Review - Obligations and Contracts | DBL Discussions, De Leon Jr.
, Aquino 2018
Obligations
Modes of Breaching the Obligation
Modes of Breaching the Obligation – (a) Attributable to the
debtor: Fraud, malice, negligence, delay; (b) Not attributable
to the debtor: Fortuitous Event; (c) Catch-all Provision -
Contravening the Tenor of the Obligation
1. Breach through Delay (Art 1169)
Requisites:
a. Obligation is positive
b. Obligation is demandable and liquidated
c. Debtor delays for reasons imputable to him
d. Demand whether judicial or extrajudicial and
the debtor failed to comply – As a general
rule, when there is demand and debtor
failed to comply, there is delay. Exceptions:
(i) Obligation so declares; (ii) Law so
declares; (iii) Time is of the essence; (iv)
Where demand would be useless; (v) In
reciprocal obligations when one of the
parties failed to comply
In reciprocal obligations, neither party incurs
in delay if the other does not comply or is not
ready to comply in a proper manner with
what is incumbent upon him. Delay begins
from the moment one of the parties fulfills
his obligation.
2. Breach through fraud (Art 1170) – Fraud is intentional
evasion to the performance of the obligation
a. Applies to all obligations
b. There is bad faith or malice
Any waiver of future fraud is void. (Art 1171)
3. Breach through negligence (Art 1173) – Culpa
contractual, Culpa Aquiliana, Criminal Negligence
4. Fortuitous Event (Art 1174)
Debtor is liable for loss even if there is fortuitous event
– Loss occurred before delivery in the following
instances:
a. Debtor delays
b. Debtor promised the same thing to two or
more persons who do not have the same
interest
c. There is a stipulation or agreement that the
obligor will not be excused
d. There is assumption of risk as required by the
nature of the obligation
e. Thing to be delivered is generic
f. Debtor is at fault, the fortuitous event is in
effect humanized
g. Nature of the obligation makes the debtor
liable
h. Law makes the debtor liable
i. Liability from Delict (Art 1268)
Labor unrest is not considered a fortuitous event. The
debtor-company cannot be excused from complying
its obligation because labor unrest is not impossible
to foresee since it is was caused by the debtor-
company’s non-compliance with its legal obligation to
the workers. Meanwhile, the creditor-company
cannot unilaterally and immediately cancel the
contract because it involves reciprocal obligations.
Rescission can be resorted by filing a case in court for
such purpose. In addition, must pay for damages
cause by breach of contract due to delay.
Where the debtor delays, he shall be responsible for
any fortuitous event until he has effected delivery.
(Art 1165)
Breach in Reciprocal Obligations
General Rule: In case of breach in reciprocal obligations, the
injured party can choose one of the following: (1) Specific
performance + damages; OR (2) Resolution [Rescission] +
Damages. However, Art 1191 provides that rescission can still
be availed of even if the injured party has already chosen
specific performance if specific performance becomes
impossible. Resolution under Art 1191 abrogates the contract
from its inception and restores the parties to their original
positions as if no contract has been made. The aforementioned
article contemplates of judicial rescission and thus, a case
should be filed in court.
Rescission will only be permitted for substantial
breach, and not for a slight/casual breach.
Rescission is not available where the suspensive
condition has not been fulfilled because there is no
obligation yet to rescind.
The person who will rescind the obligation is the
injured party – the person who is ready to comply.
Rescission creates the obligation of mutual rescission,
as far as practicable.
Remedies of the Creditor
1. Principal Remedies
a. Specific Performance (Art 1165, 1167)
b. Substitute Performance (Art 1165)
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c. Equivalent Performance (Art 1168, 1170)
2. Subsidiary Remedies
a. Accion Subrogatoria (Art 1177)
b. Accion Pauliana (Art 1177, 1381(3))
c. Accion Directa (Art 1608, 1652, 1729, 1893)
Principal Remedies of the Creditor
1. In case of failure to Deliver a Specific Thing
a. Specific Performance (Art 1165) – Creditor
can compel debtor to give or to make
delivery. Before delivery, the debtor has the
obligation to preserve the thing.
b. Action for Damages “Equivalent
Performance” (Art 1170) – Those who are
guilty of fraud, negligence, delay or those
who in any manner contravene the tenor of
the obligation.
2. In case of failure to Deliver a Generic Thing
a. Specific Performance – In case of generic
things where the quality and circumstances
are not stipulated, the creditor cannot
demand a thing of superior quality and the
debtor cannot deliver a thing of inferior
quality.
b. Substitute Performance – Another person
can will substitute the debtor in the
performance of the obligation at the
debtor’s expense.
c. Action for Damages “Equivalent
Performance” (Art 1170)
3. In case of failure of Obligations to Do (Art 1167)
a. Total Failure to Do – the obligation can be
done by another at the expense of the
debtor because the debtor himself is not
compel to do it himself as it would amount
to involuntary servitude. However, where
the obligation has to be done personally
done by the debtor himself such that no
other person can do it, the remedy is to file
an action for damages against the debtor.
b. Failure to do in accordance with the tenor of
the obligation – Where the debtor
performed the obligation in an erroneous
manner, the creditor can have it done by
someone else at the expense of the debtor.
c. Failure to do correctly or performing the
obligation poorly – The creditor can have (i)
what was poorly done be undone; (ii) the
obligation be done by someone else at the
expense of the debtor.
4. In case of Obligations Not to Do
a. If the debtor did what he was obliged not to
do – It can be undone at the debtor’s
expense. However, where it is impossible to
undo, the debtor is liable for damages
because it cannot be undone.
Subsidiary Remedies of the Creditor
1. Accion Subrogatoria (Art 1177) – The creditor will file
a case in behalf of the debtor with respect to another
obligation that is due to the debtor. It is a case against
the debtor’s debtor.
Requisites:
a. Creditor has a right of credit against the
debtor although at the moment it is not
liquidated;
b. Credit must be due and demandable;
c. Failure of the debtor to collect from third
persons (debtor of debtor)
d. Assets in the hands of the debtor are
insufficient – the creditor need not bring a
separate action to show this exhaustion or
insolvency of the debtor but he can prove
the same in the very action to exercise the
subrogatory action; and
e. Right and actions are not purely personal or
inherent in the person of the debtor
2. Accion Pauliana (Art 1177, 1381(3)) – The creditor will
impugn the acts of the debtor that is in fraud of
creditors. It is a case against the transferee of the
property
Requisites:
a. Plaintiff asking for rescission has a credit
prior to the alienation although demandable
later;
b. Debtor has made a subsequent contract
conveying a patrimonial benefit to a third
person;
c. Creditor has no other legal remedy to satisfy
his claim;
d. Act being impugned is fraudulent
e. Third person who received the property
conveyed, if by onerous title, has been an
accomplice in the fraud
Accion Pauliana presupposes a judgment
and the issuance by the trial court of a writ
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of execution for the satisfaction of the power to comply with the

judgment and the failure of the sheriff to obligation, the condition should be
enforce and satisfy the judgment of the deemed satisfied.
court. vi. Possible
vii. Impossible (Art 1183)
3. Accion Directa – allows direct action against third viii. Positive (Art 1184) – An event is
persons supposed to happen or something
a. Vendor’s right against the possessor (Art must be done for the obligation to
1608) arise.
b. Lessor against the sub-lessee for unpaid ix. Negative (Art 1185) – An event is
rentals (Art 1652) not supposed to happen or
c. Supplier of labor or materials to contractor something must not be done.
(Art 1729) x. Divisible
d. Principal against the substitute of an agent xi. Indivisible
(Art 1893) xii. Conjunctive
xiii. Alternative
Liability to Pay Interest xiv. Express
xv. Implied
Requisites:
1. Agreement that the interest shall be earned; 2. Obligations with a period – (i) when the obligation
2. Agreement that interest shall be due shall be was already constituted but we do not know when it
expressly stipulated in writing; and is to be performed; OR (ii) nature of obligation
3. Rate of interest must not be usurious or excessive or requires a period
unconscionable a. Suspensive
b. Resolutory
The legal rate of interest is now 6% both for loans and c. Legal – fixed by law
forbearance of money and for obligations that are not loans d. Conventional – fixed by parties
and forbearance of money. (BSP Circular No 799, Series of 2013 e. Judicial – fixed by court
as of July 1, 2013) f. Definite – exact date is specified
g. Indefinite – event is certain to happen but
Kinds of Obligations exact date is unknown

1. Pure and Conditional Obligations 3. Alternative Obligations – Two or more prestations

a. Pure Obligation
b. Conditional Obligation
i. Suspensive – Happening of the
condition or event gives rise to the
obligation or acquisition of a right
ii. Resolutory – Immediately
demandable; Happening of the
condition or event extinguishes the
obligations or rights
iii. Potestative – If the performance
depends upon the sole will of the
debtor, the conditional obligation is
void.
iv. Casual (Art 1182) – Fulfillment is
dependent on chance and/or the
will of a third person. The condition
is valid.
v. Mixed – Fulfillment depends partly
upon the will of the parties and
partly upon chance/will of third
persons. When a condition was not
fulfilled but the debtor did all in his
but the debtor is obliged to completely perform only
one.
4. Facultative Obligations – Only one (1) prestation was
agreed upon and due but the debtor may render
another in substitution. The debtor has only one
choice with a right to substitute.
5. Joint and Solidary Obligations
a. Joint Obligations – Each joint debtor is liable
only for proportionate part of the debt and
the joint creditor is entitled to demand only
a proportionate part of the credit from each
debtor. The obligation is presumed to be
joint unless: (i) agreement provides
otherwise; (ii) law provides otherwise; (iii)
nature of the obligation contemplates a
solidary obligation.
b. Solidary Obligations – Each of the solidary
debtors is liable for the entire obligation and
each of the solidary creditors is entitled to
demand the satisfaction of the whole

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obligation from any or all of the debtors. a. Loss

There is plurality of subjects and unity of a.
Without debtor’s fault – obligation
prestation. is extinguished
b. Debtor is at fault – debtor is liable
6. Divisible and Indivisible Obligations for damages
b. Deterioration
7. Obligations with a penal clause -Penal clause is an a. Without debtor’s fault – Creditor
accessory undertaking to assume greater shall bear deterioration. The thing
responsibility in case of breach. Being an accessory will still be delivered to the creditor
obligation, it dies upon the extinguishment of the even if deteriorated by debtor will
principal obligation. not be liable for damages.
b. Debtor is at fault – Credit can
Obligations demandable at once: choose either from (i) specific
1. Pure Obligation w/o condition or period performance + damages; OR (ii)
2. Obligation w/ resolutory condition rescission + damages
3. Obligation w/ resolutory term or period c. Improvement
a. By nature or through time –
Suspensive and Resolutory Conditions creditor will get the improvement
b. Due to debtor’s expense – debtor
1. Suspensive Condition should be reimbursed necessary
expenses but not for
The non-compliance of the suspensive condition is useful/luxurious expenses
not a breach but simply an event which prevented the
obligation from acquiring obligatory force. Thus, 2. Resolutory Condition
rescission is not the proper remedy because there is
no need to rescind an obligation when there is none Rights before fulfillment of resolutory condition –
in the first place. Example, non-payment of full Since it is immediately demandable, the creditor can
purchase price [suspensive condition] in a contract to compel compliance with the obligation.
sell
Rights upon fulfillment of resolutory condition –
Constructive fulfillment of suspensive condition: If the Mutual restitution (Art 1190)
debtor voluntarily prevents the fulfillment of the
suspensive condition, the condition is deemed Rights upon failure to fill resolutory condition – the
fulfilled. There must be intent to prevent coupled obligation will not be extinguished and remains in
with actual prevention of fulfillment. (Art 1186) force.

Rights before fulfillment of suspensive condition: Rules on loss, deterioration and improvement before
a. Preservation of the thing – judicial action to fulfillment of resolutory condition: Law aims to
stop conveyance of object of the obligation, restore the parties as far as practicable to their
filing a notice of adverse claim positions when the obligation was constituted.
b. Debtor cannot be required to pay before a. Loss
fulfillment of condition and if he pay, he may a. Without the fault of the person who
recover what he was paid by mistake. will return – obligation is
extinguished
Rights upon fulfillment of suspensive condition: b. Person who will return is at fault –
a. Obligations to give – Retroactivity and fruits he is liable for damages
b. Obligations to do – Courts shall determine b. Deterioration
a. Without the fault of the person who
Rights upon failure to fulfill suspensive condition: will return – person who will
The obligation will not arise. Creditor may either receive shall bear the deterioration
refuse to proceed with the agreement OR waive the b. Due to fault of the person who will
fulfillment of the condition return – (i) Rescission + damages;
OR (ii) Disregard condition and
Rules on loss, deterioration and improvement before proceed with the contract +
fulfillment of suspensive condition: damages

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c. Improvement
a. By nature or through time – person
who will receive will get
improvement
b. Through expense of person who
will return – person who will return
entitled to necessary expenses but
not for useful/luxurious expenses
Potestative Condition (Art 1182)
Effects of Suspensive Potestative Conditions:
1. Will of the Debtor – If the fulfillment of the
suspensive condition that will give rise to the
obligation depends upon the will of the debtor – the
conditional obligation shall be VOID.
2. Will of Creditor – If the fulfillment of the suspensive
condition depends upon the will of the creditor, the
conditional obligation is VALID.
3. Not attached on birth of obligation – If the
suspensive potestative condition is not attached to
the birth of the obligation but on the fulfillment or
performance of an obligation that is already existing -
VALID and the court must fix the period to comply.
Effects of Resolutory Potestative Conditions:
Whether the fulfillment of the resolutory condition depends
on the will of the debtor or creditor, the obligation is valid.
Impossible Conditions (Art 1183)
1. Positive Impossible Condition
a. Conditional Obligation is VOID. The positive
impossible condition makes both the
obligation and the condition void because
the debtor knows the obligation cannot be
fulfilled.
b. Conditional Obligation is VALID. If the effect
of the condition is only partial and the
obligation is divisible, the portion not
affected shall be valid.
c. Only the condition is void but the obligation
remains valid. If the obligation is a pre-
existing condition and does not depends
upon the fulfillment of the condition which is
impossible for its existence, only the
condition is void.
d. Donation. Only the impossible condition is
void not the donation itself.
2. Negative Impossible Condition
a. Conditional Obligation is VALID. Obligation
is rendered pure and valid.
Suspensive and Resolutory Period
Obligation was already constituted but we do not know when
it is to be performed. Time to pay is unclear but obligation is
already undertaken by the debtor. Article 1180 in relation to
Article 1197 NCC provides that when the debtor binds himself
to pay when his means permit him to do so, the obligation shall
be deemed to be one with a period and the creditor may ask
the court to fix the period. After the expiration of the period
fixed by the court, make a demand which will make the debtor
in delay. (Art 1180)
Nature of obligation requires a period. Period is dependent on
the will of the debtor. A suspensive potestative period is valid.
On the other hand, a suspensive potestative condition is void.
Rules on loss, deterioration and improvement before
fulfillment of a period:
a. Loss
a. Without debtor’s fault – obligation is
extinguished
b. Debtor is at fault – debtor is liable for
damages
b. Deterioration
a. Without debtor’s fault – Creditor shall bear
deterioration.
b. Debtor is at fault – Credit can choose either
from (i) specific performance + damages; OR
(ii) rescission + damages
c. Deterioration
a. By nature or through time – creditor will get
the improvement
b. Due to debtor’s expense – debtor should be
reimbursed necessary expenses but not for
useful/luxurious expenses
Period fixed by the parties is presumed to be for the benefit of
both the creditor and debtor.
Delivery by Mistake (Art 1195) Anything paid or delivered
before the arrival of the suspensive period, the debtor being
unaware of the period or believing the obligation has become
due and demandable, may be recovered, with the fruits and
interests. It is only applicable in obligations to give.
• NOT applicable when:
o Obligations to do or not to do
o Reciprocal obligations and both parties
prematurely performed their respective
obligations
o Period is for the benefit of the creditor alone
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o Debtor voluntarily and knowingly delivered
the thing knowing that the obligation is not
yet due. It is just pre-payment.
Fixing of the period (Art 1197) – Court may ask to fix a period
in the following instances:
1. Period is intended when the obligation does not fix a
period;
2. Period depends on the will of the debtor;
3. When debtor binds himself to pay when his means
permits him to do so
Atty DBL: Until the period fixed by the court arrives, creditor
cannot demand performance. The period fixed by the court
must be filed within 10 years from the perfection of the
contract. However, the parties may change the period and it
constitutes novation.
When the Debtor loses the benefit of the period:
1. After the obligation has been contracted, he becomes
insolvent unless he gives a guaranty/security for the
debt;
2. Debtor does not furnish to the creditor
guarantees/securities which he has promised;
3. Debtor’s own acts has impaired said
guarantees/securities after their establishment, and
when through a fortuitous event they disappear
unless he immediately gives new ones equally
satisfactory
4. Debtor violates any undertaking in consideration of
which the creditor agreed to the period;
5. Debtor attempts to abscond
Alternative Obligations
Distinguished from generic obligations. Generic obligations
are limited to a particular class.
Not conditional. The act of choosing does not suspend the
effectivity of the obligation. It is effective but the exact
prestation is not yet fixed.
Who will make the choice? As a general rule, the debtor has
the choice unless there is a stipulation to the contrary.
However, if the choice belongs to a third party, the choice is
effective the moment the same is communicated to all parties
– debtor and creditor.
Effectivity of choice. The choice becomes effective the
moment it is communicated to the other party. The obligation
at that time becomes simple and the election made is
irrevocable. Furthermore, it is not necessary for the other
party to give his consent unless the prestation chosen is
impossible, unlawful or it was intended it was not the intended
options.
Effect of loss or impossibility if the choice is with the DEBTOR:
1. Only 1 option remains – Comply with the remaining
prestation. No liability for damages.
2. 2 or more options remain – Debtor should choose any
of the remaining prestations. No liability for damages.
3. All alternatives are lost – Debtor is liable for damages
if the loss of the last object was due to his fault.
However, if the loss of the last object was due to a
fortuitous event, he is not liable.
4. Loss after election – Governed by simple obligations
to give
Effect of loss or impossibility if the choice is with the
CREDITOR:
1. If loss due to fortuitous event – deliver that which the
creditor chooses among the remainder
2. If loss due to fault of debtor – creditor may (i) claim
from among those subsisting; OR (ii) price of the thing
that disappeared + damages
3. All things lost through fault of debtor – creditor may
claim the price of any one of the things lost + damages
Note: Where the choice is with the creditor, even if there are
remaining alternatives, the debtor is liable for damages if any
of the alternatives are lost due to his fault.
Facultative Obligations
The debtor has only one choice but with a right to substitute.
The option to substitute is always with the debtor.
Loss of the substitute due to the debtor’s fault will not make
him liable.
If the principal is lost or is void, there is no need to give the
substitute.
Joint and Solidary Obligations
Relationship between solidary creditors and debtors:
1. One solidary creditor may ask for full payment or full
compliance with the obligation. One solidary debtor
may be obliged or sued to perform the entire
obligation.
2. The other solidary debtors are not indispensable
parties in a case against one of the solidary debtors.
3. The moment a demand is made by one solidary
creditor, payment must be paid to him. (Art 1214)
However, if the demand is made on one solidary
debtor, demand can be made on the others so long as
there is no full compliance.
4. Any one of the solidary creditors may extinguish the
obligation. The remission made by the creditor of the
share which affects one of the solidary debtors does
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not release the latter from his responsibility towards
the co-debtors in cause the debt had been totally paid
by any of them before the remission was effected.
(Art 1215, 1219)
5. Compensation takes place when two persons are
creditors and debtors of each other and the
respective obligations are extinguished as to the
extent that they coincide.
6. Extension of time given in favor of one solidary debtor
will not release the other debtors except in the case
of a surety.
7. Payment by one solidary debtor extinguishes the
obligation.
8. If the thing which is the object of the obligation
disappears or the prestation becomes impossible. If
due to the fault of one or all solidary debtors, each
solidary co-debtor shall be liable for the value of the
obligation and damages.
9. If two or more solidary debtors offer to pay, the
creditor may choose which offer to accept. (Art 1217)
Relationship among solidary creditors:
1. If the solidary creditor was able to recover from the
debtor, he must thereafter give the share of the other
creditors.
2. Solidary creditors may do whatever may be useful to
the other solidary creditors. However, solidary
creditors may not do anything that is prejudicial to
the other creditors. (Art 1212, 1215)
3. Solidary creditor must get the consent of the other
creditors before assigning or transferring his right or
share in the credit to a third person. (Art 1213)
4. Novation may result in prejudice or benefit to the
solidary creditors. If the novation is prejudicial to the
creditors, the creditor who cause the novation shall
be liable to the other solidary creditors. If the
novation is beneficial to the creditors, the creditor
who caused the novation must share the benefits to
the other creditors.
Relationship among solidary debtors:
1. If one of the solidary debtors paid the creditor, he can
claim reimbursement from the other solidary
debtors. However, there is no right of reimbursement
if he paid after the obligation has prescribed.
2. A solidary debtor who paid the remaining debt may
claim reimbursement even against a debtor whose
share was remitted by the creditor. While a creditor
may release one solidary debtor only, the debtor who
is released remains to be solidary debtor.
3. A solidary debtor who was able to obtain release or
remission of the entire obligation is not entitled to
reimbursement.
4. In addition to the right of reimbursement, a solidary
debtor is also entitled to interest if he is paid on due
date but not if he paid before the obligation became
due.
5. If one of the solidary debtors is insolvent, the share of
the insolvent debtor shall be borne by the other
solidary debtors.
A solidary debtor may rase defenses against the creditor in
the following cases: (Art 1222)
1. Defenses that are derived from the nature of the
obligation – Prescription
2. Defenses that pertain to one debtor only. With
respect to those which personally belong to the
others, a solidary debtor may avail himself thereof
only as regards that part of the debt for which the
solidary with personal defense are responsible.
3. Defenses pertain only to the share of one debtor.
4. Defenses that pertain to other debtors.
Note: There is mutual guarantee among solidary creditors.
Hence, the solidary debtor guarantees the solvency of the other
solidary debtors. Thus, the insolvency of the solidary debtor
cannot be invoked as a defense.
Effects of Joint Indivisible Obligations
Problem: A, B and C are solidary debtors bound to pay
P120,000 to X. According to the PN, A can be compelled to pay
only on June 1, 2010, B can be compelled to pay only on June 1,
2011, and C can be compelled to pay only on June 1, 2012. On
June 1, 2010, X made a demand upon A to pay the entire
indebtedness but A only paid P40,000. Due to the A’s refusal to
pay the entire P120,000, X brought an action against him for
collection of the whole amount. Will the action prosper?
Answer: The action will not prosper. Art 1211 NCC provides
that the solidary character is not destroyed by the fact that the
debtors are bound by different periods of payment. Since each
solidary debtor can be compelled to pay on different dates, the
right of the creditor to collect is limited to the solidary
debtor(s) whose obligation(s) have matured and the recovery
is limited to the amount owed by the debtor(s) whose
obligation(s) have already matured. In the present case, only A
is liable on June 1, 2010 and the liability is limited to P40,000.
On June 1, 2011, B’s obligation shall have matured and the
creditor can compel either A or B to pay which is limited to B’s
obligation of P40,000. On June 1, 2012, C’s obligation shall
have matured and the creditor can compel A,B, or C to pay
which is limited to C’s obligation of P40,000.
Answer: If in the above problem, A, B and C are joint debtors,
the action will still not prosper. On June 1, 2011, only B is liable.
On June 1, 2012, only C is liable.
Divisible and Indivisible Obligations
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The fact that the obligation is indivisible does not mean that
the obligation is solidary. The peculiarity however is that it
cannot be performed by only one in party. Thus, the effect of
non-compliance is to convert the obligation into one for
damages and to make the debtors liable thereafter for their
proportionate shares.
Example: The joint indivisible obligation to deliver a horse is
converted into one for damages in case of breach.
Effect of nullity of principal obligation or accessory obligation
(Art 1230) The nullity of the principal carries with it the nullity
of the accessory. However, the nullity of the accessory does
not carry with it the nullity of the principal.
Penalty may be reduced by the court in the following cases:
1. There was partial compliance
2. There was compliance but was irregularly done
3. Penalty is iniquitous or unconscionable

In obligations to give, the obligation to deliver a specific thing Extinguishment of Obligations

is always indivisible.
Grounds for Extinguishment:
In obligations to perform service, the obligation is divisible if:
(i) work will be executed within a certain number of days; (ii) 1. Payment or performance
work is to be accomplished by metric units. 2. Loss of the thing due
3. Condonation or remission of debt
Even if the obligation is divisible by nature, the same may be 4. Confusion or merger of the rights of creditor and
rendered indivisible by law or by agreement of the parties. debtor
However, if the obligation is indivisible by nature, it cannot be 5. Compensation
made divisible by law or agreement of the parties. 6. Novation
7. Annulment
Obligations with a Penal Clause 8. Rescission
9. Fulfillment of resolutory condition
A penal clause is in the nature of an accessory obligation which 10. Prescription
makes one party liable or makes him perform another 11. Death whenever personal obligations are involved
prestation if the principal obligation is not fulfilled. The penalty 12. Expiration of resolutory period
clause takes the place of indemnity for damages and the 13. Compromise
payment of interests in case of non-compliance with the 14. Impossibility of performance
obligation unless there is a stipulation to the contrary. 15. Fortuitous Event

Penal clause strengthens the coercive force of the obligation Payment

and the penalty can only be enforced when it is demandable.
Requisites of Payment:
Penalty shall substitute indemnity for damages and the 1. Integrity (Art 1233, 1234, 1235)
payment of interests in case of non-compliance. Nevertheless, 2. Identity (Art 1244, 1245)
damages shall be paid if the obligor refuses to pay the penalty 3. Indivisibility (Art 1248)
or is guilty of fraud in the fulfillment of the obligation. (Art
1226) Integrity of Payment

Penalty is not an alternative (Art 1227) The enforcement of
the penalty is made only if there was non-compliance with the
principal obligation.
Generally not complementary (Art 1227) Creditor can either
demand fulfillment of the obligation or enforce the penalty.
However, the creditor can demand both where there is an
agreement that he can enforce the penalty and at the same
time demand the performance of the obligation.
Proof of actual damage not necessary (Art 1228) The penalty
is meant to deter violation and to punish violation. The penalty
is provided in the agreement between the parties.
As a general rule, integrity of payment means the obligation
must be completely and faithfully complied with. As a
consequence, the creditor may reject partial or incomplete
performance. However, partial performance is allowed in the
following cases:
1. Substantial Compliance (Art 1234) – It applies when
the debtor admits breaching the contract after
honestly and faithfully performing all material
elements except for some technical aspects that
cause no serious harm to the creditor. The technical
aspect should not affect the purpose of the contract.
Furthermore, there must be payment of damages
which may have been incurred by the creditor.
2. Estoppel or the Creditor is barred to question
incomplete performance (Art 1235)

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3. When the debt is liquidated and unliquidated in part
4. Parties agreed on partial compliance
5. Nature of the obligation is that it cannot be done in
one instance
6. Solidary obligations where the debtors are bound by
different terms and conditions
7. Joint debtors who are bound to deliver their
respective shares only
Who can pay the obligation? The debtor or a third person.
However, the third person may not compel the creditor to
accept payment or performance. The creditor may insist that
the debtor should pay or perform the obligation. Full payment
of the obligation by a third person extinguishes the obligation.
1. If payment by third person is made with the
knowledge and consent of the debtor
a. Right of reimbursement – Debtor should pay
third person unless third person does not
intend to be reimbursed.
b. Right of subrogation
2. If payment by third person is made without
knowledge and consent of the debtor
a. Limited right of reimbursement – up to what
is beneficial to the debtor
To whom should payment be made? The creditor, successors-
in-interest of the creditor, or any person authorized to receive
the payment by agreement/law.
Capacity of the payor: Person who must pay must be
capacitated. Otherwise, payment by an incapacitated person is
invalid.
Capacity of the payee: Payment to an incapacitated person is
generally not effective. However, if the incapacitated person
benefitted then payment is valid.
Identity of Performance
As a general rule, identity of the performance of the obligation
means that the debtor must give what should be given or he
must do what should be done. Exceptions to the
aforementioned rule are the following cases: (i) facultative
obligation; (ii) dation in payment
Dation in payment is the delivery and transmission of
ownership of a thing by the debtor to the creditor as an
accepted equivalent of the performance of the obligation.
Requisites of dation in payment:
1. Instead of the original prestation, another prestation
is performed;
2. Original prestation that is due and the one performed
are different;
3. Parties agreed that the performance of the different
prestation extinguishes the obligation
Effects of Dation in payment - Dation in payment is made if
upon the agreement of the parties, a thing is delivered to the
creditor in lieu of the original prestation. It is required that
there is an agreement that the performance of a different
prestation shall extinguish the obligation. Dation in payment
extinguishes the obligation to the extent of the value of the
thing delivered unless the parties agree that the thing is
considered as equivalent to the obligation then the obligation
is totally extinguished. Thus, an assignment which is essentially
a mortgage cannot constitute dation in payment.
Payment should be in legal tender. The value of the currency
at the time of the establishment of the obligation shall be the
basis of payment except when (i) there is an agreement to the
contrary; OR (ii) there is extraordinary inflation or deflation
based on a declaration from the appropriate government
agency like the BSP of Department of Finance.
Tender of payment:
1. Tender of payment must be made to the creditor;
2. Payment tendered must be complete, regular and
identical
3. Payment must not only be complete but must also
include accessory obligations like payment of
interest;
4. The obligation must be due; and
5. The tender must be unconditional
Consignation:
1. Debt must be due
2. Unjustified refusal on the part of the creditor to accept
- Consignation of the obligation had been made
because the creditor to whom tender of payment was
made refused to accept without just cause;
3. Prior notice of the consignation had been given to the
person interested in the performance of the
obligation;
4. Amount due was placed at the disposal of the court;
and
5. After the consignation had been made, the person
interested must be notified thereof.
Withdrawal by the debtor of the thing consigned:
1. Without authority of creditor – Debtor may still
withdraw the thing consigned in court if: (i) creditor
has not yet accepted the consignation, and (ii) court
has not yet declared that the consignation was
properly made
2. With authority of creditor – The obligation remains in
force. Creditor will no longer have any preference
over the thing. Co-debtors, guarantors and sureties
shall be released.
Loss of the thing due
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As a general rule, when a thing is lost, perishes, goes out of
commerce, or disappears in such a way that its existence is
unknown or cannot be recovered, the obligation is
extinguished.
As an exception, the obligation is not extinguished because of
loss or impossibility in the following cases:
1. Law provides that it shall not be extinguished
2. Parties agree that the obligation shall not be
extinguished
3. Nature of the obligation requires assumption of risk
4. Thing to be delivered is a generic thing
5. Debtor is guilty of delay
6. Debtor promised to deliver the same thing to two or
more persons
7. When the obligation to deliver the determinate thing
arises from a criminal act
8. Debtor’s negligence concurs with a fortuitous event
Theory of imprevisibility. Art 1267 NCC provides that when the
prestation has become so difficult as to be manifestly beyond
the contemplation of the parties, the obligor may also be
released therefrom, in whole or in part. Requisites -
1. Event or change in circumstance could not have been
foreseen at the time of the execution of the contract;
2. It makes the performance of the contract extremely
difficult but not impossible;
3. It must not be due to the act of any of the parties – no
fault or negligence;
4. Contract is for future prestation – prestation that will
be performed in the future
Summary: As a general rule, mere difficulty in the
performance of the obligation does not amount to loss or
impossibility. Parties to the contract are presumed to have
assumed the risks of unfavorable developments. Exception,
theory of imprevisibility also known as theory of unforeseen
event – where only in absolutely exceptional changes of
circumstances that equity demands assistance to the debtor
because of the difficulty, although not impossible, to comply
with the obligation.
Partial loss will extinguish the obligation if the portion that was
lost is so important such that it amounts to total loss.
Disputable presumption of fault. Whenever the thing was lost
when it was in the possession of the debtor, it shall be
presumed that the thing was lost due to his fault. However,
fault on the debtor is not presumed if the loss occurred due to
a natural calamity.
Effect of criminal offense. Even if the loss is due to a fortuitous
event, the debtor is still liable because the determinate thing
proceeds from a criminal offense.
Refusal of the creditor to accept. The debtor will be excused if
the creditor refused to receive it after the debtor offered to
deliver and subsequently, the thing was lost due to the
fortuitous event.
Rights of creditor in case of loss: (a) exercise rights and actions
which the debtor may have against third persons; and (b)
recover indemnity that may have been already received by the
debtor
Condonation or Remission
Requisites:
1. Acceptance by the obligor, express/implied
2. Consideration which is pure liberality because it is
essentially gratuitous;
3. Compliance with the required formalities if express
condonation;
Confusion or Merger
Requisites:
1. Takes place between the principal creditor and
principal debtor;
2. Complete and definite
Confusion or merger of rights in the person of the guarantor
does not extinguish the obligation because he is not the
principal debtor.
Compensation
Kinds of Compensation:
1. Legal – takes place by operation of law
2. Conventional – parties agree to compensate their
mutual obligations
3. Judicial – compensation takes place by order of the
court. Thus, it must be pleaded and proved.
Legal Compensation – Requisites: (Art 1279)
1. Each of the obligors be bound principally, and that he
be at the same time a principal creditor of the other
2. Both debts consist in a sum of money, or if the things
due are consumable, they be of the same kind, and
also of the same quality if the latter has been stated
3. Two debts must be due
4. They be liquidated and demandable
5. That over neither of them there be any retention or
controversy, commenced by third persons and
communicated in due time to the debtor
Effect of legal compensation. It is automatic, takes place by
operation of law and no further act is necessary. Both
obligations are considered extinguished unless: (a) parties
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waive the benefit of the compensation and still consider the
obligation effective; or (b) not all requisites are present, then
parties may resort to facultative or voluntary compensation
Rescissible or voidable obligations may compensate each
other because although they are essentially defective, they are
treated as valid. However, it is always subject to any
subsequent case to rescind or annul the obligation. If the
obligation is rescinded or annulled, the effect will retroact and
will therefore also annul the rescission.
Compensation cannot take effect in the following instances:
1. When one of the debts arises from a deposit or from
the obligations of a depositary;
2. When one of the debts arises from the obligations of
a bailee in commodatum
3. When one involves a claim for support by gratuitous
title;
4. When one of the debts arises because of civil liability
arising from criminal liability;
Assignment after compensation (Art 1285). As a general rule,
the assignment is not effective because the obligation is
automatically extinguished by legal compensation when all the
requisites concur. As an exception, the obligation remains
effective where the debtor consents. As an exception to the
exception, liability is still extinguished if the debtor consents
with reservation with respect to the compensation.
Assignment before compensation of some obligation
1. If notice is given at the time of the transfer of credit –
compensation of all debts due prior to the transfer is
effective but ineffective as to debts due after the
transfer;
2. If assignment was made without notice or knowledge
of the debtor – may set up compensation of all credits
prior to obtaining knowledge of the assignment;
compensation for all debts due prior to the notice is
effective but not for debts due after the notice
Novation
Novation has dual functions: (1) extinguish the obligation; (2)
substitute a new one in its place.
Requisites:
1. Previous valid obligation;
2. Agreement of the parties concerned to a new
contract;
3. Extinguishment of the old contract;
4. New valid contract
In an extinctive novation, the old obligation is extinguished. In
a modficatory novation, the old obligation is only modified.
Novation can be express/implied. Implied when the two
obligations are incompatible “material incompatibility”.
Subjective or personal novation is when the debtor/creditors
change. Objective or real novation is when there is a change
in the cause, object or principal conditions.
Extinctive novation applies when:
1. Obligation is originally pure and the new obligation us
subject to a suspensive/resolutory condition;
2. Amount to be paid is increased in the new obligation;
3. Parties agreed to reduce the period;
4. Different object is to be delivered;
No extinctive novation in the following cases:
1. Parties agreed to impose payment of interest;
2. Parties agreed that the debtor will give additional
security like mortgage, pledge or surety bond
3. Where the parties agreed to an extension of the
period;
4. Where the parties reduced a verbal agreement into
writing
5. Where the parties changed the place where the
payment is to be made
Expromission – Insolvency of the new debtor before/after the
novation does not revive the obligation of the debtor.
Delegacion – Insolvency of the new debtor revives the
obligation of the debtor if: (a) insolvency is anterior – existing
at the time of novation; and (b) of public knowledge or known
to the debtor
Subrogation – it is the transfer of all the rights of the creditor
to a third person. It involves novation by changing the creditor.
Effects of subrogation: The third person acquires: (1) right that
the creditor may have against the debtor like the right to
demand payment; (2) right to proceed against third persons or
any security like the right to foreclose any mortgage.
As a general rule, legal subrogation is not presumed. However,
legal subrogation is presumed in the following cases:
1. Creditor pays another creditor who is preferred even
without the debtor’s knowledge;
2. When a third person not interested in the obligation
with the express/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
Art 1304 preference
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Contracts
General Principles
Can the seller who wants to back out of an agreement
because he thinks he could have gotten a better price have
any legal consequences?
Article 24 of the NCC which mandates the courts to be vigilant
for the protection of a party at a disadvantage due to his moral
dependence, ignorance, indigence, mental weakness, tender
age or other handicap.
In the absence of any handicap, the law cannot protect those
who are not vigilant in not protecting their interests. (Sps
Pascual vs Ramos)
Principle of Liberality of Contracts: Article 1306 NCC provides:
“The contracting parties may establish such stipulations,
clauses, terms and conditions as they may deem convenient,
provided they are not contrary to law, morals, good customs,
public order, or public policy.” Furthermore, the Philippine
Constitution recognizes the principle by prohibiting the
passage of a law that impairs the obligation of contracts
subject however to limitation.
Limitations of Liberality of Contracts:
1. Law – labor standards and social legislations, pactum
commissorium clause, recto law, maceda law,
jurisdiction of the court, constitutional prohibitions
2. Morals – scholarship grants for school propaganda
purpose, excessive interest rates
3. Good customs – only when it does not render
applicable status inoperative
4. Public Order – usually found in laws and local
ordinances pursuant to the police power of the State
5. Public Policy – undue restraint of trade, broad post-
employment restrictions as to time-industry-place,
agreement that stifles the right of the State to
prosecute, agreement allowing middleman a
percentage allocation in foreign exchange
Valid Restraint of Trade: Factors to consider – . As a general
rule, when there is prohibition of the former employee from
working, must consider time, industry, and place regarding the
restriction. However, forfeitures for engaging in subsequent
competitive employment included in pension and retirement
plans are valid even though unrestricted in time or geography.
(Rivera vs Solidbank, 2006)
Principle of Mutuality of Contracts: Article 1308 NCC provides:
“The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them.” As a
consequence, a party cannot revoke or renounce a contract
without the consent of the other party nor can the contract be
set aside on the ground that he made a bad bargain. However,
it is valid if resolutory.
Is the stipulation in the Contract to Sell that the vendor “has
the right to declare this contract cancelled and of no effect”
valid? Yes, valid. A contract expressly giving to one party the
right to cancel the same if a resolutory condition (installment
payment) therein agreed upon is valid. It is not unilateral
because it depends on the fulfillment of the obligation of the
other party. (Garcia vs Rita Legarda, 1967)
Is the stipulation in the Lease Agreement that the “lease shall
continue for as long as the lessee is willing to pay” valid? Not
valid because it is violative of the principle of mutuality of
contracts. The lessor may be deprived of the perpetual use of
his property. (Encarnacion vs Baldomar) However, a
stipulation in lease contract stating that “the term of the lease
shall be 14 years and may be renewed for a like term at the
option of the lessee” is valid because ultimately, the lessor is
free to give such option to the lessee to renew every 14 years.
(Allied Banking Corp vs CA)
Is a provision in the credit agreement that “bank reserves the
right to increase the interest rate within the limits allowed by
law at any time” valid? It is violative of the principle of
mutuality of contracts because it gives the bank the unbridled
right to unilaterally upwardly adjust the interest of the loa
(PNB vs CA, 1994)
Principle of Relativity of Contracts: Article 1311 NCC provides:
“Contracts take effect only between the parties, their assigns
and heirs, except in case where the rights and obligations
arising from the contract are not transmissible by their nature,
or by stipulation or by provision of law. The heir is not liable
beyond the value of the property he received from the
decedent.” As a general rule, third persons not parties to the
contract cannot be prejudiced by the contract. However, the
contract may effect insofar as third persons are concerned in
the following instance: (1) Heirs/Assignees except when the
nature of the obligation is personal exception to exception is
when the obligations can be passed on to the heirs (eg recover
real/personal property or interest therein, enforce lien,
recover damages for injury) but such heirs cannot be liable
beyond the value of the property they received from the
decedent; (2) Stipulation pour atrui (3) Interference with
Contractual Relations (4) Third person adversely affected by
contract and Accion Pauliana (5) Accion Directa (6) contracts
creating real rights
Would the real estate mortgage executed by seller-
mortgagor in favor of the mortgagee bind the buyer? The
remedy of the unpaid creditor is accion pauliana case may be
availed of when the properties of the debtor are sold to a third
person in order to defraud to the creditor. Where the real
estate mortgage is registered before the sale, the third person
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cannot oppose the foreclosure because registration is
equivalent to constructive notice to the whole world which
binds third persons.
Stipulation pour atrui: Requisites –
1. Clear and deliberate (not incidental) conferment of a
favor upon a third person,
2. 3rd person has communicated his acceptance to the
obligor before revocation (both express/implied);
3. Stipulation in favor of third person is only part of the
contract,
4. Favorable stipulation is not burdened by condition or
otherwise compensated,
5. Third person is not an agent of the contracting parties
There is contract to sell of real property which provides that
the commission paid to the broker shall be paid by the seller.
However, the contract to sell was cancelled. Can the broker
file a case against the seller for breach of contract because
the broker’s fee was not paid? No, broker cannot file a case
because the broker’s fee is incidental to the contract to sell real
property. The broker is considered a stranger who is not a
party to the contract.
A school had hired a nurse. Can the student file a case against
the nurse? The student cannot file a case against the nurse
invoking the contract because it is only incidental to the main
contract which is that the school should give education to the
student. However, the student may file a case for damages
under other civil law provisions.
Interference with Contractual Relations: Requisites –
1. Existence of a valid contract
2. Knowledge of the existence of contract
3. Interference of the contract is without legal
justification
Seller and buyer agreed to enter into a contract of sale.
Instead, a third person enters into a contract of sale with the
seller by offering a higher price. Does the first buyer have a
remedy? Interference with Contractual Relations - Buyer can
file a case against the seller and the third person although the
buyer is not a party to the contract of sale between seller-third
person. Prior knowledge coupled with bad faith of the third
person is sufficient.
There is a sub-lease. If the lessee fails to pay the rental to the
lessor, can the lessor collect from the sub-lessee? Yes, accion
directa. Even though the sub-lessee is not a party to the lease
contract between lessor and lessee, the lessor can file a case
against the sub-lessee.
Principle of Consensuality of Contracts: As a general rule,
Contracts are generally perfected by consent. As a
consequence, parties become bound by the terms of the
contract and all legal consequences arising therefrom. As
exceptions:, (1) Real contracts (eg deposit, pledge,
commodatum) are perfected not just by mere consent but by
delivery of the object of the obligation; (2) Solemn contracts
also require for their perfection the execution of documents in
certain forms.
Stages and Elements of Contracts
Stages:
1. Negotiation
2. Perfection
3. Consummation
Negotiation – whether preparatory acts will give rise to the
perfection of the contract
Rules on Offer
1. Certain (as to thing and cause; Art. 1319)
The offer must be certain and the acceptance
absolute. It is certain and sincere as to the thing and
cause.
Counter-offer is not a valid offer.
2. Offeror may fix time, place and manner of acceptance
(Art 1321)
3. May be made through an agent (Art 1322)
The agent must have authorize to make an offer and
accept so that the principal will be bound. Where the
agent is only authorized to make an offer but not to
accept, Article 1322 does not apply.
4. Becomes ineffective by death, civil interdiction,
insanity or insolvency of party before acceptance is
conveyed (Art 1323)
There is no acceptance where the aforementioned
happened before acceptance is conveyed. The offer is
ineffective.
5. May be made electronically (Sec 16 RA 8792)
In the Civil Code, offer may be accepted by letter or
telegram. At present, RA 8792 now permits offer and
acceptance through electronic means.
Through letter or telegram: The offer is acceptance
when the offeror has knowledge of such acceptance
pursuant to the Cognition Theory.
6. May be effective for a certain period (Art 1324)
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As a general rule, if the offeror gives the offeree a
certain period to accept an offer, it can be withdrawn
anytime by communicating such withdrawal before
acceptance.
Exceptions:
1. When offeree already accepts the offer
2. When there is a valid “Option Contract” (Art
1324)
Option Contract – Separate from the principal
contract. Where there is a promise and consideration,
it gives rise to the option contract and the offeror is
bound by his offer. “Option Money” is the
consideration of an option contract.
For as long as it is a consideration for the period given,
no min/max amount of option money.
Earnest Money – Forms part of the purchase price. In
rescission under Art 1191, the earnest money should
be returned.
Article 1324 lays down the general rule on offer and
acceptance; Art 1479 applies to an acceptance
unilateral promise to buy/sell. In Sanchez vs Rigor, the
term accepted in Article 1479 refers only to the option
and not to the offer to buy/sell. A unilateral promise
to buy/sell can still be withdrawn despite acceptance
of that promise unless there is a consideration distinct
from the price where the offer can no longer be
withdrawn.
7. Business advertisements (Art 1325) and
advertisement for bidders (Art 1326) are not
necessarily offers
As a general rule, Business advertisements by itself
are not necessarily offers. It’s legal effect is just a
mere invitation to the public to make a bid. The one
advertising the bid is not bound by the highest or
lowest bidder.
However, if the business advertisement is so specific
as to the object and consideration where the only
thing the public needs to do is accept it because there
is no need for the public to inquire, the offer is
considered specific as to the cause. It binds both
parties once acceptance is made.
Situation: X places in the newspaper an ad that says
Lot 12 consisting of 10 hectares for 10 million. The ad
does not supply the manner of payment. The ad is not
necessarily an offer.
8. Must be made by one who has the capacity to give
consent (Art 1327) and not disqualified by law (Art
1329)
Situation: An agent makes an offer and it was
subsequently accepted. However, the agent did not
have authority to make such offer and thus, the
corporation is not bound by such offer.
Incapacitated to give consent – VOIDABLE
Minors, insane/demented, deaf-mutes who do not
know how to read and write, civil interdiction,
incompetents, insolvents, etc.
As a general rule, contracts entered into by a person
who is incapacitated to give consent is voidable.
Exceptions -
a. A minor who actively misrepresents age
(estoppel);, Active misrepresentation as to
the his age will make the contract voidable.
(Mercado vs Espiritu) Passive
misrepresentation is considered a complete
defense on the part of the minor who did not
answer as to his age. (Braganza vs Abrille)
b. Sale and delivery of necessaries to minor
c. Creditor consumes goods in GF
Prohibited to enter into contracts – VOID (Art 1329)
Situation: Judge makes an offer. The offer is not
binding where by specific provision of law, a judge
cannot make an offer regarding the property subject
of litigation. Contract is void.
Insanity – The contract entered into during lucid
interval is valid. Insanity is never presumed and thus,
the one who claims that the contract is not valid has
the burden of proof. However, where there had been
a judicial declaration of insanity, the burden is shifted
on the one who claims that the contract is valid.
Manresa added by analogy, the rules on insanity
applies drunkenness and hypnotic spell.
9. Must be free and voluntary (Art 1330)
Where the offer was made by mistake, the offer is not
binding.
10. Must not be fictitious (Art 1346)
Theories on Perfection of Contracts
Theories on Perfection of Contracts
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1. Manifestation – the moment acceptance is made
2. Expedition – the moment acceptance is transmitted
3. Reception – the moment the acceptance is received
by the offeror
4. Cognition – the moment acceptance came to the
knowledge of the offeror (Art 1319 par 2) Cognition
theory admits of actual or constructive knowledge.
Such knowledge can be determined through direct or
in the absence, circumstantial evidence. Receiving the
letter but not having read it is sufficient to constitute
constructive knowledge. However, in Laudico vs
Arias, the Supreme Court ruled that cognition theory
is not followed in revocation of offer. For example,
where before acceptance, the offeror withdrew the
offer, even if the fact of revocation was received after
acceptance, the offer’s revocation is valid.
Vices of Consent
Vices of Consent – VOIDABLE contract
1. Error or mistake (Art 1331)
a. Must be mistake of fact, not of law (Mistake
of fact as to one party.
- As an exception, it includes
mistake of law when there is
“mutual error as to the legal
effects of an agreement” because
there is no meeting of minds
between the parties. (Art 1334)
- VS Remedy of Reformation of
Instrument (Art 1361): there is
mutual mistake as to the facts.
The contract is valid but what is
to be corrected is the instrument
disclosing such instrument.
b. Plain ignorance or honest mistake (Art 1333)
c. Must be substantial [substance of the thing,
vital conditions of the contract, other
principal causes of the contract like identity
or qualifications]
Situation: The buyer thought the property
was 900sqm but in fact, it was only 800sqm.
It will not necessarily annul the contract and
should only be subject to correction. To be
safe, the contract should say e.g. 900sqm
more or less.
d. Burden of proof rule in case of (a) inability to
read and (b) language not understood
The person enforcing the contract has the
burden of showing that the terms have been
fully explained to the other party. However,
a notarized document enjoys the benefit of
having the notary public in order to explain
the circumstances surrounding the
execution of the contract. There is a
presumption of regularity in the words of the
notary public and carries a big weight in
court proceeding.
2. Violence OR Intimidation/threat/duress (Art 1335,
1336)
Violence: serious and irresistible physical force is
employed
Intimidation: need not be physical but must produce
a reasonable and well-grounded fear, imminent and
grave danger upon a person or property of the party,
his spouse, descendants, or ascendants. List is
exclusive if we are to apply the law strictly.
Intimidation is directed to a certain individual and the
reason why he enters into the contract.
Violence/Intimidation even if employed by a third
person shall annul the contract because of vitiation of
consent (Art 1336). However, fraud must be
committed by one of the parties to vitiate consent.
“Reverential fear” does not vitiate consent – fear of
punishment from supernatural beings.
Threat to sue or enforce a legal claim is valid because
you are exercising a right. As an exception, not valid
where the threat to sue is groundless, malicious, in
bad faith and it vitiated consent.
3. Undue influence
Contemplates – (Note: Not presumed)
a. Special relations that create power by one
over the other
b. Mental weakness or financial distress
4. Fraud
a. Use of serious “insidious words” or
“machinations” (Art 1338) or “concealment
(Art 1339) by one of the contracting parties
b. Causal fraud – must be the reason why the
party entered into the contract
c. Not presumed
d. Failure to disclose facts when there is duty
do so is fraud
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e. But, (1) usual exaggerations in trade or (2)
mere expression of opinion or (3) third
person’s misrepresentations are not in
themselves fraudulent
Fraud in the performance of an obligation will not affect the
validity of the contract but will give rise to the liability for
damages. The contract is valid.
Fraud in obtaining the consent of another is not presumed.
When proven, it vitiates consent and can annul the contract.
Non-disclosure of a fact when there is a duty to do so may
constitute fraud. Example, the applicant for an insurance
policy does not disclose important facts constitutes fraud
because it is concealment of fact where there is duty to
disclose.
If the fraud is committed by another party and results to
mutual mistake for both parties, it vitiates consent. (Art 1342)
Simulation of Contract
Simulation of Contract (Art 1345, 1346)
1. Absolute: Intentionally deceiving others by producing
the appearance of a contract that really does not exist
= VOID. For example, sells the property to another to
evade creditors but there is no consideration.
As a general rule, sale transaction without
consideration is fictitious, inexistent and therefore
void. It is therefore not a consummated sale that can
validly transfer title to the supposed buyer and it
cannot transfer title to third persons because a void
title cannot give rise to a valid one. A contract of sale
is void and produces no effect whatsoever where the
price which appears to be paid has in fact never been
paid by the purchaser to the vendor. (Gardner vs CA;
Ladanga vs CA)
Exception, “Buyer in Good Faith”, “Mirror Doctrine”:
A defective title may be the source of a completely
legal and valid title provided that the buyer is an
innocent third person who in good faith relied on the
correctness of the certificate of title or an innocent
purchaser for value. This principle is applicable where
there is a certificate of title of a registered land.
(Locsin vs Hizon, 2014; Sec 55 of Land Registration
Act[PD 1529])
Exception to Mirror Doctrine: When the party has
actual knowledge of facts and circumstances that
would impel a reasonably cautious man to make such
inquiry or when the purchaser has knowledge of a
defect or the lack of title in his vendor or of sufficient
facts to induce a reasonably prudent man to inquire
into the status of the title of the property in litigation.
Example, annotation in the TCT should impel the
buyer to make further investigation regarding the
property.
Note: Where there is no mention in the problem that
the property is registered land and there is only a
DOS, mirror doctrine does not apply to determine
buyer in good faith. Recovery is possible and can seek
reimbursement from the person who does not have
actual title. Determination is when the seller has a
certificate of title in his name during the sale/transfer.
2. Relative: A contract which is different from the true
agreement in order to hide the true agreement. True
agreement is valid between the parties unless it (1)
prejudices a third person or (2) is for illegal purpose.
For example, seller sold the property for 10m but to
hide his true agreement, executed a Deed of
Donation instead. If the seller demands payment, he
can demand payment of 10 million because both
parties are bound by their true agreement.
Object of Contract
Object of Contracts
Requisites:
1. Within the commerce of men
a. It includes future things but does not include
future inheritance (Art 1347)
b. Must be transmissible
Art 1347(2) applies when the following requisites
concur: (1) succession has not yet been opened;
(2) the object of the contract forms part of the
inheritance; and (3) the promisor has, with
respect to the object an expectancy of a right
which is purely hereditary in nature.
Where there is a will: At the time the deed was
executed, Faustina’s will was not yet probated;
the object of the contract, the 9000sqm property
still formed part of the inheritance of his father
from the estate of Faustina and Domingo had a
mere inchoate hereditary right therein. (Vda de
Cabalu vs Sps Tabu)
Exceptions to Art 1347(2):
i. Art 84 FC on donation by one
spouse to another of not more than
1/5 of the present property to take
effect after death, where the
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spouses have agreed on marriage
settlement other than absolute
community
ii. Partition of property inter vivos to
take effect upon death of the owner
of the property (Art 1080)
2. Must not be impossible
3. Existence or capable of coming into existence
4. Determinate or determinable without need of a new
contract.
Cause or Consideration of Contracts
Cause or Consideration of Contracts: - is the reason which
moves the party to enter into the contract
Although the cause is not stated in the contract, it is presumed
that it exists and is lawful, unless the debtor proves the
contrary. (Art 1354)
Motive
(Liguez vs CA) Motive [eg desire to cohabit] usually irrelevant
in determining the validity of the contract (Art 1351) however
can be considered the cause if it predetermines the purpose of
the contract.
Example, if the motive of the seller in selling his land is to
defraud a creditor, the latter has the right to go after the land
for its satisfaction and indebtness of the seller. The creditor
may ask the court for rescission or cancellation of sale. (Art
1381(3), 1387)
Absence of cause, unlawful cause, no true cause [VOID] (Art
1352)
Contracts without cause confers not right and produce no legal
effect:
1. Absolutely simulated contract (Art 1346, 1409(3))
2. Contract has no consideration
3. Promises to make a gift or to render some gratuitous
service in the future are not enforceable because they
have no consideration
4. Promises made in gratitude for good deeds of others
cannot be enforced for they constitute only moral,
not legal, consideration
A false cause may be erroneous of simulated. The first always
renders a contract void. If the cause is false, the contract is
rendered void because the same actually does not exist. (Art
1353, 1409(3)). However, the second is not always void
because it may happen that the hidden true cause is sufficient
to support the contract. If the parties can show that there is
another cause and that said cause is true and lawful, then the
parties shall be bound by the true agreement. (Art 1346)
Failure of cause [VALID] (Art 1169(3), 1170,1191)
Contract is valid but remedy is to ask for damages.
a. When demand would be useless, as when the obligor
has rendered it beyond his power to perform (Art
1169(3))
b. Fraud in the performance of an obligation already
existing because of the contract, negligence that
prevents the fulfillment of an obligation, delay,
contravention of the terms of the obligation (Art
1170)
c. (Art 1191)
Inadequacy of cause [generally valid] (Art 1355)
As a general rule, lesion or inadequacy of cause does not by
itself invalidate a contract. A person who willingly enters into
a contract will be held bound by its terms though the exchange
of benefits may seem to be inequitable or unfair to him. The
law assumes that the parties themselves remain the best
judges of how much their bargain is worth.
As an exception, lesion will invalidate a contract when –
a. When there has been fraud, mistake or undue
influence
b. In cases specified by law (Art 1381(1)(2), 1098, 1470)
Thus, gross inadequacy of price does not affect a contract of
sale except as it may indicate a defect in the consent, or that
the parties really intended a donation or some other act or
contract. (Art 1460) If such indicates defect in consent or party
intended another contract, remedy is rescission.
Forms of Contracts
As 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. If any of the essential
requisites are not present, there is no contract whether oral or
written. However, form is required by law for (1) necessary for
validity of the contract; scattered provisions in NCC and special
laws (2) necessary for enforceability of the contract; Statute of
Frauds (3) for convenience of parties. Art 1356-1358
Required for validity of the contract:
1. Writing – may be in a private document
2. Public – written but notarized
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e. Mutual restitution
f. Object of the contract must NOT legally be in
possession of a third person who acted in GF
g. Period for filing action for rescission should not
prescribe: It prescribes in 4 years.

If the damage can be repaired or partially rescinded, no need

for rescission. It covers only to the extent of damage caused.

Mutual restitution includes: object of the contract, fruits and

the price with interest (Art 1385)

Mutual restitution cannot be availed of when:

1. Party who demands cannot return what is needed to
be returned;
2. Object is legally in possession of a third person in
good faith – The remedy is indemnity for damages
from the person who caused the loss and the third
person can invoke good faith so he will not be sued.
However, where the alienation is gratuitous, the third
person cannot invoke good faith because it would
cause unjust enrichment.

Rescissible Contracts (Art 1381)

a. Rescissible because of lesion or prejudice

a. Contracts entered into in behalf of wards

b. Contracts agreed upon representation of
absentees

Wards or absentees suffer lesion more than ¼ of the

value of the things which are the object of the
contract entered into in behalf of them.

Rescission is not applicable if the contracts entered

into in behalf of wards or agreed representation of
Defective Contracts absentees are approved by the court.

1. Rescissible Contracts b. Rescissible on account of fraud or bad faith

2. Voidable Contracts
3. Unenforceable Contracts a. Contracts undertaken in fraud of creditors
4. Void Contracts
Contract is entered into to prejudice the
Rescissible Contracts creditor. Rescission is available when the
creditor in any other manner cannot collect
Rescissible Contracts – there is lesion or monetary damage; the claims due.
rescission is granted to secure reparation for damages
The remedy for creditors is accion pauliana.
Requisites of Rescissible Contracts: (Art 1380) The purpose is to secure payment of an
a. Contract is validly agreed upon existing credit and the debtor is not required
b. There must be lesion or pecuniary damage to be insolvent.
c. Rescission must be based upon a case provided by law
d. It is a subsidiary remedy - there must be no other Accion pauliana – requisites: (1) there must
legal remedy to obtain reparation of damages be an existing credit prior to the contract to

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be rescinded although it is not yet due and
demandable; (2) subsequent contract made
by debtor conveys patrimonial benefit to
third person; (3) fraud on the part of the
debtor; (4) If contract is onerous, third
person has been a party to the fraud; (5)
Creditor has no other legal remedy because
accion pauliana is a subsidiary remedy.
Fraud is not presumed and must be proved.
Accion pauliana presupposes a judgment
and issuance of a writ of execution for
satisfaction of judgment and failure to
enforce such judgment. Accion pauliana is
not available if there is no transfer.
Vendor is an indispensable party in action for
rescission of sale. Only actual creditors can
ask for rescission.
b. Contracts which refer to things in litigation
Contracts which refer to a thing in litigation if they
have been entered into by defendant without the
knowledge and approval of litigants or of the court.
Examples: Recovery of ownership, replevin suit
That is why litigants should file a notice of lis pendens.
It is filed for the purpose of warning all persons that
the title to certain property is in litigation and that if
they purchase the same, they are in danger of being
bound by an adverse judgment. The notice is,
therefore, intended to be a warning to the whole
world that one who buys the property does so at his
own risk. This is necessary in order to save innocent
third persons from any involvement in any future
litigation concerning the property.
If real property is involved, file a petition for order of
attachment OR appoint a receiver to place the
property in custodia legis.
c. Specified by law to be subject of rescission
a. Partition ‘judicial/extrajudicial’ on account
of lesion (Art 1098)
b. Gross inadequacy of the price which may
indicate defect in consent or party intended
another contract (Art 1659)
c. Vendee may exercise rescission when lack
in area of real estate sold exceeds 1/10 of
the state value or when inferior value of the
thing exceeds 1/10 of the price agreed upon
(Art 1539)
d. Breach of warranty by seller (Art 1599)
d. Payment made in state of insolvency for obligations
not yet due and demandable (Art 1382)
e. Violation of right of first refusal
First buyer whose right of first refusal has been
violated is entitled to rescission of the contract
between the vendor and the new buyer.
If the new buyer is in good faith, the remedy of the
first buyer is an action for damages against the
vendor.
Voidable Contracts
Voidable Contracts
1. One of the parties is incapacitated (Art 1327)
2. Consent is vitiated by mistake, violence,
intimidation, undue influence or fraud (Art 1390)
3. Consent is given in a state of drunkenness or given
during a hypnotic spell (Art 1328)
Modes of extinguishing action to annul contract:
1. Ratification – express/implied
2. Prescription – prescriptive period is 4 years
3. Loss of object – If without fault, no obligation to
return unless person who lost the thing offers to pay
the value then the other party has the obligation to
return what he has received. If with fault, obligation is
not extinguished and is converted into indemnity for
damages consisting of the thing at the time of loss +
interest + fruits from the time of loss
Unenforceable Contracts
Unenforceable Contracts – It cannot be enforced in court or
sued upon unless ratified. It cannot be assailed by a third
person.
1. Unauthorized contracts – absence or in excess of
authority
2. Do not comply with the Statute of frauds
Statute of Frauds (Art 1403 par 2)
a. Agreement by its terms not to be performed within
one (1) year from the making thereof. Agreement
must be in writing in case memory of witness is faulty
Exception: When there has been total or partial
performance. Even though it is not in writing, it is
enforceable. Exception to the exception: When the
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contract is vague and ambiguous, there can be no
partial performance.
b. Special promise to answer for the debt, default or
miscarriage of another. Applicable if promise is
merely subsidiary or collateral to promise of another
(e.g guaranty). Not applicable to principal debtor
c. Agreement made in consideration of marriage other
than mutual promise to marry. Examples: Marriage
settlement, Donations propter nuptias (Donations by
reason of marriage)
d. Agreement for sale of goods, chattels or things in
action at a price of “at least 500 pesos” Applicable to:
Sale of Goods, Things in action Exception: Not
applicable, may be enforceable even if not in writing:
When buyer accepts goods (total or partial
acceptance), When buyer pays (total or partial), IF
sale is made by auction and sale is made in sales book
now it is enforceable because it is now in writing
e. Agreement for leasing for a period longer than one
(1) year , or sale of real property or interest therein.
f. Representation as to credit of a third person.
Example: D wants to get a loan from C. T tells (orally)
C that D is solvent and has good reputation. C grants
the loan to D who is actually insolvent. In this
situation, it must be in writing to be enforceable.
Otherwise, it cannot be enforced in court or sued
upon.
g. Express trusts concerning an immovable or interest
therein.
Satisfaction of Statute of Frauds (will become enforceable)
a. Modes in Sale of Goods to be enforceable
a. Giving note or memorandum
b. Acceptance and receipt of part of goods or
things in action
c. Partial payment of purchase price
b. Modes of Ratification
a. Waiver: Failure to object to presentation of
oral evidence
b. Acceptance of benefits
Art. 1406. “When a contract is enforceable under the Statute of
Frauds, and a public document is necessary for its registration
in the Registry of Deeds, the parties may avail themselves of
the right under Article 1357.”
3. Both parties are incapable of giving consent
Art. 1407. In a contract where both parties are incapable of
giving consent, express or implied ratification by the parent, or
guardian, as the case may be, of one of the contracting parties
shall give the contract the same effect as if only one of them
were incapacitated.
If ratification is made by the parents or guardians, as the case
may be, of both contracting parties, the contract shall be
validated from the inception.
Void or Inexistent Contracts
Void or Inexistent Contracts
1. Contracts contrary to law, morals, good customs,
public order or public policy
2. Contracts which are absolutely simulated or fictitious
3. Contracts where the cause or object did NOT exist at
the time of the transaction (no cause or object)
4. Contracts whose object is outside the commerce of
man
5. Contracts which contemplates an impossible service
6. Contracts where intention of the parties relative to
the principal object of the contract cannot be
ascertained
7. Expressly prohibited or declared void by law
a. Contracts upon future inheritance except in
cases provided by law (Art 1347)
b. Sale of property between husband and wife
(Art 1490)
c. Purchase of property by persons who are
specifically disqualified by law (e.g
guardians, agents, executors,
administrators, public officers and
employees, judges, lawyers, etc) because of
their position or relation with the person or
property under their care. (Art 1491)
d. Every donation between spouses during the
marriage shall be void except moderate gifts
on the occasion of family rejoicing (Art 87 FC)
e. A testamentary provision in favor of a
disqualified person even though made under
the onerous contract or made through an
intermediary shall be void. (Art 1031)
f. Any stipulation that household service is
without compensation shall be void. (Art
1689)
g. Under the Constitution, members of the
Congress are prohibited from being
financially interested or indirectly in any
contract with the government or subdivision
or instrumentality thereof.
Art. 1420. In case of a divisible contract, if the illegal terms can
be separated from the legal ones, the latter may be enforced.
Effects:
1. If contract is indivisible (consideration is entire and
single)
• If part of consideration is illegal, whole
contract is void and unenforceable
2. If contract is divisible (consideration is made up of
several parts
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• Illegal ones can be separated from legal ones d. Agreement is not illegal per se but merely
unless it is contrary to intention of the parties prohibited (Art 1416) Recovery is permitted
provided: (i) Agreement is not illegal per se
Art. 1422. A contract which is the direct result of a previous but merely prohibited; (ii) Prohibition
illegal contract, is also void and inexistent. designed for protection of plaintiff; (iii)
• Void contracts cannot be novated. Void contracts Public policy would be enhanced by allowing
cannot give rise to a valid contract. plaintiff to recover what has been delivered
or paid
WHEN IN PARI DELICTO RULE NOT APPLICABLE e. Recovery of amount paid in excess of ceiling
price determined by law (Art 1417) Ceiling
1. Breach of warranty cases price is determined by law (Ceiling Law). May
2. Simulated contracts; contracts without an essential recover such excess.
element. Note: Pari delicto doctrine is applicable f. Recovery of additional compensation for
where there is illegal consideration. The reason for services rendered beyond maximum hours
this is because there is cause or consideration of labor (Art 1418) According to the Labor
although it is illegal. Code, Normal hours of work: eight (8) hours
3. Parties not equally guilty. Note: For pari delicto to per day Labor Code is not applicable to
apply, guilt must be more or less equal government employees, managerial
4. Against the government employees, field personnel, members of
5. Prohibited conveyance under the law. Example: Sale family dependent upon him for support,
of homestead within five (5) year prohibitory period domestic helper, persons in personal service
Effect: Parties must return to their status prior to the of another, workers who are paid by results
execution of the contract. In the above example, the g. Recovery of amount of wage less than the
land is to be returned to the grantee who sold the minimum fixed. If employee receives less
land within the prohibitory period. than the minimum wage rate, he can still
6. Constitutional prohibition against landholding. recover deficiency with legal interest.
Example: The constitutional prohibition that aliens
cannot own lands in the Philippines. It is cured when:
(a) when alien who buys the land acquires Philippine
citizenship; (b) When alien sells the Philippine land
that he purchased to a Filipino citizen.
7. Other exceptions
a. Recovery of usurious interest in excess of
maximum allowed under usury law. (Art
1413) May be recovered from the date of
payment. Note: A usurious loan is not a
complete nullity but merely a nullity with
respect to agreed interest. Interest is only an
accessory to the principal obligation which is
the loan. The extinguishment of the
accessory does not carry with it the
extinguishment of the principal. Prestation
to pay principal debt is separate from
accessory obligation to pay the interest. The
unpaid principal remains valid.
b. Recovery where contract is for an illegal
purpose (Art 1414) – Requisites: (i) Contract
is for an illegal purpose; (ii) Contract is
repudiated: before purpose has been
accomplished OR before damage has been
caused to a third person; (iii) Court considers
recovery for public interest. Reason:
Prevention of violation of law.
c. Recovery by an incapacitated person in an
illegal contract (Art 1415)
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