano, G.R. No. 149683,
June 16, 2003).
The extinctive novation would thus have the twin
effects of first, extinguishing an existing Obligation
and second, creating a new one in its stead.
 11

the time of the delegation of the debt to the

b. Partial or modificatory – Original obligation is new debtor (NCC, Art. 1295).
not extinguished but merely modified.
DELEGACION EXPROMISSION
Person who Old debtor Third person
4. As to their origin initiated the
a. Legal novation – By operation of law substitution
(NCC,Art. 1300 & 1302). Consent of the It may be express or implied from
b. Conventional novation – By agreement of the creditor his acts but not from his mere
parties (NCC, Arts. 1300-1301). acceptance of payment by a third
party.
Consent of the With the With or without
5. As to presence of absence of condition
old debtor consent of the the knowledge
a. Pure – New obligation is not subject to a
old debtor of the debtor or
condition. (sincehe against the will
b. Conditional – When the creation of the new initiated the of the old
obligation is subject to a condition. substitution). debtor.
Consent of Consent is Consent is
 Rights of the new debtor third person needed but it needed.
1. With the debtor’s consent – Right of need not be
reimbursement and subrogation. given
2. Without the consent of the old debtor or Simultaneously
against his will – Right to beneficial .
reimbursement. Intention of Released from the obligation with
substitution the consent of the creditor.
Rights of the With the With the
 Novation by substitution of debtor
new debtor debtor’s debtor’s
- The consent of the creditor is mandatory both in
consent consent
delegacion and expromission (NCC, Art. 1293). It – right of – right of
may be express or implied from his acts but not reimbursement reimbursement
from his mere acceptance of payment by a third and and
party, for there is no true transfer of debt. subrogation. subrogation.

NOTE: Creditor‟s consent or acceptance of the Without the

substitution of the old debtor by a new one may be consent of the
given at anytime and in any form while the old debtor or
agreement of the debtor subsists (Asia Banking Corp. against his will
v. Elser, G.R. No. L-30266, March 25, 1929). –right to
beneficial
reimbursement
 Insolvency of the new debtor in delegacion
.
Insolvency or shall not revive With the
GR: Insolvency of the new debtor (delegado), who has nonfulfillment action of the debtor’s
been proposed by the original debtor (delegante) and of the latter against consent
accepted by the creditor (delegatario), shall not revive obligation of the original - If the old
the action of the latter against the original obligor the new obligor. debtor gave his
(NCC, Art. 1295). debtor Original debtor consent and
shall be held the new debtor
XPNs: Original debtor shall be held liable; if: liable: could not fulfill
1.Insolvency the obligation,
1. Insolvency was already existing and of public was already the old debtor
knowledge, or known to the debtor; - (NCC, existing and should be liable
Art. 1295);or public for the
knowledge, or payment of his
2. Insolvency of the new debtor was already
known to the original
existing and known to the original debtor at

debtor. obligation.
2. Insolvency of Without the
the new debtor consent of the
was already old debtor or
existing and against
known to his will –
 Effects of novation
1. Extinguishment of principal also extinguishes the
accessory, except:
a. Mortgagor, pledgor, surety or guarantor
agrees to be bound by the new obligation
b. (Tolentino, 1999);or
c. Stipulation made in favor of a third person
such as stipulation pour atrui (NCC, Art. 1311)
unless beneficiary consents to the novation
(NCC, Art. 1296).
2. If old obligation is:
a. Void – Novation is void (NCC, Art. 1298)
b. Voidable – Novation is valid provided that the
annulment may be claimed only by the debtor
or when ratification validates acts (NCC, Art.
1298).
c. If the old obligation was subject to a
suspensive or resolutory condition, the new
obligation shall be under the same condition,
unless it is otherwise stipulated. (NCC, Art.
1299).
3. If old obligation is conditional and the new
obligation is pure:
a. If resolutory and it occurred – Old obligation
already extinguished; no new obligation since
nothing to novate.
b. If suspensive and it did not occur – It is as if
there is no obligation; thus, there is nothing to
novate.
4. If the new obligation is:
a. Void – Original one shall subsist, unless the
parties intended that the former relation
should be extinguished in any event (NCC, Art.
1297).
b. Voidable – Novation can take place, such case,
old obligation shall
c. Pure obligation – Conditions of old obligation
deemed attached to the new, unless
otherwise stipulated (Tolentino, 1999).
d. Conditional Obligation:
12
i. If resolutory– Valid until the
happening of the condition
ii. ii. If suspensive and (NCC, Art. 1181).
NOTE: Novation does not extinguish criminal liability
PNB V. SORIANO, G.R NO. 164051, October 3, 2012).
 Subrogation
- It is the active subjective novation characterized
by the transfer to a third person of all rights
appertaining to the creditor in the transaction
concerned including the right to proceed against
the guarantors or possessors of mortgages and
similar others subject to any applicable legal
provision or any stipulation agreed upon by the
parties in conventional
NOTE: Whoever pays on behalf of the debtor without
the knowledge or against the will of the latter cannot
compel the creditor to subrogate him in his rights,
such as those arising from a mortgage, guaranty, or
penalty (NCC, Art. 1237).
LESSON 7-8
CONTRACTS
GENERAL PRINCIPLES
- 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 (NCC, Art. 1305).
 Meeting of minds
- Speaks of the intention of the parties in entering
into the contract respecting the subject matter
and the consideration thereof. As a rule
therefore, a contract is perfected by mere
consent. It does not require any special form, as a
rule, and is binding from the moment that the
essential requisites are present. Thus, the
meeting of the minds between the parties rise to
the binding contract although they have not
affixed their signature to its written form (Rabuya,
2017)
 Obligation vs. contract
- While a contract is one of the sources of
obligations, an obligation is the legal tie or
relations itself that exists after a contract has
been entered into.

- Hence, there can be no contract if there is no
obligation. But an obligation may exist without a
contract (De Leon, 2010).
 Elements of a contract
a. Essential elements – (without them a contract
cannot exist)
e.g. consent, subject matter, cause or
consideration
note: in some contracts, form is also essential; still
in others, delivery is likewise essential.)
b. Natural elements – (those found in certain
contracts, and presumed to exist, unless the
contrary has been stipulated)
e.g. warranty against eviction and against hidden
defects in the contract of sale
c. Accidental elements - (these are the various
particular stipulations that may be agreed
upon by the contracting parties in the
contract. They are called accidental, because
they may be present or absent depending
upon whether or not the parties have agreed
upon them)
e.g. the stipulation to pay credit; the stipulation to
pay interest; the designation of the particular
place for delivery or payment.
 Duty of courts in interpreting contracts
- It is not the province of the court to alter a
contract by construction or to make a new
contract for the parties. Its duty is confined to the
interpretation of the one which they have made
for themselves without regard to its wisdom or
folly as the court supply material stipulations or
red into the contract words which it does not
contain (Cuizon v. CA, G.R No. 102096, August 12,
19996).
 Stages in the making of a contract
Three stages in the making of a contract:
1. Conception or Generation – the first stage
where the parties begin their initial
negotiation and bargaining for the formation
of the contract ending at the moment of
agreement of the parties.
2. Perfection or Birth – Here, the parties had a
meeting of minds as to the object, cause or
consideration and other terms and conditions
of the contract.
13
3. Consummation or fulfillment - This is the last
stage which consists in their performance or
fulfillment by the parties of their obligations
under the term of the perfected contract.
 Characteristics of a Contract
The following are the characteristics of a contract:
1. Autonomy (article 1306, New Civil Code)
- 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.
2. Mutuality (article 1308 NCC)
- The contract must bind both contracting parties;
its validity or compliance cannot be left to the will
of one of them.
3. Obligations and consensuality (Article 1315 NCC)
- 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.
4. Relativity (Article 1311 NCC)
- Contracts take effect only between the parties,
their assigns and heirs, except in case where the
rights and obligations arising from the contract
are not transmissible by their nature, or by
stipulation or by provision of law. The heir is not
liable beyond the value of the property he
received from the decedent.
5. Consensuality (Article 1315, NCC)
- 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.
 Relativity of contracts
Principle of relativity or Principle of limited
effectivity of contracts
GR: Contract take effect only between the parties or
their assigns and heirs.
Res inter alios acta aliisnequenocitprodest (a thing
done between others does not harm or benefit

others) – a contract can only obligate the parties who
entered into it, or their successors who assumed their
personalities, and that, concomitantly, a contract can
neither favor nor prejudice third persons (Vitug,
2006).
NOTE: With respect to the heir, he shall not be liable
beyond the value of the property he received from
the decedent (NCC, Art. 1311).
XPNs:
1. Rights and obligations that are not transmissible
by their nature, or by the stipulation or by
provisions of law (NCC, ART. 1311);
NOTE: Determine whether a contract terminates upon
the death of one of the parties
2. Stipulation pour autrui (stipulation in favor of a
third person) – benefits clearly and deliberately
conferred by parties to a contract upon third
persons (NCC, ART. 1311) and which stipulation is
merely part of a contract entered into by the
parties, neither of whom acted as agents of the
third person and which favor can be demanded by
the third person if duly accepted by him before it
could be revoked;
Requisites of stipulation pour atruit:
a. Stipulation in favor of a third person
b. Stipulation in just part and not the whole
obligations of the contract;
c. Contracting parties must have clearly and
deliberately conferred a favor upon third
person;
d. Favor or benefit conferred is not just an
incidental benefit or interest;
e. Third person must have communicated his
acceptance; and
f. Neither of the contracting parties bears the
legal representation of the third person
(Young v. Court Appeals, G.R. No 79518,
January 13, 1989).
NOTE: The fairest to test to determine whether
the interest of third person in a contract is a
stipulation pour atrui or merely an incidental
interest, is to rely upon the intention of the
parties as disclosed by their contract. In applying
this test, it matters not whether the stipulation is
in the nature of a gift or whether there is an
obligation owing from the promise to the third
person (Rabuya, 2017).
14
3. Third persons coming into possession of the
object of the contract creating real rights subject
to the provisions of Mortgage Law and the Land
Registration Law (NCC, ART. 1312);
4. Contracts entered into in fraud of creditors; (NCC,
ART. 1313);
5. When a third person induces a party to violate the
contract (NCC, ART. 1314).
NOTE: This tort or wrongful conduct is known as
“interference with contractual relations.”
Requisites:
a. Existence of a valid contract
b. Third person has knowledge of such contract;
c. Third person interfaces without legal
justification or excuse (De Leon, 2010).
Thus, third person and the breaching party is liable
for damages. It is based on quasi-delict and their
liability is solidary.
NOTE: A third person can be held liable for tort inter
reference even if he does not know the identity of one
of the contracting parties. The interference with
lawful contracts by strangers there to gives rise to an
action for damage in favor of the injured person. The
law does not require that the responsible person shall
have known the identity of the injured person
(Rabuya, 2017).
 Obligatory force of contracts
- Contracts shall be obligatory, in whatever form
the may have been entered into, provided all the
essential requisites for validity are present (NCC,
ART. 1356).
- Obligations arising from contracts have the force
of law between the contracting parties and should
be complied with in good faith. (NCC, ART. 1159)
- This provision must fall within the other
characteristic of a contract
NOTE: Obligations arising from contracts have the
force of law between the contracting parties and
should be complied with in good faith (NCC, ART.
1159).
 Requisites for the application of the principle
Before a contract may be considered obligatory, it is
necessary that:

1. It is perfected;
2. It is valid; and
3. It is enforceable (Rabuya, 2017).
 Mutuality of contracts
- The contract must bind both contracting parties
and its validity or compliance cannot be left to the
will of one of them (NCC, ART. 1308).
- If a party alleges defects in the contract so that it
could be set aside, he must prove conclusively the
existence of the defects because the validity and
fulfillment of the contract cannot be left to the
will of one of the contracting parties. (Pineda,
2009)
- The binding effect of any agreement between
parties to a contract is premised on two settled
principles:
1) That any obligation arising from contract has
the force of law between the parties; and
2) That there must be mutuality between the
parties based on their essential equality.
- Any contract which appears to be heavily
weighted in favor of one of the parties so as to
lead an unconscionable result is void. Any
stipulation regarding the validity or compliance of
the contract which is left solely to the will of one
of the parties, is likewise, invalid. (Sps. Jucio vs.
China Banking Corp., G.R. 187678, April 10, 2013)
NOTE: A contract containing a condition whose
efficiency or fulfillment is dependent solely on the
uncontrolled will of one of the parties is void.
However, the termination of the contract does not
necessarily require mutuality, and it can even be
validly left to one party by agreement or under a
resolutory facultative condition.
 Contract of Adhesion
- It is a contract in which one of the parties
prepares the stipulations in the form of a ready-
made contract, which the other party must accept
or reject, but not modify, by affixing his signature
or his “adhesion” thereto; leaving no room for
negotiation and depriving the latter of the
opportunity to bargain on equal footing.
15
 Validity of contract of adhesion
- It is entirely prohibited since the one who adheres
to the contract is, in reality, free to reject entirely,
and if he adheres, he gives consent. However, it is
void when the weaker party is imposed upon
dealing with the dominant bargaining party, and
its option is reduced to the alternative of “taking
or leaving it,” completely depriving such party of
the opportunity to bargain on equal footing.
NOTE: Such contracts are not void in themselves. They
are as binding as ordinary contracts. Parties who enter
into such contracts are free to reject stipulations
entirely.
 Interpretation of contract adhesion
- In interpreting such contracts, however, courts
are expected to observe greater vigilance in order
to shield the unwary or weaker party from
deceptive schemes contained in ready-made
covenants. In case of doubt, which will cause a
great imbalance of rights against one of the
parties, the contract shall be construed against
the party who drafted the same.
 Third person may determine the performance of
a contract
- The determination of the performance may be left
to a third person. However, his decision shall not
be binding until it has been known to both the
contracting parties (NCC, ART. 1309). Moreover,
the determination made shall not be obligatory if
it is evidently inequitable. In such case, the courts
shall decide what is equitable under the
circumstance (NCC, ART. 1310).
 Unilateral increase of interest rate
- Even assuming that the loan agreement between
the creditor and the debtor gave the former a
license to increase the interest rate at will during
the term of the loan, the license would have been
null and void for being violative of the principle of
mutuality essential in contracts (Rabuya, 2017).
 Autonomy of contract/ Liberty of contracts
- It is the freedom of the parties to contract and to
stipulate provided the stipulations are not
contrary to law, morals, good customs, public
order or public policy (NCC, ART. 1306).
NOTE: Courts cannot make for the parties better or
more equitable agreements that they themselves

have been satisfied to make, or rewrite contracts
because they operate harshly or inequitably as to
one of the parties, or alter them for the benefit of
one party and to the detriment of the other, or by
construction, relieve one of the parties from terms
which he voluntarily consented to, or impose on him
those which he did not.
An agreement to pay unconscionable interest on a
loan is against morals.
 Perfection by mere consent
- 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. (NCC, ART. 1315).
NOTE: This refers to consensual contracts. However,
real contracts are perfected by delivery and formal
contracts are perfected upon compliance.
 Effects of contracts
- Contracts take effect only between the parties,
and their assigns and heirs, the latter being liable
only to the extent of the property from the
decedent (NCC, ART. 1311).
 Persons affected by a contract
GR:
1. Parties to the contract; and their
2. Corresponding successors
XPNs:
1. Contracts containing a stipulation in favor of a
third person (pour autrui) [NCC, ART. 1311
(2)];
2. Contracts containing real rights (NCC, ART.
1312);
3. Contracts entered into to defraud creditors
m(NCC, ART. 1313);
4. Contracts which have been violated at the
inducement of 3rd persons (NCC, ART. 1314);
5. Quasi-contract of negotiorum gestio (NCC,
ART. 2150).
 Liability of heirs for the obligation contracted by
the decedent
- The heirs are liable for the obligation contracted
by the decedent when the rights and obligations
arising from the contract are transmissible:
1. By their nature;
16
2. By stipulation; or
3. By provision of law (NCC, ART. 1311).
 Requisites in order that a third person may
demand the fulfillment of the contract
1. The contracting parties must have clearly and
deliberately conferred a favor upon the third
person;
2. The third person’s interest or benefit in such
fulfillment must not be merely incidental; and
3. Such third person communicated his
acceptance to the obligor before the
stipulations in his favor are revoked.
LESSON 9-10
CONTRACTS
ESSENTIAL REQUISITES OF CONTRACTS
 ELEMENTS OF A CONTRACT
1. Natural Elements – Those which are derived
from the very nature of the contract, and as a
consequence, ordinarily accompany the same.
2. Essential Elements – Those without which
there can be no contract.
3. Accidental Elements – Those which exist only
when the contracting parties expressly
provide for them (De Leon, 2010).
CONSENT, OBJECT and CAUSE
 ESSENTIAL REQUISITES OF A CONTRACT
The following are the essential requisites of contracts
(COC):
1. Consent of the contracting parties;
2. Object or subject matter; and
3. Cause or consideration (NCC, Art 1318, Cathay
Pacific v. Vasquez,
NOTE: These three requisites are, therefore, the
essential elements of a contracts, however, in
addition to the above, the delivery of the object of the
contract is required as a further requisite.
CONSENT
- It is the concurrence of the wills of the contracting
parties with respect to the object and cause,

which shall constitute the contract (De Leon,
2010).
NOTE: Consent is essential to the existence of a
contract; and where it is wanting, the contract is non-
existent.
 CONSENT
‘Consent’ Defined
a. It is the meeting of the minds between the
parties on the subject matter and the cause of
the contract, even if neither one has been
delivered.
b. It is the manifestation of the meeting of the
offer and the acceptance upon the thing and
the cause which are to constitute of the
contract. (ARTICLE 1319, 1ST PART).
EXAMPLE:
A offered to sell B a particular car for 200,000
PESOS. Before B could consent, A withdrew
the offer. Was A allowed to do so?
Ans: Yes, because there was no meeting of
the minds yet, hence no contract has been
perfected yet.
 Requisites of Consent:
a. There must be two or more parties [NOTE:
one person may represent two or more
parties, unless there are contradictory or
prejudicial interests involved. (see. Article
1490, Civil Code; Garchitorena v Sotelo, 74
Phil. 25)]
b. The parties must be capable or capacitated
(hence, if one party be insane, the contract is
merely voidable)
c. there must be no vitiation of consent.
(Example: there must be no fraud or
intimidation, otherwise the contract is
voidable)
d. there must be no conflict between what was
expressly declared and what was really
intended. Otherwise, the remedy may be
reformation, as when the parties really
intended to be bound, or else the contract is
VOID as when the contract is fictitious or
absolutely simulated.
e. The intent must be declared properly (that is
whatever legal formalities are required must
be complied with).
NOTE: A qualified acceptance constitutes a counter-
offer. Acceptance made by letter or telegram only
17
binds the offer or from the time such acceptance is
known to him. In such case, it is presumed that the
contract has been entered into in the place where the
offer was made. (NCC, ARTICLE 1319).
NOTE: We follow the cognitive theory and NOT the
mailbox theory. Under our Civil Law, the offer and
acceptance concur only when the acceptance has
reached the knowledge of the offer or (actual
knowledge), and not at the time of sending the
acceptance.
 Requisites for the Meeting of the Minds
a. An offer must be CERTAIN
b. And an acceptance must be UNQUALIFIED and
ABSOLUTE
 Persons incapacitated to give consent
1. Unemancipated minors
- Emancipation only takes place upon
attainment of the age of majority, that is,
reaching the age of eighteen (18) as provided
under Article 234 of the Family Code of the
Philippine.
2. Insane or demented persons (unless they
acted during the lucid interval), drunks, and
those hypnotized. (ART. 1328, Civil Code).
3. Deaf – mutes who do not know how to read
and write (if they know how to read but
don’t know how to write, it is submitted that
the contract is valid, for then they are capable
of understanding, and therefore capacitated
to give consent).
 Rules on advertisements as offers
1. Business advertisements – Not a definite
offer, but mere invitation to make an offer,
unless it appears otherwise (NCC, ART. 1325).
2. Advertisement for bidders – Simply invitation
to make proposals and advertiser is not bound
to accept the highest or lowest bidder, unless
the contrary appears (NCC, ART. 1326).
 Mirror Image Rule in law on contracts
- This is a common law concept which states that in
order for there to be an acceptance, the offeree
must accept the terms as stated in the offer. Our
courts also adhere to the “mirror-image rule”.
Thus, it has been ruled that acceptance must be
identical in all respects with that of the offer so as
to produce consent of meeting of the minds.

 Persons incapacitated to give consent
1. Deaf-mutes who do not know how to read
and write (illiterates);
2. Insane or demented persons, unless the
contract was entered into during a lucid
interval;
3. Minors (NCC, ART. 1327) except:
a. Contracts for necessaries (NCC, Art. 1489)
b. Contracts by guardians or legal representatives
and the court having jurisdiction had approved
the same;
c. When there is active misrepresentation on the
part of the minor (minor is
NOTE: It is now well settled that
misrepresentation by un emancipated minors
with regard to their age when entering into a
contract shall bind them in the sense that they are
estopped subsequently from impugning the
validity of the contract on the ground of minority.
It is, however, necessary that the
misrepresentation must be active, not merely
constructive.
d. Contracts of deposit with the Postal Savings Bank
provided that the minor is over seven years of age; or
e. Upon reaching age of majority – they ratify the
same
NOTE: Because the law incapacitates them to give
their consent to a contract, the only way by which
any one of those enumerated above can enter
into a contract is to act through a parent or
guardian. If this requirement is not complied with,
the result is adefective contract. If only one of the
contracting parties is incapacitated to give his
consent, the contract is voidable. If both of them
are incapacitated to give their consent, the
contract is unenforceable.
 Vices of consent
1. Mistake;
2. Intimidation Violence;
3. Undue influence;
4. Fraud.
NOTE: A threat to enforce a just or legal claim through
a competent authority does not amountto
intimidation nor vitiate consent (NCC, ART. 1335).
 Mistake
18
GR: Mistake as a vice of consent refers to voidable
(Jurado, 2010).
XPN: When mistake of law involves mutual error as to
the legal effect of an agreement when the real
purpose of the parties is frustrate (NCC, Art. 1334).
Requisites:
1. Mistake must be with respect to the effect of
the agreement
2. It must be mutual; and
3. Real purpose of the parties must have been
frustrated.
 Kinds of mistakes of fact which vitiate consent
1. Error in re (mistake as to object)[NCC, Art. 1313
(1)];
a. Error in corpore (mistake as to the identity of
the thing);
b. Error in substantia (mistake as to the
substance of the thing);
c. Error in quantitae (mistake as to the quantity
of the thing)
Mistake as to the conditions of the thing, provided
such conditions have principally moved one or
both parties to enter into the contract.
2. Error in Persona (mistake as to person)
- Mistake as to the identity or qualifications of one
of the parties will vitiate consent only when such
identity or qualifications have been the principal
cause of the contract. For mistake (as to the
qualification of one of the parties) to vitiate
consent, two requisites must concur:
a. The mistake must be either with regard to the
identity or with regard to the qualification of
one of the contracting parties; and
b. The identity or qualification must have been
the principal consideration for the celebration
of the contract.
 Intimidation
- There is intimidation when one of the contracting
parties is compelled by a reasonable and well-
grounded fear of an imminent and grave evil upon
his person or property, or upon the person or
property of his spouse, descendants or
ascendants, to give his consent (NCC, ART. 1335
(2))
 Requisites of intimidation (CICU)

1. One of the parties is compelled to give his
Consent by a reasonable and well-grounded
fear of an evil;
2. The evil must be Imminent and
3. It must be Unjust; and
4. The evil must be the determining Cause for
the party upon whom it is employed
inentering into the contract (NCC, Art. 1335).
NOTE: To determine the degree of the
intimidation, the age, sex and condition of the
person shall be borne in mind (NCC, Art. 1335).
 Validity of a contract if consent is reluctant
- A contract is valid even though one of the parties
entered into it against his wishes and desires or
even against his better judgment. Contracts are
also valid even though they are entered into by
one of the parties without hope of advantage or
profit.
 Violence
- There is violence when in order to wrest consent,
serious or irresistible force is employed.
 Requisites of violence
1. Physical force employed must be serious or
irresistible; and
2. The determining cause for the party upon
whom it is employed in entering into the
contract.
NOTE: Violence or intimidation shall annul the
obligation, although it may have been employed by a
third person who did not take part in the contract
(NCC, ART. 1336).
 Undue influence
- There is undue influence when a person takes
improper advantage of his power over the will of
another, depriving the latter of a reasonable
freedom of choice (NCC, ART. 1337).
 Circumstances to be considered for the existence
of undue influence
1. Confidential, family, spiritual and other
relations between the parties;
2. Mental weakness;
3. Ignorance; and
4. Financial distress (NCC, Art. 1337).
19
NOTE: The enumeration is NOT exclusive. Moral
dependence, indigence, mental weakness, tender age
or other handicap are some of the circumstances to
consider undue influence.
 Determination of undue influence
The test to determine whether or not there is undue
influence which will invalidate a contract is to
determine whether or not the influence exerted has
so overpowered and subjugated the mind of the
contracting party as to destroy his free agency,
making him express the will of another rather than his
own (Jurado, 2011).
 Fraud
- There is fraud when through the insidious words
or machinations of one of the contracting parties
the other is induce to enter into a contract which,
without them, he would not have agreed to (NCC,
ART. 1338).
NOTE: Insidious words refers to a deceitful scheme or
plot with an evil design, or a fraudulent purpose
(Pineda, 2000).
Failure to disclose facts, when there is a duty to reveal
them, as when the parties are bound by confidential
relations, constitutes fraud (NCC, ART 1339).
 Requisites of Fraud to vitiate consent
1. Serious fraud; and
2. Parties must not be in pari delicto. Otherwise
neither party may ask for annulment (Para,
2008).
 Kinds of Fraud
1. Fraud in the perfection of the contract
a. Casual Fraud (dolocausante)
b. Incidental Fraud (doloincidente)
2. Fraud in the performance of an obligation
(NCC ART. 1170)
Requisites:
a. Fraud, insidious words or
machinations must have been
employed by one of the contracting
parties;
b. It must have been material and
serious;
c. It included the other party to enter
into a contract;
d. It must be a deliberate intent to
deceive or and induce;
 20

e. Should not have been employed by Articles. 1345 – 1346). In absolute simulation,
both contracting parties or by third there is color able contract but it has no
persons; and substance as the parties have no intention to
f. The victim suffered damage or injury. be bound by it. The main characteristic of an
absolute simulation is that the apparent
BASIS DOLO DOLO contract is not really desired or intended to
CAUSANTE INCIDENTE produce legal effect or in any way alter the
(ART. 1338) (ART. 1344) juridical situation of the parties. As aresult, an
Gravity of Serious in Not serious absolutely simulated or fictitious contract is
Fraud character void, and the parties may recover from each
Efficient Cause Efficient cause Not the other what they may have given under the
which induces efficient cause contract.
the party to
enter into a
2. Relative (Disimulados)- The contracting
contract
parties conceal, their true agreement (NCC,
Effect on the Renders the Does not affect
Status of the contract validity of the ART. 1345); binds the parties to their real
Contract voidable contract agreement when it does not prejudice third
Remedies Annulment Contract persons or is not intended for any purpose
with damages remains valid. contrary to law, morals, good customs, public
Remedy is order or public policy(NCC, Art. 1346). If the
claim for concealed contract is lawful, it isabsolutely
damages. enforceable, provided it hasall the essential
requisites: consent, object, and cause (NCC,
ART. 1345-1346).
 Acts considered not fraudulent
1. The usual exaggerations in trade and the As to third persons without notice, the apparent
other party had an opportunity to know the contract is valid for purposes beneficial to third
facts are not themselves fraudulent (NCC, Art. persons with notice of the simulation, they acquire no
1340). better right to the simulated contract than the original
2. A mere expression of an opinion does not parties to the same.
signify fraud, unless made by an expert and
the other party had relied on the former’s The primary consideration in determining the true
special knowledge (NCC, ART. 1341); nature of a contract is the intention of the parties.
3. Misrepresentation by a third person does not Such intention is determined from the express terms
vitiate consent, unless such misrepresentation of their agreement as well as from their
has created substantial mistake and the same contemporaneous and subsequent acts.
is mutual (NCC, ART. 1342); and
4. Misrepresentation made in good faith is not NOTE: If the parties state a false cause in the contract
fraudulent but may constitute error (NCC, to conceal their real agreement, the contract is only
ART. 1343). relatively simulated and the parties are still bound by
the real agreement. Hence, where the essential
 Simulation of contract requisites of a contract are present and the simulation
- It is the declaration of a fictitious will, deliberately refers only to the content or terms of the contract,
made by agreement of the parties, in order to the agreement is absolutely binding and enforceable
produce, for the purposes of deception, the between the parties and their successors.
appearance of a juridical act which does not exist in interest.
or is different from that which was executed.

 Kinds of simulation of contract OBJECT

1. Absolute (simulados) – The contracting
parties do not intend to be bound by the - It is the subject matter of the contract. It can be a
contract at all, thus the contract is void (NCC, thing, right or service arising from a contract.

 Requisites of an object
1. Determinate as to kind (even if not
determinate, provided it is possible to
determine the samewithout the need of a
new contract);
2. Existing or the potentiality to exist subsequent
to the contract;
3. Must be LIcit;
4. Within the Commerce of man; and
5. Transmissible.
NOTE: The most evident and fundamental requisite in
order that a thing, right or service may be the object
of a contract, is that it should be inexistence at the
moment of the celebration of the contract, or at least,
it can exist subsequently or in the future (De Leon,
2010).
 Object of contracts
GR: All things or services may be the object of
contracts.
XPNs:
1. Things outside the commerce of men (NCC,
ART. 1347);
2. Intransmissible rights;
3. Future inheritance, except in cases expressly
authorized by law
4. Services which are contrary to law, morals,
good customs, public order or public policy;
5. Impossible things or services; and
6. Objects which are not possible of
determination as to their kind.
CAUSE
- It is the essential and impelling reason why a party
assumes an obligation.
 Requisites of a cause
It must:
1. Exist;
2. Be True; and
3. Be Licit.
NOTE: Every contract is presumed to have a cause and
such cause is LAWFUL.
 Kinds of cause
1. Cause of onerous contracts – The prestation
or promise of a thing or service by the other
e.g. Contract of Sale
21
2. Cause of remuneratory contract – The service
or benefit remunerated.
e.g. Donation in consideration of a past
service which does not constitute a
demandable debt.
3. Cause of gratuitous contract - The mere
liberality of the donor or benefactor.
4. Accessory – Identical with cause of principal
contract, the loan which it derived its life and
existence.
e.g. Mortgage or pledge.
 Complementary contracts construed together
doctrine
- An accessory contract must be interpreted with its
principal contract. The provisions must be
construed together to arrive at their true
meaning. Certain stipulations cannot be
segregated and then made to control. This
doctrine closely adheres to the spirit of ART. 1374
of the Civil Code which states that the various
stipulations of a contract shall be interpreted
together, attributing to the doubtful ones
thatsense which may result from all of them taken
jointly.
 Rules relating to cause on contracts
1. Absence of cause – Confers no right and
produces no legal effect.
2. Failure of cause – Does not render the
contract void.
3. Illegality of cause – Contract is null and void.
4. Falsity of cause – Contract is void; unless the
parties show that there is another cause
which is true and lawful.
5. Lesion or inadequacy of cause – Does not
invalidate the contract, unless:
a. There is fraud, mistake, or undue
influence;
b. When the parties intended a donation
or some other contract; or
c. In cases specified by law
e.g.Contracts entered by guardian when
ward suffers lesion of more than 25% and
with courtapproval, otherwise, if there is
no approval, the contract is void
regardless of the amount of lesion.