OBLIGATIONS AND CONTRACTS

I. OBLIGATIONS

A. GENERAL PROVISIONS

Obligation – Juridical necessity to give, to do or not to do. (Art. 1156)

REQUISITES OF OBLIGATION

1. Juridical tie (vinculum juris)

2. Active subject (obligee or creditor)
3. Passive subject (obligor or debtor)
4. Prestation (object of the obligation)

SOURCE OF OBLIGATION

1. Law

- Must be expressly provided for by the law.

2. Contracts

- Must be complied with in good faith.

- The law between the parties.

- Parties are allowed to enter into any stipulations, provided they are not
contrary to law, morals, good customs, public order or public policy.

3. Quasi-Contract

- Juridical relation resulting from a lawful, voluntary and unilateral act, and
which has for its purpose the payment of indemnity to the end that no
one shall be unjustly enriched or benefited at the expense of another.

Two kinds

a. Negotiorum Gestio: Unauthorized management, this taxes place when

a person voluntarily takes charge of another’s abandoned business or
property without the owner’s authority.

b. Solutio Indebti: Undue payment; this takes place when

something is received when there is no right to demand it, and it
was unduly delivered thru mistake.

4. Delicts / Acts or omissions punished by law

- Every person criminally liable is civilly liable.

- Civil liability arising from crimes includes restitution, reparation of

damage caused and indemnity for consequential damages.

- Effect for acquittal: if acquittal is due to reasonable doubt, there

is no civil liability. If the acquittal is due to exempting circumstance
or there is preponderance of evidence, there is civil liability.
 5. Quasi-Delict

- It is a fault or act of negligence which causes damage to another,

there being no pre-existing contractual relations between the
parties.

Requisites:

1. There must be an act or omission;

2. There must be fault or negligence;

3. There must damage caused; to the plaintiff;

4. There must be a direct relation of cause and effect between the act
or omission and the damage; and

5. There is no pre-existing contractual relation between the parties.

Negligence – Failure to observe for the protection of the interests of

another person, that degree of care, precaution and vigilance which
the circumstances justly demand, whereby such other person suffers
injury.

NATURE OF OBLIGATIONS

1. Personal Obligations – obligations to do.

a. Positive – obligation to do

b. Negative – obligation not to do

2. Real Obligations – obligations to give

a. Determinate or Specific – object is particularly designated or

physically segregated from all other of the same class

b. Generic – object is designated merely by its class or genus

c. Limited generic thing – when the generic objects are confined to

a particular class.

PERSONAL vs. REAL RIGHT

Personal
1. Jus ad rem, a right enforceable
only against a definite person
or group of persons
2. Right pertaining to the person
demand from another, as a
definite passive subject, the
fulfillment of a prestation to
Real
1. Jus in re, a right enforceable
against the whole world
2. Right pertaining to a person
over a specific thing, without a
passive subject individually
determined against whom such
 give, to do or not to do. right may be personally
enforced

ACCESSORY OBLIGATIONS

1. Exercise of due diligence/preservation of the thing

2. Delivery of fruits

3. Delivery of accessions and accessories.

Right of the Creditor:

A. Determinate Obligations:

1. Specific performance; and

2. Damages exclusive or in addition to the remedy at the option of the

creditor.

B. Generic Obligations

1. Specific performance

2. To demand that obligation be complied with at the expense of the

debtor; and

3. Damages.

Obligation of the Debtor

A. Determinate Obligations:

1. Specific performance;

2. Take care of the thing with proper diligence;

3. Deliver all accessions and accessories; and

4. Pay for damages in case of breach by reason of delay, fraud,

negligence or contravention of the tenor thereof.

B. Generic Obligations:

1. Deliver the thing which is neither of superior nor inferior quality;

and

2. Pay damages in case of breach of obligation.

BREACH OF OBLIGATIONS

1. Voluntary – debtor, in the performance of the obligation, is guilty of:

 a. Default (mora)

b. Fraud (dolo)

c. Negligence (culpa)

d. Contravention of the tenor of the obligation

Note: debtor is liable for damages

2. Involuntary – debtor is unable to comply with his obligation because

of fortuitous event.

Note: debtor is not liable for damages

DELAY (MORA)

- Incurred from the moment the obligee judicially or extra-judicially

demands the fulfillment of the obligation.

General Rule: There must be a demand before delay may be incurred.

Exceptions:

1. Time is of the essence;

2. When the obligation or law expressly declares that demand is not

necessary;

3. Demand is useless as when obligor has rendered it beyond his power

to perform; or

4. There is an acknowledgment of default.

Classification of Delay

1. Mora Solvendi - delay of the debtor

- Mora Solvendi ex persona – demand is necessary.

- Mora Solvendi ex re – demand is not necessary.

2. Mora accepiendi – delay of the creditor

3. Compensatio morae – mutual delay of the parties has the effect of

cancelling the liabilities of the parties.

FRAUD (dolo) – must be present during the performance of the

obligation and not fraud at the time of the birth of the obligation (Casual
or Incidental Fraud).

NEGLIGENCE (Culpa) – consists in the omission of the diligence which is

required by the nature of the circumstances of the persons of the time
and of the place.
Diligence Required

1. That agreed upon by the parties;

2. In the absence of stipulation, that required by law in the particular

case; and

3. If both the contract and law are silent, diligence of a good father of a
family.

Incidental Fraud Causal Fraud

(Dolo Incidente) (Dolo Causante)
Present during the performance of a Present at the time of birth of the
pre-existing obligation. obligation.
Purpose is to evade the normal Purpose is to secure the consent of
fulfillment of the obligation. the other to enter into a contract.
Results in the non-fulfillment or Results in the vitiation of consent.
breach of the obligation.
Gives rise to a right of the creditor to Gives rise to a right of an innocent
recover damages from the debtor. party to annul the contract.

FORTUITOUS EVENT

- An event which could not be foreseen, or which, though foreseen, is

inevitable.

General Rule: No liability in case of fortuitous event.

Exceptions:

1. By contrary stipulation in the contract;

2. Declared by law;
e.g. Art. 552(2), 1165(3), 1268, 1942, 2147, 2148 and 2159 of
the Civil Code.

3. Nature of the obligation requires assumption of risk when expressly

declared by law; or

4. When the obligor is in default or has promised to deliver the same

thing to two (2) or more persons who do not have the same interest
(art. 1155[3]).

Essential Characteristics of a Fortuitous Event

1. Cause is independent of the will of the debtor;

2. Impossibility of foreseeing or impossibility it to be foreseen even if

foreseen;
 3. Occurrence renders it impossible for debtor to fulfill his obligation in a
normal manner; and

4. Debtor is free from any participation in the aggravation of the injury to

the creditor.

Negligence, as commonly understood, is that conduct that naturally or

reasonably creates undue risk or harm to others. It may be a failure to
observe that degree of care, precaution or vigilance that the
circumstances justly demand (Valenzuela vs. CA, 253 SCRA 303 [1996];
Quibal vs. Sandiganbayan, 244 SCRA 224 [1995]; Citibank vs.
Gatchalian, 240 SCRA 212 [1995] or to do any other act that would be
done by a prudent and reasonable person who is guided by
consideration that ordinarily regulate the conduct of human affairs.
(Layugan vs. IAC, 167 SCRA 363[1998]; Builan vs. COA 300 SCRA 445
[1998]; Minder Resources Development vs. Morillo, GR 138123, March
12, 2002 [379 SCRA 1441])

Moreover, even in cases where natural cases where natural disaster is

the proximate and only cause of the loss, a common carrier is still
required to exercise due diligence to prevent or minimize loss before,
during and after the occurrence of the natural disaster, for it to be
exempt from liability under the law for the loss of goods (Art. 1739,
NCC). If a common carrier fails to exercise due diligence or that
ordinary care which the occasion of a natural disaster, it will be deemed
to have been negligent and the loss will not be considered as having
been due to a natural disaster under Article 1734 (Philippine American
General Insurance Co. vs. MGG Marine Services, Inc. GR 135645, March
8, 2002 [378 SCRA 650]).

B. KINDS OF OBLIGATIONS

1. Pure and Conditional

2. Obligation with a period

3. Alternative and Facultative

4. Joint and Solidary

5. Divisible and Indivisible

6. Obligation with a penal cause

PURE AND CONDITIONAL OBLIGATIONS

PURE OBLIGATION

- Effectivity or extinguishment does not depend upon the fulfillment

or non-fulfillment of a condition or upon the ex-[iration of a term or
period.

CONDITIONAL OBLIGATION

- Effectivity is subordinate to the fulfillment or non-fulfillment of a

future and uncertain of a future and uncertain fact of event.
Kinds of Conditions:

1. Suspensive – fulfillment of the condition results in the acquisition of

rights arising out of the obligation.

2. Resolutory – fulfillment of the condition results in the

extinguishments of rights arising out of the obligation.

3. Potestative - fulfillment of the condition depends upon the will of a

party to the obligation.

4. Casual - fulfillment of the condition depends upon chance and/or upon

the will of a third person.

5. Mixed - fulfillment of the condition depends partly upon chance and/or

the will of a third person.

6. Possible – condition is capable of realization according to nature, law,

public policy and good customs.

7. Impossible – condition is not capable of realization according to

nature, law, public policy and good customs.

8. Positive – condition involves the performance of an act.

9. Negative – condition involves the omission of an act.

10. Divisible – condition is susceptible of partial realization.

11. Indivisible – condition is not susceptible of partial realization.

12. Conjunctive – where there are several conditions, all of which

must be realized.

13. Alternative – where there are several conditions but only one
must be realized.

Rule in Potestative Conditions

a. If the fulfillment of potestative condition depends upon the sole will of

the debtor. The condition and the obligation is void.
(Applicable only to a suspensive condition)

b. If the fulfillment depends exclusively upon the will of the creditor, both
the condition and obligation is valid.

Rule in Impossible Conditions

General Rule: They shall annul the obligation which depends upon them.

Exceptions:

1. Pre-existing condition;
 2. If obligation is divisible;

3. In simple or renumeratory donations;

4. In testamentary dispositions; and

5. In case of conditions not to do an impossible thing.

Effects of Suspensive Condition

1. Before fulfillment of the condition, the demandability as well as the

acquisition or effectivity of the rights arising from the obligation is
suspended.

2. After the fulfillment of the condition, the obligation arises or becomes

effective.

3. The effects of a conditional obligation to give, once the condition has

been fulfilled, it shall retroact to the day of the constitution of the
obligation;

4. When the obligation imposes reciprocal pretastations upon the parties,

the fruits and interests shall be deemed to have been mutually
compensated.

5. If the obligation is unilateral, the debtor shall appropriate the fruits

and interests received unless from the nature and circumstances it
should be inferred that the intention of the persons constituting the
same was differed.

6. In obligations to do or not to do, the court shall determine the

retroactive effect of the conditions that has been complied with.

Effects of Resolutory Condition

1. Before the fulfillment of the condition, the right which the creditor has
already acquired by virtue of the obligation is subject to a threat of
extinction.

2. Upon fulfillment of the condition, the parties shall return to each other
what they received including the fruits.

Loss, Deterioration and improvement

(During the Pendency of the Condition)

1. Loss

Without debtor’s fault – obligation is extinguished.

With debtor’s fault – debtor pays damages.
A thing is lost when it:

1. Perishes;
 2. Goes out of commerce; or

3. Disappears in such a way that its existence is unknown or it cannot

be recovered.

2. Deterioration

Without debtor’s fault – obligation is extinguished.

With debtor’s fault – creditor may choose between the rescission of

the obligation and its fulfillment with indemnity for damages in either
case.

3. Improvements

By the thing’s nature or by time – improvement shall inure to the

benefit of the creditor.

At the debtor’s expense – debtor shall have no other right that

granted to a usufructuary.

Reciprocal Obligations – Those which are created or established at the

same time, out of the same cause, and which result in mutual relationships
of creditor and debtor between the parties.

Tacit Resolutory Condition – If one of the parties fails to comply with that
is incumbent upon him, there is a right on the part of the other to rescind
the obligation.

Right to Rescind

General Rule: The right to rescind needs judicial approval.

Exceptions:

1. If there is an express stipulation of automatic rescission; and

2. When the debtor voluntary returned the thing.

OBLIGATION WITH A PERIOD

- Consequences are subjected in one way or another to the expiration

of the period or term.

Requisites:

1. Future

2. Certain

3. Possible, legally and physically

Classification of Term or Period

 1. a. Suspensive (ex die) – obligation becomes demandable only upon
arrival of a day certain

b. Resolutory (in diem) – arrival of day certain terminates the

obligation

2. a. Legal – granted by law

b. Conventional – stipulated by parties

c. Judicial – fixed by courts

3. a. Definite – date/time is know beforehand

b. Indefinite – the date/time of day certain is unknown

4. a. Express – when specifically stated

b. Tacit – as when a person undertakes to do some work which can be
done only during a particular season

5. a. Original Period

b. Period of Grace

Term
1. Interval of time that is
future and certain.
2. Interval of time that must
necessary come, although it
may not be known when.
3. Exerts an influence upon
the time of demandability of
an obligation
4. Does not have any
retroactive effect unless
there is an agreement to
the contrary.
5. When it is left exclusively to
the will of the debtor, the
existence of the obligation
is not affected.
Condition
1 Fact or event that is future
. uncertain.
2 Future and uncertain fact or
. event that may or may not
happen.
3. Exerts an influence upon
the very existence of the
obligation itself.
4. Has retroactive effect.
5. When it is left exclusively to
the will of the debtor, the
very existence of the
obligation is affected.

Period for Whose Benefit

General Rule: When a period is designated for the performance or

fulfillment of an obligation, it is presumed to have been established for the
benefit of both creditor and debtor. Hence, creditor cannot demand
performance, nor the debtor perform the obligation before the expiration of
the designated period.
Exception: When it appears from the tenor of the obligation or other
circumstances that the period has been established in favor of one or the
other.

Period for the Benefit of the Creditor

- Creditor may demand the fulfillment of the obligation at any time

but the obligor cannot compel him to accept before the expiration of
period

Period for the Benefit of the Debtor

- Debtor may oppose any premature demand of the creditor but he

may renounce the benefit of the period by performing his obligation
in advance

When May Courts Fix Term

1. Obligation does not fix a period, but from its nature it can be inferred
that a period was intended by the parties.

2. Duration of the period depends upon the will of the debtor.

3. Debtor binds himself when his means permit him to do so.

When Debtor Loses the Right to Make Use of the Period

1. He becomes insolvent, unless he gives a sufficient guaranty or

security;

2. He does not furnish to the creditor the guaranties or securities he

promised;

3. By his own act he has impaired said guaranties or securities after their
establishment, and when through fortuitous event they disappear,
unless he gives new ones equally satisfactory;

4. Debtor violates any undertaking, in consideration of which the creditor

agreed to the period; or

5. Debtor attempts to abscond.

ALTERNATIVE OBLIGATION – Debtor may give the creditor either one of

several prestations (to give, to do, or not to do).

Facultative Obligations Alternative Obligations

1. Comprehends only one 1. Comprehends several

object or prestation which is objects or prestations which
due, but it may be complied are due but may be
with by the delivery of complied with by the
 another object or delivery or performance of
performance of another only one of them.
prestation in substitution.

2. Choice pertains only to 2. Choice may pertain to

debtor. creditor or even third
person.

3. Culpable loss obliges the 3. Culpable loss of any object

debtor to deliver substitute due will give rise to liability
prestation without liability to debtor.
to debtor.

4. Fortuitous loss extinguishes 4. Fortuitous loss of all

the obligation. prestations will extinguish
the obligation.

Effect of Loss of Object of Obligation

1. If right of choice belongs to debtor

a. If through a fortuitous event – debtor cannot be held liable for

damages.
b. If one or more but not all of the things are lost one or some but not
all of the prestations cannot be performed due the fault of the
debtor, creditor cannot hold the debtor liable for damages because
the debtor can still comply with his obligation.

2. If right of choice belongs to the creditor

a. If one of the things is lost through a fortuitous event, the debtor

shall perform the obligation by delivering that which the creditor
should choose from among the remainder, or that which remains if
only 1 subsists.
b. If the loss of 1 of the things occurs through the fault of the debtor,
the creditor may claim any of those subsisting, or the price of that
which, through the fault of the former, has disappeared with a right
to damages.
c. If all the things are lost through the fault of the debtor, the choice
by the creditor shall fall upon the price of any one of them, also
with indemnity for damages.
d. If all are lost due to fortuitous even, debtor is not liable.
e. If one is lost due to the creditor’s fault, he could still choose the
other.
f. If one is only lost due to the creditor’s fault, the obligation ceases
to be alternative and becomes a simple obligation.

JOINT AND SOLIDARY OBLIGATIONS

Joint Obligation – Each debtor is liable only for the proportionate part of
the debt, and each creditor is entitled only to a proportionate part of the
credit.

General Rule: Obligation is presumed joint if there is occurrence of two (2)

or more creditors in the same obligation

Exceptions:

1. Expressly stated to be solidary

2. Law requires solidarity

3. Nature of the obligation requires solidarity

Solidary Obligation – Each of the debtors are liable for the entire
obligation/s and each of the creditors are entitled to demand the whole
obligation from any or all of the debtors.

Divisible Obligations – Those which have as their object a prestation

which is susceptible of partial performance without the essence of obligation
changed.

Indivisible Obligations – An obligation is not susceptible of partial

performance.

Reciprocal Obligation – Created or established at the same time, out of

the same cause, and which results to mutual relationships of creditor and
debtor between the partners.

Joint Divisible Obligations – each creditor can demand for the payment of
his proportionate share of the credit, while each debtor can be held liable
only for the payment of his proportionate share of the debt.

Joint Indivisible Obligations

1. If there are two or more debtors, compliance with the obligation

requires the concurrence of all of them, although each for his own
share. Consequently, proceeding against all of the debtors can enforce
the obligation.

2. If there are two or more debtors, the concurrence of the collective acts
of all the creditor’s, although each for own share is also necessary for
the enforcement of the obligation. A creditor cannot act in
representation of the others, and it is also indivisible and therefore,
not susceptible of partial fulfillment.
 Indivisibility Solidarity
Refers to the prestation which Refers to the legal tie or vinculum
constitutes the object of the juris and consequently to the subject
obligation or parties of the obligation

Plurality of subjects is not required Plurality of subjects is indispensable

In case of breach, obligation is When there is liability on the part of

converted into 1 of indemnity for the debtors because of the breach,
damages because of breach, the solidarity among the debtor
indivisibility of the obligation is remains.
terminated.

Effect of breach – If one of the joint debtors fails to comply with his
undertaking, the obligation can no longer be fulfilled or performed.
Consequently, it is converted into one of indemnity for damages. Innocent
joint debtors shall not contribute to the indemnity beyond their
corresponding share of the obligation.

Effect of insolvency of a debtor – If one of the joint debtors should be

insolvent, the other shall not be liable for his share.

Kinds of Solidarity
1. Active solidarity
- Solidarity of creditors

- Each is empowered to exercise against the debtor not only the

rights which correspond to the other creditors, with the consequent
obligation to render an accounting of his acts to such creditors

- Creates a relationship of mutual agency among solidary creditors

2. Passive solidarity

- Solidarity of debtors

- Liability of each debtor for the payment of the entire obligation,

with consequent right to demand reimbursement from the others
for their corresponding shares once payment has been made

3. Mixed solidarity

- Solidarity among creditors and debtors

Effect of Assignment by Solidary Creditor Without Consent of Others

1. If assignee is co-creditor – no violation of Art. 1213 because there can

be no invasion or confidential relationship.
 2. If assignee is third person – co-creditors and debtors are not bound by
the assignment.

Effect of Novation upon Solidary Obligation

1. If the novation is prejudicial, the solidary creditor who effected the

novation shall reimburse the others for damages incurred by them.

2. If it is beneficial and the creditor who effected the innovation is able to

secure performance of the obligation such creditor shall be liable to the
others for the share which corresponds to them, not only in the
obligation, but also in the benefits.

3. If the novation is effected by substituting other person in place of the

debtor, the solidary creditor who effected the novation is liable for the
acts of the new debtor in case there is deficiency in performance or in
case damages are incurred by the other solidary creditors as a result
of the substitution.

4. If the novation is effected by subrogating a third person in the rights

of the solidary creditor responsible for the novation, the relation
between the other creditors not substituted and the debtor or debtors
is maintained.

Effect of Compensation and Confusion upon Solidary Obligation

1. If the confusion or compensation is partial, the rules regarding

application of payment shall apply.

2. If the confusion or compensation is total, the obligation is

extinguished, what is left is the ensuing liability for reimbursement
within each group.

a. The creditor causing the confusion or compensation is obliged to

reimburse the other creditors.

b. The debtors benefited by the extinguishment of the obligation is

obliged to reimburse the debtor who made the confusion or
compensation possible.

Effect of Remission upon Solidary Obligation

1. If the remission covers the entire obligation, the obligation is totally

extinguished and the entire juridical relation among the debtors is
extinguished all together.

2. If the remission is for the benefit of one of the debtors and it covers
his entire share in the obligation, he is completely released from the
creditors but is still bound to his co-debtors.

3. If the remission is for the benefit of one of the debtors and it covers
only a part of his share in the obligation, his character as a solidary
debtor is not affected.
Effect of Payment by Solidary Debtor

1. Whole or partial extinguishment of debt;

2. Right to recover against co-debtor; and

3. Right to recover interest from time the obligation becomes due

Defenses Available to a Solidary Debtor

1. Defenses derived from the very nature of the obligation;

2. Defenses personal to him pertaining to his own share; and

3. Defenses personal to the others, but only as regards that part of the
debt for which the latter are responsible.

OBLIGATION WITH A PENAL CLAUSE

One to which an accessory undertaking is attached for the purpose of

insuring its performance by virtue of which the obligor is bound to pay a
stipulated indemnity or perform a stipulated prestation in case of breach.

General Rule: The penalty fixed by the parties is a compensation or

substitute for damages in case of breach of obligation.

Exceptions: Cases where creditor can recover penalty plus damages:

1. Stipulation to the contrary;

2. Obligor is sued for the refusal to pay the agreed penalty; and

3. Obligor is guilty of fraud.

Purpose Penalty Clause

1. To insure the performance of the obligation; and

2. To liquidate the amount of damages to be awarded to the injured party

in case of breach of the principal obligation.

General Rule: The penalty fixed by the parties is compensation or

substitute for damages in case of breach.

Exceptions:

1. Stipulation to the contrary;

2. Debtor is sued for refusal to pay the agreed penalty.

The stipulated penalty might even be deleted such as when there has been substantial
performance in good faith by the obligor (Article 1234, NCC), when the penalty clause
itself suffers from fatal infirmity or when exceptional circumstances so exist as to
warrant it. (Garcia vs. CA 167 SCRA 815 [1988]; Palmares vs. CA 288 SCRA 423
 [1988]; Ibarra vs Aveyro, 37 Phil. 278 [1917]; Ligutan vs. CA et. Al., GR 138677,
February 12, 2002 [376 SCRA 560])

Extraordinary Inflation

- In case extraordinary or deflation of the currency stipulated

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. (Article 1250,
NCC; Singson vs Caltex Phil., Inc., GR. 137798, October 4,
2000 [342 SCRA 91]).

- Extraordinary inflation exists when there is a decrease or

increase in the purchasing power of the Philippine currency
which is unusual or beyond the common fluctuation and
contemplation of the parties at the time of the establishment
of the obligation (Hubonhoa vs CA, GR 95897 and 102604,
December 14, 1999 [320 SCRA 625, 647]; Sierra vs. CA,
SCRA 60 [1998]; Hahn vs. CA, 173 SCRA 675 [1989]; Filipino
Pipe and Foundry Foundation Corporation vs. NAWASA, 161
SCR 32 [1988])

- The effects of extraordinary inflation are applicable only when

there is an official declaration by competent authorities
(Lantion vs. NLRC, 181 SCRA 513 [1990]; commissioner of
Public Highways vs. Burgos, 96 SCRA 831 [1980])

C. MODES OF EXTINGUISHING AN OBLIGATION

1. Payment of performance
2. Loss of the thing due
3. Annulment
4. Rescission
5. Novation
6. Confusion or merger of rights of the creditor and debtor
7. Compensation
8. Condonation or remission of the debt
9. Prescription
10. Fulfillment of Resolutory condition

Note: The enumeration is not exclusive.

Other modes not found in Art. 1231 are:

1. Death
2. Discharge in case of insolvency
3. Discharge under Negotiable Instruments Law
4. Mutual desistance (mutuo disenso)

PAYMENT OR PERFORMANCE
General Rule: Creditor is not bound to accept payment or performance by a
third person.

Exceptions:

1. When made by a third person who has an interest in the fulfillment of

the obligation; and

2. Contrary stipulation

Rights of a Third Person Who Paid the Obligation of Another

With the knowledge and Without the Knowledge or

Consent of the Debtor Against the Will of Debtor
a. Recover entire amount paid. Can recover only insofar as
b. Subrogated to all the rights payment has been beneficial to
of the creditor. the debtor.

To Whom Payment Must be Made:

1. The person in whose favor the obligation has been constituted;

2. His successor in interest; or

3. Any person authorized to receive it.

General Rule: If payment is made to a person other than those

enumerated, it is NOT valid.

Exceptions:

1. Payment made to ta 3rd person, provided that it has redounded to the

benefit of the creditor.

2. Payment made to the possessor of the credit, provided that it was

made in good faith.

Obligation to Deliver a Generic Thing

If the quality and circumstances have not been stated, the creditor
cannot demand a thing of superior quality; neither can the debtor deliver a
thing of inferior quality.

Rules in Monetary Obligations:

1. Payment in Cash – must be made in the currency stipulated; if not

possible, then in the legal tender in the Philippines

2. Payment in Check or Other Negotiable Instrument – not considered

payment; not considered legal tender and may be refused by the
creditor. It shall only produce the effect of payment:
 a. When it has been cashed; or
b. When it has been impaired through the fault of the creditor

Legal Tender

- Such currency which may be used for the payment of all debts,
whether private or public

- Legal tender of the Philippines would be all notes and coins issued
by the Central Bank.

- Section 52, R.A. 7653

1. 25c and above, legal tender up to P50

2. 10c and below, legal tender up to P20

Legal Forms of Payment

1. Application of payment
2. Dation in Payment
3. Tender of payment and Consignation

Application of Payment

- 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 same creditor.

Requisites:

1. One debtor and one creditor

2. Two or more debts of the same kind;
3. All debts must be due; and
4. Amount paid by the debtor must not be sufficient to cover the debts.

General Rule: The right to designate the debt to which the payment shall
be applied primarily belongs to the debtor.

Exception: If the debtor does not avail of such right and he accepts from
the creditor a receipt in which the application is made.

2. Dation in Payment (Dacion En Pago)

- The property alienated by the debtor to the creditor in satisfaction

of the debt in money, as an accepted equivalent of the performance
of the obligation.

Requisites:

a. Existence of a money obligation;

b. Alienation to the creditor of a property by the debtor with the

consent of the former;
 c. Satisfaction of the money obligation of the debtor.

3. 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 their
credit.

Requisites:

a. Plurality of debts;
b. Partial or relative insolvency of the debtor; and
c. Acceptance of the cession by the creditors.

Date in Payment Payment by Cession

One Creditor Plurality of creditors
Not necessarily in a state of financial Debtor must be partially or relatively
difficulty. insolvent.
Thing delivered is considered as Universality of property of debtor is
equivalent of performance. what is ceded.
Payment extinguishes obligation to Merely releases the debtor for net
the extent of the value of the thing proceeds of things ceded or assigned
delivered as agreed upon, proved or unless there is contrary intention.
implied from the conduct of the
creditor.

4. TENDER OF PAYMENT AND CONSIGNATION

Tender of Payment – Manifestation of the debtor to the creditor of his

decision to comply immediately with his obligation.

Consignation – Deposit of the object of the obligation in a competent court

in accordance with rules prescribed by law after refusal or inability of the
creditor to accept the tender of payment.

Requisites:

a. The debt sought to be paid must be due.

b. There must be a valid and unconditional tender of payment or any

of the causes stated by law for effective consignation without
previous tender of payment exists.

c. The consignation of the thing due must first be announced to the

persons interested in the fulfillment of the obligation.

d. Consignation shall be made by depositing the things due at the

disposal of judicial authority.
 e. The consignation having been made, the interested parties shall
also be notified thereof.

General Rule: It shall produce effects payment only if there is valid tender
of payment.

Exceptions:

1. Creditor is absent or unknown or does not appear at the place of

payment.

2. Creditor is incapacitated to receive payment at the time it is due;

3. When 2 or more persons claim the right to collect;

4. When the title to the obligation has been lost;

5. When without just cause he refuses to give a receipt;

LOSS OF THE THING DUE WITHOUT THE FAULT OF THE DEBTOR

In DETERMINATE Obligation TO GIVE:

General Rule: Extinguishes obligation.

Exceptions:

1. By law, or stipulation in the contract obligor is liable even for fortuitous

event.

2. Nature of the obligation requires the assumption of risk.

3. Due partly to the fault of the creditor.

4. Occurs after the debtor incurred delay.

5. Promise by debtor to deliver the same thing to two or more persons

who do not have the same interests.

6. Debt of a certain and determinate thing proceeds from a criminal

offense.

7. When the obligation is generic.

In GENERIC Obligations TO GIVE

General Rule: Obligation is not extinguished; the genus of the thing never
perishes (genus nunquam perit).

Exception: In case of a generic obligation whose object is particular class or

group with specific or determinate qualities (limited generic obligation).
In Obligation TO DO: Obligation is extinguish when prestation becomes
legally or physically impossible.

REMISSION OR CONDONATION

- An act of pure liberality by virtue of which the obligee, without

receiving any price or equivalent, renounces the enforcement of the
obligation, as result of which it is extinguished in its entirety or in
that part or aspect of the same to which the remission refers.

Essential Characteristics of Remission

1. Gratuitous in character.
2. Must be an act of pure liberality.
3. Creditor should not have received any price or equivalent from the
debtor as a result of his act in removing the enforcement of obligation.

Kinds of Remission

1. As to Form

Express – made in acceptance with formalities prescribed by law of

donations.

Implied – not made in acceptance with formalities of donations but

deducible from the acts of oblige/creditor.

2. As to Extent

Total – when the entire obligation is extinguished.

Partial – refers only to principal or accessory obligation.

3. As to Constitution

Inter Vivos – constituted by agreement between obligor and obligee

which partakes the nature of donation inter vivos.

Mortis Causa – constituted by last will and testament which partakes

the nature of donation mortis causa.

Necessity of Acceptance by Debtor

- For a valid donation there must be acceptance by the debtor/done

because in reality it is by nature a donation.

Applicable by Rules on Donations

- Governs the forms of donation if remission is express, those

governing the extent or amount of donation; and those governing
the revocation of donation.
CONFUSION OR MERGER OF RIGHTS

- Merger of the characters of the creditor and the debtor in one

person by virtue of which the obligation is extinguished.

Requisites:

1. Characters of creditors and debtors must be in the same person.

2. Takes place in the person of either the principal creditor of the

principal debtor.

3. Complete and definite.

Kinds of Confusion or Merger of Rights

1. As to cause or constitution:

Inter Vivos – constituted by agreement of the parties.

Mortis Causa – by succession.

2. As to extent or effect:

Total – if it results in the extinguishment of the entire obligation.

Partial - only a part is extinguished.

COMPENSATION

- Extinguishment in the concurrent amount of the obligation of those

persons who are reciprocally debtors and creditors of each other.

Requisites:

1. Two parties, who in their right, are principal creditors and principal
debtors of each other
2. Both debts must:

a. Consist in money or of the same kind and quality.

b. Due, liquidated and demandable.

3. No retention or controversy commenced by 3 rd persons over either of

the debts and communicated in due time to the debtor.

4. Not prohibited by law.

Compensation Payment
Takes place ipso jure Takes effect by act of the parties.
Capacity to give and acquire not Capacity to give and acquire is
essential. essential.
 As a rule, partial. As a rule, couple and indivisible.

Compensation Confusion
There must be two persons who, There is only one person in whom
in their own right, are creditors is merged the qualities of creditor
and debtors with each other. and debtor.
Must be at least two. There is only one.

Kinds of Compensation

A. As to cause:

1. Legal – take effect by operation of law from the moment all

requisites are present.

2. Voluntary – parties who are mutually creditors and debtors agreed

to compensate their respective obligation, even though requisites
are not present.

3. Judicial – takes effect by judicial decree.

B. As to effect:

1. Total – debts are equal in amount.

2. Partial – not equal in amount.

Right of Guarantor to Set Up Compensation

- Exception to the rule that principal debtor can only set up

compensation with the creditor for what the latter owes.

- The guarantor, in case the payment of the debt was demanded

from him, may set up creditors owe him, but also for what such
creditor owes the principal debtor.

- Basis: Bond of the guarantor cannot be resorted to as long as the

debtor can pay although it may be in the abbreviated form of
compensation and also on the fact that if the principal obligation is
extinguished, the accessory obligation of the guarantor is also
extinguished since it is subordinated thereto.

Judicial Compensation

- In reality, what is set up with the other party is a counterclaim.

- A counterclaim must be pleaded to be effectual; whereas

compensation takes place by mere operation of law.
 Hence, counter claim defined by Rules of Court is not the legal
compensation contemplated by the Code.

- Reason: The very nature of counter claim can have no effect

unless it is pleaded.

Rules in Case of Rescissible or Voidable Debts

- The above rule us an exception to the general rule of demandability

in order that compensation shall take place.

- Justified by the fact that rescissible or voidable obligations are

considered demandable while the vices with which they are tainted
are not yet judicially declared.

- Consequently, if the action for rescission or annulment is not

exercised, or is renounced, or if the debts are ratified the obligation
or obligations are susceptible of compensation.

Effect of Assignment of Rights (Art. 1285)

It is a firmly settled doctrine that the rights of an assignee are not any
greater than the rights of the assignor, since the assignee is merely
substituted in the place of the assignor and that the assignee acquires his
rights subject to the equities – i.e., the defenses – which the debtor could
have set up against the original assignor before notice of the assignment
was given to the debtor. (Sesbreno vs CA and Delta Motors Corp. and
Pilipinas Bank, GR 89252, May 24, 1993 [222 SCRA 466]).

Effect of Assignment of Credit to Third Person

- If the assignment of credit to a third person is made after

compensation took place. It shall have no effect since the
compensation has already been perfected.

- If the assignment is made before the compensation took place,

this would depend:

a. If the assignment was made with consent of the debtor, he is

estopped unless he reserves his right and gave notice to the
assignee;

b. If the assignment was made with knowledge but without the

consent of the debtor, the compensation may be set up as to
debts maturing prior to the assignment;

c. If the assignment was without knowledge, the compensation

may be set-up on all debts prior to his knowledge.

Compensation with Knowledge but Without Consent of Debtor

1. If notification preceded the assignment, the effects of the assignment

are produced from the time it is made and not from the time the
 notification is given. Consequently, debtor can set up the defense of
compensation of debt contracted prior to the assignment.

2. If made simultaneously, debtor can set up a defense of compensation.

3. If notification is made after the assignment has already made, it is

evident that the assignment must have been effected without the
knowledge and consent of the debtor in which case the provision of
Article 1285 is applicable.

Debts Not Susceptible of Compensation

1. Arising from contract of deposit;

2. Arising from contracts of commodatum;

3. Claims for support due by gratuitous title;

4. Obligations arising from criminal acts;

5. Certain obligations in favor of government.

Effects of Compensation

- Extinguishes the obligation/debt to the extent that the amount of

one is covered by the amount of the other.

o If compensation is total because both debts are equal,

obligation totally extinguished, since the amount of one is
entirely covered by the other.

o However, if partial, because the amounts are different, the

extinguishment would be total with respect to one and partial
with respect to the other.

NOVATION

Substitution or change in the obligation by another resulting in the

extinguishment or modification, either by:
a. Changing the object or principal condition (objective).

b. Substituting another in place of the debtor (passive subjective).

c. By subrogating another person in the rights of the creditors (active

subjective).

Requisites of Novation

1. Previous valid obligation;

2. Agreement of the parties to the new obligation;

3. Extinguishment of the old obligation; and

 4. Validity of the new obligation.

Extinctive Novation Modificatory Novation

The old obligation is terminated by Old obligation subsists to the extent
the creation of a new obligation that it remains compatible with the
takes the place of the former. amendatory agreement.
Results either by changing the object The unmodified potion of the
or principal conditions (objective or obligation remains effective. In case
real), or by substituting the person of doubt on whether the novation is
of the debtor or subrogating a third extinctive or modificatory, it is
person in the rights of the creditor presumed that it is only
(subjective or personal). modificatory.

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.

Kinds

1. As To Essence:

a. Objective or Real – refers to change either in the cause, object or

principal condition of the obligation.

b. Subjective or Personal – refers to the substitution of the person

of the debtor or to the subrogation of a third person in the rights of
the creditor.

2. As To Form and Constitution:

a. Express – Declared in unequivocal terms that the old is

extinguished by a new one and is incompatible with each other
at every point.

b. Tacit/Implied – When the old obligation and the new one are
incompatible with each other at every point.

3. As To Extent of Effect:

a. Total – There is absolute extinguishment.

b. Partial – Merely a modification.

Forms of Extinguishment
 a. Express Novation – Takes effect only when the intention to effect a
novation clearly results from the terms and agreement or is shown by
full discharge of the original debtor.

b. Implied Novation – There are no express declarations that the old

obligation is extinguished by the new one. However, the old and the
new obligations are incompatible on every material point such that
they cannot co-exist.

In Case of Obligation with a Term or Period

- Distinction must be made by the effect of any subsequent change of

the or period.

- Changes that breed incompatibility must be essential in nature and

not merely accidental.

- Incompatibility must take place in any essential element, otherwise

a change would only be modificatory.

Novation by Substitution of Debtor:

- Consist in the substitution of a new debtor in the place of the

original debtor.

- It must be effected with the consent of the creditor at the instance

of either the new debtor or the old creditor.

Two Forms of Substitution of Debtors

Expromission
Effect with the consent of
- -
the creditor at the instance
of the new debtor even
without the consent or even
against the will of the old
debtor.
Subrogation
Delegacion
Effected with the consent of
the creditor at the instance
of the old debtor with the
circumstance of the new
debtor.

It is the transfer of all the rights of the creditor to a third person, who
substitutes him in all rights. It may be legal or conventional. Legal
subrogation is that which takes place without agreement but by operation of
law because of certain acts. Conventional subrogation is that which takes
place by agreement of parties.

Conventional Subrogation Assignment of Credit or Rights

Extinguishes the original obligation The transfer of the credit or right
and creates new one. does not extinguish or modify the
 obligation. The transferee becomes
the new creditor for the same
obligation.
The consent of the debtor is The consent of the debtor is not
necessary. (1) necessary. Notification is enough for
the validity of the assignment. (Art.
1626).
Effectivity begins from the moment Effectivity begins from the
of subrogation. notification of the debtor.

General Rule: Subrogation cannot be presumed.

Exceptions:

1. Creditor pays another creditor who is preferred, without debtor’s

knowledge;

2. A third person not interested in the obligation pays with the express or
tacit approval of the debtor; or

3. Even without debtor’s knowledge, a person interested in the fulfillment

of the obligation pays without prejudice to the effects of confusion as
to the latter’s share.

Conventional Subrogation Assignment of Credit of Rights

The defect in the old obligation may The defect in the credit or rights is
be cured such that the new not cured by its mere assignment to
obligation becomes valid. a third person.
Debtor cannot set up a defense The debtor can still set up a defense
against the new creditor which he (available against the old creditor)
could have awaited himself of against the new creditor.
against the old creditor.
This is governed by Articles 1300- This is governed by Articles 1624-
1304. 1627.

Necessity of Creditor’s Consent:

- Whether substitution is through Expromission or delegacion, the

consent of the creditor must always be secured.

Payment by 3rd Person Change of Debtor

1. Debtor is not necessarily 1. One debtor is released.
 released from debt.
2. Can be done without consent 2. Needs consent of creditor –
of creditor. express or implied
3. There is only one obligation. 3. Two obligations: One is
extinguishment and new one
is created
4. Third person has no obligation 4. New debtor is obliged to pay.
to pay if insolvent.

Effect upon Accessory Obligation

General Rule: It is a necessary consequence of the principle that an

accessory obligation is dependent upon the principal obligation to which it is
subordinated. (Art. 1296)

Exception: When stipulation refers to a third person, which is demanded

separately from the principal obligation, although subordinated to the latter.

Two Forms of Subrogating a Third Person in the Rights of the

Creditor

1. Conventional Subrogation – takes place upon agreement of the

original creditor, and the third person subrogating the original creditor.

2. Legal Subrogation – takes place by operation of law.

Effect of Total Subrogation: Accessory obligations are not extinguished

because in such obligation the person subrogated also acquires all the rights
which the original creditor had.

Effects of Total Subrogation: Both rights shall co-exist.

II. CONTRACTS

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.
13050)

A. ELEMENTS OF CONTRACTS

Essential Elements – those without which there can be no contract:

a. Consent
b. Object
c. Consideration

Note: In real contracts, DELIVERY is also an essential element.

CONSENT
 - Manifested by the meeting of the offer and acceptance upon the
thing and the cause which are to constitute the contract.

Requisites:

1. Plurality of subjects;
2. Legal capacity of the contracting parties;
3. Freewill;
4. Express manifestation of the will; and
5. Conformity of the internal will and its manifestation.
Manifestation of Consent – Consent is manifested by the concurrences of
the offer and acceptance with respect to the object and cause of the
contract.

Offer – a proposal made by one contracting party to another to enter into a

contract. Offer must be definite.

Acceptance – manifestation by the offeree of his assent to the terms of the

offer. Acceptance must be absolute: otherwise it is counter-offer.

Cognition Theory

- Contract is perfected from the moment the acceptance comes to

the knowledge of the offeror.

VICES OF CONSENT

1. Mistake - it should refer to the substance of the thing which is the

object of the contract or to the conditions which principally moved the
parties to enter into the contract.

General Rule: Mistake should be a Mistake of Fact and not Mistake of

Law.

Exception: Mistake of Law under Art. 1334.

Requisites of Mistake of Law:

a. Mistake must be with respect to the legal effect of an agreement.

b. Mistake must be mutual.
c. The real purpose of the parties must have been frustrated.
2. 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 his spouse, descendants, or ascendants, to
give his consent.

3. Violence – when in order to wrest consent, serious or irresistible force

is employed.

4. Undue Influence – when a person takes improper advantage of his

power over the will of another depriving the latter of a reasonable
freedom of choice.
 5. Fraud – when, through insidious words or machinations of one of the
contracting parties, the other is induced to enter into a contract which
without them, he would not have agreed to.

SIMULATION OF CONTRACTS

1. Absolute – no real transaction is intended.

Effect: Simulated contract is inexistent.

2. Relative – the real contract is void but the hidden contract is valid if it
is lawful and has the necessary requisites.
Effect: as to third person with notice:
The apparent contract is valid on the principle of estoppel.

OBJECT

- The subject matter of the obligation arising from the contract.

Requisites:

1. The object must be within the commerce of man.

2. The object should be real or possible.

3. The object should be licit (not contrary to law, morals, good customs,
public order and public policy).

4. The object should be determinable.

Things which cannot be the Object of Contract

1. Things which are outside the commerce of men.

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.

6. Objects which are not possible of determination as to their kind.

CAUSE
- It is the immediate direct or most proximate reason which explains
and justifies the creation of an obligation through the will of the
contracting parties.

Requisites:

1. The cause should be in existence at the time of the celebration of the

contract.
 2. The cause should be licit or lawful.

3. The cause should be true.

Effects of Absence. Falsity, Illegality, or Inadequacy of Cause:

1. Absence of cause – there is no perfected contract; thus, it produces

no effect whatsoever. (Art. 135, NCC)

2. Falsity of cause – the contract is void. (Art. 1353, NCC)

3. Illegality of cause – the contract is void. (Art. 1352, NCC)

4. Inadequacy of cause – it shall not invalidate a contract, unless there

has been fraud, mistake or undue influence. (Art. 1355, NCC)

Different Kinds of Cause

1. In onerous contracts – the prestation or promise of a thing or

service by the other.

2. In remuneratory contracts – the service of benefit remunerated.

3. In gratuitous contracts – pure beneficiary or liberality of the

benefactor.

4. In accessory contracts – the cause if the accessory contract is

identical with that of the principal contract.

B. CHARACTERISTICS OF CONTRACTS

1. Autonomy – The parties are free to stipulate anything deem

convenient provided that they are not contrary to law morals, good
customs, public order and public policy, (Art. 1306, NCC)

2. Mutuality – The contract must bind both parties, its validity or

compliance must not be left to the will of one of them (Art. 1308, NCC)

3. Obligatoriness –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 consequences which,
according to their nature may be in keeping with good faith, usage and
law. (Art. 1315, NCC)

4. Relativity – Contracts take effect only between parties, their assigns

and heirs. (Art. 1311, NCC)

RELATIVITY OF CONTRACTS

General Rule: A contract is valid only between parties, assigns and heirs.
(Art. 1311, NCC)

Exception: Stipulation Pour Autrui – stipulation in favor of a third party.

 Requisites:

a. Stipulation must be in part, not the whole contract itself.

b. Contracting parties must have clearly and deliberately conferred a

favor upon a third person.

c. Third person must have communicated his acceptance.

d. Neither of the parties bears the legal representation of the third

person.

Test of Beneficial Stipulation – the fairest test to determine

whether the interest of a 3rd 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 their contract. Determine whether the
contracting parties desired to tender him such an interest (Uy Tam vs.
Leonard, 30 Phil. 471, 1915)

C. FORMS OF CONTRACTS

General Rule: Contract should be obligatory, in whatever form they may

have been entered into, provided all the essential requisites for their validity
are present.
Exceptions:

1. When the law requires that a contract be in some form in order that it
may be valid.

2. When the law requires that a contract be in some form in order that it
may be enforceable.

3. For convenience of the parties or to bind third persons.

Contracts Where Form is Required for VALIDITY:

1. Donation of MOVABLE property, the value of which exceeds

P5,000.00. Donation and acceptance must be in writing. (Art. 748)

2. Donation of IMMOVABLE property. Donation an acceptance must

be contained in a public instrument. (Art. 749)

3. Sale of land through an Agent. The authority must be in writing;

otherwise; otherwise the sale is void. (Art. 1874)

4. Partnerships where IMMOVABLE property or real rights are

contributed to the common fund. The contract must appear in
public instrument and there must be inventory of the immovable
property or real rights signed by the partners, and attached to the
public instrument. (Art. 1771l Art. 1773, NCC)

- The contracting parties may compel each other to observe the form
required by law once the contract is valid and enforceable. (Art.
1357)
 - The required formality of contracts under Article 1358 is merely for
convenience of the parties and to ensure the efficacy of the
contract, and does not affect its validity and enforceability between
them.

D. REFORMATION OF INSTRUMENTS

Reformation is that remedy in equity by means of which the

instruments is amended to conform to the real intention of the parties.

Requisites:

1. Meeting of the minds to the contract.

2. True intention is not expressed in the instrument by reason of mistake,

accident, relative simulation, fraud, or inequitable conduct.

3. Clear and convincing proof of mistake, accident, relative simulation,

fraud, or inequitable conduct.

Instances when there can be no Reformation:

1. Simple unconditional donations inter vivos;

2. Wills;

3. When the agreement is void;

4. When one of the contracting parties has brought an action to enforce

the instrument.

E. DEFECTIVE CONTRACTS

RESCISSIBLE CONTRACTS

A rescissible contract is one which is valid because it contains all of the

essential requisites prescribed by law, but which is defective because of
injury or damage to either of the contracting parties or to third persons, as a
consequence of which it may be rescinded by means of proper action for
rescission.

Rescission – remedy granted by law to the contracting parties and

even to third persons, to secure the reparation of damages caused to them
by a contract, even if the same should be valid, by means of restoration of
things to their condition prior to the celebration of the contract.

Requisites of Rescissible Contracts:

1. No other means to obtain reparation for the damages suffered by

party asking for rescission;

2. Person demanding rescission must be able to return whatever he may

be obliged to restore if rescission is granted;
 3. Object of the contract must have passes legally to the possession of a
third person acting in good faith;

4. Action must be brought within the prescriptive period of four years.

- It is the legal possibility of bringing the action, which determine the

starting point for the computation of the four year prescriptive
period as provided by the law. (Kha Hong Cheng vs. CA GR
144169, March 28, 2001, 355 SCRA 701)

Kinds of Rescissible Contracts

1. Those entered into by guardians where the ward suffers lesion of more
than ¼ of the value of the things which are objects thereof;

2. Those agreed upon in representation of absentees, if the latter suffer

lesion by more than ¼ of the value of the things which are subject
thereof;

3. Those undertaken in fraud of creditors when the latter cannot in any

manner claim what are due them;

4. Those which refer to things under litigation if they have been entered
into by the defendant without the knowledge and approval of the
litigants and the court;

5. All other contracts especially declared by law to be subject to

rescission; and

6. Payments made in a state of insolvency on account of obligations not

yet enforceable.

Rescission in Article 1191 Rescission Proper in Article 1381

1. It is a principal action 1. It is a subsidiary remedy.
retaliatory in character.
2. The only ground is non- 2. There are 5 grounds to
performance of one’s rescind. Non-performance by
obligation/s or what is the other party is not
incumbent upon him. important.
3. It applies only to reciprocal 3. It applies to both unilateral
obligation. reciprocal obligations.
4. Only a party may demand 4. Even a 3rd person who is
fulfillment or seek the prejudiced by the contract
rescission of the contract. may demand the rescission of
the contract.
5. Court may fix a period or grant 5. Court cannot grant extension
extension of time for the of time fulfillment of the
fulfillment of the obligation. obligation.
6. Its purpose us to cancel the 6. Its purpose is to seek
 contract. reparation for the damage or
injury caused, thus allowing
partial rescission of the
contract.

Under Article 1191 of the Civil Code, the right to resolve reciprocal
obligations is deemed implied in case one of the obligors shall fail to
comply with what is incumbent upon him but right must be invoked
judicially, the same article also provides, “The court shall decree the
resolution demanded, unless there should be ground which justify the
allowance of a terms for the performance of the obligation. (Escueta
vs. Pando, 76 Phil 256 [1946])

Consequently, even if the right to rescind is made available to the

injured party the obligation is not to comply with what is incumbent
upon him, the party entitled to rescind should apply to the court for a
decree of rescission. The right cannot be exercised solely on a party’s
own judgment that the other committed a breach of the obligation.
The operative act which produces the resolution of the contract is the
decree of the court and not the mere act of a vendor. Since a judicial
or notarial act is required by law for a valid rescission to take place,
the letter written by respondent declaring his intention to rescind did
not operate to validly rescind the contract. (Iringan vs. CA, et. al.,
GR 129107, September 26, 2001 [366 SCRA 41])

Badges of Fraud

1. Consideration of the conveyance is inadequate or fictitious;

2. Transfer was made by a debtor after a suit has been begun and while
it is a pending against him;

3. Sale upon credit by an insolvent debtor;

4. Evidence of indebtedness or complete insolvency;

5. Transfer of all his property by a debtor when he is financially

embarrassed or insolvent;

6. Transfer made between father and son where there is present any of
the above circumstances;

7. Failure of the vendee to take exclusive possession of all the property.

VOIDABLE CONTRACTS

Kinds of Voidable Contracts:

1. Those where one of the parties is incapable of giving consent to a

contract; and
 2. Those where the consent is vitiated by mistake, violence, intimidation,
undue influence or fraud.

Remedy: Annulment of contract, which must be commenced 4 years from:

1. The time the capacity ceases;

2. The time the violence, intimidation or undue influence ends;

3. The time the mistake or fraud or discovered.

Discovery of fraud must be reckoned to have taken place from the

time the document was registered in the office of the register of
deeds. Registration constitutes constructive notice to the whole world.
(Cerantes vs CA, 76 SCRA 514 [1946])

Ratification of Voidable Contracts:

Requisites

1. There must be knowledge of the reason which renders the contract

voidable;

2. Such reason must have ceased; and

3. The injured party must have executed an act which expressly or

impliedly conveys an intention to waive his right.

How a Voidable Contract may be Convalidated:

1. Prescription of the action for annulment;

2. Ratification or confirmation; and

3. Loss of the thing which is the object of the contract through the fraud
or fault of the person who is entitled to institute the action for
annulment of the contract.

UNENFORCEABLE CONTRACTS

Those which cannot be enforced by proper action in court unless they

are ratified.

What are Contracts are Unenforceable:

1. Entered into in the name of another person by one who has been given
no authority or legal representation, or has acted beyond his power;

2. Both parties are incapable of giving consent; and

3. Do not comply with the Statute of Frauds.

Statute of Frauds:
 - Statute of Frauds requires certain classes of contracts to be in
writing to be enforceable. The statute does not deprive the parties
of the right to contract with respect to the matters involved; it
merely regulates the formalities of the contract to render it
enforceable. The purpose is to prevent fraud and perjury in the
enforcement of the memorandum satisfies the statute. The
application of such statute presupposes the existence of a perfected
contract. The note or memorandum to satisfy the statute must be
complete in itself and cannot rest partly in writing and partly oral.
Note or memorandum must contain the essential elements of a
contract, Furthermore, the binding note or memorandum must be
signed. (Litonjua, et. al. vs. Fernandez, et. al., GR 148116, April
14, 2004 [427 SCRA 478])

- The contracts/agreements under the Statute of Frauds require that

the same be evidenced by some note, memorandum or
writing, subscribed by the party charged or by his agent,
otherwise, the said contracts shall be unenforceable.

- The statute of frauds applies only to executor contracts, nor

those that are partially or completely fulfilled.

Agreements within the Statute of Frauds:

(Exclusive Enumeration)

1. Agreements not to be performed within one year from the making

thereof;

2. Special promise to answer for the debt, default or miscarriage of

another;
(Note: The promise referred to here is a collateral promise; and
NOT the original promise of the debtor to his own creditor)

3. Agreement in consideration of marriage other than a mutual promise

to marry;

4. Agreement for the sale of goods, etc. at a price not less than
P5,000.00;

5. Contracts of lease for a period longer than one year;

6. Agreements for the sale of real property or interest therein; and

7. Representation as to the credit of a third person.

VOID OR INEXISTENT CONTRACTS

VOID CONTRACTS

Those where all of the requisites of a contract are present but the cause,
object or purpose is contrary to law, morals, good, customs, public order or
public policy, or contract itself is prohibited or declared void by law.

Kinds of Void Contracts:

 1. Those whose cause, object or purpose is contrary to law, morals
good customs, public order of public policy;

2. Those whose object is outside the commerce of men;

3. Those which contemplate an impossible service;

4. Those where the intention of the parties relative to the principal

object of the contract cannot be ascertained; and

5. Those expressly prohibited or declared by law.

INEXISTENT CONTRACTS

Those where one or some or all of the requisites essential for the validity of
a contract are absolutely lacking.

Kinds of Inexistent Contracts:

1. Those which are absolutely simulated or fictitious; and

2. Those whose cause or object did not exist at the time of the
transaction.

Principle of IN PARI DELICTO:

General Rule: When the defect of a void contract consists in the illegality of
the cause or object of the contract and both of the parties are at fault on in
pari delicto, the law refuses them every remedy and leaves them where they
are.

Exceptions:
1. Payment of usurious interest.

2. Payment of money or delivery of property for an illegal purpose, where

the party who paid or delivered repudiates the contract before the
purpose has been accomplished, or before any damage has been
caused to a 3rd person.

3. Payment of money or delivery of property made by an incapacitated

person.

4. Agreement or contract which is not illegal per se and the prohibition is

designed for the perfection of the plaintiff.

5. Payment of any amount in excess of the maximum price of any article

or commodity fixed by law or regulation by competent authority.

6. Contract whereby a laborer undertakes to work longer than the

maximum number of hours fixed by law.

7. Contract whereby a laborer accepts a wage lower than the minimum

wage fixed by law.
 8. One who lost in gambling because of fraudulent schemes practiced on
him is allowed to recover his losses (Art. 315, 3 (b) RPC) even if
gambling is a prohibited one.

- The principle of in pari delicto is applicable only to void contracts

and NOT as to inexistent contracts.

Rules when only One of the Parties is at Fault

Fault:
1. Executory Contracts – neither of the contracting parties can demand
for the fulfillment of any obligation from the contract nor may be
compelled to comply with such obligation.

2. Executed Contracts:

a. Guilty Party is barred from recovering what he has given to the

other party and is barred from recovering what he has given to the
other party by reason of the contract.

b. Innocent party may demand for the return of what he has given.

Comparative Table on Void, Voidable, Rescissible and Unenforceable

Contracts

VOID VOIDABLE RESCISSIBLE UNENFORCEABLE

Cause Defect is Defect is Defect is caused Defect is caused
caused by lack caused by vice by by lack of form,
of essential of consent. injury/damage authority, or
elements or either to one of capacity of both
illegality the parties of to parties not cured
rd
a 3 person. by prescription.
Effect Do not, as a Valid and Valid and Cannot be
general rule, enforceable enforceable enforced by a
produce any until they are until they are proper action in
legal effect. annulled by a rescinded by a court.
competent competent
court. court.
Susceptibility Action for the Action for Action for Corresponding
to Prescription declaration or annulment or rescission may action for
nullity or defense of prescribe. recovery, if there
inexistence or annulability was total or partial
defense of may prescribe. performance of the
nullity or unenforceable
inexistence contract under No.
does not 1 or 3 of Article
prescribe. 1403 may
 prescribe.
Not cured by Cured by Cured by Not cured by
prescription. prescription. prescription. prescription.
Ratification Cannot be Can be ratified. Need to be Can be ratified.
ratified. ratified.
Who may avail Assailed not Assailed only Assailed not Assailed only by a
only by a by a only by a contracting party.
contracting contracting contracting
party but even party. party but even
by a third by a third
person whose person who is
interest is prejudiced or
directly damaged by the
affected. contract.
How assailed Assailed Assailed Assailed directly Assailed directly or
directly or directly or only. collaterally.
collaterally. collaterally.

III. SPECIAL CONTRACTS

SALES

A nominate whereby one of the contracting obligates himself to transfer the

ownership of and to deliver a determinate thing and the other to pay
therefore a price certain in money or its equivalent.

A contract of sale, which is subject to court’s approval, is a

conditional sale, and not a contract to sell. If the condition is not
satisfied the obligation to deliver remains. It is not converted to a
mere money claim. It is not even a contract to sell; the payment of
the purchase price is a positive suspensive. The vendor’s obligation
to convey the title does not become effective in case of failure to
pay.

ELEMENTS:

1. Essential Elements

Those without which there can be no valid sale:

 a. Consent or meeting of minds;

b. Determinate subject matter; and

c. Price certain in money or its equivalent.

2. Natural Elements

Inherent in the contract and which in the absence of any contract

provision, are deemed to exist in the contract:

a. Warranty against eviction; and

b. Warranty against hidden defects.

3. Accidental Elements

May be present or absent depending on the stipulation of the parties.

CHARATERISTICS

1. Principal
2. Nominate
3. Bilateral
4. Commutative; in some cases aleatory (emtio spei)
5. Onerous

CONTRACT TO SELL

A bilateral contract whereby the prospective seller, while expressly

reserving the ownership of the subject property despite delivery thereof to
the prospective buyer binds himself to sell the said property exclusively to
the prospective buyer upon fulfillment of the condition agreed upon, that is
full payment of the purchased price.

In a contract to sell real property on installments, the full payment of

the purchase price is a positive suspensive condition, the failure of
which is not considered breach, casual or serious but simply an event
that prevents the obligation of the vendor to convey title from acquiring
any obligatory force. The transfer of ownership and title would occur
after full payment of the installment price. (Leaño v. CA, G.R. No.
129018, November 18, 2001)

A deed of sale in which the stated consideration had not in fact been
paid, is null and void, and produces no effect whatsoever where the
same is without cause or consideration in that the purchase price which
appears thereon as paid ha in fact never been paid by the purchaser to
the vendor. (Yu Bun Guan V. Ong. GR No. 144735, October 18, 2001)

Contract of Sale Contract to Sell

1. Transfer of Ownership
Title passes to the buyer upon Ownership is reserved to the seller
delivery of the thing sold. and is not pass until full payment
 2. As to Perfection of Sale
Upon meeting of the minds. Upon Full payment.
3. As to Condition
Full payment is a negative Resolutory Full payment is a positive suspensive
condition. condition.
4. Effect of Non-Payment
Injured party can file action for No contract of sale perfected,
specific performance or rescission rescission is not necessary.
with damages.

OBJECT OF SALE

Requisites:

1. Things:

a. Determinate or determinable (Arts. 1458, 1460)

b. Lawful (Arts. 1347, 1409 [1,4])

c. Should not be impossible (Art. 1348)

2. Rights – must be transmissible

Exceptions:

a. Future inheritance

b. Service

Emptio Rei Speratae Emptio Spei

1. Subject Matter
Sale of a thing having a potential Sale of Hope
existence
2. Existence of Object
Sale is subject to the condition that Sale produces effect even if the thing
the thing will exist. If it does not, does not come into existence.
there is no contract.
3. Uncertainty
The uncertainty is with regard to the The uncertainty is with regard to the
quantity and quality of the thing. existence of the thing.
4. Object of the Sale
Object is a future thing. Object is a present thing, which is
the hope of expectancy.

SALE DISTINGUISHED FROM OTHER CONTRACTS

 Sale Dation in Payment
No pre-existing credit. Pre-existing credit.
Obligations area created. Obligations are extinguished.
Consideration on the part of the Consideration of the debtor is the
seller is the price; on the part of the extinguishment of the debt; it is the
buyer, the consideration is the acquisition of the object offered in
acquisition of the object. lieu of the original credit.
Greater freedom in determining the Less freedom in determining the
price. price.
Buyer still has to pay the price. The payment is received by the
debtor before the contract is
perfected.

Sale Agency To Sell

Buyer receives the goods as owner. Agent receives the goods as goods of
the principal who retains his
ownership over them.
Buyer pays the price. Agent delivers the price which in turn
he acquired from his buyer.
Buyer, as a general rule, cannot Agent can return the goods in case
return the object sold. he is unable to sell the same as a
third person.
Seller warrants the thing sold. Agent makes no warranty for which
he assumes personal liability as long
as he acts within his authority and in
the name of the seller.
Buyer can deal with the thing sold as Agent, in dealing with the thing
he pleases being the owner. received must act and is bound
according to the instructions of the
principal.

Sale Contract for Piece of Work

The thing transferred is one which The thing transferred is one not in
would have been the subject of sale existence and which never would
to some other person, even if the have existed but for the order of the
demand purchase had not been party desiring to acquire it.
given.
The primary objective of the contract The services dominate the contract
is a sale of the manufactured item; it even though there is a sale of goods
is a sale of goods even though the involved.
item is manufactured by labor
furnished by the seller and upon
previous order to the customer.
Within the statute of Frauds. Not within the statute of Frauds.

BARTER – One of the parties binds himself to give one thing in

consideration of the other’s promise to give another thing.

- The only difference between a contract of sale and barter is in the

element which is present in sale but not in barter, namely; price
certain in money or its equivalent.

PRICE – The sum stipulated as the equivalent of the thing sold and also
every incident taken into consideration for the fixing of the price, put to the
debit of the vendee and agreed to by him.

Requisites:

1. Certainty;

2. Real, not fictitious; and

3. In some cases, must not be grossly inferior to the value of the thing
sold.

Effect of Gross Inadequacy of Price

1. Voluntary Sales

General Rule: mere inadequacy of the price does not effect the
validity of the sale.

Exceptions:

a. Low price indicates vice of consent, sale may be annulled;

b. Price is so low as to be “shocking to conscience” sale may be set
aside.

2. Involuntary Sales

General Rule: mere inadequacy of the price is not a sufficient ground

for the cancellation of the sale.

Except, when the price is so low as to be shocking to the moral

conscience, sale will be set aside.

PERFECTION OF SALE

General Rule: it is perfected at the moment there is meeting of the minds

upon a determinate thing (object), and a certain price (consideration), even
if neither is delivered.

- Sale is consensual contract; hence delivery and payment are NOT

essential for its perfection.
Exception: when the sale is subject to a suspensive condition by virtue of
law or stipulation.

EFFECT OF PROMISE treated under Art. 1479 Civil Code

1. Accepted unilateral promise to sell or buy

a. Only one makes the promise, this promise is accepted by the other.

b. Does not bind the promissor even if accepted and may be

withdrawn anytime.

Pending notice of its withdrawal, the accepted promise partakes the

nature of an offer to sell which if accepted, Results in a perfected
contract of sale. (Sanchez v. Rigos, 45 SCRA 368 [1972])

- If the promise is supported by a consideration distinct and separate

from the price (option money), its acceptance will give rise to a
perfected contract.

2. Bilateral promise to buy and sell

- One party accepts the other’s promise to buy and the latter, the
former’s promise to sell a determinate thing for a price certain.

- Reciprocally demandable.
POLICITATION – Unaccepted unilateral promise to buy and sell. Even if
accepted by the other party, it does not bind the promissor and may be
withdrawn anytime before knowledge of acceptance of offer.

OPTION CONTRACT – A contract granting a person the privilege to buy a

certain object at anytime within the agreed period at a fixed price.

RIGHT OF FIRST REFUSAL – A right of first refusal is not among those

listed as enforceable under the statute of frauds. At best, it is a contractual
grant, not of the real property involved, but of the right of first refusal over
the property sought to be sold.

- It is thus evident that the statute of frauds does not contemplate

cases involving a right of refusal. As such, a right of first refusal
need not be written to be enforceable and may be proven by oral
evidence. (Rosencor Dev’t. Corporation v. Inquing, GR No. 140479,
March 8, 2001).

- Such contract of sale is not voidable but rescissible. Under Art.

1380 to 1381 (3) of the Civil Code, a contract otherwise valid may
nonetheless be subsequently rescinded by reason of injury to their
persons, like creditors. The status of creditors could be validly
accorded parties for they had substantial interests that were
prejudiced by the sale of the subject property to another without
recognizing their right of first priority under the Contract of Lease.
(Guzman Bocaling and Co. Inc. v. Bonnavie, 206 SCRA 668 [1992])
 - It is true that the acquisition by a third person of the property
subject of the contract is an obstacle to the action for its rescission
where it is shown that such third person is in lawful possession of
the subject of the contract and that he did not act in bad faith.
However, this rule is not applicable in cases where a party is not
considered a third party in relation to the Contract of Sale nor may
its possession of the subject property be regarded as required
lawfully in good faith. (Equatorial Realty and Dev. Inc. v. Mayfair
Theater Inc. 264 SCRA-483 [1996]).

- The rule on the right of first refusal is applicable even if it is

embodied in a mortgage contract. (Litonjua V. L&R Corp. 320 SCRA
405 [1999]).

PACTUM RESERVATI DOMINI (Contractual reservation of title) – A

stipulation stating that despite delivery, the ownership of the thing shall
remain with the seller until the buyer has fully paid the price.
ASSIGNMENT OF CREDIT - A contract by virtue of which one person
transfers to another his rights and actions against a third person in
consideration of the price certain in money or its equivalent.

EARNEST MONEY – A partial payment of the purchase and considered as

proof of the perfection of the sale.

- Sometimes called “ARRAS” is something of value to show that the

buyer was really in earnest, and given to the seller to bind the
bargain. It is considered as:

a. Part of the purchase price;

b. Proof of perfection of the contract.

- It shall be deducted from the total purchase price.

Earnest Money Option Money

Title passes to the buyer upon Ownership is reserved to the seller
delivery of the thing sold. and is not to pass until full payment.
In case of non-payment, an action In case of non-payment, there can
for specific performance or for be action for specific performance.
rescission can be filed by the injured
party.
Part of the purchase price. Money given as a distinct
consideration for an option contract.
When given, the buyer is bound to The would-be buyer is not required
pay the balance. to buy.
Given where there is already a sale. Applies to a sale not yet perfected.

B. LOSS OF THE OBJECT OF SALE

1. Before Perfection – seller bears the loss.

 2. At the time of perfection – contract is void and inexistent. Seller
bears the loss.

3. After the perfection but before delivery – buyer bears the loss as
an exception to the rule of Res Perit Domino.

4. After delivery – buyer bears the loss.

EQUITABLE MORTGAGE (Art. 1602)

Requisites

1. Price of the sale with right to repurchase is usually inadequate;

2. When the vendor remains in possession as lessee or otherwise;

3. When upon or after the expiration of the period, to repurchase another

instrument extending the period of redemption or granting a new
period is executed;

4. The purchase retains for him a part of the purchase price;

5. When the vendor binds himself to pay the taxes on the things sold;
and

6. The real intention of the parties is that the transaction shall secure the
payment of a debt or the performance and obligation.

For the presumption of an equitable mortgage to arise under Art.

1602, two (2) requisites must concur: 1. That the parties entered
into a contract denominated as a sale; and 2. That their intention
was to secure an existing debt by way of a mortgage (San Pedro v.
Lee et. al., GR No. 156522, May 28, 2004)

C. FORMALITIES OF CONTRACT OF SALE

General Rule: sale is a consensual contract and is perfected by mere

consent of the parties.

Exceptions: in order to be enforceable by action, the following must be in

writing:

1. Sale of personal property at a price not less than P500.

2. Sale of real property or an interest therein.
3. Sale of property not to be performed within a year from the date
thereof.
4. “Applicable statute” requires that the contract of sale be in a certain
form.

D. CAPACITY TO BUY OR SELL

General Rule: all persons who can bind themselves also have legal capacity
to buy and sell.
Exceptions:

1. Absolute incapacity (minors, demented persons, imbeciles, deaf and

dumb, prodigals, civil interdictees)

- Party cannot bind themselves in any case