Law 201:

OBLIGATIONS
&
CONTRACTS

Virtual Textbook
(University of Luzon, College of Accountancy)

Judge BRYAN JASPER D. SOLIS

(Lecturer)

OBLIGATIONS
Definition.

A juridical necessity to give, to do, or not to do (Article 1156). One impressed with the character
of enforceability.

Elements of an Obligation:

1. Active subject (called the obligee or creditor)—the possessor of a right; he in whose

favor the obligation is constituted.
2. Passive subject (called the obligor or debtor)—he who has the duty of giving, doing, or
not doing;
3. Object or Prestation –the subject matter of the obligation.
4. Efficient Cause (vinculum or juridical tie)—the reason why the obligation exists.

Sources of Obligation:
1. Law (Obligations ex lege)—like the duty to pay taxes or to support one’s family.
2. Contracts (Obligations ex contractu)—like the duty to repay the loan by virtue of an
agreement.
3. Quasi-Contracts (Obligations ex quasi-contractu)—like the duty to refund an over-
change of money because of the quasi-contract of solution indebiti or “undue payment.”
4. Crimes or Acts or Omissions Punished by Law (Obligations ex maleficio or ex delicto)
—like the duty to return a stolen carabao.
5. Quasi-Delicts or Torts (Obligations ex quasi-delicto or ex quasi-maleficio)—like the
duty to indemnify a person who suffered damages because your acts or negligence,
without criminal intent or pre-existing obligation.

Law as source of obligation.

1
 Obligation derived from law are not presumed. Only those expressly determined in this code or
by special laws are demandable, and shall be regulated by precepts of law which established them; and as
to what has not been foreseen, by the provisions of this book.

Contract as source of obligation.

Obligations arising from contracts have the full force of law between the contracting parties and
should be complied with in good faith.

Quasi-contract as source of obligation.

It is the is that 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

2 kinds:
1. Negotiorum Gestio (unauthorized management)

This takes place when a person voluntarily takes charge of another’s abandoned business or
property without the owner’s authority (Article 2144, Civil Code). Reimbursement must be made to
the gestor for necessary and useful expenses, as a rule.

2. Solutio Indebiti

This takes place when something is received when there is no right to demand it, and it was
unduly delivered thru mistake. The recipient has the duty to return it (Article 2154).

3. Other examples of Quasi-contracts recognized by law.

a. Article 2164. When, without the knowledge of the person obliged to give support, it is
given by a stranger, the latter shall have a right to claim the same from the former, unless
it appears that he gave it out of piety and without intention of being repaid.

b. Article 2167. When, through an accident or other cause, a person is injured or becomes
seriously ill, and he is treated while he is not in a condition to give consent to a contract,
he shall be liable to pay for the services of the physician or other person aiding him,
unless the service has been rendered out of generosity.

c. Article 2168. When, during a fire, flood, storm, or other calamity, property is saved
from destruction by another person without the knowledge of the owner, the latter is
bound to pay the former just compensation.

d. Article 2174. When, in a small community, a majority of the inhabitants of age decides
upon a measure for protection against lawlessness, fire, flood, storm, or other calamity,
anyone who objects to the plan and refuses to contribute to the expenses but is benefited
by the project as executed shall be liable to pay his share of said expenses.

Delict as a source of obligation.

Every person criminally liable for a felony is also civilly liable. (Article 100, Revised Penal
Code).

If a person therefore is guilty of the crime charged, he must not only be imprisoned but he shall
also answer for damages as civil obligation. Such civil obligation is a necessary consequence of criminal
liability, and is to be declared and enforced in the same criminal proceeding except when the injured party
reserved his right to file civil action independently from the criminal action.

Civil Liability may include any or all of the following:

2
 1. Restitution— (Article 105, Revised Penal Code) the return of the thing taken or restoration of
the thing destroyed.

2. Reparation for the damage caused—(Article 106, Revised Penal Code) The court shall
determine the amount of damage, taking into consideration the price of the thing, whenever
possible, and its special sentimental value to the injured party, and reparation shall be made
accordingly.

3. Indemnification for consequential damages—(Article 107, Revised Penal Code) It shall

include not only those caused by the injured party, but also those suffered by his family or by
a third person by reason of the crime.

Kinds of Damages:

M - MORAL damages, to compensate for the mental anguish, emotional distress, or serious
anxiety caused to the victim which could not be quantified in money.

E -EXEMPLARY damages, intended as corrective measure, or to set example to the

community that the wrongful act will be treated with severity and ought to be avoided.

N -NOMINAL damages, only awarded to vindicate or recognize a right that has been
violated, and not to indemnify a party for any loss suffered by the latter.

T -TEMPERATE damages, awarded if loss was proved but the exact amount cannot be
determined

A -ACTUAL damages, to compensate for the damages actually incurred and proved by
evidence

L -LIQUIDATED damages, pre-determined or fixed by the parties in the contract in case of

breach.

Quantum of Proof.

To prove criminal liability, what is required is proof beyond reasonable doubt. The
amount of evidence should be overwhelming to create moral certainty in an unprejudiced mind so much
so that even an ordinary person is convinced that the accused committed the crime charged.

To prove civil liability, what is required is mere preponderance of evidence, which

simply means evidence that is of greater weight or more convincing than what is offered against it.

Quasi-delict or culpa aquiliana or tort as a source of obligation.

One which causes damage to another, there being fault or negligence, but there is no pre-existing
contractual relation between the parties.

Classification of Obligations in General

A. From the view point of “sanction”

3
 1. Civil Obligation—that defined in Article 1156. The sanction is judicial process.
2. Natural Obligation—the duty not to recover what has voluntarily been paid
although payment was no longer required. The sanction is law but only because
conscience had originally motivated the payment.
3. Moral Obligation—the duty of the Catholic to hear mass on Sundays and holy
days of obligations. The sanction here is conscience or morality, or the law of the
church.

B. From the viewpoint of subject matter

1. Real Obligation—the obligation to give.
2. Personal Obligation—the obligation to do or not to do.

C. From the affirmativeness and negativeness of the obligation

1. Positive or Affirmative Obligation—the obligation to give or to do.
2. Negative Obligation—the obligation not to do.

D. From the viewpoint of persons obliged.

a. Unilateral—where only one of the parties is bound.
b. Bilateral—where both parties are bound.

The prestation in an obligation.

1. To give (real obligation)

2. To do (positive personal obligation)
3. Not to do (negative personal obligation)

Obligations of a person obliged to give something.

Referred to as real obligation (“res” or thing), if what is to be given is specific or particularly

designated from all others or the same class, it is real determinate obligation; if object is designated
merely by its class or genus, it is real generic obligation.

Determinate Generic

a. Deliver the thing which he has 1. Deliver the thing which is neither of
obligated himself to give (Art. 1165, superior nor inferior quality;
Civil Code);
2. Pay damages in case of breach of the
b. Take care of the thing with proper obligation by reason of delay, fraud,
diligence of a good father of a family negligence or contravention of the
(Art. 1163, Civil Code); tenor thereof (Art. 1170, Civil
Code);
c. Deliver all accessions and accessories
of the thing even though they may not
have been mentioned (Art. 1166,
Civil Code);

d. Pay damages in case of breach of the

obligation by reason of delay, fraud,
negligence or contravention of the
tenor thereof (Art. 1170, Civil Code);

Creditor’s right to the fruits of the thing.

4
 The creditor has a right to the fruits of the thing from the time the obligation to deliver it arises.

Before delivery of fruits After delivery of fruits

The creditor’s right is personal or jus in The creditor has now a real right over the
personam, a right which is enforceable only fruits from the time of delivery and becomes
against a definite passive subject, the debtor. enforceable against the whole world. In
short, it gives a person direct and immediate
juridical power over a thing which can be
exercised not only against a definite passive
subject but against the whole world. The
rights of ownership and possession are real
rights.

Kinds of fruits.

1. Natural fruits—spontaneous products of the soil without the intervention of human labor,
and the young and other product of animals with or without the intervention of human labor,
such as forest products.
2. Industrial fruits—products of the soil through cultivation or human labor, such as palay and
vegetables, planted by farmers.
3. Civil fruits—fruits as a result of civilization or fruits arising out of juridical relation, such as
rent of lands, apartments and buildings.

Accessions and accessories defined and exemplified.

Accessories Accessions
Those which are used for the Include everything which is produced by a
embellishment, use, or preservation of thing, incorporated or attached thereto, either
another thing of more importance. naturally or scientifically. It includes natural
accession, such as alluvion, and industrial
Example: tools and spare parts with respect accession, such as building, planting and
to a machine sowing.

Rights of the creditor in an obligation to do something.

Determinate
a. Compel specific
Performance (Art. 1165)
b. Recover damages in case of
breach of the obligation,
exclusive or in addition to
specific performance (Art.
1165)
c. Entitlement to the fruits,
interests from the time the
obligation to deliver arises.
Generic
Ask for the performance of the obligation
(Art. 1165)
Ask that the obligation be complied with at
the expense of the debtor (Art. 1165)
Recover damages in case of breach of the
obligation (Art. 1170)

Breach of obligations.

1. Voluntary—Debtor, in the performance of the obligation, is guilty of:

a. default (mora)

5
 b. fraud (dolo)

c. negligence (culpa)

d. contravention of the tenor of the obligation

Debtor is liable for damages.

2. Involuntary—Debtor is unable to comply with his obligation because of

fortuitous event. Debtor is not liable for damages.

Effects of Breach.

Positive Personal Obligation Negative Personal Obligation

The Creditor can: If the obligor does what has been
forbidden him, the creditor can:
a. Have the obligation performed
at the expense of the obligor a. Have it undone at the expense of
(Art. 1167); the obligor (Art. 1168); and

b. Ask that what has been poorly b. Ask for damages (art. 1170)
done be undone (Art. 1167);

c. Recover damages because of the

breach of the obligation (art.
1170).

Default or Delay (Mora)

Non-fulfilment of the obligation with respect to time, generally after demand to perform it has
been made.

Requisites:

1. Obligation is demandable and already liquidated;

2. The debtor delays performance;

3. The creditor requires performance judicially or extra-judicially

3 Kinds:
1. Mora Solvendi—delay of the debtor to perform his obligation. It may
be:
a. Ex re—obligation to give;

b. Ex persona—obligation is to do;

2. Mora Accipendi—delay of the creditor to accept the delivery of the

thing which is the object of the obligation

3. Compensatio Morae—delay of the parties or obligors in reciprocal

obligations.

When delay is incurred.

6
 There must be a demand (judicial or extra-judicial) before delay may be incurred.

Exceptions:

1. When stipulated by the parties.

2. By provision of law.

3. When time is of the essence of the contract.

4. Demand will be useless.

Fraud (Dolo).

Fraud or dolo consists in the conscious and intentional proposition to evade normal fulfilment of
an obligation.

2 kinds:

1. Fraud in obtaining consent (causal fraud/dolo causante)

2. Fraud in performing a contract (incidental fraud/dolo incidente)

Dolo incidente Dolo causante

a. Present during the performance of Present during the time of birth or
a pre-existing obligation. perfection of the obligation.

b. Purpose is to evade the normal Purpose is to secure the consent of the

fulfilment of the obligation. other to enter into a contract.

c. Result in the non-fulfilment or Results in the vitiation of consent.

breach of the obligation.

d. Gives rise to a right of the creditor Gives rise to a right of an innocent party
to recover damages from the to annul the contract.
debtor.

Negligence (Culpa).

Omission of that diligence which is required by the nature of the obligation and corresponds with
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

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

Kinds of Negligence:

1. Culpa Aquiliana—the wrong or negligence committed independent of contract and without

criminal intent.
2. Culpa Contractual—the wrong or negligence in the performance of the contract.
7
 3. Culpa Criminal—the wrong or negligence in the commission of the crime.

Concept of a Good Father of a Family.

That reasonable diligence which an ordinary prudent person would have done under the same
circumstances. The test of negligence can be determined by this standard: If defendant, in committing or
causing the negligent act, had used reasonable care and vigilance which a man of ordinary prudence
would have employed under the same situation, he is not guilty of negligence. Otherwise, he is guilty.

Fortuitous Event.

An event which could not be foreseen or which though foreseen was inevitable.

Requisites:

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

2. The event must be unforeseeable or unavoidable.

3. Occurrence must be such as to render it impossible for the debtor to fulfil his
obligation in a normal manner.

4. Debtor must be free from any participation in.

5. The aggravation of the injury resulting to the creditor.

General Rule: No liability in case of fortuitous events.

Exceptions:

1. When expressly declared by law [e.g. Article 552 (2), 1165 (3), 1268, 1942,
2147, 2148 and 2159 of the Civil Code]

2. When expressly declared by stipulation or contract

3. When the obligor is in default or has promised to deliver the same thing to 2
or more persons who do not have the same interest [Article 1165 (3)].

Effect of Fortuitous Event:

Determinate Obligation Generic Obligation

Obligation is extinguished Obligation is not extinguished based on
the rule that genus never perishes
(genus nunquam peruit)

Remedies of the Creditor to Protect Credit.

1. Exhaustion of debtor’s property

2. Accion subrogatoria to be subrogated to all the rights and actions of the debtor save
those which are inherent in his person.

3. Accion pauliana—impugn all the acts which the debtor may have done to defraud
them.

General rule: Rights acquired by virtue of an obligation are transmissible in character.

Exceptions:
8
 1. When they are not transmissible by their very nature, e.g. personal right;

2. When there is a stipulation of the parties that they are not transmissible.

3. Not transmissible by operation of law.

Classification of Obligations.

Primary Secondary
a. Pure and conditional a. Unilateral and bilateral
b. With a period or with a term b. Real and personal
c. Alternative and facultative c. Determinate and indeterminate
d. Joint and solidary d. Positive and negative
e. Divisible and indivisible e. Legal and conventional
f. With a penal clause f. Civil and natural

Pure Obligation.

One whose effectivity or extinguishment does not depend upon the fulfilment or non-fulfilment
of a condition or upon the expiration of a term or period and is demandable at once.

Conditional Obligation.

One whose effectivity is subordinated to the fulfilment or non-fulfilment of a future and

uncertain fact or 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. Casual—fulfillment of the condition depends upon chance and/or upon the

will of a third person.

4. Possible—condition is capable of realization according to the nature, law,

public policy and good customs.

5. Negative—condition involves the omission of an act.

6. Divisible—condition is susceptible to partial realization.

7. Indivisible—condition is not susceptible of partial realization.

8. Conjunctive—where there are several conditions, all of which must be

realized.

9. Alternative—where there are several conditions but only one must be

realized.

Rule in Potestative Conditions.

If the fulfilment of the potestative condition depends upon the sole will of the debtor, the
condition as well as the obligation itself is void. It renders the obligation illusory (applicable only to a
9
suspensive condition and to an obligation which depends for its perfection upon the fulfilment of the
potestative condition and not to pre-existing obligation).

If the fulfilment 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 obligation

2. If obligation is divisible

3. In simple or renumeratory donations

4. In testamentary disposition

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

Effects of Suspensive Condition.

1. Before fulfilment of the condition, the demandability as well as the acquisition or effectivity
of the rights arising from the obligation is suspended;
2. After the fulfilment of the condition, the obligation arises or becomes effective;
3. The effects of a conditional obligation to give, once the condition has been fulfilled, shall
retroact to the day of the constitution of the obligation;

4. When the obligation imposes reciprocal prestations 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 & interests received,
unless from the nature and circumstances it should be inferred that the intention of the
persons constituting the same was different;

6. In obligations to do or not to do, the court shall determine the retroactive effect or conditions
that have been complied with.

Effects of Resolutory Condition.

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

If condition is not fulfilled, rights are consolidated; they become absolute, the parties shall return
to each other what they received including the fruits.

Suspensive Condition Resolutory Condition

a. If fulfilled, obligation arises or becomes If fulfilled, obligation is extinguished;
effective;

b. If not fulfilled, no judicial relation is

created; If not fulfilled, judicial relation is consolidated;

c. Rights are not yet acquired, but there is Rights are already acquired, but subject to the
hope or expectancy that they will soon be threat or danger of extinction.
acquired.

10
Effects of Loss, Deterioration and Improvement in Real Obligations (During the Pendency
of the Condition)

A. Loss

Without debtor’s fault—obligation is extinguished

With debtor’s fault—debtor pays damages.

Applies only to determinate thing. A thing is loss when it:

1. Perishes

2. Goes out of commerce

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

recovered.

B. Deterioration

Without debtor’s fault, impairment is to be borne by the creditor.

With debtor’s fault, creditor may choose between the rescission of the obligation and its fulfilment
with indemnity for damages in either case.

C. Improvement

If the thing is improved by its nature, or by time, the improvement shall inure to the benefit of the
creditor.

If it is improved at the expense of the debtor, he shall have no other right than that granted to the
usufructuary.

Obligations with a Period.

Those whose demandability or extinguishment is subject to the expiration of a term or period.

Requisites:

1. Future
2. Certain
3. Possible, legally and physically.

Classification of Term or Period:

1. Suspensive (Ex die)—obligation becomes demandable only upon arrival of a day

certain.
2. Resolutory (In Diem)—arrival of day certain terminates the obligation;
3. Legal—granted by law.
4. Conventional—stipulated by parties.
5. Judicial—fixed by courts.
6. Definite—date/time is known beforehand.
7. Indefinite—the date/time of day certain is unknown.

Term Condition

11
 1. Interval of time which is future and Fact or event which is future and certain
certain

2. Interval of time which must necessarily Future and uncertain fact or event which may or
come, although it may not be known may not happen
when.

3. Exerts an influence upon time or Exerts influence upon the very essence of the
demandability or extinguishment of an obligation itself.
obligation.

4. Does not have any retroactive effect Has retroactive effect.

unless there is an agreement to the
contrary.

5. When it is left exclusively to the will of When it is left exclusively to the will of the
the debtor, the existence of the obligation debtor, the very existence of the obligation is
is not affected. affected.

General rule: When a period is designated for the performance or fulfilment of an obligation, it
is presumed to have been established for the benefit of both creditor and debtor.

Exception: When it appears from the tenor of the obligation or other circumstances that the
period has been established in favor of one or of the other.

When Court May Fix Period.

1. If the obligation does not fix a period, but from its nature and circumstances it
can be inferred that a period was intended by the parties;

2. If the duration of the period depends upon the will of the debtor;

3. If the debtor binds himself when his means permit him to do so (Art. 1180).

Reason for Fixing Period (Art. 1197)

There can be no possibility of any breach of contract or failure to perform the obligation unless
the period is fixed by the courts.

When debtor loses right to make use of period:

1. When after the obligation has been contracted, he becomes insolvent, unless he
gives guaranties or securities for the debt (the insolvency need not be judicially
declared);

2. When he does not furnish to the creditor the guaranties or securities he promised;

3. When 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 when debtor violates any undertaking, in
consideration of which the creditor agreed to the period; or
12
 4. When debtor attempts to abscond.

Definition of Alternative Obligation:

Alternative obligation is one where out of two or more prestations which may be given, only one
is due. In short, there are several things due but the delivery of one is sufficient to extinguish the
obligation.

General Rule: Right to choose belongs to the debtor

Exception : Unless given to the creditor

Limitations : The debtor shall have no right to choose those prestations which are:

1. Impossible
2. Unlawful
3. Those which could not have been the object of the obligation.

Effect of loss of the object of the obligation.

a. If right of choice belongs to debtor:

1. If through fortuitous event, debtor cannot be held liable for damages;

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

b. If the right of choice belongs to the creditor:

1. 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 one
subsists;

2. If the loss of one of the things occurs through the fault of the debtor, the
creditor may claim any of those subsisting, or the price of that which,
through the fault of the former, has disappeared with a right to damages;

3. If all the things are lost through the fault of the debtor, the choice by the
creditor shall fall upon the price of any one of them, also with indemnity
for damages.

Facultative obligation.

It is one where only one prestation has been agreed upon but the debtor may give another object
as substitute.

The effect of the loss of the thing in facultative obligation.

1. Before susbstitution—If the principal thing is lost due to fortuitous event, obligation is
extinguished; if due to debtor’s fault, he is liable for damages.

If the thing intended as a substitute is the one which was lost, with or without debtor’s
fault, the obligation to deliver the substitute is extinguished because what is to be delivered is the
principal object and not the substitute. The loss of this substitute is immaterial.

13
 2. After substitution—If the principal thing is lost, the debtor is no longer liable whatever be the
cause of the loss, because it is no longer due. If the substitute is lost due to fortuitous event,
obligation is extinguished; if due to debtor’s fault, he is liable for damages.

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

b. Fortuitous loss extinguishes the Fortuitous loss of all prestations will extinguish
obligation the obligation

c. Culpable loss obliges the debtor to Culpable loss of any object due will give rise to
deliver substitute prestation without liability to debtor
liability to debtor

d. Choice pertains only to debtor Choice may pertain to creditor or even third
person

Joint Obligation.

It is one where the whole liability is to be paid or fulfilled proportionately by the different debtors
and/or is to be demanded also proportionately by the different creditors.

Features:

1. Insolvency of one debtor does not make the others liable.

2. Vitiated consent on the part of one debtor does not affect the others.
3. Demand made to one of the debtors is not demand to all because the debt of one is
distinct from the others.
4. When the creditor interrupts the running of the prescriptive period by demanding
judicially from one, the others are not affected.
5. Defences of one debtor are not necessarily available to the others.

Solidary Obligation.

It is one where each one of the debtors is bound to render compliance of the entire obligation
and/or each one of the creditors has a right to demand entire compliance of the prestation.

Instances when the law requires solidarity:

1. All the partners are liable solidarily with the partnership if the act complained of
arises from a crime or quasi-delict.
2. In agency, if two or more persons have appointed an agent for a common transaction,
they shall be solidarily liable to the agent for all the consequences of the agency.
3. The responsibility of two or more persons who are liable for a quasi-delict is solidary.
4. The responsibility of two or more payees, when there has been payment of what is
not due, is solidary.
5. Legal provisions regarding the obligations of devises and legatees.
6. Liability of principals, accomplices, and accessories of a felony.

14
 7. Bailees in commodatum.

Joint vs. Solidary Obligations

General rule: Obligation is presumed joint if there is concurrence of two or more debtors and/or
creditors.

Exceptions:

1. When expressly stated that there is solidarity;

2. When the law requires solidarity;

3. When the nature of the obligation requires solidarity.

Joint Indivisible Obligations

The object or prestation is indivisible, not susceptible of division; while the tie between the
parties is joint, that is, liable only to a proportionate share.

Characteristics:

1. Demand must be made to all the joint debtors.

2. The creditor must proceed against all the joint debtors, because the compliance of the
obligation is possible only if all of the joint debtors would act together.
3. If one of the debtors is insolvent, the other shall not be liable for his share.
4. If one of the debtors cannot comply, the obligation is converted into monetary
consideration. One who is ready and willing to comply will pay his proportionate share,
and the other not willing shall pay his share plus damages when his financial condition
will improve.
5. If there are more than one creditor, delivery must be made to all, unless one is authorized
to receive from the others.

Obligations 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 for substitute for damages in
case of breach.

Exceptions:

1. Where there is a stipulation to the contrary;

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

3. When debtor is guilty of fraud.

The debtor cannot exempt himself from the performance of the principal obligation by paying the
stipulated penalty unless when the right has been expressly reserved for him.

The creditor cannot demand the fulfilment of the principal obligation and the satisfaction of the
stipulated penalty at the same time unless the right has been clearly granted him.

When penalty may be reduced.

1. If the principal obligation has been partly complied with;

2. If the principal obligation has been irregularly complied with; and

15
 3. If the penalty is iniquitous or unconscionable even if there has been no
performance;

Modes of Extinguishment of Obligations

1. By payment or performance.
2. Loss of the thing due
3. Condonation or remission of the debt
4. Confusion or merger
5. Compensation
6. Novation

In addition:

7. Annulment
8. Rescission
9. Fulfilment of a resolutory condition
10. Prescription
11. Death of a party in case the obligation is personal
12. Mutual desistance
13. Compromise
14. Impossibility of fulfilment
15. Happening of fortuitous event

Payment or Performance

General rule: A debt shall not be understood to have been paid unless the thing or service in
which the obligation in which the obligation consists has been completely delivered or rendered, as the
case may be.

Exceptions:

1. When the obligation has been substantially performed in good faith;

2. When the obligee accepts performance, knowing its incompleteness or

irregularity & without expressing any protest or objection;

3. When there is an express stipulation; and

4. When the debt is in part liquidated and in part liquidated.

Persons who may pay the obligation.

1. The debtor himself;

2. Any third person.

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 fulfilment of the
obligation;

2. When there is a stipulation to the contrary.

Rights of a 3rd person who paid the obligation.

16
 If payment was made with knowledge and consent of the debtor:

1. Can recover the entire amount paid;

2. Can be subrogated to all the rights of the creditor.

If payment was made without knowledge or against the will of the debtor, he can recover only
insofar as the payment has been beneficial to the debtor.

To whom payment must be made.

1. The person in whose favour 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 shall not be valid.

Exceptions:

1. Payment made to a 3 rd 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 generic object.

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 obligation

1. Payment in cash—must be made in the currency stipulated; if it is not

possible to deliver such currency, then in the currency which is 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 encashed; or

b. When it has been impaired throught the fault of the creditor.

Legal tender.

Such currency which may be used for the payment of all debts, whether in private or public. The
kind of currency which a debtor can legally compel a creditor to accept in payment of a debt in money
when tendered by the debtor in the right amount.

Philippine currency notes have no limit to their legal tender power. However, in the case of
coins in denomination of 1-, 5- and 10-piso they shall be legal tender in amounts not exceeding
Php1,000.00 while coins in denomination of 1-, 5- and 10- and 25-sentimo shall be legal tender in
amounts not exceeding Php100.00, pursuant to BSP Circular No. 537, Series of 2006.

Place of payment.

1. Place stipulated by the parties;

2. No stipulation and the obligation is to deliver a determinate thing, payment

shall be made at the place where the thing might be at the time;
17
 3. In any other case, the payment shall be made at the domicile of the debtor.

Special forms of payment.

1. Application of payment;

2. Dation in payment;

3. Payment by cession;

4. 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 favour of the same creditor.

Requisites:

1. There must be only 1 debtor and only 1 creditor;

2. There must be 2 or more debts of the same kind;

3. All of the debts must be duel except: if there is stipulation to the contrary; or
application of payment is made by the party for whose benefit the term has
been constituted; and

4. Amount paid by the debtor must not be sufficient to cover the total amount of
all 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.

Legal application of payment.

1. If neither the debtor nor the creditor makes any application of payment, or if
it cannot be inferred from other circumstances, the debt which is most
onerous to the debtor, among those which are due, shall be deemed to have
been satisfied;

2. If the debts due are of the same nature and burden, payment shall be applied
to all of them proportionately.

Dation in payment (dacion en pago.)

Delivery and transmission of ownership of a thing by the debtor to the creditor as an accepted
equivalent of the performance of the obligation.

Requisites:

1. Existence of a money obligation;

2. Alienation to the creditor of a property by the debtor with the consent of the
former;

3. Satisfaction of the money obligation of the debtor

Payment by cession.

18
 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 credits.

Requisites:

1. Plurality of debts;

2. Partial or relative insolvency of the debtor;

3. Acceptance of the cession by the creditors

Dation in payment Payment by cession

1. One creditor Plurality of creditors

2. Not necessarily in state of financial Debtor must be partially or relatively insolvent

difficulty

3. Thing delivered is considered as Universality of property of debtor is what is ceded

equivalent of the performance

4. Payment extinguishes obligation to the Merely releases debtor for the net proceeds of
extent of the value of the thing delivered things ceded or assigned, unless there is contrary
as agreed upon, proved or implied from intention.
the conduct of the creditor.

Tender of payment.

Manifestation of the debtor to the creditor of his decision to comply immediately with his
obligation.

It is preparatory act and extrajudicial in character.

Consignation.

Deposit of the object of the obligation in a competent court in accordance with the rules
prescribed by law, after the tender of payment has been refused or because of circumstances which render
direct payment to the creditor impossible or inadvisable.

It is the principal act and judicial in character.

Requisites:

1. The debt sought to be paid must be due;

2. 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;

3. The consignation of the thing due must first be announced to the persons interested in
the fulfilment of the obligation;

4. Consignation shall be made by depositing the things due at the disposal of judicial
authority;

5. The consignation having been made, the interested parties shall also be notified
thereof.

Effects of consignation.
1. If the creditor accepts the thing or amount deposited without contesting the validity
or efficacy of the consignation, the obligation is extinguished;

19
 2. If the creditor contests the validity or efficacy of the consignation or if the creditor is
not interested or unknown or is absent, the result is litigation. If the debtor complied
with all the requisites, the obligation is extinguished.

General rule: Consignation shall produce the effects of payment only if there is a valid tender of
payment.

Exceptions:

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

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

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

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

5. When without just cause creditor refuses to give receipt.

Loss of the Thing Due.

General rule: (In Determinate Obligations to give) Obligation is extinguished.

Requisites:

1. The thing which is lost is determinate;

2. The thing lost without the fault of the debtor;

3. The thing lost before the debtor has incurred in delay.

Exceptions:

1. When by law, obligor is liable for fortuitous event;

2. When by stipulation, obligor is liable even for fortuitous event;

3. When the nature of the obligation requires the assumption of risk;

4. When the loss of the thing occurs after the debtor incurred in delay;

5. When the debtor promised to deliver the same thing to two or more persons who do
not have the same interest;

6. When the debt of a certain and determinate thing proceeds from a criminal offense.

General Rule: (in generic obligations to give) Obligation is not extinguished because the
genus of a thing cannot perish.

Exception: In case of generic obligations whose object is a particular class or group with specific
or determinate qualities.

General rule (in obligations to do): Obligation is extinguished when prestation becomes legally
or physically impossible.

Effect of relative impossibility or doctrine of unforeseen events.

When the service has become difficult as to be manifestly beyond the contemplation of the
parties, the obligor may also be released therefrom, in whole or in part.

Requisites:

20
 1. The event or change in circumstances could not have been foreseen at the time of the
execution of the contract;

2. It makes the performance of the contract extremely difficult but not impossible;

3. The event must not be due to the act of any parties; and

4. The contract is for future prestation.

Condonation or Remission of Debt.

An act of pure liberality by virtue of which the oblige, 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 part
or aspect of the same to which remission refers.

It is the gratuitous abandonment by the creditor of his right.

Requisites:

1. It must be gratuitous.

2. It must be accepted by the debtor;

3. The obligation must be demandable.

Confusion or Merger of Rights.

Merger of the characters of the creditor and debtor in one and the same person by virtue of which
the obligation is extinguished.

Requisites:

1. That the characters of creditor & debtor must be in the same person;

2. That it must take place in the person of either the principal creditor or the principal
debtor;

3. It must be complete and definite.

Compensation.

Extinguishment in the concurrent amount of the obligation of those persons who are reciprocally
debtors and creditors to each other.

Requisites:

1. There must be 2 persons who in their own right are principal creditors and principal
debtors of each other;

2. Both debts must consist in money, or if the things due are fungibles, they must be of
the same kind or quality

3. Both debts must be due;

4. Both debts must be liquidated or demandable;

5. There must be no retention or controversy commenced by 3 rd persons over either of

the debts communicated in due time to the debtor; and

6. Compensation must not be prohibited by law.

Kinds:
21
 1. Legal—takes effect by operation of law.

2. Voluntary—agreed upon by the parties;

3. Facultative—when it can be claimed by one of the parties who, however, has the
right to object to it;

4. Judicial—takes effect by judicial decree;

5. Facultative—when it can be claimed by one of the parties who, however, has the
right to object to it.

Debts not subject to compensation.

1. Debts arising from contracts of deposit;

2. Debts arising from contracts of commodatum;

3. Claims for support due by gratuitous title;

4. Obligations arising from criminal offenses;

5. Certain obligations in favour of government.

Taxes are not subject to set-off or legal compensation because the government and taxpayers are
not mutually creditors and debtors of each other.

Novation.

Substitution or change of an obligation by another, resulting in its extinguishment or

modification, either by changing its object or substituting another in place of the debtor, or by subrogating
a third person in the rights of the creditor.

Requisites:

1. Precious valid obligation;

2. Agreement of the parties to the new obligation;

3. Extinguishment of the old obligation; and

4. Validity of the new obligation.

Kinds:

a. As to its essence

1. Objective/Real—refers to the change either in the cause, object or

principal conditions of the obligations;

2. Subjective/Personal—refers to the substitution of the person of the

debtor or to the subrogation of a 3rd person in the rights of the
creditor;

3. Mixed

b. As to its form/constitution

1. Express—when it is declared in unequivocal terms that the old

obligation is extinguished by new one which substitutes the same.

22
 2. Implied—when the old and new obligation are incompatible with
each other on every point.

Forms of substitution of debtors.

1. Expromision—effected 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;

2. Delegacion—effected with the consent of the creditor at the instance of the

old debtor, with the concurrence of the new debtor.

Effect of insolvency of new debtor.

1. Expromision—the new debtor’s insolvency or nonfulfillment of the

obligation shall not revive the original debtor’s liability to the creditor
whether the substitution is effected with or without the knowledge or against
the will of the original debtor;

2. Delegacion—the credtor can sue the old debtor only when the insolvency
was prior to the delegation and publicly known or when the old debtor knew
of such insolvency at the time he delegated the obligation.

Kinds of subrogation.

1. Conventional—takes place by agreement of the parties; this kind of

subrogation requires the intervention and consent of 3 persons: the original
creditor, the new creditor and the debtor;

2. Legal—takes place without the agreement but by operation of law because

of certain acts.

General rule: Legal subrogation cannot be presumed.

Exceptions:

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

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

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

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

CONTRACTS
Definition.

A contract is the meeting of minds between two persons whereby one binds himself, with respect
to the other, to give something or to render some service.

Elements.

a. Essential—those without which there can be no contract.

23
 1. Consent

2. Object or Subject Matter

3. Cause or Consideration

b. Natural—those derived from the nature of the contract and ordinarily accompany the same.

c. Accidental—those which exist only when the parties expressly provide for them for the purpose
of limiting or modifying the normal effects of the contract.

Different kinds of contracts.

a. According to perfection
1. Consensual—perfected by mere consent.
2. Real—perfected by the delivery of the object of the contract, such as pledge, loan and
deposit.
b. According to degree of importance
1. Principal—can stand alone, such as sale, barter, deposit or loan.
2. Accessory—its existence and validity is dependent upon another contract, such as pledge,
mortgage and guaranty.
3. Preparatory—contract is not an end by itself, but a means thru which other contracts may be
made.
c. According to subject matter
1. Contracts involving things, such as sale, barter.
2. Contracts involving rights or credits, such as usufruct or assignment of credit.
3. Contracts involving services, such as agency, lease of service and contract of carriage.
d. According to name
1. Nominate—Those which have their own distinctive individuality and are regulated by
special provisions of law.
2. Innominate--Those which lack individuality and are not regulated by special provisions of
law but regulated by stipulations of the parties, by general provisions of the Civil Code on
obligations and contracts, by rules governing the most analogous nominate contracts and by
customs of the place.

Kinds:

1. Do ut des—I give that you give;

2. Do ut facias—I give that you do;

3. Facio ut des—I do that you give;

4. Facio ut facias—I do that you do.

e. According to cause
1. Onerous—there is an exchange of consideration such as sale, barter and lease.
2. Gratuitous—there is no consideration received in exchange for what has been given, such as
donation, remission and condonation.
3. Remuneratory—something is given for a benefit or service performed without any legal
obligation to do so.
f. According to nature of obligation produced or number of parties obligated
1. Unilateral—where only one of the parties is obliged to give or to do something, such as
commodatum, gratuitous deposit, and gratuitous mutuum.
2. Bilateral—where both parties are obliged to give or to do something, such as sale, barter and
lease.
g. According to risk

24
 1. Commutative—where equivalent values are given by both parties such as sale, barter or
lease.
2. Aleatory—where fulfilment of the contract is dependent upon chance, such as insurance.

Characteristics of Contracts.

a. Principle of autonomy of contracts (liberty to contract)

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.

b. Principle of Relativity

General rule: Contracts take effect only between parties, their assigns and heirs

Exceptions:

1. Stipulations pour atrui—stipulations in favor of a third person;

2. When a third person induces a party to violate contract;

3. Third persons who come in possession of the object of the contract creating real
rights;

4. Contracts entered into in fraud of creditors.

c. Principle of Obligatory Force and Consensuality

Contracts are perfected by mere consent and from that moment, the parties are bound not only to the
fulfilment 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.

d. Principle of Mutuality

The contract must bind both parties; its validity or compliance must not be left to the will of one of
them.

The contract cannot have any stipulation authorizing one of the contracting parties (a) to determine
whether or not the contract shall be valid, or (b) to determine whether or not the contract shall be fulfilled.

e. Principle Autonomy

The parties are free to stipulate anything they deem convenient provided that they are not contrary to
morals, good customs, public order and public policy.

Consent.

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

Requisites:

1. Legal Capacity of the contracting parties;

2. Manifestation of the conformity of the contracting parties;

25
 3. The parties’conformity to the object, cause, the terms and conditions of the contract
must be intelligent, spontaneous and free from all vices of consent;

4. The said conformity must be real and not simulated or fictitious.

Offer.

A proposal made by one party to another to enter into a contract. It must be certain or definite,
complete and intentional.

Offer/proposal may be withdrawn so long as the offeror has no knowledge of acceptance by

offeree.

Rule in case of an offer to sell.

When the offerer has allowed the offeree a certain period to accept, the offer may be withdrawn at
any time before acceptance by communicating such withdrawal, except when the option is founded upon
a consideration as something paid or promised.

Option contract—one giving a person a certain period within which to accept the offer of the
offerer.

Option money—money paid or promised to be paid in consideration for the option.

Acceptance.

1. Manifestation by the offeree of his assent to the terms of the offer.

2. It must be absolute.

3. A qualified acceptance constitutes counter offer.

Acceptance may be revoked before it comes to the knowledge of the offeror.

Persons incapacitated to give consent.

a. Minors

Exceptions:

1. Contracts where the minor is stopped to false minority as a defense

through his own misrepresentation;

2. Contracts for necessaries;

3. Contracts by guardians or legal representatives;

4. Contracts of life, health or accident insurance taken on the life of the

minor.

a. Insane or demented persons, unless the contract was entered into during lucid
interval;

b. Deaf mutes who do not know how to read and write.

26
Vices of Consent.

1. Violence—when in order to wrest consent, serious or irresistible force is employed.

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 upon the
person or property of his spouse, descendants or ascendants, to give his consent.

3. Mistake—it must be substantial regarding: (a) object of the contract; (b) conditions which
principally moved one or both parties to enter into the contract; (c) identity or
qualification of persons; error must be excusable, and not caused by negligence; and the
error must be a mistake of fact, and not of law.

4. Fraud—when through insidious words or machinations of one of the contracting parties,

the other is induced to enter into a contract, without which, he would not have agreed.

5. Undue Influence

Caveat emptor (“let buyers beware”).

The transaction is not fraudulent because this is considered tolerable fraud. Exaggerations in
trade, when the other party had an opportunity to know the facts, are not in themselves fraudulent. This is
otherwise known as “dealer’s talk.” Exception: If the opinion is made by an expert and the other party
has relied on such statement.

Statement of Opinion.

The mere expression of opinion, even if false, does not vitiate consent that will render the
contract voidable unless such opinion is given by an expert and the other party relied on such opinion.

Simulation of Contracts

Is the declaration of a fictitious intent manifested deliberately and by agreement by the parties in
order to produce, for the purposes of deceiving others, the appearance of a transaction which does not
exist or which is different from their true agreement.

Kinds:

1. Absolute—when the contracting parties do not intend to be bound by the

contract at all. Thus, an absolutely simulated contract is VOID.

2. Relative—when the contracting parties conceal their true agreement. A

relatively simulated contract binds the parties to their real agreement, when it
does not prejudice 3rd persons and is not intended for any purpose contrary to
law, morals, good customs, public order or public policy.

Object of the Contract

The thing, right or service which is the subject matter of the obligation arising from the contract.

Requisites:

1. It must be within the commerce of man;

2. It must be licit or not contrary to law, morals, good customs, public order or
public policy;

3. It must be possible;

27
 4. It must be determinate as to its kind.

Things which cannot be object of contracts.

1. Things which are outside the commerce of men;

2. Intransmissible rights;

3. Services which are contrary to law, morals, good customs, public order or
public policy;

4. Impossible things or services;

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

Cause of the Contract

The immediate, direct and most proximate reason which explains and justifies the creation of
obligation.

Requisites:

1. Cause should be in existence at the time of the celebration of the contract;

2. Cause should be licit and lawful;

3. Cause should be true.

Rules:

1. In onerous contracts, the cause is understood to be, for each contracting

party, the prestation of promise of a thing or service by the other;

2. In renumenatory contracts, the service or benefit which is renumerated;

3. In contracts of pure beneficence, the mere liberality of the donor or

benefactor;

4. In accessory contracts, the cause is identical with the cause of the principal
contract, that is, the loan from which it derives its life and existence.

Form of Contracts

General rule: Contracts shall 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.

Parties may compel each other to comply with the form required once the contract has been
perfected;

Contracts which are required to be in some specific form is only for the convenience of parties
and does not affect validity and enforceability as between them.

Reformation of instruments:

28
 Requisites:

1. Meeting of the minds to the contract;

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

accident, relative simulation, fraud, inequitable conduct;

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

inequitable conduct.

When reformation is not proper

1. Simple unconditional donations inter vivos;

2. Wills;

3. When the agreement is void.

Rescissible Contracts

Contracts validly agreed upon byt, by reason of lesion or economic prejudice may be rescinded in
cases established by law.

What contracts are rescissible

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;

Voidable Contracts

Those in which all of the essential elements for validity are present, although the element of
consent is vitiated either by lack of capacity of one of the contracting parties.

What contracts are voidable

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

2. Those where the consent is vitiated by mistake, violence, intimidation, undue

influence, or fraud.

Causes of extinction to annul a voidable contract

1. Prescription—the action must be commenced within 4 years arising from:

a. The time the incapacity ends;

29
 b. The time the violence, intimidation, or undue influence ends;

c. The time the mistake or fraud is discovered.

2. Ratification

Requisites:

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

voidable;

b. Such reason must have been ceased and

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

impliedly conveys an intention to waive his right;

3. By loss of the thing which is the object of the contract through fraud or fault of
the person who is entitled to annul the contract.

Unenforceable Contracts

Those which cannot be enforced by proper action in court unless ratified.

What contracts are unenforceable:

1. Those entered into in the name of another by one without authority or acting in
excess of authority;

2. Those where both parties are incapable of giving consent;

3. Those which do not comply with the Statute of Frauds.

Contracts covered by Statutes of Fraud

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

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

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

4. Agreement for the sale of goods at the price of not less than P500.00;

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.

The contracts/agreements under the Statute of Frauds require that the same be evidence by some
note, memorandum or writing, subscribed by the party charged or by his agent, otherwise, the said
contracts shall be unenforceable.

Ratification of contracts in violation of Statutes of Fraud

1. Failure to object to the presentation of oral evidence to prove such contracts;

2. Acceptance of benefits under these contracts.

Void Contracts

30
 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.

What contracts are void.

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

5. Those expressly prohibited or declared void by law.

Inexistent Contracts

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

What contracts are inexistent

1. Those which are absolutely simulated or fictitious; and

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

Comparative table of defective contracts

VOID VOIDABLE RESCISSIBLE UNENFORCEABLE

1. Defect is caused Defect is caused by vice Defect is caused by Defect is caused by lack
by lack of of consent injury/damage either to of form, authority, or
essential one of the parties or to a capacity of both parties
elements or 3rd person not cured by prescription
illegality

2. Do not, as a Valid and enforceable Valid and enforceable Cannot be enforced by

general rule, until they are annulled by until they are rescinded proper action in court
produce legal a competent court by a competent court
effects

3. Action for the Action for annulment or Action for rescission may Corresponding action for
declaration of defense of annulability prescribe recovery, if there was total
nullity or may prescribe or partial performance of
inexistence does the unenforceable contract
not prescribe may prescribe

4. Not cured by Cured by prescription Cured by prescription Not cured by prescription

prescription

5. Cannot be Can be ratified Need not be ratified Can be ratified

ratified

31
 6. Assailed not only Assailed only by a Assailed not only by a Assailed only by a
by contracting contracting party contracting party but even contracting party
party but even by by third person who is
a third person prejudiced or damaged by
whose interest is the contract
directly affected

7. Assailed directly Assailed directly or Assailed directly only Assailed directly or

or collaterally collaterally collateraly

Principle of pare delicto

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 or 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
accomplkished, or before any damage has been caused to a 3 rd person;

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

4. Agrrement or contract which is not illegal per se and the prohibition is designed
for the protection 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. Contracts whereby a labourer accepts a wage lower than the maximum number of
hours fixed by law;

7. One who lost in gambling because of fraudulent schemes practiced on him is

allowed to recover losses.

Rules when only one of the parties is at fault.

1. Executed contracts:

a. Guilty party 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.

2. Executory contract—neither of the contracting parties can demand for the

fulfilment of any obligation from the contract nor may be compelled to comply
with such obligation.

Natural Obligations

They are real obligations to which the law denies an action, but which the debtor may perform
voluntarily.
32
 Examples:

1. Performance after the civil obligation has prescribed;

2. Reimbursement of a third person for a debt that has prescribed;

Estoppel

A condition or state by virtue of which an admission or representation is rendered conclusive

upon the person making it and cannot be denied or disproved as against a person relying thereon.

Laches or “stale demands”

Failure or neglect, for an unreasonable length of time, to do that which due diligence, could or
should have been done earlier.

Elements:

1. Conduct on part of the defendant or of one under whom he claim, giving rise to
the situation of which complainant is made and of which the complaint seeks a
remedy;

2. Delay in asserting the complaint, rights, the complainant having knowledge or

notice of defendant’s conduct and having been afforded the opportunity to
institute the action;

3. Lack of knowledge or notice on the part of the defendant that the complainant
would assert on the right on which he bases his suit;

4. Injury to the defendant in the event relief is accorded to the complainant or the
suit is not held to be barred.

-END-

There is no substitute for good preparation. GOD bless you future CPAs!!!

--Sir Jasper

33