LAW ON OBLIGATIONS (PART 2)

EXTINGUISHMENT OF OBLIGATION Other causes of extinguishing an obligation

1. Payment or Performance a. Arrival of resolutory period
2. Loss of the thing due b. Death of the party
3. Condonation or Remission of the debt c. Mutual desistance/withdrawal
4. Confusion or Merger of the rights of the creditor and debtor d. Compromise
5. Compensation e. Impossibility of performance
6. Novation f. Happening of a fortuitous event
7. Annulment
8. Rescission
9. Fulfillment of resolutory condition
10. Prescription
11. Other causes

Payment or Performance (1232)

- Consist of the delivery of money or the performance of an obligation

General rule: There must be total performance. Partial or irregular performance does not extinguish
obligation. (1233)

Exceptions:
On the complete payment or performance of obligation

a. Substantial performance in good faith (1234): obligor may recover (as if there had been complete
fulfillment) less damages suffered by the obligee.
Requisites of Substantial Performance
1. Attempt in Good Faith to perform without willful or intentional departure
2. Deviation is slight
3. Omission/Defect is technical or unimportant
4. Must not be so material that intention of parties is not attained

Effect of Substantial performance in good faith

1. Obligor may recover as though there has been strict and complete fulfillment, less damages suffered by the
oblige
2. Right to rescind cannot be used for slight breach

b. Creditor’s acceptance of the performance knowing its incompleteness or irregularity and without any protest or objection
(principle of estoppels) (1235): obligation is deemed fully
complied with
Art. 1232 – payment means not only the delivery of money but also the performance, in any other manner, of an obligation.

How payment must be made?

1. There must be delivery of the thing or rendition of the service that was contemplated.
2. The payment or performance must be complete.

On the delivery of the thing or rendition of the service

a. Debtor of a thing cannot compel the creditor to accept a different one.

b. In obligations to do or not to do, no substitution of an act by another act against the obligee’s will.
c. In obligation to give a generic thing whose quality and circumstances have not been stated,
 Creditor cannot demand a thing of superior quality.
 Debtor cannot deliver a thing of inferior quality.
d. If a monetary obligation, payment must be in legal tender.

Legal tender – the money or currency which the debtor may compel his creditor to accept in payment of his debt.
*However, the parties may stipulate that the payment may be made in currency other than the Philippine legal tender at the
time of payment.
  The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then
in the currency which is legal tender in the Philippines. (1249)
 The delivery of mercantile documents shall produce no effect of payment until cashed or impaired through creditor’s fault.
 A check is not a legal tender and cannot constitute a valid legal tender of payment until actually realized.
 In case an extraordinary inflation or deflation of the currency stipulated should supervene, the value of the currency at the
time of the establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary (1250)

Nota Bene:
Section 52. Legal Tender Power. - All notes and coins issued by the Bangko Sentral shall be fully guaranteed by the Government of the
Republic of the Philippines and shall be legal tender in the Philippines for all debts, both public and private: Provided, however, That,
unless otherwise fixed by the Monetary Board, coins shall be legal tender in amounts not exceeding Fifty pesos (P50.00) for
denominations of Twenty-five centavos and above, and in amounts not exceeding Twenty pesos (P20.00) for denominations of Ten
centavos or less. (R.A. 7653)

Hence, Philippine currency notes have no limit to their legal tender power. However, pursuant to BSP Circular No. 537, Series 2006
(Dated: July 18, 2006), coins in denomination of 1-,5- and 10-piso shall be legal tender in amounts not exceeding P1,000.00 while coins in
denomination of 1-,5- and 10- and 25 sentimo shall be legal tender in amounts not exceeding P100.00.

Who must make the payment?

Payment must be made by the debtor who has:
1. The free disposal of the thing due.
2. The capacity to alienate the thing.

Free of disposal – the thing is not subject to claim by any person.

When creditor may refuse to accept payment?

1. Payment by 3rd person
2. Partial performance
3. When the debtor has no capacity to alienate or free disposal of the thing

General rule: Creditor not bound to accept performance by 3rd person. (1236) The creditor is bound
to accept payment only by:
1. Debtor
2. Has interest in the performance of obligation (guarantor, surety)
3. 3rd person if there is stipulation.
But the payment in any case valid if the creditor accepts. The option to accept is granted to the creditor.

Payment by a third person (1236)

General rule: The creditor is not bound to accept payment or performance of a third person who has no
interest in the fulfillment.
Exceptions:
1. When there is a stipulation to that effect
2. When the third person has an interest in the fulfillment of the obligation such as a guarantor or a co-debtor

Rights of a third person who makes the payment

1. Payment with knowledge and consent of the debtor (1236 par 2)
a. He can recover what he has paid. (right of reimbursement)
b. He is entitled to be subrogated in the rights of the creditor such as those arising from mortgage, guaranty, or penalty.
2. Payment without the knowledge or against the will of the debtor (1237)
a. He can recover only insofar as the payment has been beneficial to the debtor. He is not entitled to subrogation.
3. Payment by a third person who does not want to be reimbursed
a. The payment shall be deemed to be a donation which requires the debtor’s consent.
b. If the debtor does not consent, the payment shall nevertheless be valid to the creditor who has accepted it.
Partial payments (1248)
General rule: The creditor cannot be compelled to receive, and the debtor to be compelled to make partial payments.

Exceptions: 1. When there is an agreement to that effect.

2. When the debt is in part liquidated and in part unliquidated.
3. Different prestation are subject to different terms or conditions which affect some of them.
To whom shall payment be made? (1240)
1. To the creditor
2. To the creditor’s successor in interest, such as his heirs or assigns
3. To any person authorized to receive payment
Payment to an incapacitated creditor (1241)
General rule: Not valid
Exceptions, i.e. payment is valid
1. If has kept the thing to be delivered
2. Insofar as the payment has been beneficial to him
Payment to an unauthorized third person (1241)
General rule: Not valid
Exceptions, i.e. payment is valid
1. If the payment has redounded to the benefit of the creditor
2. If the payment is made in good faith to a third person in possession of the credit
Where payment must be made? (1251)
1. If there is a stipulation, then in the place designated
2. If there is no stipulation
a. If the obligation is to give a determinate thing, wherever the thing might be at the time the obligation was
constituted
b. If the obligation is to give a generic thing or an obligation to do, then at the domicile of the debtor
 Payment made in good faith to any person in possession of the credit shall release the debtor. (1242)
Requisites:
1. Payment by debtor must be made in good faith
2. Creditor must be in possession of the credit & not merely the evidence of indebtedness
  Payment made to the creditor by the debtor after the latter has been judicially ordered to retain the debt shall not be valid.
(1243)
 Debtor cannot compel the creditor to receive a different one although of the same value or more valuable than that which is
due. (1244)
 Obligation to do or not to do, an act or forbearance cannot be substituted by another act or forbearance against the obligee’s
will. (1242 par 2)
 Obligation to deliver an indeterminate or generic thing whose quality and circumstances have not been stated. (1246)
a. Creditor cannot demand a thing of superior quality.
b. Debtor cannot deliver a thing of inferior quality.
 Extrajudicial expense – account of the debtor
 Judicial expense – The Rules of court apply. Judicial expense is shouldered by the losing party.

Special forms of payment

1. Dation in payment (1245) – the ownership of the property is transferred to his creditor to pay a debt in money.
 One creditor, debtor is not insolvent, does not involve all property of the debtor and the
creditor becomes the owner of the property (asset swap)
 governed by law on sales
2. Application of payment (1252) – the designation of the debt to which payment shall be applied when
the debtor owes several debts in favor of the same creditor
Requisites for Application of payment
1. There must be 1 debtor and 1 creditor
2. There must be 2 or more debts
3. The debts must be of the same kind
4. The debts to which payment made by the debtor has been applied must be due
5. The payment made must not be sufficient to cover all the debts
Rules on application of payments
1. Debtor has the 1st choice – must indicate at the time of payment
2. If the debtor does not apply, the creditor may make the designation. Specify in the receipt which debt is being paid
3. In the absence of above, debt which is most onerous to the debtor
4. If the same nature and burden – applied to all of them proportionately.
5. Payment applies to interest, then to principal.
3. Payment be cession (1255) – the abandonment or assignment by the debtor of all his property in favor of his creditors so that
the latter may sell them and recover their claims out of the proceeds.
 Several creditors, debtor is partially insolvent, involves all the property of the debtor
and the creditors were only given the right over such property
Requisites of payment by cession
1. There must be 2 or more creditors
2. The debtor must be (partially) insolvent
3. The assignment must involve all the properties of the debtor
4. The cession must be accepted by the creditors
4. Tender of payment and consignation (1256) - Creditor refuse to accept payment without just cause
Tender of payment (extrajudicial) – debtor’s act of offering what is due to his creditor
Consignation (judicial) – the act of depositing the sum or thing due with the judicial authorities whenever the creditor
refuses without just cause to accept the same, or in the cases when the creditor cannot accept it. (always
judicial and generally requires prior tender of payment)
Rules on payment and consignation
 Must comply with the rules on payment (must be total)
 Unconditional and total
 Actual. Manifestation of a desire or intention to pay is enough.
 The debtor must show possession of the thing at the time of the offer (tender).
 Before creditor accepts the consignation or before judicial declaration, the debtor may withdraw the thing deposited.
 Should the creditor authorize to withdraw the thing consigned – He lose every preference over the thing (co-debtor, guarantors
and sureties are released)
Tender of payment alone cannot extinguish valid debt. However, consignation alone when allowed extinguished obligation.

Requisites on tender of payment and consignation :

1. Existence of valid debt which is due and demandable
2. Tender of payment by the debtor
3. Refusal without justifiable reason by the creditor to accept it.
4. Previous notice of consignation to persons interested in the fulfillment of the obligation. (guarantor, mortgagee,
solidary debtors, solidary creditors).
 5. Consignation of the thing
6. Subsequent notice of consignation to in interested parties.
When tender of payment not required
1. Creditor is absent or unknown or does not appear in the place of payment
2. Creditor is incapacitated at the time of payment
3. Creditor refuse to give receipt without just cause
4. Two or more person claim the same right to collect
5. Title of the obligation has been lost
Dation in payment vs. Payment by cession
1. One creditor vs. several creditor
2. Debtor not insolvent vs. debtor insolvent
3. Not all property of the debtor vs. all property of the debtor
4. Creditor become the owner vs. creditor acquire only the right to dispose the thing and apply the proceeds to their
credit proportionately.
5. Act of novation vs. not act of novation

Loss of the thing due (1262)

- A thing is considered lost when it perishes, or goes out of commerce, or disappears in such a way that its existence is unknown
or it cannot be recovered.

Kinds of loss
a. Physical loss – perishes
b. Legal loss – goes out of commerce
c. Civil loss – thing disappears in a such way that its existence is unknown.

Effect of loss on obligation

1. Loss of a determinable thing
A. Total loss
General rule: Obligation is extinguished! (Loss without the fault of the debtor - Fortuitous
event)
Exceptions:
a. When loss is due to the fault of the debtor
b. When the debtor has incurred in delay
c. When so provided by law
d. When stipulated by the parties
e. When the nature of the obligation requires the assumption of risk
f. When the debt proceeds from a criminal offense
B. Partial loss (1264) – The court shall determine whether, under the circumstances, the partial loss of
the object of the obligation is so important to extinguish the obligation. (i.e. Broken leg - horse for race or
horse to be slaughtered)
2. Loss of a generic thing
General rule: “genus nunquam perit” or genus never perishes
Exception: in case of a delimited generic thing
3. Loss in personal obligations (to do)
a. When the prestation becomes legally or physically impossible (without debtor’s fault) – obligation is extinguished
(1266)
 Impossibility at the beginning – void
 Impossibility after the constitution of the obligation
b. When the service becomes difficult as to be manifestly beyond the contemplation of the parties – the obligor may be
released in whole or in part. (1267)

Kinds of impossibility
1. Physical impossibility – (Accident/death)
2. Legal impossibility – Ordinance declaring an area residential zone (i.e. obligation to construct commercial building; Lawyer
appointed as judge)

General rule: When a thing is loss in possession of the debtor it is presumed that it was loss due to his fault. (1265)
Exception:
1. Earthquake
2. Flood
3. Storm
4. Other natural calamity
 The obligation having been extinguished by the loss of the thing, the creditor shall have all the rights of action which the debtor
may have against third persons by reason of the loss. (1269)
Condonation or Remission (1270)

- The gratuitous abandonment by the creditor of his right and it requires the debtor’s consent to extinguish the obligation.
- It may be made expressly or impliedly. One and the other kind shall be subject to the rules which govern inofficious donations.
Express condonation shall, furthermore, comply with the forms of donation.

Kinds of remission
a. Amount or Extent
1. Complete – cover the entire obligation
2. Partial – Not cover the entire obligation
b. Form
1. Express – verbal or in writing
2. Implied – Inferred from conduct
Voluntary delivery of private document evidencing the credit by the creditor to the debtor (Art 1271)
c. Date of effectivity
1. Intervivos – take effect during lifetime of the donor
2. Mortis cause – effective upon death of the donor

Requisites of Condonation or Remission

1. It must be gratuitous
2. It must be accepted by the obligor
3. The parties must have capacity
4. It must be inofficious
5. If made expressly, it must comply with the forms of donation

Art. 1271 – Voluntary delivery of private document of indebtedness by creditor

Presumptions:
1. Presumption of implied remission – creditor renouncing his right
2. Contrary evidence – prima facie or rebuttable by contrary evidence
3. Extent or remission – if joint, presumption of remission pertains only to the share of liability and if solidary, to the
total obligation
4. Presumption applicable only to private documents

Art. 1272 – Private document found in the possession of debtor

Presumption: Presumed that the creditor delivered it voluntarily.

Art. 1273 – The renunciation of the principal debt shall extinguish the accessory obligations; but the waiver of the latter shall leave the
former in force. (accessory follows the principal)

Art. 1274 – Thing pledged found in the possession of debtor

Presumption: the accessory obligation is presumed remitted, not the obligation itself. Obligation still not
extinguish but the debtor does not have to return the thing pledge.

Confusion or Merger (1275)

- The meeting in one person of the qualities or the characters of creditor and debtor.
- The character of creditor and debtor are merged in the same person.
- Obligation is extinguished from the time the characters of creditor and debtor are merge in the same person

Requisites of confusion
1. It must take place between the principal debt and creditor
2. It must be complete

Effects of merger when there is guarantor (1276)

1. Merger which takes place in the principal debtor or creditor (e.g. when principal obligation is extinguished by merger) – Both
principal obligation and the guaranty are extinguished
2. Merger which takes place in the person of the guarantor – Here, only the guaranty is extinguished

 Merger which takes place in the person of the principal debtor or creditor benefits the guarantors. (principal obligation is
extinguished as well as accessory obligation) Confusion which takes place in the person of any of the latter does not extinguish
the obligation. (Only accessory obligation is extinguished) (1276)
  Confusion does not extinguish a joint obligation except as regards the share corresponding to the creditor or debtor in whom
the two characters concur. (1277)

Compensation (1278)

- A mode of extinguishing an obligation when two persons, in their own right, are debtors and creditors of each other.

Kinds of compensation
1. As to amount or extent
a. Total – debts are of the same amount
b. Partial – debts are of different amounts
2. As to cause or origin
a. Legal – takes place by operation of law
Requisites:
1. Each party must be bound principally
2. Both debts in a sum of money
3. Two debts are due
4. Both debts be liquidated and demandable
5. No retention or controversy commenced by third persons and communicated in due time to the
debtor
b. Voluntary or conventional – by agreement
c. Judicial (or set-off) – takes place by order from a court in a litigation
d. Facultative – can be set up only by one of the parties

Requisites of Legal Compensation

1. The parties are principal creditors and principal debtors of each other.
2. Both debts consist in a sum of money or of consumable things of the same kind and quality
3. Two debts are due
4. Two debts be liquidated and demandable
5. Neither of the debts there be any retention or controversy, commenced by third persons and communicated in due
time to the debtor. (1196)

Confusion vs. Compensation

1. Only one person who is a debtor and creditor of himself vs. two person involved, each of whom is a debtor and a
creditor of the other
2. Only one obligation vs. 2 obligation
3. Impossiblity of payment vs. indirect payment

Pertinent notes:
 The parties may agree upon the compensation of debts which are not yet due. (1282)
 If one of the parties to a suit over an obligation has a claim for damages against the other, the former may set it off by proving his
right to said damages and the amount thereof. (1283)
 When one or both debts are rescissible or voidable, they may be compensated against each other before they are judicially
rescinded or avoided. (1284)
 The debtor who has consented to the assignment of rights made by a creditor in favor of a third person, cannot set up against the
assignee the compensation which would pertain to him against the assignor, unless the assignor was notified by the debtor at the
time he gave his consent, that he reserved his right to the compensation. (1285)
 If the creditor communicated the cession to him but the debtor did not consent thereto, the latter may set up the compensation of
debts previous to the cession, but not of subsequent ones.
 If the assignment is made without the knowledge of the debtor, he may set up the compensation of all credits prior to the same and
also later ones until he had knowledge of the assignment. (1198a)
 Compensation takes place by operation of law, even though the debts may be payable at different places, but there shall be an
indemnity for expenses of exchange or transportation to the place of payment. (1286)
 If a person should have against him several debts which are susceptible of compensation, the rules on the application of payments
shall apply to the order of the compensation. (1289)

Art. 1287. Compensation shall not be proper when one of the debts arises from a depositum or from the obligations of a depositary or of
a bailee in commodatum.
Neither can compensation be set up against a creditor who has a claim for support due by gratuitous title, without prejudice to
the provisions of paragraph 2 of article 301. (1200a)
Art. 1288. Neither shall there be compensation if one of the debts consists in civil liability arising from a penal offense. (n)

Novation

- The modification or extinguishment of an obligation by another, either by changing the object or principal condition,
substituting the person of the debtor, or subrogating a third person in the rights of the creditor

Requisites of Novation
1. There must be a previous valid obligation
2. There must be an agreement between the parties to modify or extinguish an obligation, except in the following:
a. When the person of the debtor is changed which can be made even if it is against the debtor’s will, or
b. When another person is subrogated in the place of the creditor:
1) When the creditor pays another creditor who is preferred, even without the debtor’s knowledge
2) When, even without the knowledge of the debtor a person interested in the fulfillment of the obligation
pays, without prejudice to effects of confusion as to the latter’s share.
3. There must be the extinguishment of the old obligation
4. The new obligation must be valid

Kinds of novation
1. According to subbject or purpose
a. Real or objective – Object or principal condition are changed
b. Personal or subjective – person of the debtor is substituted/ or when a third person is subrogated in the
right of the creditor.
1) Substitution – Person of the debtor is substituted
a. Expromision – third person initiates the substitution and assumes the obligation even
without the knowledge or against the will of the debtor. (Only the consent of the
creditor and 3rd person is made)
b. Delegacion – debtor initiates the substitution (it requires the consent of all parties)
2) Subrogation – Third person is subrogated in the rights of the creditor
*Subrogation means the transfer to the person subrogated the credit with all
the rights pertaining thereto.

Kinds of Subrogation
a) Conventional – change of creditor by agreement of parties
b) Legal – subrogation by operation of law
c. Mixed – Combination of real and personal novation, change of object and parties to the obligation
2. According to how it is constituted
a. Express – Declared in unequivocal term
b. Implied – Old and new obligation are essentially incompatible with each other
3. According to extent or effect
a. Total or extinctive – Old obligation is completely extinguished
b. Partial or modificatory – Old obligation is merely modified
4. According to origin
a. Legal – operation of law
b. Conventional – agreement of the parties

Novation on accessory obligation

General rule: Accessory follows the principal

Exceptions:
1. When the accessory obligation was established for the benefit of third person who did not give their consent.
2. When there was a stipulation
3. When there is a subrogation in the rights of the creditor
Pertinent notes:
 Novation is never presumed.
  Test: Is the old and new obligation having an independent existence. Positive - compatible (No novation); Negative –
incompatible - Novation.
 Conventional subrogation be clearly established (1300) and it requires the consent of the original parties and of the third
person. (1301)

 Legal subrogation is not presumed except in cases provided for by law. (1300)

 When the principal obligation is extinguished in consequence of a novation, accessory obligations may subsist only insofar as
they may benefit third persons who did not give their consent. (1296)
 If the new obligation is void, the original one shall subsist, unless the parties intended that the former relation should be
extinguished in any event. (1297)
 The novation is void if the original obligation was void, except when annulment may be claimed only by the debtor or when
ratification validates acts which are voidable. (1298)
 If the original obligation was subject to a suspensive or resolutory condition, the new obligation shall be under the same
condition, unless it is otherwise stipulated. (1299)
 Subrogation transfers to the persons subrogated the credit with all the rights thereto appertaining, either against the debtor or
against third person, be they guarantors or possessors of mortgages, subject to stipulation in a conventional subrogation.
(1303)
 A creditor, to whom partial payment has been made, may exercise his right for the remainder, and he shall be preferred to the
person who has been subrogated in his place in virtue of the partial payment of the same credit. (1304)

Art. 1302. It is presumed that there is legal subrogation:

(1) When a creditor pays another creditor who is preferred, even without the debtor's knowledge;
(2) When a third person, not interested in the obligation, pays with the express or tacit approval of the debtor;
(3) When, even without the knowledge of the debtor, a person interested in the fulfillment of the obligation pays, without prejudice to
the effects of confusion as to the latter's share. (1210a)
 CONSENT (1319)

Art. 1319. Consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the
contract. The offer must be certain and the acceptance absolute. A qualified acceptance constitutes a counter-offer.
Acceptance made by letter or telegram does not bind the offerer except from the time it came to his knowledge. The contract,
in such a case, is presumed to have been entered into in the place where the offer was made.

1. Theory of cognition – The acceptance is considered to effectively bind the offeror only from the time it came to his knowledge. (Civil
code)
2. Theory of manifestation – The contract is perfected at the moment when the acceptance is declared or made by the offeree. (Code
of commerce)

Art. 1320. An acceptance may be express or implied.

Art. 1321. The person making the offer may fix the time, place, and manner of acceptance, all of which must be complied with.
Art. 1322. An offer made through an agent is accepted from the time acceptance is communicated to him. (n)
Art. 1323. An offer becomes ineffective upon the death, civil interdiction, insanity, or insolvency of either party before acceptance is
conveyed.
Art. 1325. Unless it appears otherwise, business advertisements of things for sale are not definite offers, but mere invitations to make an
offer.
Art. 1326. Advertisements for bidders are simply invitations to make proposals, and the advertiser is not bound to accept the highest or
lowest bidder, unless the contrary appears.
Art. 1327. The following cannot give consent to a contract:
1. Unemancipated minors;
2. Insane or demented persons, and deaf-mutes who do not know how to write. (1263a)
Art. 1328. Contracts entered into during a lucid interval are valid. Contracts agreed to in a state of drunkenness or during a hypnotic spell
are voidable. (n)
OPTION PERIOD (1324)
Art. 1324. 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. (n)

VICES OF CONSENT
1. Error or mistake
 In order that mistake may invalidate consent, it should refer to the substance of the thing which is the object of the contract, or
to those conditions which have principally moved one or both parties to enter into the contract.
Mistake as to the identity or qualifications of one of the parties will vitiate consent only when such identity or qualifications
have been the principal cause of the contract.
A simple mistake of account shall give rise to its correction. (1331)
 When one of the parties is unable to read, or if the contract is in a language not understood by him, and mistake or fraud is
alleged, the person enforcing the contract must show that the terms thereof have been fully explained to the former. (1332)
 There is no mistake if the party alleging it knew the doubt, contingency or risk affecting the object of the contract. (1333)
 Mutual error as to the legal effect of an agreement when the real purpose of the parties is frustrated, may vitiate consent.
(1334)

2. Violence - when in order to wrest consent, serious or irresistible force is employed. (1335)

3. 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.
(1335)
To determine the degree of intimidation, the age, sex and condition of the person shall be borne in mind.
A threat to enforce one's claim through competent authority, if the claim is just or legal, does not vitiate consent.

4. Undue influence - when a person takes improper advantage of his power over the will of another, depriving the latter of a
reasonable freedom of choice. The following circumstances shall be considered: the confidential, family, spiritual and other relations
between the parties, or the fact that the person alleged to have been unduly influenced was suffering from mental weakness, or was
ignorant or in financial distress. (1337)

5. Fraud - when, through insidious words or machinations of one of the contracting parties, the other is induced to enter into a
contract which, without them, he would not have agreed to.
 Failure to disclose facts, when there is a duty to reveal them, as when the parties are bound by confidential relations,
constitutes fraud. (1339)
 The usual exaggerations in trade, when the other party had an opportunity to know the facts, are not in themselves fraudulent.
 (1340)
 A mere expression of an opinion does not signify fraud, unless made by an expert and the other party has relied on the former's
special knowledge. (1341)
 Misrepresentation by a third person does not vitiate consent, unless such misrepresentation has created substantial mistake
and the same is mutual. (1342)
 Misrepresentation made in good faith is not fraudulent but may constitute error. (1343)
 In order that fraud may make a contract voidable, it should be serious and should not have been employed by both contracting
parties. (1344)
Incidental fraud only obliges the person employing it to pay damages.

Employed by one of the

Employed by 3rd person
contracting party

Violence Voidable Voidable

Intimidation Voidable Voidable
Valid, unless it results to substantial
Fraud without connivance/ knowledge by
Voidable mistake and the same is mutual. It can be
the party benefited by the fraud
annulled on the ground of mistake

Fraud with connivance/ knowledge by the Voidable. As if exercised by the party

Voidable
party benefited by the fraud benefited by the fraud.

Undue influence Voidable Valid

Absolute simulated or
Relative simulated
fictitious contract

The parties do not intend to be

The parties conceal their true agreement. (1345)
bound at all. (1345)

When it does not prejudice a third person and is not

VOID intended for any purpose contrary to law, morals,
(1346) good customs, public order or public policy binds the
parties to their real agreement. (1346)