OBLIGATIONS AND CONTRACTS

WEEK 1

LAW - any rule of action or any system of uniformity.

DIVINE LAW - believed to be promulgated by God. Ex: Ten Commandments

NATURAL LAW - sense of fairness, justice, righteousness.

Ex: We all know it’s bad to kill another person.

MORAL LAW - sense of right and wrong.

STATE LAW - promulgated by the State.

Ex: Income Tax Law, etc.

LAW ON OBLIGATIONS AND CONTRACTS

► It is a part of the Civil Code of the Phil.

PRESUMPTION OF KNOWLEDGE OF LAW - all persons are presumed to know

the law. Ignorance of the law is not a valid defense.

Art.1
An obligation is a JURIDICAL necessity to GIVE, to DO or NOT TO DO.

ESSENTIAL REQUISITES OF AN OBLIGATION:

1. Passive subject or debtor/obligor    

2. Active subject or creditor/obligee
3. Prestation or object of obligation
4. Juridical or legal tie
(Give an example of each).

Art.1157
Sources of Obligation:
1. law
2. contracts
3. quasi contracts
4. crimes/delicts
5. quasi delicts
(Give examples of each)

Art. 1159
Obligations arising from contracts have the force of law....

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Contracts are obligatory in whatever form they make been entered into for as
long as the requisites of a valid contract (lawful, good morals, public policy-
compliant, etc.) are present.

Ex. of quasi-contract - Delivery of milk to a home, even without a contract, if

consumed and not objected to, ripens into an obligation to pay on the part of
the deliveree/person to whom the milk was delivered. This is an example of an
obligation arising from a quasi-contract.

Basis of obligations arising from delicts - One who is criminally liable is also
civilly liable (obligated to pay damage for wrong done). Remember: There
should be damage for liable party to pay.

Art.1163
A person obliged TO GIVE SOMETHING is also obliged to TAKE CARE of it
with that diligence of A GOOD FATHER OF A FAMILY.

Art. 1164
The creditor has a right over the fruits of the thing. His right exists from the
moment it becomes DELIVERABLE (Perfection of contract).

Fruits:
1. Natural
2. Industrial
3. Civil

Delay in the delivery merits payment of interest/damages. 

Delay is incurred from the moment it is demanded.

Obligation to give a DETERMINATE THING includes obligation to deliver

accessories (keys to a house) and accessions (trees on a land).

If the obligation is to do a thing, DEBTOR should do it. If he fails, CREDITOR

MAY DO IT at debtor’s expense.

Art. 1166
If the obligation is NOT TO DO A THING, debtor should not do it; if he dies
what is forbidden, it could be UNDONE at his expense.

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 WEEK 2

Art. 1170
Those, who in the performance of the obligation, is guilty of FRAUD (cheating),
NEGLIGENCE (without care), DELAY (not compliant with time requirement) or
in CONTRAVENTION of contractual terms, are liable to pay damages.

NEGLIGENCE
Is the non observance of required diligence. (Degree of negligence is either
agreed upon or, in its absence, that of a GOOD FATHER OF A FAMILY (how a
good father treats his family).

PRESUMPTIONS:

► Receipt of principal raises the presumption that interest was also

received.
► Receipt of latter installment raises presumption that earlier receipt
was already paid.

DISPUTABLE presumption is one that is rebuttable or that which could be

explained otherwise.

CONCLUSIVE presumption is final and non-contestable.

Creditor may EXHAUST all remedies to satisfy his credit (demand, sue,
garnish, execute).

Rights acquired by virtue of obligations are transferable (by SPA, by giving

authority, etc), except those which are VERY PERSONAL.

KINDS OF OBLIGATIONS:

1. Pure - no conditions.
2. Conditional - subject to agreed conditions.
3. Divisible - compliable in parts.
4. Indivisible - cannot be divided physically or agreed upon as indivisble.
5. Alternative - deliverable by substituting subject of contract.
6. With a penal clause - there is a penalty in case of default or non-
compliance.

KINDS OF CONDITIONAL OBLIGATIONS:

 
. SUSPENSIVE - demandable upon HAPPENING of the condition.

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. RESOLUTORY - ALREADY or right away, but ends when condition happens. 

Art. 1170
Performance of an OBLIGATION, with
a. FRAUD
b. NEGLIGENCE
c. DELAY
d. CONTRARY TO THE TERMS of the contract

► are ACTIONABLE, meaning, the person who committed the above, could be
held liable to pay DAMAGES.

For example:
► the debtor who promised 10 kilos of sugar, only delivered 9 kilos,
representing them to be as 10 kilos is guilty of FRAUD. If proven, he could be
held liable for damages.

Suppose, the CREDITOR is the one guilty of any of the “faults” mentioned
above, can he recover damages? NO, Only a party with CLEAN HANDS can
complain, he cannot profit from his own fault.

FORTUITOUS EVENT, otherwise called INEVITABLE EVENT (or, at times

called ACT OF GOD) is defined as event that cannot be foreseen or even if
foreseen is inevitable.

EFFECT: it frees the obligor from liability as he could not have controlled it’s
happening.

Example:
A debtor is prevented from performing his obligation because of a disaster,
calamity or the like, he is not liable for his failure to comply with his obligation.

Note: While INEVITABLE ACCIDENT could be man-made (Eample: Arson,

sudden declaration of Marshall Law, a vehicular accident) ACT OF GOD is
always nature-related (Example: Earthquake, Flood).

The rule of DILIGENCE OF A GOOD FATHER OF A FAMILY applies

only when the standard of care has NOT been agreed upon by the parties.

If the parties expressly agreed the standard of care that should be exercised,
that standard SHOULD be complied with.

Example:
Parties agreed that a sprinkler system should be installed in the warehouse,
which debtor sold to creditor, to prevent its being damaged by fire. The debtor

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did not install the sprinkler system. If the object was damaged by fire, even if
he was not negligent, he is liable because the standard of care agreed upon was
not complied with.

Another example:
If the agreement was to the effect that the subject of contract ( chicks of Texas
fighting cocks) should be transported by air, and the debtor ignored the
agreement and transported it by ship, he is liable for the death of the chicks
because of the long travel time.

The APPLICABLE LAW could also express the DEGREE OF DILIGENCE

required.

Example:
Drivers of public service buses, BY LAW, should exercise Utmost Care and
diligence.

MEASURE OF LIABILITY FOR DAMAGES:

1. Value of the damage in PARTIAL LOSSES.

2. Value of object, if lost in its entirety. Total loss could be ACTUAL TOTAL
LOSS (entire object lost/totally damaged) or CONSTRUCTIVE TOTAL
LOSS (object partially lost, but it is not fit for its intended use, or is
significantly damaged as it has become uneconomically feasible to
repair).
3. Damages
4. Penalty (if there is a penal clause OR as a PUNITIVE SANCTION for
fraud or  bad faith, as in a case where the contract says, debtor will build
a house for creditor in 30 days and for any delay, debtor will pay creditor
a penalty of say, P10K a week).

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 WEEK 3

Art. 1179. PURE OBLIGATIONS

► An obligation which does not contain any condition or term upon
which the fulfillment is made to depend.

► Immediately demandable by the creditor and the debtor cannot be

excused from not complying with the prestation.

CONDITIONAL obligations are those where there is/are conditions in the

contract.

Example:
Creditor says “I will give you a car when you graduate. Graduation is the
condition. The condition must first be fulfilled before debtor could demand the
delivery of the promised car.

NOTE: A condition, the fulfillment of which, SOLELY depends upon the debtor
is VOID. Fulfillment of the condition must not be at his sole discretion.

Example:
Debtor says I will pay you my debt IF I WANT TO”. Fulfillment/payment of the
obligation depends solely on the debtor’s will). In this case the contract or
agreement is void.

Other kinds of conditions:

a. Express - clearly stated.

b. Implied - only inferred.
c. Possible - capable of being fulfilled.
d. Impossible - not capable of fulfillment.
e. Positive - condition consists of doing.
f. Negative - condition consists of not doing.

Conditions, the fulfillment of which depends upon CHANCE or upon a THIRD

PARTY FULFILLING THE CONDITION, are valid.

Example:
I will sell you my car if Joe wins the Lotto draw (based on chance) OR, if Joe
marries Joanna (fulfillment of condition depends upon the act of a third party.

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Impossible, illegal or immoral conditions are VOID.

Example:
I will give you the moon (IMPOSSIBLE);
I will sell you a pound of shabu (ILLEGAL):
I will give you my neighbor as your common- law wife (IMMORAL).

Debtor is not liable for the LOSS OF THE SUBJECT without his fault. If the
loss happened because debtor was at fault, he is liable.

(NOTE: This is repeat - because it is important).

If the law or the contract STATES THE DEGREE OF DILIGENCE REQUIRED,

that is the degree of diligence that should be followed; in the absence of that
kind of provision or agreement, the diligence to be applied is that of a good
father of a family.

If the creditor prevents the happening of the condition, the condition is deemed
fulfilled, AS IF THE CONDITION happened.

DEPRECIATION OR BETTERMENT - value of subject gets reduced due to

varying reasons.
Example:
A car when new could be worth P1million. After 5 years or after having been in
an accident, the value becomes lesser. The reduction in value is called
DEPRECIATION or BETTERMENT.

To name two, here are CAUSES of reduction of value, are:

1. Wear and tear - reduced value on account of everyday use.

2. Damage - reduced value because of damaged nature of subject, like the
subject had been in an accident.

USUFRUCT - right to enjoy the use of or the fruits of a thing which belongs to
another.

RESCISSION - means cancellation.

Example:
The right to rescind could be based on an EXPRESS IN provision of the
contract .
Example:
Contract says, failure to pay three installments in a row gives the
creditor the right to cancel or rescind the contract of sale).

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In reciprocal obligations, it could be IMPLIED if one party defaults in his
obligation (Ex. If debtor does not deliver the thing promised, creditor has the
right to cancel or rescind contract).

If both debtor and creditor commit a breach, both are guilty. The first one to
violate the contract is called FIRST INFRACTOR. His fault is tempered by the
fault of the SECOND INFRACTOR.

Example:
The debtor, bound himself to deliver to the creditor a car. B agreed to pay upon
delivery of the car. Debtor delays delivery of car., so he is violation of the
contract. Creditor also failed to pay at time of delivery, so he is also guilty of
violating the contract. Result:  Debtor/first infractor pays higher amount of
damages for his delay. Creditor/second infractor also pays damages, but less
than that of the debtor’s because latter was the first infractor.

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 WEEK 4

Art.1193
Obligations for whose fulfillment a day has been fixed becomes demandable
only on the day fixed, and/or onwards.

Art.1193
Obligation with a period; one for its fulfillment a DAY CERTAIN has been
fixed.

► Obligations for whose fulfillment a day has been fixed becomes

demandable only on the day fixed, and/or onwards.

PREMATURE - demand is premature if made before obligation becomes due.

DUE AND DEMANDABLE

Fulfillment of obligation becomes due and demandable on the day fixed or
agreed upon, and/or after.

A day certain one which will definitely happen, even if the exact date (Jan. 1,
2020) is not known (When X dies).

If the happening of the EVENT is not certain, the obligation is CONDITIONAL

(not with a period).

If debtor pays or delivers before the obligation becomes due, UNAWARE of the
date of demandability, he can recover what he paid or delivered, together with
the fruits and interests. However, there is a presumption that a debtor KNOWS
when his obligation is due and demandable. He has to overcome this
presumption, for him to prove he really was unaware of the due date.

Let us say, A is obliged to deliver the car he sold to B, a year after the sale, that
is Jan.1, 2020, A loses the benefit of the future period if he:

1. Becomes insolvent/bankrupt
2. Fails to furnish the promised guaranty or mortgage
3. When he impairs the promised guaranties or thing to be mortgaged
4. When he violates the undertaking in consideration of which, creditor
agreed to the period (EX, “I will buy your and will agree to have you
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 deliver it a year from now, IF YOU REMAIN IN THIS TOWN”). If debtor
leaves town, the delivery can be demanded by the creditor right away)
5. When he ATTEMPTS to abscond (leaves without telling the creditor).

Art. 1199
A person bound by ALTERNATIVE prestations must completely do/deliver one
of them.

Example:
A binds himself to pay his debt of P20K to B, either by paying it or delivering a
piano. The entire piano OR the full 20K should be delivered, not a part of the
piano AND an amount less than P20K and say “that’s my performance”.

The creditor cannot be compelled to accept part of one and part of the other
prestation.

Art 1200
The right of choice (as to which of the alternative prestations he will do or
perform) is given to the debtor, unless the contrary has been agreed upon.

When the choice has been given to the creditor, the obligation is no longer
alternative from the moment the choice has been COMMUNICATED (by the
creditor).

Contrast alternative obligation with FACULTATIVE OBLIGATION, which is one

where there is only ONE prestation, but the parties agreed that debtor could
deliver another one as a SUBSTITUTE.

Example:
Debtor has the obligation to deliver a piano, but his agreement with the
creditor is that he may deliver a colored TV set (as a SUBSTITUTE).

Art. 1208
If the law or contract does NOT state the nature of the obligations, it is
PRESUMED that the obligation is divided into as many shares as there are
debtors and creditors, meaning, it is a JOINT OBLIGATION.

Example:
A, B and C owe X, Y and Z, P900. Each debtor owes each creditor P300.

Art. 1210
The indivisibility of an obligation (EX - a car) does not necessarily give rise to
SOLIDARITY.

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Example:
A and B are jointly liable to deliver a car to B. The car is indivisible, but the
LIABILITY of A and B is JOINT, not solidary.

On PAYMENT: if the debtor, in an obligation to pay, has paid the amount

owing or promised, the obligation is EXTINGUISHED.

In a JOINT obligation, each debtor is liable only for HIS OWN share. He cannot
be held liable for his co- debtor’s shares. If he voluntarily pays the whole, he
can recover from his co-debtors.

In SOLIDARY obligation, each debtor is liable for the WHOLE OBLIGATION.

The creditor has the right to ask payment or fulfillment from ANY one of the
SOLIDARY debtors. The debtor who pays can recover from the others.

Art. 1218
Question: Effect of payment after obligation has prescribed or become llegal?
Answer: Payment by a SOLIDARY debtor does not entitle him to
reimbursement from his SOLIDARY co-debtors, because there was no more
debt when he paid it.

Art. 1220
The remission of the whole amount obtained by any of the SOLIDARY debtors
does not entitle him to reimbursement from his co-debtors.

Question: Why?
Answer: Because remission is gratuitous or free.

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 WEEK 5

Art 1223
Obligations can be divisible or indivisible.

DIVISIBLE obligations are those that are capable of partial fulfillment

Example: loan in installments

INDIVISIBLE obligations are those that are not capable for partial fulfillment
Example: A promised to deliver a car

● Obligations are generally indivisible.

Kinds of indivisibility:

a. Legal indivisibility
● the law says so, as in payment of taxes.
b. Conventional indivisibility
● the parties agree that it be indivisible, as in a loan, which by
agreement, is to paid in full (not in installments).
c. Natural indivisibility
● indivisible because of its nature, as in a promise to deliver a cow.

Note:
So, in fact, even if a thing is divisible, by law or by convention/agreement, the
obligation to fulfill it could be made indivisible.

Art. 1226
Obligations with a penal clause. Here, the penalty shall substitute the payment
of damages and interests in the event of non-compliance.

Principal obligation, which can stand on itself is called the main contract.

Accessory obligation is attached to the Principal obligation. It cannot stand

on its own. (like a penal clause), it must have a principal obligation to deliver a
thing, to do or not to do.

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Example:
A entered into a contract of building a house for X, with an undertaking that it
will be finished in a month. The contract further says, for any delay incurred
by A, he will pay X a penalty of P10K every week. The construction is the
principal obligation. The penalty is the penalty clause.

● The debtor cannot excuse himself from his obligation by paying the penalty.
He must do the principal obligation. If he can’t deliver, as per terms or
conditions of the contract, then the penalty clause kicks in/applies.

● To be entitled to the penalty, the creditor is not obligated to prove any

damages. The amount of the penalty has been pre-agreed.

Art.1229
The judge may reduce the penalty if there has been fulfillment by the debtor,
although it was only partial or irregular. Reduction could also be ordered if the
penalty is so iniquitous or unconscionable (unreasonably exhorbitant). This is
based on equity and fairness.

Art. 1230
Nullity of the penalty clause does not affect the validity of the principal
obligation. Nullity of the principal obligation, makes the penalty clause invalid.

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 WEEK 6

CAUSES OF TERMINATION of an obligation:

a. Loss of the thing due

► The subject is lost without anybody being at fault.
b. Novation
► Changing the contract or making a new contract in lieu of the
existing one.
c. Compensation
► There is compensation when two persons, in their own right, are
creditors and debtors of each other.
d. Remission
► Voluntary and gratuitous (free; no pay) forgiveness of the debt
by the creditor.
e. Payment
► Satisfaction of the obligation by payment or by compliance (with
the obligation).

Art. 1232
Definition of payment. It is paying the money owed or performing the
obligation.

► Payment must be full and complete, for it to be considered PAYMENT.

► Good faith must always be observed in all kinds of obligation. It means

fairness, equity and honesty.

► If the compliance with the obligation is incomplete, but the creditor accepts
it without any objection or question, compliance is deemed complete and full.

► The creditor cannot be forced to accept payment or compliance from a Third

Party, unless there be a an agreement or provision to that effect.

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► Whoever pays for another can recover what he has paid. If the payment was
without the knowledge or against the will of the debtor, he can only recover
only insofar as the payment has been beneficial to the debtor.

Example:
A owes X P1000. S, a third party, wants to pay the P1000 owing. X, can refuse
payment OR he may accept it, if he wants to. If S pays P1000 without X
knowing it or against X will, he (S) can recover only as the payment has been
beneficial to X ( if X has already paid P400 before), S can recover from X only
P600).

Art.1238
Payment of the debt of another by a third party who does not intend to be
reimbursed is deemed a DONATION.

ART. 1239
Payment by one who does not have the free disposal of the thing due is not
valid.
Example:
A promised to sell to B a TV set. A delivered a TV set belonging to X. The
delivery/payment is not valid. X can recover his TV from B.

► Payment to a person not entitled to receive it is invalid.

► The creditor cannot be forced to accept a thing, not the subject of the
obligation, although it may be of the same value or more valuable.

ART. 1240
Question: To whom payment of the obligation is to be made?
Answer: To the CREDITOR or to the person authorized to receive it.

Art.1241
Payment to a person to a person INCAPACITATED to administer his property
is VALID:
a. If he kept the property (if he lost it, Payment is not valid).
b. To the extent that the CREDITOR has been benefited by the payment

Example:
Debtor paid the creditor the FULL amount of the obligation, THROUGH an
incapacitated person. The latter only delivered half the payment, the payment
is valid only to the extent of the half delivered to the creditor.

Art. 1242
Payment IN GOOD FAILTH to a person in possession of the credit is VALID.

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Example:
Creditor is abroad. His wife has the receipt of indebtedness. Debtor pays the
creditor’s wife in exchange of the receipt. Payment is valid.

Art.1244
Question: What if the debtor is offering the creditor with a different thing
MORE VALUABLE than the thing promised, is the creditor BOUND to accept
it?
Answer: No.  Even if the thing offered has more value than the subject of the
obligation.

What is DATION IN PAYMENT?

It is the conveyance of ownership of a thing as an ACCEPTED equivalent of
performance.

NOTE: the creditor has to ACCEPT or CONSENT before a Dation in Payment

could be made.

Example:
A owes B P30K. A, with the consent of B, delivers a piano instead. If the value
or worth of the piano is only P25K, UNLESS THERE BE AN AGREEMENT TO
THE CONTRARY, A still owes B P5K. This is Dation in Payment.

Art. 1246
Rule of MEDIUM QUALITY ► If the quality or circumstances of the thing to be
delivered has not been specified, creditor cannot demand the delivery of a thing
of SUPERIOR QUALITY and the debtor cannot deliver a thing with an
INFERIOR QUALITY.

Example:
A promised to deliver to B a horse. No description. No circumstances
mentioned. A can’t deliver a thin, sickly horse, neither can B require A to
deliver an imported race horse.

Art. 1247
In the absence of agreement, extrajudicial expenses

Example:
Expenses of mailing or delivery shall be paid by the debtor.

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 WEEK 7

PARTIAL PAYMENT OR PERFORMANCE is generally not allowed, unless

a. agreed upon or 
b. in staggered demandability (meaning, demand payment of part that is
already due; wait for the other part to become due, before demand for
payment/fulfillment, of that part, could be made).

Art 1248
Question: In what CURRENCY should payment be made?
Answer: In the currency agreed upon. If there is NO agreement, in Philippine
Currency, which is THE LEGAL TENDER in the Philippines.

Art. 1250
If there is an EXTRAORDINARY inflation Money gets reduced value) or deflation
(money increases in value), in the absence of AGREEMENT TO THE
CONTRARY, the amount of the obligation, AT THE TIME IT WAS MADE should
be the basis of payment.

Example:
A owes B P10,000 to be paid after five years. When the five year period arrives,
the value of the P10,000 is P5,000. A is offering to pay B only P10,000. Can B
refuse to accept? Yes, in this case, there has been an EXTRAORDINARY
INFLATION as the value of money gets reduced. The reverse of this is called
DEFLATION. The solution is, they go back to the time the obligation was made
when the value of P10,000 was P10,000. So, B is entitled to get that value.
That value is now P20, 000, so he is entitled to P20,000.

Question: Where shall payment to be made?

Answer: In the place agreed upon. If there is no agreement, or where the

obligation is to deliver a determinate thing, in the PLACE WHERE THE THING

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to be delivered is. In any other case, in the RESIDENCE/DOMICILE of the
debtor.

SUBROGATION: Stepping into the shoes or rights of the creditor to recover

from a party responsible to pay.

Example:
● A negligently drove into and damaged the fence of B. B could collect from A
the amount of his damage. Instead OF COLLECTING FROM A, B collected his
damage from his insurance company. The insurance company is
SUBROGATED to the right of B to collect what it paid B for the latter’s claim
for fence damage.

● A owes B P1000. C pays B the P1000. C can go after A for reimbursement of

what he paid (because if C didn’t pay A’s debt, A. must pay B anyway). In
effect, this right of B to collect from A has only been transferred to C. This right
to collect is called SUBROGATION.

APPLICATION OF PAYMENTS HAPPENS WHEN A DEBTOR HAS SEVERAL

INDEBTEDNESS AND HIS ABILITY TO PAY IS LIMITED OR COULD’NT
MATCH THE TOTALITY OF ALL THE DEBTS. 

Art.1252
In essence, this article provides that a debtor who has various indebtedness,
must DECLARE at the time he makes the payment, which of them he is
paying. 

IF THE DEBT CONSISTS OF THE PRINCIPAL AMOUNT AND INTERST:

If the debt is for principal and interest, the debt is not considered paid unless
the interest is also paid.

Example:
A owes B P10K, with P1K interest (for a total of P11K). If A pays B P10K only,
P1K thereof will be applied first to the interest and P9K will be applied to the
principal. This will leave an outstanding balance of P1K, which A still has to
pay B on the principal.

WHAT IS THE RULE IF THERE ARE SEVERAL DEBTS AND PAYMENT IS

NOT SUFFICIENT TO COVER THE TOTAL AND THERE IS NO
DECLARATION OF PAYMENT?
Answer:
1.  If there are several debts, and there is no declaration as to what debt is
being paid, the one that is MOST ONEROUS (or burdensome) is deemed to be
paid first.

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Example:
A owes B two separate debts, one is interest bearing and the other is not. The
one with interest is more onerous than the one without interest. If the amount
of payment does not fully cover both debts, the one with interest is deemed
paid first, because same is more onerous or burdensome.

2. If all the debts have the SAME burden, payment is applied proportionately.

Example:
A has 3 debts with B. If A pays B an amount which does not fully cover all
three debts, the payment shall be applied to all three debts
PROPORTIONATELY.
WEEK 8

PAYMENT BY CESSION: A debtor with several debts, may offer ALL his
property in payment.

RULE: If it is stipulated or agreed that the proceeds of all property ceded (after
selling same) will completely settle the indebtedness, then the debt is deemed
fully paid. If there is NO such stipulation, and if the proceeds are less than or
fall short of the total debts, the debtor still owes the uncovered or unpaid
portion of the debts.

Art. 1256
CONSIGNATION HAPPENS WHENTHE DEBTOR OFFERS PAYMENT OR
DELIVERY BUT CREDITOR REFUSES TO ACCEPT IT.

HOW IS IT DONE? By depositing the money or the thing due, with a court of
justice, which money or thing was earlier offered in payment by the debtor to
the creditor who refused to accept same without just cause.

THE REQUIREMENT OF ANNOUNCEMENT: Before actually depositing the

money or the thing with the court, which is called CONSIGNATION, there will
be an announcement of such consignation to the person interested in the
fulfillment of the obligation.

EFFECT OF CONSIGNATION - It releases the debtor from the obligation.

WHO PAYS EXPENSES OF CONSIGNATION? - To be paid by the creditor

(because his refusal has forced the debtor to make the CONSIGNATION).

WITHDRAWAL OF THE MONEY OR THING DEPOSITED WITH THE COURT

BEFORE APPROVAL (of consignation) - If the money or thing consigned is

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withdrawn by the debtor before the court has approved same, the withdrawal is
valid, BUT the debt still remains unpaid. 

Art. 1262:
LOSS OF THE THING DUE: the loss or destruction of the thing due, WITHOUT
THE FAULT of the debtor, extinguishes the obligation.

NOTE: AN agreement to the effect that the loss or destruction of the thing due
CAUSED BY THE FAULT OF THE DEBTOR will not extinguish the obligation
is also valid.

LOSS OR DESTRUCTION OF A GENERIC THING: The loss or destruction of a

GENERIC thing due, does not extinguish the obligation.

Example:
A promised to deliver 5 cavans of rice, which were later destroyed or lost, does
not relieve him of his obligation to deliver another 5 cavans of rice.

THE TOTAL LOSS OF THE THING DUE WITHOUT THE FAULT OF THE
DEBTOR EXTINGUISHES THE OBLIGATION, BUT WHAT ABOUT A PARTIAL
LOSS ONLY, COULD IT BE CONSIDERED A GROUND FOR EXTINGUISHING
AN OBLIGATION?
Yes, the partial  loss of the thing due COULD be the basis of the
extinguishment of the obligation.

EXPLANATION: If the partial loss is SIGNIFICANT enough, such partial loss

could be considered the LOSS of the thing promised. As such, it could
extinguish the obligation.

Example:
A promised to deliver to B a racehorse. The horse had an accident, as a result
of which, it developed a limp. Such partial loss could be considered significant
enough to extinguish the obligation. (After all, a racehorse with a limp will not
serve the purpose of the agreement).

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 WEEK 9

OTHER GROUNDS FOR EXTINGUISHING AN OBLIGATION:

An obligation could also be extinguished if it becomes PHYSICALLY or
LEGALLY IMPOSSIBLE to do the same.

Example:  
A promised to paint B’s house, but a week after the agreement, A had both of
his arms amputated, in which case the obligation is extinguished, because of
its physical impossibility of fulfillment.

LEGAL IMPOSSIBILITY
Example:
A promised to construct a house for B at a certain site, but the government
declared the site as a commercial site (Not allowing residential homes on this
location). This effectively extinguished the obligation because the law prevents
the obligation from being carried out.

Art. 1267
When the service to be provided becomes too difficult to do as WHEN IT
BECAME MANIFESTLY BEYOND THE AGREEMENT, the obligation is
extinguished.

Example:
A promised to construct a road, near a mountain range, for B. An avalanche
occurred and it buried the site which makes it too difficult for A to carry on
with the project. The obligation could be extinguished, as the parties could not
have expected that degree of difficulty in constructing a road. 

Art. 1268

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The loss or destruction of a thing which proceeds from a  CRIMINAL ACT does
not exempt the criminal from paying its price.

Example:
A steals B’s car. The car, which was in the possession of A, was lost or
destroyed. (WE ALL KNOW THAT A THIEF HAS THE OBLIGATION TO RETURN
OR PAY FOR THE THING HE STOLE). A still has the obligation to pay the price
of the car he stole from B.

Art. 1270:
CONDONATION OR REMISSION OF DEBT: Defined as the gratuitous (FREE)
abandonment of the right of the creditor against the debtor.

Like a donation, it requires the acceptance of the debtor.

PRESUMPTION OF CONDONATION/REMISSION - The delivery of a document
evidencing credit implies a remission or renunciation by the creditor of his
right to go against the debtor.

Art. 1272
EFFECT OF THE DOCUMENT OF CFREDIT BEING IN THE POSSESSION OF
THE DEBTOR: The fact that the document of credit is in the possession of the
debtor raises the PRESUMPTION that the credit has been renounced or
forgiven.

Art. 1273:
EFFECT OF REMISSION OF THE PRINCIPAL OBLIGATION ON THE
SECONDARY/ACCESSORY OBLIGATION: The extinguishment of the principal
obligation ALSO extinguishes the accessory/secondary obligation. The reverse
is not true.

Example:
A owes B P10,000, with C as guarantor.  B condones the P10K obligation,
which extinguishes the obligation to pay P10K and also the guaranty. However,
in the same example, if B condones the guaranty, it extinguishes the guaranty,
but the obligation to repay the P10K still subsists.

WHAT IS THE EFFECT OF THE THING PLEDGED BEING IN THE

POSSESSION OF THE DEBTOR OR OWNER OF THE THING PLEDGED?
Art. 1274 - If the thing pledged (to secure a debt), AFTER ITS
DELIVERY TO THE CREDITOR, is found in the possession of the debtor or
the owner of the thing pledged, the presumption is raised that the accessory
obligation of pledge has been condoned or waived. 

CONFUSION OR MERGER OF RIGHTS

Art. 1275

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One form of extinguishing an obligation is when the rights of creditor and
debtor reside in the same person. This is called CONFUSION OR MERGER OF
RIGHTS. 

Example:
A owes B P10K, for which he issues a negotiable promissory note. B indorsed
the note to C, who in turn indorsed it to D, who turned around and indorsed
the note to A (as payment for P10K that D owes A). Now, A owes himself P10K.
There is CONFUSION or MERGER as he has both the rights of creditor and
debtor. That extinguishes the obligation.

Art. 1277
In a JOINT obligation, confusion or merger only extinguishes the obligation of
the obligor where the rights of creditor and debtor concur.
Example:
A, B, C jointly owe D P9K. They issued a negotiable promissory note. D
indorsed it to E and E to F. F indorsed it to A. A became creditor and debtor.
His P3K obligation is extinguished because of CONFUSION or MERGER. B and
C (his joint co-debtors) are still liable to pay their P3K obligation each, this time
to A.

Art. 1278
COMPENSATION: When two persons become the creditor and debtors of each
other, and both debts are due at the same time, there is compensation. (In
street language, this is what we call QUITS).

EFFECT: When this happens, the obligation is extinguished to the extent there
is compensation.

Example:
A owes B P2K. B owes A P1K. With respect to P1k, there is PARTIAL
compensation. A can still recover from B the difference of P1K. If both debts are
of the same amount (P2K each and both are due at the same time), the
compensation is TOTAL.

Art. 1291
NOVATION: is the total or partial extinction of the original contract and
substituting it with a NEW one.

Example: A owes B P5K. A paid B P3K, which B accepted. If there is no

stipulation that this is just a partial payment, technically, a NEW obligation is
created, which is for P2K. In the same Example, if A leaves town, and B agrees
to substituting X for A, a NEW contract is created between B and X. The
original contract between A and B is extinguished. In yet the same example, Y
paid B the P5K that A owed B. That obligation is extinguished because the old

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obligation between A and B has been extinguished. A NEW one is created
between A and Y (by way of subrogation).

Art. 1303
SUBROGATION: transfers all the rights of the creditor to the party who paid
the indebtedness or who was responsible for complying with the obligation of
the debtor. EX. A owes B 1K. C, with A’s permission, paid the P1K
indebtedness. C is now SUBROGATED to the right of B to collect from A.

NOTE: If the payment was only partial, the subrogation right obtained by the
person who paid is only for the extent of the partial payment.

Example:
In the above example, if C only paid P500 (of the total debt of P1K), C can only
collect from A P500. This is called PARTIAL SUBROGATION.
WEEK 10

CONTRACTS
A person’s right to enter into a contract is guaranteed by the
Constitution,

Contracts - Agreements/Kasunduan.  Two or more persons agreeing. ONE

PERSON CANNOT ENTER INTO A CONTRACT WITH HIMSELF.

Forms - Contracts could be written or oral.

● Could be on any piece of paper or any writing facility.
● Could be notarized (public instrument) or not notarized (private
instrument).

Effect - They are binding between the persons that agreed thereto. Third
parties are NOT bound.

Requisites/Elements:

a. Object - ANYTHING not against the law

b. Consent - UNFORCED, free, voluntary
c. Consideration - must be legal, not unlawful.

In Other Words - A contract should not be:

a. Unlawful (Example: sale of prohibited drugs)

b. Immoral (Example: contracting for a common-law relationship)
c. Against public policy (Example: Where the purpose of the contract is for
opposing government policies)

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 d. Against public order (Example: Contract of lease, which allows the
landlord to FORCIBLY eject the tenant in case of failure to pay rent).
e. Against good customs (Example: contracting with somebody, the
purpose of which is slapping or insulting an elderly person).

The contract must bind BOTH contracting parties.

Example: A contract that stipulates that A has the discretion of complying or

not complying with his part of the bargain is invalid.

The Law - Contracts are obligatory in whatever FORM they may have been
entered into as long as they have the ELEMENTS of legality, not violative of
public policy, public order, immorality, good customs, etc...

Contract vs. Obligation

 ► Contract CREATES obligations

 ► Obligation is the RESULT of a contract

Contract vs. Agreement

► Contracts are always BINDING/ENFORCEABLE

► Generally, agreements are merely moral or social ties; cannot be
enforced in court.

Nominate vs. Innominate Contracts

● Nominate Contracts are those with specific NAMES

Examples: Contracts of Sale, Lease, Rents, etc.

● Innominate are those WITHOUT specific names/designations.

Example: Any binding agreement, like agreement allowing A to borrow
B’s boat on Sundays, for a small charge or fee. There is no specific name for
this kind of agreement. You can come out with any GENERIC name for this, or
for any and all agreements.

A contract MUST be equitable

Example: A contract to sell a one-hectare irrigated land for P1000 could
be disputed or ruled as inequitable). Is there a P1K one-hectare irrigated land?

Contracts only bind/affect the contractual parties (This is called PRIVITY OF

CONTRACTS). It does not affect persons NOT party to the contract.

Art. 1313
Creditors are protected in cases of contracts intended to defraud them.

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Example: A is indebted to B. Just before the due date of the indebtedness, A
sells all his property to another. B could claim, A’s action of selling all his
property is fraudulent or has the effect of defeating his right to EXECUTE or go
after A’s property if the latter fails to pay.

Art. 1317
No one may contract in the name of another person without latter’s authority.

Example: A binds B (who is in the US and did not know of the contract) to sell
his car to X. The contract is not valid.

WEEK 11

ESSENTIAL REQUISITES OF A CONTRACT

a. CONSENT of the contracting parties: The parties must have knowledge

and voluntary willingness to bind themselves.
b. OBJECT CERTAIN: which is the subject of the agreement
Example: A car, a horse, a house are objects certain. On the other
hand, selling SOMETHING, without specification, does not have an
object certain).
c. CAUSE of the obligation - This is the CONSIDERATION, like the PRICE
in a contract of sale, love in a deed of donation, etc.

► For a contract to be valid, there must be an OFFER (or proposal) and an

ACCEPTANCE (or agreement). This is called MEETING OF THE MINDS.

► The offer must be CERTAIN and the acceptance CLEAR (could be express or
implied) and COMMUNICATED.

► Consent must be free.

Persons who cannot give consent:

a. A minor or insane person could not validly consent to a contract. In law,

they are incapable of understanding what they are entering into.
b. A lunatic, could agree validly, if done during his LUCID INTERVAL.
Otherwise, it is invalid.

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 c. Contract entered into by a intoxicated person or under a hypnotic
spell is VOIDABLE.
d. Forced, involuntary, consent obtained by fraud or trickery cannot be the
basis of a valid contract. Because there is no FREE consent. (vices of
consent)

► Acceptance by letter or telegram is valid from the time it has come to the
knowledge of the offeror.

► Advertisements are NOT offers, they are simply invitations to make

proposals.

Art. 1330
A contract where consent is given through, MISTAKE, VIOLENCE,
INTIMIDATION, UNDUE INFLUENCE, OR FRAUD (vices of consent) is voidable.

Consent must be free.

► A minor or insane person could not validly consent to a contract. In
law, they are incapable of understanding what they are entering into.
► A lunatic could agree validly, if done during his LUCID INTERVAL.
Otherwise, it is invalid.
► Contract entered into by a intoxicated person or under a hypnotic
spell is VOIDABLE.
► Forced, involuntary, consent obtained by fraud or trickery cannot be
the basis of a valid contract. Because there is no FREE consent.

♣ Acceptance by letter or telegram is valid from the time it has come to the
knowledge of the offeror.

EXAMPLE of MISTAKE
A sold his Ferrari sports car to B for P2m. The written contract says
P200k (instead of P2m). A could ask for rescission of the contract because of a
BIG mistake in the price. (If the mistake is a SMALL one, P1.9m., instead of
P2m., it may not be rescinded).

EXAMPLE of VIOLENCE
A was forced to sign the contract because he was being tortured at the
time he signed it. 

EXAMPLE of INTIMIDATION
A signed the contract because he was threatened that if he did not sign,
they will kidnap his son, and he believed the threat to be true and imminent
(reason why he signed it)

UNDUE INFLUENCE

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 When a person takes improper advantage of his power over the will of
another.

Example:
A priest administering last rites over a dying person, who donated a piece of
land to the church. (It could also exist when the victim is of weak mind, in
financial distress, etc.).

Usual exaggerations in trade, when the victim has the opportunity to

investigate and know the truth, are not grounds to rescind a contract.

Example:
Advertisement saying “try it, you will like it”, “good to the last drop” are
EXAMPLES of this. If the buyer did not like the product or did not feel that the
product was good up to the last drop, as represented in the sales talk/pitch or
advertisement, he couldn’t ask for the cancellation of the sale.

A mere expression by a person, who is not an expert, is also not a ground to

rescind a contract.

Example:
The neighbor of A, who is not an expert, tells A that a certain weed killer is
effective. If it turns out to be ineffective, such statement is not a ground for the
rescission of the sale of such weed killer.

EXAMPLE of FRAUD which could invalidate a contract

A sold his land to B on which, according to him, 4000 mango trees are
planted. If it turned out, there were only 1000 mango trees. Sale could be
annulled for FRAUD (or misrepresentation) on the part of A.

WHAT CAN BE THE OBJECTS OF A CONTRACT?

     1. Things within the commerce of men or those which can be legally sold,
peddled or transferred commercially. One cannot sell a baby, a sidewalk, a
bridge, a lake, because these are NOT within the commerce of men.
 
2. THINGS EXISTING - those which are already existing. FUTURE
INHERITANCE cannot be sold by the expectant heir, because, these things are
not existent yet (as far as the heir is concerned; he could expect, but he is not
the owner yet). There should be death on the part of the owner before
ownership passes onto his heirs.

3. SERVICES not contrary to law (example: slavery or servitude), good

customs, public policy, public order) can be object of contracts.

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NOTE: IMPOSSIBLE THINGS (delivery of the moon) or SERVICES (military
services of a foreigner) CANNOT be the object of Contracts.

CAUSE OR CONSIDERATION - reason or purpose why the contracting parties

enter into a contract.

In a CONTRACT OF SALE, cause for the seller is the price to be paid by the
buyer, for the buyer, it is the acquisition of the object.

It is quite, confusing, but the thing to remember is the CAUSE is the

CONSIDERATION. 

A sells his watch to B for P1K. A has the prestation to deliver the watch. B has
the prestation to pay A P1K. If the cause is the prestation, A‘s consideration is
the delivery of the watch, and B’s prestation is to pay the price.

MOTIVE is different from consideration.

ONEROUS consideration means for a price. 

GRATUITOUS CONSIDERATION means it is for free, like in DONATION of

GIVING A GIFT, where the consideration is the donor’s love, concern, affection
for the donee. 

ART. 1356: FORM OF CONTRACTS

General rule: Contracts could be in ANY form - oral or written. If all requisites
of a valid contract are present, it is binding and enforceable by and between
the parties. This is the GENERAL RULE.

Exceptions: There are laws that require certain contracts to be in specific

written form.

Examples:
a. Donation of real property - must in a public document (notarized).
b. Donation of personal property valued more than P5K - donation and
acceptance must be in writing
c. Sale of land thru an agent - authority to sell must be in writing.
d. Stipulation to pay interest - must be in writing, otherwise no interest is
due.
e. Contract of partnership - if there are immovable properties involved,
inventory must be in writing.

REFORMATION

ART. 1359: Reformation of contracts

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 Where there is a contract/meeting of the minds, but the TRUE
INTENTION of the parties is not expressed, the parties may ask the court to
have the instrument/contract REFROMED (to have the true intention
expressed).

Example:
A and B entered into a contract of sale of a piece of land. The agreement is to
have all the improvements on the land included, like a house and some trees
existing on the land. The contract was executed, but it failed to mention the
inclusion of the house and the trees. This is contrary to the intention of the
parties, so they could ask the court to REFORM the document.

However, if there was fraud, mistake, etc, which are the usual factors that are
grounds for cancellation of contracts, the remedy is NOT reformation. It is
RESCISION or CANCELLATION of instrument that is the remedy. Why?
Because there really was NO meeting of the minds between A and B.

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 WEEK 12

INTERPRETATION OF CONTRACTS

Interpretation means finding out what THE CONTRACT MENANS or what

words used in the contract really mean.

Art.1370
Should there be confusion or question re what words used in a contract mean
or what a contract means, the RULE OF INTERPRETATION is “literal
interpretation”. In other words, the literal meaning (the direct or usual
meaning) of the stipulations will be used.

Example: A, the “SELLER” sold his land to B, the “BUYER”. Is the contract a
contract of sale or what? The contract is one for sale. If it was for lease or
mortgage, the words “seller” and “buyer” would not have been used in the
contract. Literal interpretation.

CONTEMPORANEOUS ACTS of the parties could also be used as a rule of or

guide in the interpretation. In the above example, if B, after the contract was
completed, registers his ownership and obtains a torrens title, this
contemporaneous act is a clear help in interpreting the contract as a contract
of sale of a piece of land. Or, A’s contemporaneous act of admitting to other
people that he already sold his land to B also helps in knowing that A REALLY
sold his land to B.

Another thing that could help in interpreting the meaning of the contract is
CUSTOM of the place. In the above example, if in the place where A and B live,
people have the custom of NOT registering leases and mortgages, and
registering only SALE OF LAND, this custom could guide in knowing whether
the contract between A and B was in fact one of SALE.

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Another rule of interpretation - If there is ambiguity/ confusion in
interpreting word(s) used in a contract, interpretation shall be AGAINST THE
PARTY WHO WAS RESPONSIBLE FOR DRAFTING THE WORDS OF THE
CONTRACT. The reason for this is common sense: if the words used are
confusing, the party who made the contract is responsible for the confusion.

RESCISSIBLE CONTRACTS: these are contracts which could be cancelled  or

rescinded because they cause economic damage  to one of the parties.

RESCISSIBLE Contracts are valid until they are annulled.

NOTE: Art. 1380: Rescission is only available as a remedy, if the prejudiced

party has NO OTHER ACTION or remedy available.

Example of RESCISSIBLE Contracts:

1. Contracts entered into by guardians, in representation of their wards,

where the damage or prejudice to the ward exceeds one fourth of the
value of subject of the contract.
Example: Guardian sells ward’s property worth P1m. for P500K. The
contract is RESCISSIBLE as the damage to the ward is more than one
fourth of value of the property sold.

2. Contracts entered into by one in representation of an absentee where

damage to the latter is more than one fourth of the value of the property.
(Similar to the above example).
3. In fraud of creditors
4. Sale of property under litigation, without the permission of the litigants.
5. Other contracts declared by law as rescissible.

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 WEEK 13

ART. 1390: VOIDABLE CONTRACTS

Voidable Contracts are valid, but are annullable, because either party is
incapable of giving consent (as in the case of a minor or one who is mentally-
challenged) or where the consent of one of the parties was obtained by force,
intimidation or by an act or factor that flaws his consent.

Voidable Contracts could be ratified. A contract entered into by a minor is

annullable, but if after reaching majority age, he ratifies same, then the
contract becomes permanently valid.

ART. 1403: UNENFORCEABLE CONTRACTS

These are contracts that cannot be enforced in court or sued upon, because of
certain defects (like, entered into on behalf of a party who has not given
authority to the one who represented him, those that do not comply with the
Statute of Frauds, those where both parties are incapable of giving consent, as
a contract between 2 minors, unless they are subsequently ratified.

Unenforceable Contracts could be ratified.

ART. 1409: VOID OR INEXISTENT CONTRACTS

These are contracts which are flawed and which produce no effect at all.

Example:
1. cause, object or purpose is illegal
2. totally simulated
3. object or cause inexistent
4. subject outside the commerce of men

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 5.impossible service
6. intention of the parties cannot be ascertained
7. those expressly prohibited by law

These contracts CANNOT be ratified.

ART. 1423: NATURAL OBLIGATIONS

Obligations are either CIVIL (those which can be sued upon or are enforceable
in law/court, as in people’s contract of sale, or NATURAL (those which
originates from equity and fairness; they cannot be enforced in court or sued
on).

Example: A owes B P20K. After 50 yrs., A paid B. In this case, the debt has
already expired and cannot be sued on anymore. Payment is valid as A felt he
is bound by a natural obligation a just debt.

A owes B P20K. No mention of interest.

Remember: If interest was not agreed upon, it is not payable. B paid the P20 K
and also 6 percent interest. Payment of interest was a natural obligation and
the money paid as interest cannot be recovered back by A.

END

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