University of San Jose-Recoletos

Corner P. Lopez and Magallanes St. Cebu City 6000, Philippines

College of Commerce
Accountancy and Finance Department

COURSE OUTLINE FOR STUDENTS

on
OBLIGATIONS AND CONTRACTS RFBT 1
First Semester: MWF 6:00-7:00/7:00-8:00/8:00-9:00
Instructor: Atty. Ma. Cassandra C. Teves

Course Description: This course deals with the basic principles of law in relation to Obligations and
Contracts. It involves a discussion on the sources of obligations, particularly on contracts; nature and
effect of obligations, with emphasis on the respective rights and duties of the parties; the different
kinds of obligation and the modes of extinguishing obligations. It also gives insights on how to
determine the validity of contracts by studying the elements, stages and classifications of contracts;
forms, interpretation and reformation of contracts; and defective contracts.

Prescribed Book: Obligations and Contracts by Hector De Leon

A. PRELIM COVERAGE/TOPICS

I. INTRODUCTION TO LAW
 Laws, morals, customs/classifications and sources/who makes laws/how a bill becomes a
law/importance in society

II. CONCEPT OF OBLIGATIONS

 Concept
A. Definition
B. Elements
C. Distinction between Natural and Civil Obligations
 Sources of Obligations
A. Law
B. Contracts
C. Quasi-Contracts
D. Acts/omissions punished by law- Art. 1161
E. Quasi-Delicts-Art. 1162, 2176

CONTRACTS
III. GENERAL PROVISIONS
A. DEFINITION
 Essential Elements Natural Elements/Accidental Elements
B. CHARACTERISTICS
 Obligatory force/Mutuality/Relativity
Exceptions to principle of relativity:
a. obligations not transmissible by nature, stipulation, law
b. stipulation pour autrui
c. third person induces another to violation his contract under Art. 1314
C. PARTIES
 Auto-contract/Freedom to contract
D. CLASSIFICATION:
 According to subject matter;name;perfection;to its relation to other contracts;nature of
the vinculum produced;cause;risk
E. STAGES
 Preparation /Perfection /Consummation or death

IV. ESSENTIAL REQUISITES OF CONTRACTS

A. MUST BE MANIFESTED BY THE CONCURRENCE OF THE OFFER AND ACCEPTANCE (1 st
requisite of Consent)
1. Offer
a. must be certain
b. what may be fixed by the offeror
c. Offer when made through an agent
d. Circumstances when offer becomes ineffective
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 e. Business advertisements of things for sale
f. Advertisement for bidders
2. Acceptance
a. Must be absolute
b. Kinds
i. Express [Art. 1320. An acceptance may be express or implied]
ii. Implied e.g. from conduct, or acceptance of unsolicited services.
iii. Qualified (constitutes a counter-offer)
c. If [acceptance] made by letter or telegram
i. Cognition Theory
ii. Period of acceptance
d. Contract of option
o Distinguish from “RIGHT OF FIRST REFUSAL”

B. NECESSARY LEGAL CAPACITY OF THE PARTIES

1. Who cannot give consent
2. When offer and/or acceptance is made
a. During lucid interval
b. In a state of drunkenness
c. During a hypnotic spell

C. CONSENT MUST BE INTELLIGENT, FREE, SPONTANEOUS, AND REAL

1. Effect: Voidable
2. Vices of Consent
a. Mistake or error [ vice of consent]
b. Kinds
c. Mistake of Fact
i. Substance of the object
ii. As to principal conditions
iii. As to identity or qualifications of one of the parties
iv. As to quantity, as distinguished from a simple mistake account
e.g. buying land consisting of 100 hectares and buyer discovers
land has only 60 hectares
d. Error of law: Art. 3. Ignorance of the law excuses no one
e. Exception: Mutual error of law
f. When one of the parties is unable to read
g. Inexcusable mistake
h. Violence and intimidation [vice of consent]
 Effect of “violence” and “intimidation”:
i. Undue influence [vice of consent]
j. Fraud or dolo [vice of consent]
 2 kinds of fraud:
o Dolo causante - one which vitiates a contract
o Dolo incidente
 Failure to disclose facts; duty to reveal (fraud)
 Usual exaggerations in trade: opportunity to know the facts
 Expression of an opinion (fraud)
o Effects:
o Art. 1344, NCC
k. Misrepresentation [vice of consent]
i. By a third person:
ii. Made in good faith:
iii. Kinds of: Article 1345
a) Absolute- no intention to be bound at all
b) Relative- parties conceal their true agreement
o e.g. deed of sale is intention, what is executed is deed of
donation
o Effects; Art. 1346., NCC

V. OBJECT OF CONTRACTS
1. What may be the objects of contracts-
a. All things not outside the commerce of man
b. All rights not intransmissible e.g. right to vote and be voted, parental authority
c. All services not contrary to law, morals, good customs, public policy
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 2. Requisite- must be determinate as to its kind
3. What may not be the object of contracts
a. Future inheritance, except when authorized by law
o Exceptions:
 Marriage settlements, partitions inter vivos under Art. 1080
b. Impossible things/services

VI. CAUSE OF CONTRACTS

a. Meaning of cause-
b. Onerous contracts-
c. In remuneratory contracts
d. Contracts of pure beneficence-
o As distinguished from motive- Article 1351
 NOTE, HOWEVER, A MOTIVE MAY PREDETERMINE A CAUSE, AND MOTIVE
MAY HAVE AN EFFECT ON THE CONTRACT.
e. Defective causes and their effects

i. Absence of cause/unlawful cause- Article 1352

ii. Statement of a false cause in the contract- Art. 1353
iii. Lesion/inadequacy of cause
o What is lesion? Inadequacy of cause e.g. insufficient price of the thing
sold
iv. Presumption of the existence and lawfulness of a cause, though not stated in the
contract- Article 1354

VII. FORM OF CONTRACTS

A. General rule: contracts shall be obligatory, in whatever form they may have been
entered into, provided all the requisites for their validity are present- Article 1356
B. Exception: When the law requires that a contract be in some form in order that it may
be valid or enforceable (meaning form must be observed strictly)
C. Kinds of formalities required by law:
1. Those required for validity of contracts e.g.
a. Art. 748;Art. 749;Art. 1874;Art. 2134;Art. 1771’Art. 1773
2. Those required, not for validity, but to make contract effective as against
third persons
a. Art. 1357
b. Art. 1358
Note: Before applying Art. 1357 (right to compel execution of document),
it is essential that:
a. Contract is perfected (valid)
b. Enforceable under the Statute of Frauds i.e. Unenforceable agreements
3. Those required for the purpose of proving the existence of the contract e.g.
those under the Statute of Frauds in Article 1403.

VIII. REFORMATION OF INSTRUMENTS

Action in personam, not in rem
A. Requisites
1. Meeting of the minds upon the contract
2. True intention of the parties is not expressed in the instrument
3. Failure of the instrument to express the true agreement is due to mistake, fraud,
inequitable conduct, or accident
o Note: In reformation (remedy in equity), the courts do not make
another contract for the parties. They merely inquire into the intention
of the parties and having found it, reform the written instrument

What is reformed is not the contract itself, but the instrument embodying the
contract.
B. Cases where no reformation is allowed- Art. 1366
C. Implied Ratification- Art. 1367
D. Who may ask for reformation- Art. 1368
E. Procedure of reformation- Art. 1369

IX. INTERPRETATION OF CONTRACTS

A. Primacy of Intention-Arts. 1370, 1372
B. How to determine intention- Art. 1371
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 C. How to interpret a contract
1. When it contains stipulations that admit several meanings- Art. 1373
2. When it contains various stipulations, some of which are doubtful-
Art. 1374
3. When it contains words that have different significations- Art. 1375
4. When it contains ambiguities and omission of stipulations- Art. 1376
5. With respect to the party who cause obscurity-Art. 1377
6. When it is absolutely impossible to settle doubts by the rules above – Art. 1378
7. When the doubts are cast upon the principal object so that the intention
cannot be known-Art. 1378.

X. DEFECTIVE CONTRACTS

A. RESCISSIBLE CONTRACTS
a. Kinds- Art. 1381
b. Characteristics
c. Rescission- Art. 1380
 Definition:
 Distinguished from rescission under Article 1191
 Requisites
 Effect of Rescission- Art. 1385
 Extent of Rescission- Art. 1384
 Presumption of fraud- Art. 1387
 Liability for acquiring in bad faith the things alienated in fraud of creditors- Art.
1388

B. VOIDABLE /ANNULLABLE CONTRACTS

A. Kinds- Art. 1390
B. Characteristics
C. Annulment
 As distinguished from rescission:
o Grounds- Art. 1390 (incapacity to consent and vice of consent)
 Who may and may not institute action for annulment- Art. 1397
 Prescription- Art. 1391
 Effect (of annulment)
 Mutual restitution- Arts. 1398 and 1402
 Extinguishment of the action (i.e. when action to annul is extinguished)
 By ratification- Art. 1392
 [action to annul may also be extinguished when…] When the thing is lost through the
fault of the person who has the right to file the action- Art. 1401

D. Ratification
1. Requisites
a. Contract is voidable
b. Ratification is made with knowledge of the cause for nullity
c. At the time of ratification, the cause of nullity has already ceased to
exist.

2. Forms (of ratification)

a. Express or tacit- Art. 1393
b. By the parties themselves or by the guardian in behalf of an
incapacitated party- Art. 1394
3. Effects
a. Action to annul is extinguished- Art. 1392
b. The contract is cleansed retroactively from all its defects- Art. 1396

C. UNENFORCEABLE CONTRACTS
1. Characteristics
a. Cannot be enforced by a proper action in court.
b. Susceptible of ratification
c. Cannot be assailed by third persons
2. Kinds [of unenforceable contracts] - Art. 1403
a. unauthorized contracts (1ST kind of unenforceable contract] governing rules:
Art. 1404
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 b. Contracts covered by statute of frauds [2nd kind of unenforceable contract]
3. STATUTE OF FRAUDS
 Purpose: prevent fraud, and not to encourage
 History
England was first country to adopt statute of frauds (in 1676).
English Parliament passed law [requiring certain agreements to
be in writing]
 Characteristics
4. BASIC AND FUNDAMENTAL PRINCIPLES GOVERNING STATUTE OF FRAUDS:
1. Applies only to executory contracts (no performance yet).
Does not apply to partially or completely executed contracts.
eg
o downpayment is made [not applicable
o delivery of land.
2. Cannot apply if the action is neither for damages [because of
the violation of an agreement] nor for specific performance
between landlord and tenant regarding sharing of the crops
or produce in a land]
3. Statute of frauds is exclusive
o e.g. only those contracts enumerated are covered.
Thus, the following are not:
 Setting up of boundaries
 Oral partition of real property
 Agreement creating right of way
 Agreement on right of first refusal
4. Defense of statute of frauds may be waived
5. Statute of frauds is a personal defense [available only to the
party affected]
6. They are not void
c. SPECIFIC AGREEMENTS COVERED BY STATUTE OF FRAUDS:
i. What is “sufficient memorandum”?
ii. Rule: cannot prove contract orally unless evidence by memorandum
o (Note if there is written agreement, but is lost, it may be proven by
“secondary evidence”.
o contracts [entered] by parties [both] are incapable of giving consent to a
contract. [3rd kind of unenforceable contract]

d. Contracts executed by parties who are both incapable of giving

consent to a contract
a. Effect of ratification by the parents/guardian of one of the parties- Art. 1407
b. Effect of ratification by the parents/guardian of both of the parties.

D. VOID/INEXISTENT CONTRACTS
1. Characteristics
2. Kinds [of VOID CONTRACTS]- Art. 1409
 Pari delicto doctrine does not apply:
1. One party is much less guilty than the other
2. Does not apply where a superior public policy intervenes ( e.g. sale of a land under
homestead, therefore, homesteader can recover..)
3. Party repudiates a contract (void) before the illegal purpose is accomplished (Art.
1414)

B. MIDTERM COVERAGE/TOPICS

OBLIGATIONS
I. NATURE AND EFFECTS OF OBLIGATIONS

1. Kinds of Prestations
o Obligation to Give
o Obligation to do- Art. 1244
o Obligation not to do-Art. 1244
2. Breach of Obligation
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 o Concept
o Modes of Breach- Art. 1170
a) Fraud (dolo)
b) Negligence-Art. 1172
c) Delay
d) Contravention of the tenor
3. Remedies of Creditor in case of Breach
o Action for Performance
o Action for damages-Art. 1170
o Action for rescission-Art. 1191, 1192
4. Subsidiary Remedies of Creditor
o Accion subrogatoria-Art. 1177
o Accion Pauliana- Art. 1177, 1381 par. 3
o Other Specific Remedies- Art. 1652, 1729, 1608, 1893
5. Extinguishment of Liability in case of Breach due to fortuitous event
o Concept of Fortuitous Event
o Requisites
o Extinguishment of Liability; Exceptions-
6. Usurious Transactions
o BSP Circular No. 799 Series of 2013
o Nacar vs. Gallery Frames, G.R. No. 189871 (13 August 2013)
7. Fulfillment of Obligations
o Chapter 4, Payment
o Presumptions in payment of interests and instalments Art. 1176
8. Transmissibility of Rights- Art. 1178

II. DIFFERENT KINDS OF OBLIGATIONS

1. Pure and Conditional Obligations

A. Pure Obligations-Art. 1179, par.1
B. Conditional Obligations- Art. 1181
o Condition v. Period/Term
o Kinds of Conditions
a. As to effect on obligation-Art. 1181
i. Suspensive (condition precedent)
ii. Resolutory (condition subsequent)
b. As to cause or origin- Art. 1182
i. Potestative
o effect if fulfilment of condition depends solely on the will
of the debtor
o debtor’s promise to pay when he can is not a conditional
obligation- Art. 1180
ii. Casual
iii. Mixed
c. As to possibility-Art. 1183 (Possible/ Impossible)
d. As to mode (Positive-Art. 1184/Negative-Art. 1185)

o Rules in case of loss, deterioration, or improvement pending happening of the

condition- Arts. 1189 and 1190
a. Meaning of loss ( Art. 1189 [2]), deterioration, and improvement
b. Effect of loss or deterioration
c. Effect of improvement

o Effect of prevention of the fulfilment of the condition by the obligor-Art. 1186

2. Reciprocal Obligations- Art. 1191, 1192

1. Concept
2. Alternative remedies of injured party in case of breach

3. Obligations with a Period

A. Period or Term
 Concept
 Period/Term vs. Condition

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 B. Kinds of Period/Term
i. As to effect
o Suspensive (ex die)-Art. 1193 (1)/Resolutory (in diem)-Art. 1193 (2)
ii. As to expression
o Express/Implied
iii. As to definiteness
o Definite/Indefinite
iv. As to source
o Voluntary/Legal/Judicial
C. Rules in case of loss, deterioration, or improvement before arrival of period- Art.
1194, 1189
D. Effect of payment in advance- Art. 1195
E. Benefit of Period
 For whose benefit (Creditor/Debtor/both)
 When debtor loses the right to make use of the period- Art. 1198
F. When Court may fix period- Art. 1197
 Period is implied
 Period depends solely on will of debtor

4. Alternative Obligations
A. Concept- Art. 1199
B. Right of Choice- Art. 1200
C. Effect of notice of choice
D. When notice produces effect- Art. 1201
E. Effect of loss or impossibility of one or all prestations-Art. 1202 to 1205
F. Facultative Obligation- Art. 1206
 Concept
 Distinguished from Alternative Obligation
 Effect of substitution

5. Joint and Solidary Obligations .

 Joint Obligations
 Concept
 Presumption- Art. 1207, 1208
 Effects- Art. 1207, 1208
a. Extent of liability of debtor
b. Extent of right of creditor
c. In case of novation, compensation, confusion
(Art.1277), remission

6. Solidary Obligations
A. Concept
 Requisites
 words used to indicate solidary obligations
B. Kinds
a. As to source- Art. 1208 (Legal- Art. 1915,1945, 2194; Art. 119
R.P.C./Conventional/Real)
b. As to parties bound (Active/Passive/Mixed)
c. As to Effects
a. Solidary creditor in relation to:
i. common debtor
ii. solidary co-creditor/s
o in case of novation,
o compensation, confusion, Art. 1215, par. 2
o prejudicial acts prohibited-Art. 1212
o assignment of rights not allowed-Art. 1213

b. Solidary debtor in relation to:

i. common creditor
o obligation to perform-Art. 1207
o in case of novation, compensation, confusion, remission by a
creditor-Art.1215, par. 1
ii. solidary co-debtor
o in case of payment by a co- debtor-Art.1217, 1218,1220,1219
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 o in case of fortuitous event- Art. 1221
C. Defenses available to a solidary debtor against the creditor-Art. 1222
a. Types
i. those derived from the nature of the obligation
ii. personal defenses
iii. defenses pertaining to his share
iv. those personally belonging to the other co-debtors
b. Effects

7. Joint Indivisible Obligations

1. Concept
2. Indivisibility distinguished from solidarity-Art. 1210
3. Effects-Art. 1209
4. liability for damages in case of breach-Art. 1224

8. Divisible and Indivisible Obligations

A. Divisible Obligations
1. Concept
2. Effects-Art. 1223, 1233
B. Indivisible Obligation
1. Concept
a. Distinguished from solidary obligations
2. Kinds
a. natural-Art. 1225, par.1
b. legal-Art. 1225, par. 3
c. conventional-Art. 1225, par. 3
3. Presumptions
a. of indivisibility-Art. 1225, par. 1
b. of divisibility-Art. 1225, par.2
4. Divisibility and indivisibility of obligations not to do-Art. 1225, par. 3
5. Effects- Art. 1223, 1233, 1224
6. Cessation of indivisibility

9. Obligations with a Penal Clause

A. Concept
1. Principal vs. Accessory Obligation
2. Distinguished from Conditional Obligations
3. Distinguished from Alternative Obligations
4. Distinguished from Facultative Obligations
5. Distinguished from Guaranty
B. Kinds of Penal Clause
1. As to effect
a. Subsidiary
b. Complementary
2. As to source
a. Conventional
b. Legal
3. As to purpose
a. Punitive
b. Reparatory
C. Demandability of Penalty-Art. 1226, par. 2
D. Effects of Penal Clause
1. substitute for indemnity for damages and payment of interest
2. Not exempt debtor from performance-Art. 1227
a. exception- Art. 1227
3. Creditor cannot demand both performance and penalty at the same time-Art.
1227
4. Creditor cannot collect other damages in addition to penalty-Art. 1226
a. Exceptions-Art. 1226
E. When penalty shall be equitably reduced-Art. 1229
F. Nullity of Principal Obligation or Penal Clause
1. Effects-Art. 1230
2. Rationale

C. FINAL COVERAGE/TOPICS
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 I. EXTINGUISHMENT OF OBLIGATIONS

 Modes of Extinguishment
1. Payment/Performance
2. Loss/Impossibility
3. Condonation/Remission
4. Confusion/Merger
5. Compensation
6. Novation
7. Other Causes

II. PAYMENT OR PERFORMANCE

A. Concept- Art. 1232
B. Requisites
1. Who can pay
2. To whom payment may be made
a. in general- Art. 1240
b. incapacitated person-Art. 1241, par. 1
c. third person- Art. 1241, par. 2
i. requisites
ii. when proof of benefit not required-Art. 1241 par. 3, 1242
d. in case of active solidarity-Art. 1214
3. What is to be paid ( “identity”)
a. in general-Art. 1233
in obligations to:
i. give a specific thing-Art. 1244
ii. give a generic thing-Art. 1246
iii. pay money- Art. 1249, 1250; R.A. 529, R.A. 4100
b. payment of interest-Art. 1956
4. How payment to be made (“integrity”)
a. In general- Art. 1233
o Gen.Rule: Partial payment is not allowed-Art. 1248
Exceptions: Art. 1248
b. substantial performance in good faith-Art. 1234
c. estoppel-Art. 1235
d. presumptions in payment of interests and installments- Art. 1176
5. When payment is to be made
a. In general-Art. 1169
b. See Chapter 2: Delay
6. Where payment is to be made-Art. 1251, par.1
a. if no place is expressly designated- Art. 1251, par. 2 to par. 4
7. Expenses of making payment
C. Application of Payments
1. Concept- Art. 1252
2. Requisites
3. Rules in application of payments- Art. 1252,1253
i. If rules inapplicable and application cannot be inferred-Art. 1254
o meaning of “most onerous to debtor”
4. Payment by Cession
i. Concept-Art. 1255
ii. Requisites
iii. Effects
5. Dation in Payment
i. Concept-Art. 1245
o Distinguished from Payment by Cession
ii. Requisites
iii. Effects
6. Tender of Payment and Consignation
i. Tender of Payment
a. Concept
b. Requisites
ii. Consignation
a. Concept
b. Purpose
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 a. Requisites
b. 1 when tender and refusal not required- Art. 1256, par. 2
b. 2 two notice requirement- Art. 1257, par. 1; 1258, par.2
o effects of non-compliance
b. Effects- Art. 1260, par. 1
c. Withdrawal by debtor before acceptance by creditor or approval by court;
effects-Art. 1260, par. 2
d. withdrawal by debtor after proper consignation- Art. 1261
i. with creditor’s approval; effects
ii. without creditor’s approval; effects
e. Expenses for consignation

III. LOSS OR IMPOSSIBILITY

A. Loss of the Thing Due
1. Concept- Art. 1189 (2)
2. Kinds
a. As to extent
i. Total
ii. Partial
3. Requisites- Art. 1262
4. Presumption- Art. 1265, 1165
a. when not applicable
5. Effects
a. in obligation to give a specific thing- Art. 1262, 1268
b. in obligation to give a generic thing-Art. 1263
c. in case of partial loss- Art. 1264
d. action against third persons- Art. 1269
B. Impossibility of Performance
1. Concept- Art. 1266, 1267
2. Kinds
a. As to extent
i. Total
ii. Partial
b. As to source
i. Legal
ii. Physical
3. Requisites- Art. 1266
4. Effects
a. in obligations to do- Art. 1266, 1267, 1262 par. 2 (by analogy)
i. “impossibility” distinguished from “difficulty”
in case of partial impossibility- Art. 1264

IV. CONDONATION OR REMISSION

A. Concept
B. Kinds
1. As to extent
a. Total
b. Partial
2. As to form-Art. 1270 (1)
a. Express
b. Implied
C. Requisites
a. when formalities required- Art. 1270 par. 2
D. Presumptions- Arts. 1271, 1272, 1274
E. Effects
1. in general
2. in case of joint or solidary obligations
F. Governing Rules- Art. 1270
G. Renunciation of Principal or Accessory Obligation
1. Effects- Art. 1273
2. Rationale

V. CONFUSION OR MERGER OF RIGHTS

A. Concept
B. Requisites
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 C. Effects
1. in general- Art. 1275
2. in case of joint ( Art. 1277) or solidary obligations
D. Confusion in Principal or Accessory Obligation- Art. 1276

VI. COMPENSATION
A. Concept- Art. 1278
1. Distinguished from Confusion
B. Kinds
1. As to extent
a. Total
b. Partial
2. As to origin
a. Legal
b. conventional-Art. 1279 inapplicable, 1282
c. judicial-Art. 1283
d. facultative
C. Legal Compensation
1. Requisites- Art. 1279,1280
a. “due” distinguished from “demandable”
2. Effects- Art. 1290, 1289
D. When compensation is not allowed- Art. 1287, 1288
E. Compensation of Debts payable in Different Places-Art. 1286
F. Effect of Nullity of Debts to be Compensated- Art. 1284
G. Effects of Assignment of Credit
1. with consent of debtor-Art. 1285 (1)
2. with knowledge but without consent of debtor-Art. 1285, par. 2
3. without knowledge of debtor-Art. 1285, par. 3
3.1 rationale

VII. NOVATION
A. Concept- Art. 1291
B. Kinds
1. As to form(Express/implied)
2. As to origin (Conventional/Legal)
3. As to object (objective/real; subjective or personal)
C. Requisites-Art. 1292
D. Effects
1. in general-Art. 1296
2. when accessory obligation may subsist- Art. 1296
E. Effect of the Status of the Original or New Obligation-
1. nullity or voidability of original obligation-Art. 1298
2. nullity or voibability of new obligation-Art. 1297
F. Objective Novation
1. meaning of “principal conditions”
G. Subjective Novation
1. By change of debtor
a. Expromision
i. requisites-Art. 1293
ii. effects-Art. 1294
b. Delegacion
i. requisites (vs. Art. 1293)
ii. effects- Art. 1295
2. By change of creditor: subrogation of a third person in the rights of the
creditor- Art. 1300
a. conventional subrogation
i. requisites-Art. 1301
ii. distinguished from Assignment of Credit
iii. effects- Art. 1303, 1304
b. legal subrogation
i. requisites
ii. when presumed- Art. 1302
iii. effects- Art. 1303, 1304

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End

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