LAW ON OBLIGATIONS AND CONTRACTS Karl Gonzales

INTRODUCTION TO LAW

Law - is the system of rules which a particular country recognizes as regulating (official rule) actions of its members.

THREE BRANCHES OF GOVERNMENT

1. Legislative Branch - authorized to make laws, alter, and repeal them through the power vested in the Philippine
Congress. This includes the Congress (Senate and House of Representatives) and several agencies that provides support
to the congress.

2. Executive Branch - carries out and enforces laws. It is composed of the President, Vice President, and Cabinets (serves
as advisors to the president) that holds responsibility for the governance of a state.

3. Judicial Branch - evaluates laws, applies the laws to cases. It holds the power to settle controversies involving rights
that are legally demandable and enforceable. It is made up of a Supreme Court (Chief Justice, 14 Associate Justice) and
lower courts (trial courts).

GENERAL NATURE OF LAW (PORC) According to Saint Thomas Aquinas:

1. Promulgated by Competent Authority (the legislative branch).

- Law is made known by the government.

2. Obligatory and Just

- Obligatory because the non-observance of a law will have to be met with penalties. (Civil or Criminal)
- If not fulfilled when it becomes due and demandable, may be enforced in court through action. (judicial due process)

3. Rule of Conduct
- Provides for uniformity of action.
- Set of standards.
- Provides for certain acts which must be performed and prohibits certain actions not allowed by law.
- Rules and regulations that can create an orderly, peaceful and harmonious country.

4. Common Observance and Benefit

- For the benefit of the general public.
- The application of law should not be titled or favoring an individual.

DIVISION OF LAW

1. State Law - enforced by the government which can be general (mass obligatory) or specific (particular situation).
Source: Municipal Law, Civil Law, International Law, Criminal Law, etc.
Sanction: Legal Sanction
Binding Force: Only law enforced by state

2. Divine Law - about religion and faith.

Source: God
Sanction: Lies on present and future life / Not autonomous because we are under God
Binding Force: Religion/Faith

1
3. Moral Law - tells you what is right and wrong.
Source: Norms of Right Conduct
Sanction: No definite legal sanction
Binding Force: Not absolute/relevant or dependant on something else

4. Natural Law - justice, fairness and righteousness, based upon principles and truth
Source: Divine Inspiration of Man
Sanction: Depends, no law, no sanction
Binding Force: Always Present

5. Physical Law - pertains to regularity and physics.

Source: Science
Sanction: None
Binding Force: Physics

Everyone is presumed to know the law, any kind of excuse is not allowed. According to Article 3, a provision in Civil
Code, "Ignorance of the law excuses no one."

ORGANIZATION OF LAW

1. Supreme Court - Its principal function is the supervision and administration of the lower courts throughout the
Philippines and all their personnel.

2. Special Courts - exist for both civil and criminal disputes.

2.1 Anti-Graft Court
2.2 Sandiganbayan
2.3 Court of Tax Appeals

3. Court of Appeals / Appellate courts - task is to determine whether or not the law was applied correctly in the trial
court. Hear appeals from the High Court and the Circuit Court.
3.1 Family Law Cases
3.2 Probate Cases
3.3 Juvenile Cases
3.4 Felony Cases
3.5 Civil Cases

4. Regional Trial Court - shall exercise appellate jurisdiction over all cases decided by Metropolitan Trial Courts,
Municipal Trial Courts, and Municipal Circuit Trial Courts in their respective territorial jurisdictions.

5. Municipal/Metropolitan Trial Court - a court that sits in some cities and larger towns and that usually has civil and
criminal jurisdiction over cases arising within the municipality.

Appellate - responsible for hearing and reviewing appeals.

2
SOURCES OF LAW [CCOLAJ]

1. Constitution
- Supreme/highest law of the land.
- In case that a law will not be in accordance with the constitution between the law or republic act, the constitution
will always prevail.
- In case a law will violate a provision or a fundamental principle in the constitution, that law becomes an
unconstitutional law which means that it is void.
- It has no rights, affords no protection and creates no duty.
- Fundamental law of the land. All laws are created pursuant to the principle enshrined in the 1987 Philippine
Constitution.
- The written instrument by which the fundamental powers of the government are established, limited, and defined,
where these powers are distributed among the several departments for their safe and useful exercise to benefit the
people.

2. Custom
- Is a generally accepted practices or habits.
- Is a set of practices, beliefs and habits that are accepted as obligatory rules of conduct by indigenous peoples and
local communities.
- The habits and practices, which through long and uninterrupted usage have become acknowledged and approved by
society as binding rules of conduct.
- One of the oldest sources of law-making.

3. Other Sources
- Opinions of well-qualified or highly regarded experts in the Field of Law (legal scholars).
- Secondary source of the law because it has considerable influence on decisions of the courts.

4. Legislation
- Prime source of law.
- Pieces of laws which are passed by congress (two houses: upper house/chamber (senate) and lower house/chamber
(house of representatives).
- Act of making new law.
- Enacted or statute law.
- The law making body.
- Under Article 6 of the constitution, the legislative powers or the power to make laws is enacted in congress.

5. Administrative, regulations and rulings

- Issued by administrative officials (e.g. BIR or the DTI) will have to issue some regulations in the form of administrative
regulations.
- These laws govern the formation and operation of administrative agencies.
- Rules and regulations are policies that dictate how a law is to be used.

6. Judicial Decisions
- Decision of the Supreme Court
- If you file a petition in the SC, whatever decision that the SC will have to make will form part of the law of the land.

3
CLASSIFICATION OF LAW

As to its PURPOSE:

1. Substantive
- Creates, defines and regulates right and duty.
- It gives you a privilege to perform a particular act.
- Set of laws that governs how members of a society are to behave.

2. Adjective
- Provide the procedures through which the courts may enforce compliance with the provisions of substantive law.
- AKA as Remedial Law, procedure by which rights can be enforced.

As to its SUBJECT MATTER:

1. Public
- governs the relationship between the government and its people.

2. Private
- governs the relationship among private individuals.

TITLE 1 - OBLIGATION

GENERAL PROVISIONS

ARTICLE 1156. An obligation is a juridical necessity to give, to do or not to do.

PROVISION
- A provision is a condition or requirement in a legal document.
- Requirements including standard conditions in contracts like terms of payment, terms of delivery, and recommended
measures.

OBLIGATION
- An obligation is a juridical necessity to give, to do or not to do.
- An act or course of action to which a person is morally or legally bound.
- Bound to render something to another.
- A duty or commitment.
- Should be complied with in good faith. (performance in accordance with the stipulations of the contract)

CIVIL OBLIGATION
- Has legal basis; give a right of action to compel its performance.
- If not fulfilled when it becomes due and demandable, may be enforced in court through action. (judicial due process)

NATURAL OBLIGATION
- Has no legal basis; does not give a right of action to enforce its performance but is based on equity, morality and
natural law, and should be voluntary.
- Example: To pay back your debt of gratitude.
4
MORAL OBLIGATION
- A duty which one owes, and which he ought to perform, but which he is not legally bound to fulfill.
- The sanction is conscience or morality, or the law of the church.
- Basing on dignity.
- Example: Your obligation to attend mases. Helping a friend.

JURIDICAL NECESSITY
- Means that obligation must be fulfilled otherwise there will be corresponding penalties for non-compliants.
- If obligation has not been performed or violated, it gives the other party (aggrieved party) a remedy to go to court
and ask for a particular relief.
- He can invoke the power of the court to order the other party to comply with the obligation.

PRESTATIONS
- Conduct to be observed by the debtor
- A performance of something due upon an obligation.
- To give: delivery of something.
- To do: performance of an act.
- Not to do: prohibition not to do a certain act.

EXAMPLES OF CIVIL OBLIGATIONS

1. Obligation to pay your tuition fee at school (to give)
2. Obligation of a parent to take care of their children (to do)
3. Obligation of anyone not to steal (not to do)

NOT A JURIDICAL NECESSITY/CIVIL OBLIGATION

1. Your obligation to attend masses (moral obligation)
2. To pay back your debt of gratitude (natural obligation)

REQUISITES OF CIVIL OBLIGATION

1. Passive Subject (Obligor/Debtor)

- Party which is bound to perform the obligation/prestation.

2. Active Subject (Obligee/Creditor)

- Party which is entitled to demand the fulfillment on the obligation.
- The one who has a right.

3. Juridical Tie (Vinculum Juris)

- What binds or connect parties.
- Legal relationship between the parties.

4. Prestations (Object/Subject Matter)

- Conduct required to be observed by the debtor. (to give, to do or not to do)

5
 - REQUISITES OF PRESTATIONS
4.1 Licit, lawful, legal, not forbidden by law (if illicit, it is void)
4.2 Possible, condition is capable of fulfillment (if impossible, it is void)
4.3 Determinate or determinable (or else, void)
4.4 Pecuniary value, consisting of money (has monetary value)

EXAMPLE

1. Naruto is obliged to pay his income taxes.

Passive Subject - Naruto
Active Subject - Philippine Government
Prestation - To give money (pay income taxes)
Juridical Tie - Law

2. Under a building contract, X bound himself to construct a house for Y for P1,000,000.00.
Passive Subject - X
Active Subject - Y
Prestation - Building of the house
Juridical Tie - Building contract

Suppose X had already constructed the house and it was the agreement that Y would pay X after the construction is
finished.
Passive Subject - Y
Acitive Subject - X

OBLIGATION, RIGHT AND WRONG (CAUSE OF ACTION)

1. Obligation
- Is a juridical necessity to give, to do or not to do.
- Is the act or performance which the law will enforce.

2. Right
- Is the power which a person has under the law, to demand from another any prestation.

3. Wrong (cause of action)

- Is an act or omission of one party in violation of the legal right or rights of another, causing injury to the latter.

- REQUISITES OF CAUSE OF ACTION:

3.1 A right in favor of the plaintiff by whatever means and under whatever law it arises or is created.
3.2 An obligation on the part of the named defendant to respect or not to violate such right.
3.3 An act or omission on the part of such defendant violative of the right of the plaintiff.

6
KINDS OF OBLIGATION ACCORDING TO PRESTATION

1. Real
- Consists of obligation to give.
- Involves delivery of something to another.

2. Personal
- Consists of an obligation to do or not to do.
- Involves rendering service.
- Two kinds of personal obligation:
2.1 Positive personal obligation or obligation to do or to render service
2.2 Negative personal obligation or obligation not to do (which naturally includes obligations “not to give”).

The obligation "not to give" was not included in the law because it is included in the obligation "not to do".

ARTICLE 1157. Obligations arise from (1) Law, (2) Contracts, (3) Quasi-contracts, (4) Delicts, (5) Quasi-delicts

SOURCES OF OBLIGATIONS

1. Law
- ARTICLE 1158. Obligations derived from law are not presumed, only those expressly determined in this code or in
special laws are demandable, and shall be regulated by the precepts of the law which establishes them; and as to
what has not been foreseen, by the provisions of this Book.
- Imposed by law
- Example: pay taxes (tax code), obligations of parents to the family (family code).

2. Contracts
- ARTICLE 1159. Obligations arising from contracts have the force of law between the contracting parties and should
be complied with in good faith. (performance in accordance with the stipulations of the contract)
- A meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or
to render some service.
- Has the Force of Law as long as it has the essential requisites of a contract.
- Two individuals bind themselves based on the terms and conditions of the agreement.
- If the contract is violated or breached then the aggrieved party can go to court and seek for redress of his grievances.

3. Quasi-contracts
- ARTICLE 1160. Obligations derived from quasi-contracts shall be subject to the provisions of Chapter 1, Title 17, of
this Book.
- ARTICLE 2142. Certain lawful, voluntary and unilateral acts give rise to the juridical relation of quasi-contract to the
end that no one shall be unjustly enriched or benefited at the expense of another.
- Arises from LUV (lawful, unilateral and voluntary act) and which are enforceable to the end the no one shall be
benefited at the expense of the other party; there is an obligation to pay for compensation so that no one shall be
unjustly enriched or benefited at the expense of another.
- Almost as it were ; As if a - contract but without agreement.

7
 - THREE KINDS OF QUASI-CONTRACTS:

3.1 Negotiorum Gestio (Nominate)

- Officious or voluntary administration/management of the property or affairs of another without the knowledge or
consent of the latter.
- For example, you are on a vacation and all of a sudden your community was flooded and that your neighborhood
exerted efforts and resources to salvage your property and important belongings, there creates a quasi-contracts.
- There is no prior agreement that your neighbors are in charge of your property. But because your neighbor has saved
your properties, then there creates an obligation on the part of the property owner to reimburse the neighbor of the
expenses incurred in saving their properties. In this case, the law will impose obligation on the owner of the property.

3.2 Solutio Indebiti (Nominate)

- Payment by mistake. Payment made to the wrong person. Overpayed.
- If something is received when there is no right to demand it, and it was unduly delivered through mistake, the
obligation to return it arises.
- In case of this, if a person has payed by mistake or payment is in excess which is due, then there creates an obligation
on the part of the payee or the person receiving the payment to return the excess or payment made by mistake.
- It proceeded from a LUV act of one person giving rise to the juridical relation between the payor and the payee.

3.3 Other quasi-contracts (Innominate)

- When, without the knowledge of the person obliged to give support, it is given by a stranger, the latter shall have the
right to claim the same from the former, unless it appears that he gave it out of piety and without intention of being
repaid.
- Example: if a parent does not give the basic needs of a child but a stranger do, the stranger has the right to claim
reimbursement because it is the parent's obligations to provide for their children.

4. Delicts/Crimes (Acts or Omissions punished by law)

- ARTICLE 1161. Civil obligations arising from criminal offenses shall be governed by penal laws, subject to the
provisions of Article 2177, and of the pertinent provisions of Chapter 2, Preliminary Title on Human Relations, and of
Title 18 of the Book, regulating damages.
- If you committed certain acts or refuse to perform a certain act which is required to be done by the law, then you
commit criminal offenses.
- Governed by criminal laws or penal laws.
- Delicts produce both criminal and civil liabilities.

5. Quasi-delicts
- ARTICLE 1162. Obligations derived from quasi-delicts shall be governed by the provisions of Chapter 2, Title 17 of
this Book, and by special laws. (1093a)
- ARTICLE 2176. Whoever by act or omission causes damage to another, there being fault or negligence, is obliged to
pay for the damage done. Such fault or negligence, if there is no pre-existing contractual relation between the parties,
is called a quasi-delict and is governed by the provisions of this Chapter.
- When there is fault or negligence that causes damage on another, there being no prior meeting of the minds
between the parties; there is an obligation to pay for the damage done.
- Arises from "negligence" (kapabayaan).
- Damages arising from tort or civil act which is not amounted to crime.
8
 - Example: the owners and managers of a business are responsible for damages caused by their employees.
- Because you are not careful while running in a busy sidewalk, you bumped into a child and the child suffered injuries.
In this case, the tortfeasors (you), will answer for the medical expenses of the child because you are the reason why the
child was injured.

- Requisites of a quasi-delicts:
5.1 Fault or Negligence (direct relation)
5.2 Act or Omission (no pre-existing contract)
5.3 Damaged Caused (no pre-existing contract)

Actually, there are only two (2) sources: law and contracts, because obligations arising from quasi-contracts, crimes,
and quasi-delicts are really imposed by law.

- According to Art. 1162, there is a comparison between Crime and Quasi-delict.

Crime: "malicious intention" ; quasi-delict: "negligence"
Crime: "purpose is punishment" ; quasi-delict: "indemnification of offended party"
Crime: "affect public interest" ; quasi-delict: "concerns private interest"
Crime: "criminal and civil liable" ; quasi-delict: "civil liable"

INJURY, DAMAGE AND DAMAGES

1. Injury
- The act or omission which causes harm.
- Legal wrong.

2. Damage
- The harm done to a party.
- Loss or injury to a person or property.

3. Damages
- Sum of money recoverable by reason of damage done.
- Money claimed by, or ordered to be paid to, a person as compensation for loss or injury.

EXAMPLE

1. X sold a bottle of wine to Y for P1,000. X has the obligation to deliver the bottle of wine and has the rights to demand
collection of P1,000. If X delivered the bottle of wine and Y does not pay X the money (P1,000), X will have a right of
action.

If the two are in the court,

X - plaintiff
Y – defendant

9
Cause of action - Omission on part of Y (not paying P1,000)
Damage - X incurred loss on the sale
Damages - Sum of money recoverable (P1,000 plus other damage like moral damages, costs incurred to file the case)

CIVIL LIABILITY
- Responsibility for the harm alleged by the plaintiff and the damages suffered.

SCOPE OF CIVIL LIABILITIES

1. Restitution
- Returning the property.
- If the property is destroyed, you have to pay/return the value of the property.

2. Reparation
- Paying damages caused to restore the item to its original state.

3. Indemnification
- Paying other damages (like potential income).
- Compensation for loss and damages.

EXAMPLE

1. X stole the vehicle of Y. X was apprehended by the authority but Y's vehicles got damaged. Y should have presented
the car in a car show but X stole the vehicle. As a result, Y loss potential income from the car show.

Restitution - return the vehicle. If the vehicle is destroyed, X should pay the monetary value of the car.

Reparation - answer for the damage caused to the vehicle to return to its original state. If the vehicle is lost, X should
pay for the monetary and sentimental value of the car.

Indemnification - because Y suffered loss on potential income, X will answer the said loss.

10
CHAPTER 2

NATURE AND EFFECT OF OBLIGATIONS

ARTICLE 1163. Every person obliged to give something is also obliged to take care of it with the proper diligence of a
good father of a family, unless the law or the stipulation of the parties requires another standard of care.
- It is an incidental duty to preserve a thing with ordinary care (diligence of a good father of a family) to ensure the
delivery of an obligation and prevent negligence of the debtor. Furthermore, parties can stipulate another standard of
care.
- The good father of a family is borrowed from Roman Law concept, during that time, only men can enter into a
contract into a society.
- If the obligation consist of delivery of a specific thing, then the law imposes the diligence of a good father of a family.
- If the obligation consist of the giving of a specific property, then the law gives in what is called as, "incidental duty".
Incidental duty means that duty (to care for the item) comes with it.
- Because if the person who is obliged to give something is not obliged to take care of that object, then the obligation
will be rendered nugatory.

EXTRAORDINARY CARE
- Is the highest standard of care observed by the common carriers and bank.
- For example, the common carriers, public utility vehicles (jeeps, buses).
- Under the law, they are obliged to observe the extraordinary care because the law wants to protect the general
public.
- The bank's also as a financial institution is required by law to observe extraordinary care.
- Bank's are expected and set to higher standards than all of the businesses because it involves integrity in the bank's
banking system and keeping deposits of the general public.

Law impose the standard of care therefore parties cannot stipulate that there should be no standard of care because
the obligation will become useless since there is no obligatory force. Parties can only stipulate to a higher standard of
care because the default care is the diligence of a good father of a family.

TWO KINDS OF OBJECT

1. Specific/Determinate
- Has sufficient particularity.
- Cannot be substitued if it has been lost.
- Distinct.

DUTIES OF DEBTOR IN OBLIGATION TO DELIVER A SPECIFIC/DETERMINATE THING

1.To preserve or take care of the thing due.
2.To deliver the fruits of the thing.
3.To deliver its accessions and accessories.
4.To deliver the thing itself.
5.To answer for damages in case of non-fulfillment or breach.

11
REMEDIES OF CREDITOR IN AN OBLIGATION THAT IS DETERMINATE
1. Specific performance of obligation + indemnity (sum of money paid for compensation)
2. Rescission (cancellation) + recovery of damage
3. Payment of damage

2. Generic/Indeterminate
- Class or genus (genus nunquam perit/genus never perish).
- Can be substituted.
- Not particular or segregated from others of the same class.

DUTIES OF DEBTOR IN OBLIGATION TO DELIVER A GENERIC THING

1. To deliver a thing which is of the quality intended by the parties taking into consideration the purpose of the
obligation and other circumstances.
2. To be liable for damages in case of fraud, negligence, or delay, in the performance of his obligation, or contravention
of the tenor thereof.

REMEDIES OF CREDITOR IN AN OBLIGATION THAT IS GENERIC

1. Ask for the performance of the obligation.
2. To ask that the obligation be complied with at the expense of the debtor.
3. Can recover damage in case of breach.

EXAMPLE
- If an iPhone is lost without the declaration of serial number or specific description, then it is generic/indeterminate.
But if you specify the serial number of the iPhone, then it will be converted to being specific/determinate.

Debtor is not liable if his failure to deliver the thing is due to fortuitous events (not foreseeable/inevitable) or force
majeure.

If the object of the obligation is lost due to a fortuitous event without the fault on the part of the debtor then he is not
liable.

ARTICLE 1164. The creditor has a right to the fruits of the thing from the time the obligation to deliver it arises.
However, he shall acquire no real right over it until the same has been delivered to him.

REAL RIGHT (jus in re)

- Right or interest of a creditor over a specific thing w/o definite passive subject; enforced directly against the world.
- Right pertaining to person over a specific thing.
- Binds the property regardless of the person against whom it can be invoke/enforced against.

PERSONAL RIGHT (jus ad rem)

- Right or power of creditor enforceable against a particular person or passive subject.
- Right pertaining to a person to demand from another.

Real right is what acquired upon delivery, while ownership is transferred from the perfection of the contract.

12
CIVIL LAW PRINCIPLE: ACCESSORY FOLLOWS THE PRINCIPAL.

EXAMPLE

On Sept. 1, A and B entered into a contract for the sale of a female dog. A will deliver to B the dog on Oct. 1, but on Oct.
1 the dog gave birth that is supposed to be delivered by A. Who owns the puppies? B, Because at the time of oct. 1, A
has the obligation to deliver the thing, meaning if you have that obligation, you are now liable to deliver the fruits.

NOTES
1. Before the delivery, the creditor, in obligations to give, has merely a personal right against the debtor – a right to ask
for delivery of the thing and the fruits thereof.
2. Once the thing and the fruits are delivered, then he acquires a real right over them.
3. Ownership is transferred by delivery which could be either actual or constructive. (Art. 1477)
4. The remedy of the buyer when there is no delivery despite demand is to file a complaint for “specific performance
and delivery” because he is not yet the owner of the property before the delivery.

ACTUAL DELIVERY
- Actual delivery of a thing from the hand of the grantor to the hand of the grantee (personally), or manifested by
certain possessory acts executed by the grantee with the consent of the grantor (realty).

THE OBLIGATION TO DELIVER FRUITS ARISES WHEN

1. Time of the perfection of the contract.
2. Obligation is subject to suspensive condition.
3. Contract of Sale.
4. From law, quasi-contracts, delicts and quasi-delicts.

DIFFERENT TYPES OF FRUITS

1. Natural
- Spontaneous products of the soil and young of the animals.
- Without the intervention of human labor.

2. Industrial
- Produced by lands through human cultivation or labor. (i.e. if you have a farm, then you planted some fruits, then
that is cultivation/labor)

3. Civil
- Those derived by virtue of juridical relation. (i.e. payment of rents, revenues from operations)

ESSENTIAL REQUISITES ON THE PERFECTION OF THE CONTRACT

1. Consent
2. Object
3. Payment of consideration

13
ARTICLE 1165. When what is to be delivered is a determinate thing, the creditor may compel the debtor to make
delivery. If the thing is indeterminate or generic, he may ask that the obligation be complied with at the expense of
the debtor. If the obligor delays or has promised to deliver the same thing to two or more persons who do not have
the same interest, he shall be responsible for any fortuitous event until he has effected the delivery.

GENERAL RULE
- If the thing is lost or destroyed due to fortuitous event, the obligation is extinguished.

- EXEMPTIONS:
- Delay
- Promise to deliver the same to 2 or more persons of different interest
- Generic Thing

ARTICLE 1166. The obligation to give a determinate thing includes that of delivering all its accessions and accessories,
eventhough they may not have been mentioned.

ACCESSIONS (can be without)

- Fruits or additions or improvements.
- Those which are naturally or artificially attached to the thing.

ACCESSORIES (can’t be without)

- Things included to the principal for better use or completion.

ARTICLE 1167. If a person obliged to do something fails to do it, the same shall be executed at his cost. (to do)

This same rule shall be observed if he does it in contravention of the tenor of the obligation, it may be decreed that
what has been poorly done be undone.

THREE SITUATIONS:

1. Debtor’s failure to perform an obligation

- Creditor may do the obligation, or by another, at the expense of the debtor.
- Recover damages.

2. Performance was contrary to the terms agreed upon

- Order of the court to undo the same at the expense of the debtor.

3. Performance in a poor manner

- Order of the court to undo the same at the expense of the debtor.

ARTICLE 1168. When the obligation consists in not doing and the obligor does what has been forbidden him, it shall
also be undone at his expense. (not to do, negative personal)

14
ARTICLE 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or
extrajudicially demands from them the fulfillment of their obligation.

However, the demand by the creditor shall not be necessary in order that delay may exists:

1. When the obligation or the law expressly so declare; or

2. When from the nature and the circumstances of the obligation it appears that the designation of the time when the
thing is to be delivered or the service is to be rendered was a controlling motive for the establishment of the contract;
3. When demand would be useless, as when the obligor has rendered it beyond his power to perform.

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. From the moment one of the parties fulfills his obligation, delay by
other begins. (Compensatio Morae).

Under the principle of ARTICLE 1169. NO DEMAND, NO DELAY.

EXCEPTIONS
1. When the obligation or law so provides. (i.e. payment of taxes)
2. Time is a controlling motive. It is of the essence. (i.e. delivery of a wedding cake)
3. When demand would be useless. (i.e. when the object of the obligation is lost or destroyed through the fault of the
debtor)

ORDINARY DELAY
- Failure to perform an obligation on time.
- Mere failure to perform an obligation at the appointed time.
- No punishment.

LEGAL DELAY (MORA/DEFAULT)

- Delay that results in breach of contract.
- Tantamount to non-fulfillment of the obligation and arises after an extrajudicial demand was made upon the debtor.

KINDS OF DEFAULT

1. Mora Solvendi
- Fault of the debtor.
- Delay on the part of the debtor to fulfill his obligation.

- REQUISITES:
1.1 Failure of the obligor to perform obligation on the DATE agreed upon.
1.2 Demand (judicial/extrajudicial) by the creditor.
1.3 Failure to comply with such demand.

- EFFECTS:
1.4 Debtor – liable for damages and interests.
1.5 Debtor – liable for the loss of a thing due to a fortuitous event.
15
 - KINDS:
1.6 Mora solvendi ex re – default in real obligations (to give).
1.7 Mora solvendi ex persona – default in personal obligations (to do).

2. Mora Accipiendi
- Fault of the creditor.
- Delay on the part of the creditor to accept the performance of the obligation.

- EFFECTS:
2.1 Creditor – liable for damages.
2.2 Creditor – bears the risk of loss of the thing.
2.3 Debtor – not liable for interest from the time of creditor’s delay.
2.4 Debtor – release himself from the obligation.

3. Compensatio Morae
- Both party is at fault.
- Delay of the obligors in reciprocal obligation.

- EFFECT:
3.1 The default of one compensates the default of the other; their respective liabilities shall be offset equitable.

There is no delay in NEGATIVE PERSONAL OBLIGATIONS. In negative obligation, only fulfillment and violation are
possible.

WHEN BOTH PARTIES ARE ALREADY IN DELAY, THE LAW IMPOSES THAT THERE IS NO DELAY FOR EQUITY.

ARTICLE 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those
who in any manner contravene the tenor thereof, are liable for damages.

4 GROUNDS OF LIABILITY/BREACHES (Tip: When the law distinguishes two concepts, you have to take note of the
distinctions, because there are different treatments to each concept.)

1. Fraud (Deceit or Dolo)

- Deliberate or intentional evasion of the normal fulfillment of an obligation.
- There is deceit when an act is performed with deliberate intent.
- Action or practice of deceiving someone by concealing or misrepresenting the truth.

- KINDS:
1.1 Dolo causante (causal fraud) - fraud upon perfection or commencement of the contract. (GROUND TO ANNUL
THE OBLIGATION)
1.2 Dolo incidente (incidental fraud) - fraud upon the performance of the obligation. (LIABLE TO PAY DAMAGES, NOT
A GROUND TO ANNUL THE OBLIGATION)

16
2. Negligence (Culpa or fault)
- Voluntary act or omission, there being no bad faith or malice, which prevents the normal fulfillment of an obligation.

KINDS OF NEGLIGENCE ACCORDING TO SOURCE OF OBLIGATION (remember the latin words)

1.1 Contractual Negligence (Culpa Contractual) Contracts

- Negligence in contracts resulting in their breach.
- Remedy of the creditor: can seek for payment of damages from the debtor.

1.2 Civil Negligence (Culpa Aquiliana) Quasi-delicts

- Negligence which by itself is the source of an obligation between the parties not so related before by any pre-
existing contract. (i.e. quasi-delicts)
- Penalty: payment of damages.

1.3 Criminal Negligence (Culpa Criminal) Delicts

- Crime committed under negligence.
- Under ARTICLE 365 of the revised penal code, the law punishes culpa criminal.
- Penalty: imprisonment and payment of damages.

3. Delay (Mora)
- Default or tardiness in the performance of an obligation after it has been due and demandable.

- KINDS
3.1 Mora Solvendi – fault of the debtor.
3.2 Mora Accipiendi – fault of the creditor.
3.3 Compensatio Morae – fault of both, no delay.

4. Contravention of the terms of the obligations

- Covers all forms of violation.
- Violation of terms and conditions stipulated in the obligation.
- This must not be due to a fortuitous event.

ARTICLE 1171. Responsibility arising from fraud is demandable in all obligations. Any waiver of an action for future
fraud is void.

WAIVER FOR FUTURE FRAUD IS VOID

- It allows the performance of fraud in the side of the debtor.

WAIVER FOR PAST FRAUD IS VALID

- It is an act of generosity and magnanimity from the part of the creditor.

WAIVER ARISING FROM NEGLIGENCE IS VALID WHEN

- The standard of care is the ordinary care or the proper diligence of a good father of the family.

17
 - EXCEPTION:
- If the stipulation requires another standard of care or an extraordinary care. (i.e. common carriers)

NOTE: "Only incidental fraud - contract is still demandable."

INCIDENTAL FRAUD
- Committed in the performance of an obligation already existing because of a contract; incidental fraud obliges the
person employing it to pay damages.

CAUSAL FRAUD
- Employed in the execution of contract in order to secure consent; remedy is annulment because of vitiation of
consent.

ARTICLE 1172. Responsibility arising from negligence in the performance of every kind of obligation is also
demandable, but such liability may be regulated by the courts, according to circumstances.

COURT'S DISCRETION BECAUSE

1. Negligence depends upon the circumstances of a case – good or bad faith of the obligor may be considered as well as
the conduct or misconduct of the obligee.
2. It is not as serious as fraud.

IMPRUDENCE
- Lack of skill or precaution.

NEGLIGENCE
- Lack of foresight or knowledge.
- Consists in the omission of the diligence which is required by the nature of the particular obligation and corresponds
with the circumstances of the persons, of the time, and of the place.

- KINDS OF NEGLIGENCE ACCORDING TO SOURCE OF OBLIGATION (remember the latin words)

1.1 Contractual Negligence (Culpa Contractual) Contracts
1.2 Civil Negligence (Culpa Aquiliana) Quasi-delicts
1.3 Criminal Negligence (Culpa Criminal) Delicts

An act no matter how wrongful would not amount a crime in absence of a law defining such a crime.

ARTICLE 1173. The fault or negligence of the obligor consists in the omission of that diligence which is required by the
nature of the obligation and corresponds with the circumstances of the person, of the time and of the place. When
negligence shows bad faith, the provisions of Articles 1171 and 2201, paragraph 2, shall apply.

DILIGENCE
- The attention and care required of a person in a given situation and is opposite of negligence.

If the law or contract does not state the diligence which is to be observed in the performance, that which is expected
of a good father of a family shall be required.
18
 - EXCEPTIONS
1. If the thing is genus
2. The thing needs an extraordinary care. (i.e. common carrier)

ARTICLE 1174. Except in cases expressly specified by the law, or when it is otherwise declared by stipulation, or when
the nature of the obligation requires the assumption of risk, no person shall be responsible for those events which
could not be foreseen, or which, though foreseen, were inevitable.

FORCE MAJEURE
- An event caused by the legitimate or illegitimate acts of persons other than the obligor.
- There is human intervention.

FORTUITOUS EVENT
- An occurrence or happening which could not be foreseen or even if foreseen, is inevitable.
- Absolutely independent of human intervention.
- Act of God.

REQUISITES OF FORTUITOUS EVENT

1. Independent of a human will or at least debtor's will.
2. The event could not be seen, or is foreseen, is inevitable.
3. Impossible for the debtor to comply with his obligation in a normal manner.
4. There is no concurrent negligence on the part of the debtor.

EXCEPTIONS
1. When it is expressly stipulated that he shall be liable even if non-performance of the obligation is due to fortuitous
events.
2. When the nature of the obligation requires the assumption of risk.
3. When the obligor is in delay.
4. When the obligor has promised the same thing to two or more persons who do not have the same interest.
5. When the possessor is in bad faith and the thing lost or deteriorated due to fortuitous event.
6. When the obligor contributed to the loss of the thing.

GENERAL RULE
- Obligation is extinguished if the loss of the thing is due to a fortuitous event.

- EXCEPTIONS:
1. When expressly specified by law
1.1 Debtor is guilty of voluntary breach of contract.
1.2 Debtor has promised to deliver the same thing to two or more persons who do not have the same interest.
1.3 Obligation to deliver a specific thing arises from a crime.
1.4 The thing to be delivered is generic.
2. Declared by the stipulation of the contractual parties.
3. When the nature of obligation requires the assumption of risk.

19
ARTICLE 1175. Usurious transactions shall be governed by special laws.

USURY
- Contracting for or receiving interest in excess of the amount allowed by law for the loan or use of money, goods, etc.

REQUISITES OF RECOVERY OF INTEREST

1. Payment of interest is expressly stipulated.
2. Written agreement.
3. The interest must be lawful.

UNDER CENTRAL BANK CIRCULAR NO. 799

- When there is no stipulated interest, the legal interest shall be 6%.

UNDER CENTRAL BANK CIRCULAR NO. 905

- Free to stipulate any amount of interest as long as it is not considered "iniquitous or unconsiderable" - ART. 1229

ARTICLE 1176. The receipt of the principal by the creditor without reservation with respect to the interest, shall give
rise to the presumption that said interest has been paid. The receipt of a later installment of a debt without
reservation as to prior installments, shall likewise raise the presumption that such installments have been paid.

THE PRESUMPTIONS WILL ONLY BE APPLIED IF

1. The prior installments have been paid.
2. Only if the receipt indicates which month the payment is being made for.

It is presumed that the prior installments are already paid even w/o its receipts, or even there are later installments.

ARTICLE 1177. The creditors, after having pursued the property in possession of the debtor to satisfy their claims, may
exercise all the rights and bring all the actions of the latter for the same purpose, save those which are inherent in his
person; they may also impugn the acts which the debtor may have done to defraud them.

REMEDIES AVAILABLE TO CREDITORS FOR THE SATISFACTION OF THEIR CLAIMS:

1. Exact fulfillment with right to damages.

2. Pursue the debtor's leviable property. Exhaustion of the debtor’s properties still in his possession – writ of attachment
or writ of execution (may go after the 3rd person).

3. Exercise all right and bring all the actions of the latter for the same purpose. (i.e. right to subrogation).
ACCION SUBROGATORIA - an action where the creditor whose claims had not been fully satisfied, may go after the
debtors (3rd person). Exercise all the rights of the debtors.

4. Impugn the acts—or contracts that were entered to defraud the creditor.
ACCION PAULIANA - where the creditor files an action in court for the recession of acts or contracts entered into by the
debtor designed to defraud the former.

20
EXAMPLE

X borrowed from Y P1,000,000 pesos. On the due date, X failed to comply despite the demands of Y. Y also exhausted all
his principal rights. Suppose X has a receivable from Z amounting P500,000 and another receivable from W amounting to
P500,000.

By Accion Subrogatoria, because X cannot pay, Y will be given a right to exercise all the debtor’s rights—receivable from
Z and W.

By Accion Pauliana, X will condone the receivables from Z and W. In this case, the condonation (chose to forgive or
ignore an act) done by X can be impugn by Y through Accion Pauliana—which rescinds (repeal, nullify) the contracts that
were entered to defraud the creditor.

ARTICLE 1178. Subject to the laws, all rights acquired in virtue of an obligation are transmissible, if there has been no
stipulation to the contrary.

GENERAL RULE
- All rights are transmissible/transfered.

- EXCEPTIONS
1. Prohibited by law.
2. Prohibited by the parties' stipulation.
3. Those not transmissible by their nature like purely personal rights.

21
CHAPTER 3

DIFFERENT KINDS OF OBLIGATIONS

Section 1 – Pure and Conditional Obligations

ARTICLE 1179. Every obligation whose performance does not depend upon a future or uncertain event, or upon a past
event unknown to the parties, is demandable at once. Every obligation which contains a resolutory condition shall
also be demandable, without prejudice to the effects of the happening of the event.

PURE OBLIGATION
- Not subject to any condition, no specific date, and immediately demandable.
- Does not depend upon a future, uncertain or a past event unknown to the parties−it is immediately demandable.

CONDITIONAL OBLIGATION
- Is subordinated to the fulfillment or non-fulfillment of a future and uncertain event or a past event unknown to the
parties.
- Takes effect when a future and uncertain event have occurred.
- Both in the future and uncertain.
- The obligation of the debtor/passive will arise only upon the fulfillment or non-fulfillment of a future/uncertain
event.

HOW CAN A PAST EVENT QUALIFY AS A CONDITIONAL OBLIGATION?

- The past event in itself is not the conditional obligation which is being referred to by law, instead, what is futuristic in
a past event is the coming to knowledge of the parties of that past event.
- It is the acquisition of knowledge by the parties of this past event unknown to them at that time that the agreement
was entered into by the parties.
- Now, if that past event was made known to the party, at a latter time, then that is what the law considers as an
conditional obligation.
- It is also in the future event in the sense that at the time the agreement was entered into by the parties, they do not
have knowledge of this past event, and that the subsequent discovery of the parties of this past event is what makes it a
future and an uncertain event.

DISTINCTION BETWEEN SUSPENSIVE AND RESOLUTORY CONDITION

As to EFFECT
1. Suspensive
- If fulfilled, the obligation arises.
- Is a mere expectancy/hope (because you do not know whether it will happen in the future).

2. Resolutory
- If fulfilled, the obligation is extinguished.
- If obligation is entered into a resolutory condition, it is immediately effective upon the birth of agreement.
- Possibility of termination (terminating the rights of the obligee/creditor/active)
22
As to CAUSE/ORIGIN
1. Potestative
- Depends upon the will of the debtor.
2. Casual
- Depends upon the will of the third person.
3. Mixed
- Depends partly upon the will of a party to the obligation and partly upon chance and/or the will of a third person.

As to POSSIBILITY
1. Possible
- Capable of fulfillment according to nature, law, public policy or good customs.
2. Impossible
- Not capable of fulfillment according to nature, law, public or good customs.

As to MODE
1. Positive
- When the condition involves the doing of an act.
2. Negative
- When the condition involves the omission of an act.

As to DIVISIBILITY
1. Divisible
- When the condition is susceptible of partial performance.
2. Indivisible
- When the condition is not susceptible of partial performance.

As to NUMBERS
1. Conjunctive
- When there are several conditions in an obligation and all of which must be performed.
2. Alternative
- When there are several conditions in an obligation but only one must be performed.

As to FORM
1. Express
- When the condition is expressly stated.
2. Implied
- When the condition is not expressly stated but merely inferred from the conduct of the parties.

AN OBLIGATION IS DEMANDABLE AT ONCE (immediately effective) IF

1. It is a pure obligation.
2. It is subject to a resolutory condition.
3. It is subject to a resolutory period.

23
ARTICLE 1180. 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, subject to the provisions of Article 1197.

WHAT DOES THIS MEAN?

- This article is indirectly telling us that the promise to pay when one means permit him to do so is a period, not a
condition.
- It is certain to happen that one will have or will acquire a means to pay, that the acquisition of the means to pay is a
period (certain to happen).
- It is not a condition because it is not uncertain to happen.

PERIOD
- A future and certain event upon the arrival of which, the obligation subject to it either arises or is extinguished.

DURATION OF THE PERIOD DEPENDS UPON THE WILL OF THE DEBTOR

1. The debtor promises to pay when his means permit him to do so−it becomes obligation with a period.
2. If both parties cannot agree as to the specific time for payment, the court shall fix the same on the application of
either party – Article 1197.

THE REMEDY OF THE CREDITOR

1. Go and ask the court to determine or to fix the period of time by which the debtor will have to perform his obligation
under the contract.

INDICATIONS OF A TERM OR PERIOD

1. When his means permit him to do so
2. Little by little
3. As soon as possible
4. From time to time
5. As soon as I have the money
6. A partial payment
7. When in the position to pay

ARTICLE 1181. In conditional obligations, the acquisition of rights, as well as the extinguishment or loss of those
already acquired, shall depend upon the happening of the event which constitutes the condition.

EFFECT OF THE HAPPENING OF CONDITION IN A CONDITIONAL OBLIGATION

1. Acquisition of rights
- If an obligation is subject to a suspensive condition, rights are acquired upon the happening of the condition.
- If the suspensive condition is certain to be not fulfilled/impossible to be fulfilled, the parties would stand as if the
conditional obligation had never exited.
- Take note: If the suspensive condition is incapable of fulfillment, the OBLIGATION is VALID, but the CONDITIONAL
OBLIGATION is deemed by law or considered by law to have never existed. The only thing that the law will disregard is
the impossible conditional obligation. If the conditional obligation is DISREGARDED by law, that obligation becomes a
PURE OBLIGATION (because it is now not subject to a condition).

24
2. Loss of rights already acquired
- If an obligation is subject to a resolutory condition, then the happening of the condition produces the extinguishment
or loss of rights already acquired.

ARTICLE 1182. When the fulfillment of the condition depends upon the sole will of the debtor, the conditional
obligation shall be void. If it depends upon chance or upon the will of a third person, the obligation shall take effect in
conformity with the provisions of this Code.

POTESTATIVE CONDITION
- A condition suspensive (happening of which will give rise to the obligation) in nature.
- Depends upon the sole will of one of the contracting parties.

NOTES

1. Suspensive Condition depends upon the sole will of the debtor.

- Condition is void but obligation is valid if the obligation is pre-existing.
- Both condition and obligation is void if the obligation does not pre-exist.
- Why is the condition void? Because if we allow the debtor to decide whether the suspensive condition will be
fulfilled or not, then the obligation is rendered nugatory (no value). The debtor will not fulfill the obligation, it is but
natural for the debtor to avoid or evade fulfillment of a suspensive condition because he is naturally reluctant to
perform his own part of the contract.

2. Suspensive Condition depends upon the sole will of the creditor.

- Both condition and obligation is valid.
- Why is the condition valid? Because naturally the creditor is interested in the fulfillment of the suspensive condition.

3. Resolutory Condition depends upon the will of the debtor.

- Both condition and obligation is valid.
- Why is the condition valid? Because the debtor is interested in the termination of the rights acquired by the creditor.

CASUAL CONDITION
- The suspensive condition depends upon chance or upon the will of a third person.
- Example: Cellphone warranty

MIXED CONDITION
- The suspensive condition depends partly upon chance and partly upon the will of a third person, the obligation is
valid.
- Combination of casual condition.
- Example: Passing the bar

25
ARTICLE 1183. Impossible conditions, those contrary to good customs or public policy and those prohibited by law
shall annul the obligation which depends upon them. If the obligation is divisible, that part thereof which is not
affected by the impossible or unlawful condition shall be valid. The condition not to do an impossible thing shall be
considered as not having been agreed upon.

This article refers to suspensive conditions wherein it applies only to cases where the impossibility already existed at
the time the obligation was constituted.

IMPOSSIBLE CONDITION
- Those contrary to good customs or public policy and those prohibited by law shall annul the obligation which
depends upon them.
- Both obligation and condition are void.
- The reason behind the law is that the obligor knows his obligation cannot be fulfilled. He has no intention to comply
with his obligation.

POSSIBLE CONDITION
- If it is capable of realization or actualization according to nature, law, public policy or good customs.

KINDS OF IMPOSSIBLE CONDITIONS

1. Physically
- In nature of things, cannot exist or cannot be done.

2. Legally
- Can be physically done but is contrary to law, morals, good customs, public order or public policy.

EFFECT OF IMPOSSIBLE CONDITION

1. The condition and obligation are void.
2. If the condition is negative, not to do an impossible thing, the condition is disregarded and the obligation is valid.
3. If the obligation is divisible, only the affected obligation is void and those that are not affected by the impossible
condition shall be valid.
4. If the obligation is pre-existing, the condition is void but the obligation is still valid.

ARTICLE 1184. The condition that some event happen at a determinate time shall extinguish the obligation as soon as
the time expires or if it has become indubitable that the event will not take place.

POSITIVE CONDITION
- Refers to the fulfillment of an event or performance of an act.

NEGATIVE CONDITION
- Refers to the non-fulfillment or non-performance of an act.

POSITIVE (SUSPENSIVE) CONDITION

- Is the happening of an event at a determinate time.

26
 - The obligation is extinguished:
1. As soon as the time expires without the event taking place.
2. As soon as it has become indubitable/certain that the event will not take place although the specified time has not
expired.

If no time is fixed, the circumstances shall be considered to arrived depending upon the intention of the parties.

ARTICLE 1185. The condition that some event will not happen at a determinate time shall render the obligation
effective from the moment the time indicated has elapsed, or if it has become evident that the event cannot occur.

If no time has been fixed, the condition shall be deemed fulfilled at such time as may have probably been
contemplated, bearing in mind the nature of the obligation.

This is a condition of non-happening of a future event.

THE OBLIGATION SHALL BECOME EFFECTIVE AND BINDING:

1. From the moment the time indicated has elapsed without the event taking place;
2. From the moment it has become evident that the event cannot occur, although the time indicated has not yet
elapsed.

ARTICLE 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment.

This provision speaks of the DOCTRINE OF CONSTRUCTIVE FULFILLMENT – if the obligor himself will exert effort or will
voluntarily prevent the fulfillment of the condition, then the condition is considered by law to have been fulfilled.

REQUISITES FOR THE APPLICATION OF THIS ARTICLE

1. The condition is suspensive.
2. The obligor actually prevents the fulfillment of the obligation.
3. The obligor acts voluntarily.

Article 1187. The effects of a conditional obligation to give, once the condition has been fulfilled, shall retroact to the
day of the constitution of the obligation.

Nevertheless, when the obligation imposes reciprocal prestations upon the parties, the fruits and interests during the
pendency of the condition shall be deemed to have been mutually compensated.

If the obligation is unilateral, the debtor shall appropriate the fruits and interests received, unless from the nature
and circumstances of the obligation it should be inferred that the intention of the person constituting the same was
different.

In obligations to do and not to do, the courts shall determine, in each case, the retroactive effect of the condition that
has been complied with.

This article discusses about the retroactive effects of the fulfillment of suspensive condition.

27
Once a conditional obligation to give was fulfilled, then from the time that the condition was fulfilled, it will be
deemed to have retroacted to the day of the constitution of the obligation.

RETROACTIVE
- Extending the scope or effect to matters that have occured in the past.
- Cause to take effect from a date in the past.
- Means it will take effect from the time that the condition was fulfilled up to the time the obligation was entered into
by the parties.

NOTES
1. Obligations to do or not to do – the retroactive effect shall be determined by the court using its sound discretion
without disregarding the intentions of the parties.
2. Obligations to give subject to a suspensive condition – once the condition is fulfilled; its effects shall retroact because
the condition is only an accidental element of a contract. The obligation can exist without being subject to a condition.
3. The effects of the obligation is deemed to commence not from the fulfillment of the obligation but from the day of its
constitution (similar to the legitimation of a natural child)
4. When the obligation is unilateral, the debtor shall appropriate the fruits and interests received because he does not
receive any equivalent or valuable consideration from the obligee.
5. The article does not require the delivery of fruits or payment of interests accruing (accumulating) before the
fulfillment of the suspensive condition.

RETROACTIVE EFFECTS AS TO FRUITS AND INTERESTS IN OBLIGATIONS TO GIVE

1. In reciprocal obligations – no retroactivity.
2. In unilateral obligations – usually no retroactivity effect because they are gratuitous.

Article 1188. The creditor may, before the fulfillment of the condition, bring the appropriate actions for the
preservation of his right. The debtor may recover what during the same time he has paid by mistake in case of a
suspensive condition.

RIGHTS OF THE CREDITOR

1. May take or bring appropriate actions for the preservation of his right.
2. Action for prohibition restraining the alienation of the thing pending the happening of the suspensive condition.
3. Action to demand security if the debtor has become insolvent.
4. Action to set aside alienations made by the debtor in fraud of creditors.
5. Actions against adverse possessors to interrupt the running prescriptive period.
6. Actions to have his rights annotated in the registry.

RIGHTS OF THE DEBTOR

1. Entitled to recover what has been paid by mistake prior to the happening of the suspensive condition. (solutio
indebiti)

28
ARTICLE 1189. When the conditions have been imposed with the intention of suspending the efficacy of an obligation
to give, the following rules shall be observed in case of the improvement, loss or deterioration of the thing during the
pendency of the condition:

LOSS
1. If the thing is lost without the fault of the debtor, the obligation shall be extinguished;
2. If the thing is lost through the fault of the debtor, he shall be obliged to pay damages; it is understood that the
thing is lost when it perishes, or goes out of commerce, or disappears in such a way that its existence is unknown or it
cannot be recovered;

DETERIORATION
3. When the thing deteriorates without the fault of the debtor, the impairment is to be borne by the creditor;
4. If it deteriorates through the fault of the debtor, the creditor may choose between the rescission of the obligation
and its fulfillment, with indemnity for damages in either case;

IMPROVEMENT
5. If the thing is improved by its nature, or by time, the improvement shall inure to the benefit of the creditor;
6. If it is improved at the expense of the debtor, he shall have no other right than that granted to the usufructuary.

THIS ARTICLE APPLIES ONLY IF

1. The obligation is a real (like delivery) obligation.
2. The object must be determinate.
3. The obligation is subject to a suspensive condition (pertains to both future and uncertain happening which gives rise
to the obligation).
4. The condition is fulfilled.
5. There is loss, deterioration or improvement (LDI) of the thing during the pendency of the condition.

LOSS
- the fact or process of losing something or someone.
- KINDS OF LOSS:

1. Physical
- A thing perishes.

2. Legal
- A thing goes out of commerce or a thing heretofore legal becomes illegal.

3. Civil
- A thing disappears in such a way that its existence is unknown or if known, it is impossible to recover, where as a
matter of fact or of law.

DETERIORATION
- When the value of a thing is reduced or impaired with or without the fault of the debtor.

29
IMPROVEMENT
- A thing improved is when its value increased or enhanced by nature or by time or the expense of the debtor or
creditor.

RULES IN CASE OF LOSS, DETERIORATION OR IMPROVEMENT OF THING DURING PENDENCY OF SUSPENSIVE COND.
1. If the loss of thing is without the fault of the debtor, then obligation is extinguished.
2. If the loss of thing is through the debtor’s fault, then he becomes liable for damages.
3. If the thing deteriorates without the fault of the debtor, then the creditor will bear the impairment.
4. If the thing deteriorates with the fault of the debtor, the creditor has two options: the creditor may choose between
rescission (cancellation of obligation) or fulfillment of the obligation with indemnity for damages in either cases.
5. If the thing is improved by nature or by time, the improvement shall inure to the benefit of the creditor.
6. If the thing is improved at the expense of the debtor, then the debtor will have the right to a usufructuary.

USUFRUCTUARY
- The right to enjoy the use and fruits of a thing belonging to another. (Civil Law Defition)

Article 1190. When the conditions have for their purpose the extinguishment of an obligation to give, the parties,
upon the fulfillment of said conditions, shall return to each other what they have received.

In case of the loss, deterioration or improvement of the thing, the provisions which, with respect to the debtor, are
laid down in the preceding article shall be applied to the party who is bound to return.

As for the obligations to do and not to do, the provisions of the second paragraph of article 1187 shall be observed as
regards the effect of the extinguishment of the obligation.

This article talks about the effects of fulfillment of a resolutory condition (the happening of which will extinguish the
obligation).

EFFECTS OF FULFILLMENT OF A RESOLUTORY CONDITION

1. In obligations to give, the obligation is extinguished and the parties are obliged to return to each other what they
have received under the obligation (Mutual Restitution).
1.1 The effect of the fulfillment is retroactive (return to the status quo−the condition of the parties prior to the
happening/birth of the obligation).
1.2 If the thing to be delivered is legally in the possession of a third person who did not act in bad faith, the remedy of
the party entitled to restitution is against the other.
1.3 The obligations of mutual restitution is absolute and applies also to the fruits and interests.
1.4 In obligations to give subject to suspensive condition, the retroactivity admits exceptions according as the
obligation is bilateral or unilateral – Article 1187.

2. In obligations to do or not to do, the courts shall determine the retroactive effect of the fulfillment of the resolutory
condition.

30
Article 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not
comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of
damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become
impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period. This is
understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with
articles 1385 and 1388 and the Mortgage Law.

This articles talks about the power to rescind in case of reciprocal obligations.

RECIPROCAL OBLIGATIONS
- Both parties would have to perform their own part or prestation of the contract.
- Each is a debtor or creditor of the other.

RESCISSION
- Resolution or cancellation of the contract.
- Applies only to reciprocal obligations where two parties are mutually debtor and creditor of each other in the same
transaction. The cause must be identical ad the obligations must arise simultaneously.
- The party who can demand rescission should be the party who is ready, willing, and able to comply with his own
obligations while the other is not capable to perform his own.

EFFECT OF RESCISSION
- The parties must surrender whatever they have received from the other, and the obligation to pay is
extinguished.

If the obligation is reciprocal, the power to rescind or to cancel the obligation is given to both parties. This is made
available in case one of the obligor does not comply with what is incumbent upon him.

KINDS OF OBLIGATIONS ACCORDING TO THE PERSON OBLIGED

1. Unilateral
- Only one party is obliged to comply with the obligation.

2. Bilateral
- Both parties are mutually bound to each other (may be reciprocal or non-reciprocal).
- KINDS OF BILATERAL OBLIGATION
2.1 Reciprocal Obligations – those which arises from the same cause and in which each party is a debtor and creditor
of the other.
2.2 Non-reciprocal Obligations – those which do not impose simultaneous and correlative performance on both
parties.

31
REMEDIES IN CASE OF RECIPROCAL OBLIGATIONS
1. If one of the obligors does not comply with what is incumbent upon him, the aggrived party may choose between:
1.1 Action for specific performance of the obligation with indemnity for damages.
1.2 Action for rescission with indemnity for damages.

2. If there is non-compliance by one of the contracting parties or breach of contract,

2.1 The court may grant the guilty party term for performance.
2.2 The court shall order rescission claimed unless there should be a just cause for granting the party in default a term
or period for the performance of his obligation.
2.3 Take note: the court may only rescind the contract if there is no just cause for the fixing of the term or period.

Rescission is only a secondary remedy, the first remedy is for the party to ask for the fixing of the term or period for
the performance of obligation.

REMEDIES ARE ALTERNATIVE

- The aggrieved party may only choose one of the remedies except he may also seek rescission after he has chosen
fulfillment if the latter should become impossible.
- If the aggrieved party has chosen specific performance, can he later ask the court to rescind the contract? Yes, as
long as if after choosing fulfillment or performance, it becomes impossible.

LIMITATIONS ON RIGHT TO DEMAND RESCISSION − The right to rescind by the injured party is not absolute. A party
may not automatically demand for rescission if in case there is a reasonable or just cause for the court to fix the period.
1. Resort to courts – the rescission mentioned in this article is judicial.
2. Power of the court to fix period – when there is a just cause.
3. Right of third person – rescission is not available as a remedy.
3.1 Question: Even if there is a failure to perform on the part of obligor, can a third person ask the court to cancel or
rescind the contract? Example: Suppose that there is a contract of sale for a condo unit between a developer and a
buyer. The buyer had purchased the unit by installment. During the time that the buyer is paying the condo unit by
installment, the buyer was given the right to possess the property. Since the buyer was given the right to possess the
property, what the buyer did is to rent out the subject property (there was a contract of lease executed between the
buyer of the property by installment and third person, the lessee). The contract is not between the developer and the
lessee, but between the buyer, lessor and the lessee. In case the buyer of the condo unit fails to pay the developer, can
the developer eject or seek for eviction of the lessee of the buyer? Under Article 1191, No. Although the owner of the
property may not seek eviction of the lessee because rescission under 1191 is not an available as against a third person.
If you bought a condo, then you rent out the property to another and when you cannot pay the unit, the owner evicted
your tenant, can you sue the developer for breach of contract or unlawful interference of contract? Yes. Because the
developer/owner is a third party/person for the contract. Rescission under 1191 is not an available as against a third
person. Remember that the contract of lease is between the buyer, lessor and the lessee; not between the developer
and the lessee. In so far as the contract of lease is concered, the developer is not a party, he is a third person.

4. Substantial violation – General rule is that rescission will not be granted for slight breaches of contract.
5. Waiver of right

However, if the other party does not agree, he may resort to judicial action and let the court decide whether the
rescission was proper or not.
32
ARTICLE 1192. In case both parties have committed a breach of the obligation, the liability of the first infractor shall
be equitably tempered by the courts. If it cannot be determined which of the parties first violated the contract, the
same shall be deemed extinguished, and each shall bear his own damages.

This article talks about the instance where both parties are guilty of breach.

WHEN BOTH PARTIES ARE GUILTY OF BREACH

1. First infractor known
- The liability of the first infractor should be equitably reduced – equitably offset each other’s damages.
2. First infractor cannot be determined
- The court shall declare the extinguishment of the obligation and each shall bear his own damages.

Section 2 – Obligations with a Period

ARTICLE 1193. Obligations for whose fulfillment a day certain has been fixed, shall be demandable only when that day
comes. Obligations with a resolutory period take effect at once, but terminate upon arrival of the day certain. A day
certain is understood to be that which must necessarily come, although it may not be known when. If the uncertainty
consists in whether the day will come or not, the obligation is conditional, and it shall be regulated by the rules of the
preceding section.

OBLIGATION WITH A PERIOD

- Effects or consequences are subjected to the expiration or arrival of a said period or term.

PERIOD
- Future or certain event which arises or extinguishes the obligation.’
- Take note that period is both in the future and certain, not future OR certain, it must be future AND certain.
- It may be definite (exact date or time is known) or indefinite (arrival of date is unknown but sure to
come).

CONDITION
- Fact or event uncertain to come.

DIFFERENCE BETWEEN PERIOD AND CONDITION AS TO

Fulfillment
1. A period is a future and certain event.
2. A condition is an uncertain event.

Time
1. A period always refers to future.
2. A condition may refer to past and future.

33
Influence
1. A period fixes the time for the performance of an obligation.
2. A condition arises or extinguishes and obligation.

Effect (when left in debtor’s will)

1. A period empowers the court to fix the obligation thereof.
- If the period is dependent upon the sole will of the debtor, what is the status of the contract? It is valid.
2. A condition invalidates the obligation.
- If the condition is dependent upon the sole will of the debtor, what is the status of te contract? It depends. If the
condition is suspensive in nature, the condition is void. Whereas, if the condition is resolutory in nature, the condition is
valid.

Why is suspensive condition the one that is void? Because if what is left to the debtor’s will is a suspensive condition,
then it will render the obligation nugatory because the debtor is normally not interested in the performance of his
prestation.

Why is resolutory condition the one that is valid? Because if what is left to the debtor’s will is a resolutory condition,
the obligation is valid because the debtor is interested in the extinguishment of the obligation.

Retroactivity of the effects

1. A period has no retroactive effect unless otherwise stated or agreed upon by the parties.
2. A condition has a retroactive effect.

STAGES OF A CONTRACT
1. Perfection – birth of the contract.
2. Performance – consummation of the contract.

KINDS OF PERIOD ACCORDING TO EFFECT

1. Suspensive Period
- Gives rise to an obligation and is not demandable upon commencement, just on the arrival of the period.
- Example: I will give you a gift on your birthday. Why? Because it is not demandable upon the perfection of the
contract but upon the arrival of the period.

2. Resolutory Period
- Extinguishes the obligation and is immediately demandable.
- Example: I will give you an allowance until you reach the age of maturity. Why? Because the giving of the allowance
is immediately demandable and the happening of the period will extinguish the obligation.

Article 1194. In case of loss, deterioration or improvement of the thing before the arrival of the day certain, the rules
in Article 1189 shall be observed.

The rules under Article 1189 under Conditional Obligation will apply also to Obligations with a Period.

34
Article 1195. Anything paid or delivered before the arrival of the period, the obligor being unaware of the period or
believing that the obligation has become due and demandable, may be recovered, with the fruits and interests.

This article is about the payment or delivery before the arrival of the period which depends upon the awareness of the
debtor

WHAT IS THE RULE?

1. If the debtor is aware and nevertheless pays, he is knowledgeable and is considered intentionally paying in advance.
2. If the debtor is unaware, it is considered as a quasi-contract of solution indebiti (payment by mistake), which entitles
the payor or obligor to recover what has been payed by mistake.

Take note that this article does not apply to Personal Obligations because services cannot be recovered and you
cannot undo what has been done.

Article 1196. Whenever in an obligation a period is designated, it is presumed to have been established for the benefit
of both the creditor and the debtor, unless from the tenor of the same or other circumstances it should appear that
the period has been established in favor of one or of the other.

This article states that the period is presume to benefit both the creditor and the debtor. (GENERAL RULE)

INTEREST
- Payment for interest of money.

If there is no interest for the loan, the debtor could compel the creditor to accept the payment because the creditor is
gratituitous in the first place.

If there is interest, the debtor cannot compel the creditor to accept the payment because the payment of interest
means that the period is presumed to be for the benefit of the creditor.

THE BENEFIT OF THE TERM MAY BE THE SUBJECT OF STIPULATION OF THE PARTIES

1. Term is for the benefit of the debtor alone

- He cannot be compelled to pay prematurely, but he can if he desires to do so.
- Example: A obliges himself to pay B within 5 years. A cannot be compelled to pay prematurely, but he can pay
anytime within 5 years (A will benefit because he can pay anytime he wants as long as it is within 5 years; B will not
benefit from the interests if A decides to pay early).

2. Term is for the benefit of the creditor alone

- He may demand fulfillment even before the arrival of the term but the debtor cannot require him to accept payment
before the expiration of the stipulated period.
- Example: A borrows money from B and is obliged to make the payment on December 5. B may compel A to make the
payment before December 5, but A may not compel B to receive the payment before December 5 (B will benefit from
the interests that will accrue before December 5).

35
Article 1197. If the obligation does not fix a period, but from its nature and the circumstances it can be inferred that a
period was intended, the courts may fix the duration thereof. The courts shall also fix the duration of the period when
it depends upon the will of the debtor.

In every case, the courts shall determine such period as may under the circumstances have been probably
contemplated by the parties. Once fixed by the courts, the period cannot be changed by them.

This article talks about when the court can fix a period. The court can only fix the period if the parties intended a
period in the first place. The court cannot substitute its decision and interfere with the contract because it is the law of
the parties.

JUDICIAL PERIOD
- Period designated by court.

CONTRACTUAL PERIOD
- Period fixed by the parties in their contract.

COURT WILL FIX A PERIOD

1. When no period is mentioned, but it is inferable from the nature and circumstances of the obligation that a period
was intended by the parties.
2. When the period is dependent upon the will of the debtor.

COURT CANNOT FIX A PERIOD

1. If there is a period agreed upon by the parties and it has already lapsed or expired.
2. From the very moment the parties give their acceptance and consent to the period fixed by the court, it becomes a
law governing their contract.

Article 1198. The debtor shall lose every right to make use of the period:

1. When after the obligation has been contracted, he becomes insolvent, unless he gives a guaranty or security for the
debt;

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

3. When by his own acts he has impaired said guaranties or securities after their establishment, and when through a
fortuitous event they disappear, unless he immediately gives new ones equally satisfactory;

4. When the debtor violates any undertaking, in consideration of which the creditor agreed to the period;

5. When the debtor attempts to abscond. (1129a)

This article gives you the instances when the debtor loses the right to make use of the debtor.

When you say that the debtor loses the right to make use of the period, if any of these five instances will occur, then
the obligation becomes immediately demandable.

“YOU SHOULD MEMORIZE THESE FIVE INSTANCES UNDER ARTICLE 1198 AS THESE ARE EXCLUSIVE LISTS.”
36
THE PERIOD IS DISREGARDED AND THE OBLIGATION BECOMES PURE AND IMMEDIATELY DEMANDABLE WHEN (IGIVA)

[I] When debtor becomes insolvent

- The insolvency need not be judicially declared. It is sufficient that debtor could not pay his debts due to lack of
money or funds.

[G] When the debtor does not furnish guaranties or securities

[I] When guaranties or securities given have been impaired or have disappeared
- If security was lost through debtor’s fault - impairment
- If security was lost through fortuitous event – disappearance

[V] When debtor violates an undertaking

- If such undertaking is the reason for the creditor to agree with such period.

[A] When debtor attempts to abscond (escape).

- Mere attempt to abscond is sufficient. It is an indication of bad faith.

LIQUIDITY
- Ability to convert assets into cash.

SOLVENCY
- Ability to pay liabilities with assets.
- A solvent person could be illiquid at the same time because he could be able to pay his liabilities with his assets but
not easily converted to cash.

Just because a debtor becomes illiquid does not mean that he will loss the right to make use of the period. What is
reffered under 1198 is SOLVENCY, not LIQUIDITY.

GUARANTOR (Substitute or Replacement)

- A person who will be held liable in case of non-payment by the debtor.

37
SECURITY
- A property constituted as a mortgage when the debtor just has more liabilities but still has assets.
- It can be a real estate mortgage, chattel mortgage or a pledge in case of personal property. But take note that pledge
is a real contract meaning it requires delivery before its perfection unlike real estate and chattel mortgage.

TYPES OF SECURITIES

1. Real Estate Mortgage

- Security for real property.

2. Chattel Mortgage
- Security for personal or moveable property.

3. Contract of Pledge
- Security for jewelries.

Giving guaranty or security means that the debtor can still pay even if he failed to do so according to the agreement;
it can answer the said failure. The obligation becomes pure and immediately demandable if the debtor loses the right
to use the period.

IMPORTANT NOTE
- If a fortuitous event made guaranty or security disappear, the debtor will still use the right to make use of the period.
- This is the only rule in the Law of ObliCon that makes the debtor liable for a fortuitous event aside from the
exceptions.

SECTION 3 – ALTERNATIVE OBLIGATIONS

ARTICLE 1199. A person alternatively bound by different prestations shall completely perform one of them.
The creditor cannot be compelled to receive part of one and part of the other undertaking.

KINDS OF DISTRIBUTIVE OBLIGATIONS

1. Alternative Obligations
- Several prestations are due but the performance of one is sufficient.
- The obligor is to perform one of the choices, or the alternates.

2. Facultative Obligations
- Only one prestation is due but the debtor may substitute another.

3. Conjunctive/Compound Obligations
- Obligation where the debtor has to perform all the several prestations in the contract to extinguish the obligation.

The difference between the two is that in alternative obligations, there are several prestations. While in facultative
obligations, there is only one prestation, except that the debtor may substitute another prestation.
38
ARTICLE 1200. The right of choice belongs to the debtor, unless it has been expressly granted to the creditor.
The debtor shall have no right to choose those prestations which are impossible, unlawful or which could not have
been the object of the obligation.

In case that the obligation is silent as to who will choose the prestation (alternative obligation), the presumption is
that the right of choice belong to the debtor.

GENERAL RULE
- The right to choose the prestation belongs to the debtor.
- Exceptions:
- If the prestation is impossible, unlawful and not the object of the obligation.
- Only one prestation is practicable.

ARTICLE 1201. The choice shall produce no effect except from the time it has been communicated.

COMMUNICATION OF NOTICE THAT A CHOICE HAS BEEN MADE

1. Effect of notice
- Until the choice is made and communicated, the obligation remains alternative.

2. Proof and form of notice

- The law does not require any particular form regarding the giving of notice which may be done orally or in writing,
expressly or implied.

EFFECTS OF NOTICE
1. Obligation becomes simple
2. Irrevocable and cannot be changed without the consent of the other party.

GENERAL RULE
- All rights may be waived.

ARTICLE 1202. The debtor shall lose the right of choice when among the prestations whereby he is alternatively
bound, only one is practicable.

If only one prestation is practicable, the obligation is converted into a simple one.

ARTICLE 1203. If through the creditor's acts the debtor cannot make a choice according to the terms of the obligation,
the latter may rescind the contract with damages.

RESCISSION
- Creates the obligation to return the things which were the object of the contract together with their fruits, and the
price with its interest.

39
NOTES
1. If the debtor could not make a choice due to the creditor’s act of making the prestations impossible, debtor may
rescind the contract with damages - rescission takes place at the initiative of the debtor.
2. If the debtor is being prevented to choose only a particular prestation, and there are others available, he is free
to choose from them, after notifying the creditor of his decision.

ARTICLE 1204. The creditor shall have a right to indemnity for damages when, through the fault of the debtor, all the
things which are alternatively the object of the obligation have been lost, or the compliance of the obligation has
become impossible. The indemnity shall be fixed taking as a basis the value of the last thing which disappeared, or
that of the service which last became impossible. Damages other than the value of the last thing or service may also
be awarded.

In case of disagreement, the creditor must prove such value, thing last disappeared or service last became imposible.

ARTICLE 1205. When the choice has been expressly given to the creditor, the obligation shall cease to be alternative
from the day when the selection has been communicated to the debtor. Until then the responsibility of the debtor
shall be governed by the following rules:

1. If one of the things is lost through a fortuitous event, he shall perform the obligation by delivering that which the
creditor should choose from among the remainder, or that which remains if only one subsists;

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

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

4. If all the things are lost by fortuitous event, the obligation is extinguished.

The same rules shall be applied to obligations to do or not to do in case one, some or all of the prestations should
become impossible.

Before the creditor makes the selection, the debtor cannot incur delay.

40
SUMMARY OF 1205

This article applies only when the right of choice has been expressly granted to the creditor.

ARTICLE 1206. When only one prestation has been agreed upon, but the obligor may render another in substitution,
the obligation is called facultative. The loss or deterioration of the thing intended as a substitute, through the
negligence of the obligor, does not render him liable. But once the substitution has been made, the obligor is liable
for the loss of the substitute on account of his delay, negligence or fraud.

Once the substitution is made, the obligation is converted into a simple one to deliver or perform the substituted thing
or prestation. The substitution becomes effective from the time it has been communicated.

41
DIFFERENCE OF ALTERNATIVE AND FACULTATIVE OBLIGATION

Section 4 — Joint and Solidary Obligations

Article 1207. The concurrence of two or more creditors or of two or more debtors in one and the same obligation
does not imply that each one of the former has a right to demand, or that each one of the latter is bound to render,
entire compliance with the prestation. There is a solidary liability only when the obligation expressly so states, or
when the law or the nature of the obligation requires solidarity.

Article 1208. If from the law, or the nature or the wording of the obligations to which the preceding article refers the
contrary does not appear, the credit or debt shall be presumed to be divided into as many shares as there are
creditors or debtors, the credits or debts being considered distinct from one another, subject to the Rules of Court
governing the multiplicity of suits.

UNDER THESE ARTICLES ARE DIFFERENT KINDS OF OBLIGATIONS

As to NUMBER
1. Individual Obligation
- There is one obligee and obligor.

2. Collective Obligation
- Two or more obligees and obligor.

42
KINDS OF COLLECTIVE OBLIGATIONS

In actions of debtor/obligor, the basic distinction between JOINT and SOLIDARY obligation is that in JOINT, each
debtor is proportionately liable. On the other hand, in a SOLIDARY, each one of the debtor is bound to fulfill the entire
obligation.

In actions of creditor/obligee, the basic distinction between JOINT and SOLIDARY obligation is that in JOINT, it is to be
demanded proportionately by the different creditors. On the other hand, in a SOLIDARY, each one of the creditors has
a right to demand entire compliance with the prestation.

GENERAL RULE
- In case of Collective Obligation, the obligation is presumed to be joint.

KINDS OF SOLIDARY OBLIGATIONS

According to PARTIES BOUND

1. Passive Solidarity
- Solidary in the part of the debtor. Any of the debtor can pay or fulfill the obligation (many debtors, only one creditor).
- Example: A, B, & C are solidary debtors of D in the sum of P900. D can demand payment of the entire obligation
when it becomes due, from any one of the debtors or from all of them at the same time. If C paid the whole P900 to D,
he may claim reimbursement from A and B.

2. Active Solidarity
- Solidary on the part of the creditors, where anyone of them can demand the fulfillment of the entire obligation (one
debtor, many creditors).
- Example: Garfield owes the sum of P40,000 to Mickey, Minnie, Donald, and Pluto, who are solidary creditors. Garfield
can pay anyone of them. If Mickey received the P40,000, he is liable to pay the corresponding shares of his co-creditors.

3. Mixed Solidarity
- Solidary on the part of the debtors and creditors, where each one of the debtors is liable to render, and each one of
the creditors has a right to demand entire compliance with the obligation.
43
 - Example:

According to SOURCE

4. Legal Solidarity
- Imposed by law.
- Example: Legal Solidarity is imposed by law in case of tortfeasors.

5. Conventional Solidarity
- Solidarity is agreed upon by the parties.

6. Real Obligation
- Imposed by nature of law.
- Example: Workmen’s Compensation Law.

RULE
- Solidarity is not presumed. The presumption, there are two or more persons in the same obligation, is that it is joint.

Article 1209. If the division is impossible, the right of the creditors may be prejudiced only by their collective acts, and
the debt can be enforced only by proceeding against all the debtors. If one of the latter should be insolvent, the
others shall not be liable for his share.

This article speaks of Joint Indivisible Obligation. It is joint in the sense that the liability of the debtors are divided
proportionately among themselves. But it is indivisible in the sense that it can only be complied all at once (it cannot
be partially performed). This obligation constitutes the middle ground between a joint and solidary obligation.

JOINT INDIVISIBLE OBLIGATION

- An obligation where solidarity is not provided and the prestation or object is not susceptible of division.
- Its fulfillment requires the concurrence of all debtors, while doing each one’s parts.
- Example: Batman and Robin jointly obliged themselves to deliver a brand new Toyota Fortuner worth P1,500,000.00
to Superman. The object, a vehicle, is indivisible. They must deliver the thing jointly. In case of breach, the obligation is
converted into monetary obligation for indemnity for damages. Batman and Robin will be liable only for P 750,000.00
each.

44
Article 1210. The indivisibility of an obligation does not necessarily give rise to solidarity. Nor does solidarity of itself
imply indivisibility.

This article presents the dichotomy between indivisibility and solidarity of obligation.

SOLIDARITY
- Pertains to the obligation of the debtors, whether they can be held liable to perform for the entire obligation.
- Legal tie that binds the parties.

DIVISIBILITY/INDIVISIBILITY
- Pertains as to whether the obligation can be performed in parts or not.

INDIVISIBILITY DISTINGUSHED FROM SOLIDARITY

1. Indivisibility refers to the prestation, while solidarity refers to the juridical or legal tie that binds the parties.
2. In Indivisible Obligations, only the debtor guilty of breach of obligation is liable for damages (Arts. 1209, 1224),
thereby terminating the agency, while in Solidary Obligations, all of the debtors are liable for the breach of the
obligation committed by a co-debtor (Art. 1221), for solidarity among them remains.
3. Indivisibility can exist although there is only one debtor and creditor, while in solidarity, there must be at least two
debtors or creditors. Example: If the obligation is to deliver a horse, there can be one debtor but you cannot deliver the
horse in parts otherwise it will no longer be of use to the obligee.
4. In Indivisible Obligations, the others are not liable in case of insolvency of one debtor, while in Solidary Obligations,
the others are proportionately liable.

NOTE
- The first sentence of Art. 1210 simply means that the liability in an indivisible obligation may be either joint or
solidary. The second sentence means that in a solidary obligation, the subject matter may be divisible or indivisible.

Article 1211. Solidarity may exist although the creditors and the debtors may not be bound in the same manner and
by the same periods and conditions.

TAKE NOTE
- There is solidarity even if there are variations in terms of the manner by which the obligation is to be performed.
- There is solidarity even if the debtors have different periods and conditions in the performance of obligation.

45
Article 1212. Each one of the solidary creditors may do whatever may be useful to the others, but not anything which
may be prejudicial to the latter.

Solidary creditor may act beneficial to others but not act prejudicial because it can result to extinguishment of the
obligation but can cause damages to other.

Article 1213. A solidary creditor cannot assign his rights without the consent of the others.

The assignee does not become a solidary creditor, and any payment made upon him by the debtor does not extinguish
the obligation. He is considered a STRANGER, and his acts are not binding to the solidarity.

DOCTRINE OF MUTUAL AGENCY

- In solidary obligations, the act of one is act of the others.

Article 1214. The debtor may pay any one of the solidary creditors; but if any demand, judicial or extrajudicial, has
been made by one of them, payment should be made to him.

Since each of the solidary creditor can demand the performance of an entire obligation, then if you are a solidary
debtor then you can pay to any of the solidary creditor the entire obligation. You do not need to divide the payment to
all of them, you can pay one solidary creditor and the obligation will be extinguished EXCEPT if any solidary creditor
will demand the payment, then you will pay to him.

Article 1215. Novation, compensation, confusion or remission of the debt, made by any of the solidary creditors or
with any of the solidary debtors, shall extinguish the obligation, without prejudice to the provisions of Article 1219.
The creditor who may have executed any of these acts, as well as he who collects the debt, shall be liable to the
others for the share in the obligation corresponding to them.

NOVATION
- Is an agreement made between two contracting parties to allow for the substitution of a new party for an existing
one.

COMPENSATION
- Takes place when two persons, in their own right, become creditors and debtors of each other.
- Example: Erap borrowed P100 from Fernando. Fernando borrowed P75 from Erap. Erap’s obligation to Fernando is
now P25 only, because the original obligation was offset by Fernando’s supposed-to-be obligation to Erap.

CONFUSION
- Takes place when the characters of creditor and debtor are merged in the same person.

REMISSION
- The gratuitous abandonment by the creditor of his right; acceptance of the obligor is necessary.

46
Article 1216. The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously.
The demand made against one of them shall not be an obstacle to those which may subsequently be directed against
the others, so long as the debt has not been fully collected.

Solidary creditor has the choice to determine against whom he will enforce the collection. IT CAN BE EITHER:
1. Any one of the solidary debtors.
2. Some of the solidary debtors. > as long as the debt has not been fully collected.
3. All of the solidary debtors.

Article 1217. Payment made by one of the solidary debtors extinguishes the obligation. If two or more solidary
debtors offer to pay, the creditor may choose which offer to accept. He who made the payment may claim from his
co-debtors only the share which corresponds to each, with the interest for the payment already made. If the payment
is made before the debt is due, no interest for the intervening period may be demanded. When one of the solidary
debtors cannot, because of his insolvency, reimburse his share to the debtor paying the obligation, such share shall be
borne by all his co-debtors, in proportion to the debt of each.

TAKE NOTE OF THIS ARTICLE AS THIS HAS BEEN THE SUBJECT OF SOME EXAMINATIONS (MEMORIZE).

EFFECTS OF PAYMENT BY A SOLIDARY DEBTOR

1. Between the solidary debtors and creditor(s).

- Full payment made by one of the solidary debtors extinguishes the contract but the creditor has the right to choose
which payment to accept if two or more solidary debtors offer to pay (in full).

2. Among solidary debtors.

- After the full payment of the debt, the paying solidary debtors can demand reimbursement from his co-debtors for
their proportionate shares with the interest only from the time of payment wherein the obligation becomes joint. If one
becomes insolvent, the other solidary debtors shall be liable for his share.

3. Among solidary creditors.

- The receiving solidary creditor is jointly liable to the others for their corresponding shares.

MEMORIZE THIS ARTICLE BECAUSE THIS HAS BEEN THE SUBJECT OF PREVIOUS EXAMINATIONS.

Article 1218. Payment by a solidary debtor shall not entitle him to reimbursement from his co-debtors if such
payment is made after the obligation has prescribed or become illegal.

NO REIMBURSEMENT IF

1. Obligation PRESCRIBES
- The creditor did not make any demand for more than 10 years.

2. Obligation becomes ILLEGAL

- Law has been passed, making such prestation illegal

47
Article 1219. The remission made by the creditor of the share which affects one of the solidary debtors does not
release the latter from his responsibility towards the co-debtors, in case the debt had been totally paid by anyone of
them before the remission was effected.

TAKE NOTE THAT THIS ARTICLE IS ALSO A GOOD SOURCE OF EXAM, SO MEMORIZE.

EFFECTS OF PAYMENT

NOTES
1. It is necessary for the debtor to prove the remission to the payment to release him from his responsibility towards his
co-debtors.
2. This is to prevent fraud whereby the creditor remits the share of a particular debtor.
3. This secures the equality and justice to the paying debtor in as much as the payment benefits his co-debtors.

CONSEQUENCES OF REMITTED DEBTOR (the solidary creditor will condone and no longer collect from a single debtor
but leaving the rest liable) MASTER THESE RULES.

Take note of the third row.

Article 1220. The remission of the whole obligation, obtained by one of the solidary debtors, does not entitle him to
reimbursement from his co-debtors.

There is nothing to be reimbursed because he did not spend any money, the remission being a gratuitous act.

48
Article 1221. If the thing has been lost or if the prestation has become impossible without the fault of the solidary
debtors, the obligation shall be extinguished. If there was fault on the part of any one of them, all shall be responsible
to the creditor, for the price and the payment of damages and interest, without prejudice to their action against the
guilty or negligent debtor. If through a fortuitous event, the thing is lost or the performance has become impossible
after one of the solidary debtors has incurred in delay through the judicial or extrajudicial demand upon him by the
creditor, the provisions of the preceding paragraph shall apply.

This article talks about loss.

NOTES
1. As far as the creditor is concerned, the fault or delay of one solidary debtor shall be the fault or delay of all solidary
debtors.
2. If the creditor recovers the price and damages from the negligent debtor, the negligent debtor cannot claim
reimbursement from others because he alone was at fault.
3. If the thing to be delivered belong to the negligent debtor, only he is liable to damages and interest.

Article 1222. A solidary debtor may, in actions filed by the creditor, avail himself of all defenses which are derived
from the nature of the obligation and of those which are personal to him, or pertain to his own share. With respect to
those which personally belong to the others, he may avail himself thereof only as regards that part of the debt for
which the latter are responsible.

TAKE NOTE OF THIS ARTICLE BECAUSE THIS HAS BEEN A SOURCE OF EXAMINATIONS.

DEFENSES AVAILABLE TO A SOLIDARY DEBTOR

1. Defenses derived from the nature of obligation — such as payment, prescription, remission, statute of frauds,
presence of vices of consent, etc.
2. Defenses personal to, or which pertain to share of, debtor sued — such as minority, insanity and others
purely personal to him.
3. Defenses personal to other solidary debtors.

49
SECTION 5 — Divisible and Indivisible Obligations

Article 1223. The divisibility or indivisibility of the things that are the object of obligations in which there is only one
debtor and only one creditor does not alter or modify the provisions of Chapter 2 of this Title.

TWO KINDS OF OBLIGATIONS ACCORDING TO FULFILLMENT

1. Divisible Obligations
- The object is capable of partial fulfillment.

2. Indivisible Obligations
- The object is not capable of partial fulfillment.

KINDS OF DIVISION

1. Qualitative Division
- Based on quality; not on number or quantity of the things which are the object of the obligation.

2. Quantitative Division
- Based on quantity rather than on quality.

3. Ideal or Intellectual Division

- One which exists only in the minds of the parties.

KINDS OF INDIVISIBILITY

1. Legal Indivisibility
- Specific provisions of law declared as indivisible obligations which are divisible in nature.

2. Conventional Indivisibility
- Will of the parties makes as indivisible.

Article 1224. A joint indivisible obligation gives rise to indemnity for damages from the time anyone of the debtors
does not comply with his undertaking. The debtors who may have been ready to fulfill their promises shall not
contribute to the indemnity beyond the corresponding portion of the price of the thing or of the value of the service
in which the obligation consists.

If any one of the debtors does not comply with his undertaking in the joint obligation, then it is converted into one for
damages.

EXAMPLE - A person has ordered for the assembly of a flying car and there are many makers which will be involved in
the making of this car. If any one of the suppliers or the engine makers does not comply with his own part of the
undertaking, since the obligation is indivisible, the obligation is immediately converted into one for damages (pay for
compensation.)

50
EFFECTS OF NON-COMPLIANCE
1. Obligation converted into one for damages.
2. Creditor cannot ask for specific performance or recission.
Note: Only the debtor who fails to comply will be liable for the damages, if any.

Article 1225. For the purposes of the preceding articles, obligations to give definite things and those which are not
susceptible of partial performance shall be deemed to be indivisible. When the obligation has for its object the
execution of a certain number of days of work, the accomplishment of work by metrical units, or analogous things
which by their nature are susceptible of partial performance, it shall be divisible. However, even though the object or
service may be physically divisible, an obligation is indivisible if so provided by law or intended by the parties. In
obligations not to do, divisibility or indivisibility shall be determined by the character of the prestation in each
particular case.

IN OBLIGATIONS NOT TO DO

THE FOLLOWING ARE CONSIDERED INDIVISIBLE OBLIGATIONS

1. Obligation to give definite things.
2. Obligations which are not susceptible of partial performance.
3. Even though the object or service may be physically divisible, it is indivisible if:
a. the law so provides.
b. when the parties intended it to be indivisible.

THE FOLLOWING OBLIGATIONS ARE DEEMED DIVISIBLE

1. When the object of the obligation is the execution of a certain number of days of work.
2. When the object of the obligation is the accomplishment of work measured in units.
3. When the object of the obligation is susceptible of partial compliance.
4. When the object of the obligation is such that the debtor is required to pay in installments.

NOTES
1. If the contract is divisible, and a part of it is illegal, the illegal part is void, and the rest shall be valid and enforceable.
2. If the contract is indivisible, and a part of it is illegal, the entire contract is void.
3. Partial performance of an indivisible obligation is tantamount to non-performance.

51
SECTION 6 — OBLIGATIONS WITH A PENAL CLAUSE

Article 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the
payment of interests in case of noncompliance, if there is no stipulation to the contrary. Nevertheless, damages shall
be paid if the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation. The penalty
may be enforced only when it is demandable in accordance with the provisions of this Code.

PRINCIPAL OBLIGATION
- Validity and existence depends upon another obligation.

ACCESSORY OBLIGATION
- Attached to principal obligation.

PENAL CLAUSE
- Accessory undertaking attached to obligation for the purpose of:
1. As an obligatory force deterrent against breach or violation of the contract.
2. Substitute a penalty for indemnity and payment of interests.

DISTINCTION BETWEEN PENAL CLAUSE AND CONDITION

KINDS OF PENAL CLAUSE ACCORDING TO ORIGIN

1. Legal
- Provided by law.

2. Conventional
- Stipulation of parties.

KINDS OF PENAL CLAUSE ACCORDING TO PURPOSE

1. Compensatory
- Take the place of damage.

2. Punitive
- Punishment for breach.

52
KINDS OF PENAL CLAUSE ACCORDING TO EFFECT/DEMANDABILITY

1. Subsidiary/Alternative
- Penalty can only be enforced.

2. Joint/Cumulative
- Can enforce principal + penalty.

RECOVERY OF DAMAGES AND INTERESTS CAN BE

1. Stipulated by parties.
2. Recover legal interest upon refusal to pay penalty by the debtor.
3. Recover damages caused by fraud.

Article 1227. The debtor cannot exempt himself from the performance of the obligation by paying the penalty, save in
the case where this right has been expressly reserved for him. Neither can the creditor demand the fulfillment of the
obligation and the satisfaction of the penalty at the same time, unless this right has been clearly granted him.
However, if after the creditor has decided to require the fulfillment of the obligation, the performance thereof should
become impossible without his fault, the penalty may be enforced.

The creditor cannot demand the stipulated fulfillment of the principal obligation and the penalty at the same time,
EXCEPT:
1. When the creditor was clearly given the right to enforce both the principal and the penalty.
2. When the creditor has demanded fulfillment of the obligation but cannot be fulfilled due to the:
2.1 Debtor’s fault – creditor may demand for penalty.
2.2 Creditor’s fault – he cannot claim penalty.
2.3 Fortuitous event – principal obligation and penalty is extinguished.

Article 1228. Proof of actual damages suffered by the creditor is not necessary in order that the penalty may be
demanded.

When you say obligation with a penal clause, that penal clause will specify for a specific amount to be paid by the
obligor to the creditor incase the principal obligation may no longer be performed. In case that there is a breach, the
obligee or the creditor does not need to establish that there was actual damages that he incur. The stipulation of the
parties pertaining to the penal clause will always be demandable incase of breach and proof of the actual damages is
no longer necessary.

Article 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly
complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts
if it is iniquitous or unconscionable.

JUDICIAL REDUCTION OF PENALTY

1. Principal obligation
- Partly complied with by the debtor (but not in indivisible obligation, because it is tantamount to
non-compliance).
53
2. Principal obligation
- Complied not in accordance with the tenor of the agreement (refers to irregular performance).

3. Penalty
- Is iniquitous or unconscionable.
- The penalty is too high.

INIQUITOUS OR UNCONSCIONABLE
- When it is revolting to the conscience or common sense; grossly disproportionate to the damages suffered.

PENALTY NOT ENFORCEABLE

1. Impossible performance of principal obligation due to fortuitous events.
2. Creditor prevented the debtor from fulfilling the obligation.
3. Penalty is contrary to good morals or good customs.
4. Both parties are guilty of breach of contract.
5. Breach of contract by the creditor.
6. None of the parties committed any willful or culpable violation of the agreement.

Article 1230. The nullity of the penal clause does not carry with it that of the principal obligation. The nullity of the
principal obligation carries with it that of the penal clause.

Because the penal clause is only an accessory to the principal obligation, it cannot exist alone. If the penal clause is
void, the principal obligation remains enforceable.

This means that the extinguishment of the principal will carry with it the extinguishment of the accessory obligation,
but the opposite is not true.

EXAMPLE
- In case of non-payment of P10,000, P1,000 per day as penalty shall be imposed. It is a void contract but it is not an
excuse that you don't have to pay the principal which is P10,000.

CHAPTER 4

EXTINGUISHMENT OF OBLIGATIONS

Article 1231. Obligations are extinguished:

1. By payment or performance.
2. By loss of the thing due.
3. By condonation or remission of the debt.
4. By confusion or merger of the rights of creditor and debtor.
5. By compensation.
6. By novation.
Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of a resolutory condition,
and prescription, are governed elsewhere in this Code.

54
ADDITIONAL CAUSES OF EXTINGUISHMENT
1. Fortuitous event.
2. Impossibility of fulfillment.
- Legal (prohibited by law) or Physical (incapable of performance thru human limitations) Impossibility.
3. Resolutory.
- If an obligation is subject to a resolutory condition upon fulfillment of the resolutory condition, the obligation is
extinguished because in resolutory condition, the obligation is immediately demandable and is terminated only after the
fulfillment of the conditio.
4. Mutual decision of the party.
5. Death of the party requiring personal services.
6. Compromise.
- Concessions given by both parties.

SECTION 1 – PAYMENT OR PERFORMANCE

Article 1232. Payment means not only the delivery of money but also the performance, in any other manner of an
obligation.

WHEN YOU SAY PAYMENT

1. In ordinary parlance
- Delivery of money.

2. In legal parlance
- Delivery of money.
- Giving a thing, doing an act or not doing an act.

Article 1233. A debt shall not be understood to have been paid unless the thing or service in which the oligatoin
consists has been completely delivered or rendered, as the case may be.

This is the concept of payment.

CONCEPT OF PAYMENT

1. Integrity of Prestation
- Full performance of obligation.
- If the thing delivered is not the thing or incomplete under stipulation, he can refuse to pay.

2. Identity of Prestation
- Must be delivered.
- The very and agreed prestation must be delivered.

Presentation of receipt is a decent confirmation of payment. In this way, a debtor can request a receipt from the
creditor once the creditor is paid.

55
Article 1234. If the obligation has been substantially performed in good faith, the obligor may recover as though there
had been a strict and complete fulfillment, less damages suffered by the obligee.

EXCEPTION IN ARTICLE 1233 FOUND IN ARTICLE 1234

- When there is substantial performance and will be considered fulfilled, only compensation about breach of obligor
must be paid.

REQUISITES OF SUBSTANTIAL PERFORMANCE (memorize)

1. Substantial Performance
- Essential or important part of contract had been performed while the minor details are not.
- Doctrine of substantial performance.

2. Obligor must be in good faith

- Presumed in the absence of proof of contrary.
- If not performed completely but the seller acted in good faith, the buyer is compelled to pay but less those that are
not yet delivered.

Article 1235. When the oblige accepts the performance, knowing its incompleteness or irregularity, and without
expressing any protest or objection, the obligation is deemed fully complied with.

In this article, the law compels the obligor to express his protest in case that he accepts the performance knowing that
it is incomplete/irregular.

If there was incompleteness/irregularity on the part of performance of the obligation, the obligee must interpose his
protest.

If there was no protest and the obligee knowingly and intelligently accepts an incomplete or irregular performance,
then the law will presume that the obligation is deemed fully complied with.

REQUISITES
1. Obligee knows the incompleteness or irregularity of the performance.
2. Accept the performance without expressing a protest.

Article 1236. The creditor is not bound to accept payment or performance by a third person who has no interest in the
fulfillment of the obligation, unless there is a stipulation to the contrary. Whoever pays for another may demand
from the debtor what he has paid, except that if he paid without the knowledge or against the will of the debtor, he
can recover only insofar as the payment has been beneficial to the debtor.

To whom can the creditor accept payment?

- The debtor, because they are the parties of the obligation.
But can the debtor compel the creditor to accept payment or performance by a third person?
- No, unless there is a contrary stipulation.

56
EXCEPTIONS
- If the payment is made without the knowledge of the debtor, or if has knowledge but it was made against his will.

BENEFICIAL REIMBURSEMENT
- The third person who payed the obligation can only obtain reimbursement if payment has been beneficial to the
debtor.

PERSONS FROM WHOM THE CREDITOR MUST ACCEPT PAYMENT

1. Debtor
2. Guarantor
3. Third person without interest but with stipulation on the contract.

EFFECTS OF PAYMENT BY A THIRD PERSON

1. If made w/o knowledge or against the will of the debtor – payor can recover only insofar as the payment is beneficial
to the latter. Recovery is only up to extent of debt at the time of payment.
2. If made with knowledge of the debtor then the third person shall have:
2.1 Rights of reimbursement and subrogation of amount that is not necessary to the debt.
2.2 Acquire all rights of the creditor.

Article 1237. Whoever pays on behalf of the debtor without the knowledge or against the will of the latter, cannot
compel the creditor to subrogate him in his rights, such as those arising from a mortgage, guaranty or penalty.

THIRD PARTY SUBROGATION RIGHTS

1. Whoever pays on behalf of the debtor with consent is entitled to subrogation.
2. If no consent, the 3rd person cannot compel the creditor to subrogate him in his rights.
3. Even if the creditor giver right Art. 1237 focus on the right of the debtor.

Article 1238. Payment made by a third person who does not intend to be reimbursed by the debtor is deemed to be a
donation, which requires the debtor’s consent/ but the payment is in any case valid as to the creditor who has
accepted it.

REASONS
1. No one is compelled to accept generosity of other.
2. If the person does not intend to be reimbursed, it is considered as donation and requires debtor’s consent to be valid.
3. If debtor accepts payment, it is valid.

ART 1239. In obligations to give, payment made by one who does not have the free disposal of the thing due and
capacity to alienate it shall not be valied, without prejudice to the provisions of article 1427 under the Title on
“Natural Obligations”.

FREE DISPOSAL OF THE THING DUE

- Thing to be delivered must not be subject to any claim of 3rd person.

CAPACITY TO ALIENATE
- Person is not incapacitated to enter into contracts.
57
DIFFERENCE OF SUBROGATION AND REIMBURSEMENT

NOTES
1. Payments that do not have free disposal and capacity is not valid.
2. Thing paid can be recovered.
3. Creditor cannot compel to accept payment where there is no capacity to make it.
4. Once the thing is consumble, he cannot recover the same because it has been consumed.
5. Minor has no power to alienate a contract.

Article 1240. Payment shall be made to the person in whose favor the obligation has been constituted, or his
successor in interest, or any person authorized to receive it.

PERSONS FROM WHOM THE PAYMENT SHALL BE MADE

1. Creditor
2. Successor
3. Person authorized to receive it

AUTHORIZED BY CREDITOR AND LAW

1. If a person is subrogated, payment should be made to him.
2. Payment in good faith to any person is valid although person may not be authorized to receive the payment.

Article 1241. Payment to a person who is incapacitated to administer his property shall be valid if he has kept the
thing delivered, or insofar as the payment has been beneficial to him. Payment made to a third person shall also be
valid insofar as it has redounded to the benefit of the creditor. Such benefit to the creditor need not be proved in the
following cases:

1. If after the payment, the third person acquires the creditor's rights;
2. If the creditor ratifies the payment to the third person;
3. If by the creditor's conduct, the debtor has been led to believe that the third person had authority to receive the
payment. (1163a)

EFFECTS OF PAYMENT TO INCAPACITATED PERSON

1. Invalid unless the thing is kept or benefited by the payment.
2. Pay to the guardian.
3. Absence of benefit can result on paying again.

58
EFFECTS OF PAYMENT TO THIRD PERSON
1. Invalid except if it has redounded to the benefit of creditor.
2. There must be proof of benefit, in absence it can be error.

This article applies to payments made by the debtor with the intention to extinguish his obligation.

WHEN BENEFITS TO CREDITOR NEED NOT TO BE PROVED BY DEBTOR

1. Subrogation in creditor’s rights.
2. Estoppel on the part of creditor.
3. Ratification by creditor.

Article 1242. Payment made in good faith to any person in possession of the credit shall release the debtor. (1164)

This law is intended to protect the debtor from being required to double the payment to creditor.

NOTES
1. Valid payment of third person.
2. Honest that he is making a valid payment and payee is the owner of the credit.
3. Possession of instrument does not entitle the holder to payment or release the debtor.

Article 1243. Payment made to the creditor by the debtor after the latter has been judicially ordered to retain the
debt shall not be valid. (1165)

PAYMENT TO CREDITOR NOT VALID WHEN

1. Payment by debtor – stranger shall not be valid if plaintiff wins the case, considered as bad faith.
2. Debtor who is creditor of another, the court may retain the debt until the right of plaintiff.
“Only applicable in ‘debts’ or ‘credits’ not in property.

Article 1244. The debtor of a thing cannot compel the creditor to receive a different one, although the latter may be
of the same value as, or more valuable than that which is due. In obligations to do or not to do, an act or forbearance
cannot be substituted by another act or forbearance against the obligee's will. (1166a)

The obligor is bound to perform the very prestation due and that must be complied with.

NOTES
1. Refers to real obligation to deliver a specific thing cannot be offered against the will of creditor or debtor.
2. Refers to personal obligations, cannot be substituted against the creditor’s will.

GENERAL RULE
- Creditors shall be paid only what has been stipulated upon. The contract shall be followed and valid.

Personal positive or negative obligations is an act that cannot be substituted by another act unless there is a creditor’s
consent. The consent shall constitute a waiver of right.

59
Article 1245. Dation in payment, whereby property is alienated to the creditor in satisfaction of a debt in money, shall
be governed by the law of sales. (n)

SPECIAL FORM OF PAYMENTS

1. Dacion en pago / Dation in payment (Adjudication)

- Special form of payment.
- A conveyance of ownership of a thing as an accepted equivalent.
- Not an ordinary way of extinguishment of obligation

2. Application of payment
- Not special form of payment.

3. Payment by cession

4. Tender of payment and consignation

- Law of sales governs because dation is considered a specie of sale, where debt becomes price of thing alienated.

What is used as payment is not MONEY but PROPERTY.

There is dation in payment when property is alienated to the creditor in satisfication of his debt.

Article 1246. When the obligation consists in the delivery of an indeterminate or generic thing, whose quality and
circumstances have not been stated, the creditor cannot demand a thing of superior quality. Neither can the debtor
deliver a thing of inferior quality. The purpose of the obligation and other circumstances shall be taken into
consideration. (1167a)

This pertains to quality of the thing to be delivered.

NOTES
1. It is waived to creditor, once accepting inferior quality or by debtor delivering superior quality.
2. Focus on the right value of amount delivered according to intention and payment.

Article 1247. Unless it is otherwise stipulated, the extrajudicial expenses required by the payment shall be for the
account of the debtor. With regard to judicial costs, the Rules of Court shall govern. (1168a)

This article does not apply to expenses incurred by the creditor in going to the debtor’s domicile to collect (i.e.,
payment of fare or gas allowance of the creditor).

NOTES
1. Extrajudicial expenses shall be accounted to the debtor.
2. Obligation is extinguished when payment is made so debtor is the primary beneficial.
3. If there is stipulation, it must be followed.
4. Does not apply to expenses by the creditor.

60
JUDICIAL COST
- Expenses incurred incase a party is compelled to file a case in court in order to enforce the obligation.
- Losing party generally pays judicial cost (pays the cost of suit).
- Statutory amounts allowed in expense incurred in the action.
- Cost of action is to be paid by losing party.

Article 1248. Unless there is an express stipulation to that effect, the creditor cannot be compelled partially to receive
the prestations in which the obligation consists. Neither may the debtor be required to make partial payments.
However, when the debt is in part liquidated and in part unliquidated, the creditor may demand and the debtor may
effect the payment of the former without waiting for the liquidation of the latter. (1169a)

NOTES
1. This provision only contemplates one creditor and debtor.
2. There should be a complete performance of prestation for the obligation to be extinguished.
3. Creditor can accept partial performance but cannot be compelled.
4. Debtor is required to comply but not required to make partial fulfillment if he does not wish.

PARTIAL PERFORMANCE IS ALLOWED WHEN

1. There is expressed stipulation.
2. Debt is partly liquidated and partly unliquidated.
3. Prestation of the obligation have different terms of conditions which affect some of them, prestations cannot be
executed simultaneously but should be complete.

If the debt is in part liquidated and in part unliquidated, the creditor may demand and the debtor may effect the
payment of the former w/o waiting for the liquidation of the latter.

Article 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not possible to
deliver such currency, then in the currency which is legal tender in the Philippines. The delivery of promissory notes
payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when
they have been cashed, or when through the fault of the creditor they have been impaired. In the meantime, the
action derived from the original obligation shall be held in the abeyance. (1170)

This provides for the kind of currency which is to be used in terms of payment.

LEGAL TENDER
- Means such currency which in a given jurisdiction can be used for the payment of debts, public and private.
- Which cannot be refused by the creditor
- Currency offered by debtor in right amount, creditor must accept it.
- Philippine Peso for Philippines.

61
PAYMENT BY MEANS OF INSTRUMENT OF CREDIT

1. Negotiable Instruments
- Checks, promissory notes payable to order or bill of exchange are not considered as legal tenders.
- They may be refused by the creditor.

NOTES

1. Right of creditor to refuse or accept

- Promissory notes, checks, bills of exchange are not legal tender, so creditor should not be compellede to accept it.

2. Effect on obligation
- Mercantile documents does not extinguish the obligation, unless: they are cashed; impaired by creditors.

Article 1250. In case an extraordinary inflation or deflation of the currency stipulated should supervene, the value of
the currency at the time of the establishment of the obligation shall be the basis of payment, unless there is an
agreement to the contrary.

The basis of payment should be based on purchasing value at that time, subject to agreement by parties.

INFLATION
- Sudden increase of money w/o increase in business transactions.
- Causes a drop of level of money and rise of general price level.

DEFLATION
- Reduction of money available, decline general price level.

DIFFERENCE OF RESIDENCE AND DOMICILE

Article 1251. Payment shall be made in the place designated in the obligation. There being no express stipulation and
if the undertaking is to deliver a determinate thing, the payment shall be made wherever the thing might be at the
moment the obligation was constituted. In any other case the place of payment shall be the domicile of the debtor.

OBLIGATION SHALL BE PAID ON

1. Stipulated price.
2. In delivery of determinate thing the place is where obligation was constituted.
3. Delivery of generic thing domicile of debtor or place of debtor.
62
SUBSECTION 1 — APPLICATION OF PAYMENTS

Article 1252. He who has various debts of the same kind in favor of one and the same creditor, may declare at the
time of making the payment, to which of them the same must be applied. Unless the parties so stipulate, or when the
application of payment is made by the party for whose benefit the term has been constituted, application shall not be
made as to debts which are not yet due. If the debtor accepts from the creditor a receipt in which an application of
the payment is made, the former cannot complain of the same, unless there is a cause for invalidating the contract.

APPLICATION OF PAYMENTS
- Means the designation of the debt to which should be applied the payment made by a debtor who has various debt
of the same kind in favor of one and the same creditor.

REQUISITES OF APPLICATION OF PAYMENTS

1. 1 debtor and 1 creditor only.
2. 2 or more debts of the same kind.
3. All debts must be due.
4. Amount paid by the debtor must not be sufficient to cover the total amount of all the debts.
5. Debts must be of the same kind.

GENERAL RULE
- Application of payments as to debts not yet due cannot be made.
- Exceptions:
1. There is a stipulation that the debtor may so apply
2. It is made by the debtor or creditor, as the case may be, for whose benefit the period has been constituted.

RULES ON APPLICATION OF PAYMENT

1. Debtor must indicate at the time of making payment, which particular debt is being paid.
Note: If the debtor applied the payment to a debt, he cannot later claim that is should be of another.
2. The right to make the application is irrevocable. (The choice once exercised is irrevocable)
Exceptions: If the creditor consents to the change.
3. The creditor may make the designation by specifying in the receipt which debt is being paid.
Question: Who between the debtor or creditor has the right to make application of payments?
Answer: The debtor. If he fails to exercise his right to apply his payment, the creditor may make the designation.
4. The debt which is the most onerous (most burdensome) to the debtor among those due shall be deemed to have
been satisfied.
Applied if: The creditor has not made the application.
5. The payment shall be applied to the debts proportionately.
Applied if: The debts are of the same nature and burden.

63
Article 1253. If the debt produces interest, payment of the principal shall not be deemed to have been made until the
interests have been covered.

GENERAL RULE
- The payment must be applied first to the interest before the principal.
- Exceptions:
1. Any agreement between parties or waived by the creditor.

The creditor can refuse an application of the debtor made contrary to the provision of this article.

Article 1254. When the payment cannot be applied in accordance with the preceding rules, or if application can not be
inferred from other circumstances, the debt which is most onerous to the debtor, among those due, shall be deemed
to have been satisfied. If the debts due are of the same nature and burden, the payment shall be applied to all of
them proportionately.

SUPREME COURT’S RULE IN DETERMINING WHICH DEBT IS MORE ONEROUS

1. Interest-bearing debt than non-interest bearing debt.
2. A debt as sole debtor than as a solidary debtor.
3. Debts secured by a mortgage or pledge than unsecured debts.
4. Debt with higher rate of interest in case of two interest-bearing debts.
5. Obligation with a penal clause than without a penal clause.

SUBSECTION 2 — PAYMENT BY CESSION

Article 1255. The debtor may cede or assign his property to his creditors in payment of his debts. This cession, unless
there is stipulation to the contrary, shall only release the debtor from responsibility for the net proceeds of the thing
assigned. The agreements which, on the effect of the cession, are made between the debtor and his creditors shall be
governed by special laws.

PAYMENT BY CESSION (Partial extinguishment of the obligation)

- Assignment or abandonment of all the properties of the debtor for the benefit of his creditors in order that the latter
may sell the same and apply the proceeds thereof to the satisfaction of their credits.

REQUISITES (Memorize)
1. Two or more creditors.
2. The debtor must be partially insolvent.
3. The assignment must inlove ALL the properties of the debtor.
4. The cession must be accepted by the creditors.

GENERAL RULE
- The assignment does not make the creditors the owners of the property of the debtor and the debtor is released
from his obligation only up to the net proceeds of the sale of the property assigned.
- There is no transfer of ownership to the creditors—what right acquired by the creditors is the right to subject the
properties to a public auction.

64
 - Exception:
1. When there is a stipulation to the contrary.

Dation in payment and payment by cession are both substitute forms of payment or performance.

DISTINCTION BETWEEN DATION IN PAYMENT AND PAYMENT BY CESSION

SUBSECTION 3 — TENDER OF PAYMENT AND CONSIGNATION

Article 1256. If the creditor to whom tender of payment has been made refuses without just cause to accept it, the
debtor shall be released from responsibility by the consignation of the thing or sum due.

Consignation alone shall produce the same effect in the following cases:

1. When the creditor is absent or unknown, or does not appear at the place of payment;
2. When he is incapacitated to receive the payment at the time it is due;
3. When, without just cause, he refuses to give a receipt;
4. When two or more persons claim the same right to collect;
5. When the title of the obligation has been lost. (1176a)

TENDER OF PAYMENT
- Act on the part of the debtor of offering to the creditor the thing or amount of due.

The debtor must show that he has in his possession the thing or money to be delivered at the time of the offer.

65
CONSIGNATION
- Act of depositing the thing or amount due with a proper court when the creditor does not desire or cannot receive it,
after complying with the formalities required by law.
- Applicable when there is a debt or an obligation to pay.
- Always judicial.
- Requires prior tender of payment which is extrajudicial.

REQUISITES OF VALID CONSIGNATION (Memorize)

1. Existence of a valid debt which is due.
2. Tender of payment by the debtor which was refused without justifiable reason by the creditor to accept it.
3. Previous notice of consignation to persons interested in the fulfillment of the obligation (first notice).
4. Consignation of the thing or sum due.
5. Subsequent notice of consignation made to the interested parties (second notice).
Note: The debtor will be relieved from the payment of any interest from the date of tender of payment.

INSTANCES WHEN TENDER OF PAYMENT IS NOT REQUIRED

1. When the creditor is absent or unknown, or does not appear at the place of payment.
2. When the creditor is incapacitated to receive the payment at the time it is due.
3. When without just cause, the creditor to give a receipt.
4. When two or more persons claim the same right to collect.
5. When the title of obligation has been lost.

REQUISITES OF VALID TENDER OF PAYMENT

1. Tender of payment must comply with the rules on payment or the terms required by the contract in making such
tender.
2. It must be unconditional and for the whole amount due and in legal tender.
3. It must be actually made.

Article 1257. In order that the consignation of the thing due may release the obligor, it must first be announced to the
persons interested in the fulfillment of the obligation. The consignation shall be ineffectual if it is not made strictly in
consonance with the provisions which regulate payment.

GENERAL RULE
- In the absence of prior notice to the persons interested in the fulfillment of the obligation, the consignation of
payment is void.

PURPOSE OF PRIOR NOTICE

- To give creditor a chance to reflect on his previous refusal to accept payment.

Article 1258. Consignation shall be made by depositing the things due at the disposal of judicial authority, before
whom the tender of payment shall be proved, in a proper case, and the announcement of the consignation in other
cases. The consignation having been made, the interested parties shall also be notified thereof.

After the consignation has been made, interested parties must be notified thereof.

66
PURPOSE OF SECOND NOTICE
- To enable creditor to withdraw the thing or sum deposited in case he accepts the consignation.

Article 1259. The expenses of consignation, when properly made, shall be charged against the creditor.

This talks about the consignation expenses.

CHARGES

WHEN CONSIGNATION DEEMED PROPERLY MADE

If the debtor would like to settle his obligation and the creditor unjustifiably refuses to accept the payment, the
remedy of the debtor will be to consign the payment to the court so that it is also the way of extinguishing the
obligation.

Article 1260. Once the consignation has been duly made, the debtor may ask the judge to order the cancellation of
the obligation. Before the creditor has accepted the consignation, or before a judicial declaration that the
consignation has been properly made, the debtor may withdraw the thing or the sum deposited, allowing the
obligation to remain in force.

WHEN THE CONSIGNATION HAS BEEN MADE, THE DEBTOR CAN

1. Order cancellation of the obligation.
2. May withdraw the thing or sum deposited.
- Before the creditor has accepted the consignation.
- Before a judicial declaration that the consignation has been properly made.

67
Article 1261. If, the consignation having been made, the creditor should authorize the debtor to withdraw the same,
he shall lose every preference which he may have over the thing. The co-debtors, guarantors and sureties shall be
released.

DEBTOR’S WITHDRAWAL

WITH CREDITOR’S CONSENT, THIS IS THE EFFECT TO

SECTION 2 — LOSS OF THE THING DUE

Article 1262. An obligation which consists in the delivery of a determinate thing shall be extinguished if it should be
lost or destroyed without the fault of the debtor, and before he has incurred in delay. When by law or stipulation, the
obligor is liable even for fortuitous events, the loss of the thing does not extinguish the obligation, and he shall be
responsible for damages. The same rule applies when the nature of the obligation requires the assumption of risk.

A THING IS CONSIDERED LOST WHEN POD

1. Perishes.
2. Out of commerce.
3. Disappears in such way its existence is unknown.

GENERAL RULE
- Loss of determinate thing extinguishes the obligation.
- Exceptions:
1. Law provides.
2. Requires assumption of risk.
3. Stipulation of the contrary.
4. Debtor contributed to the loss.
5. Debtor incurred delay.

68
 6. Debtor promise to deliver the same thing to two or more persons.
7. Proceeds from criminal offense.
8. Obligation is generic.

Article 1263. In an obligation to deliver a generic thing, the loss or destruction of anything of the same kind does not
extinguish the obligation.

GENERAL RULE
- Loss of generic thing does not extinguish the obligation.

Article 1264. The courts shall determine whether, under the circumstances, the partial loss of the object of the
obligation is so important as to extinguish the obligation.

PARTIAL LOSS
- Only a portion of the thing is lost or destroyed or when suffered from depreciation or deterioration.
- Equivalent of difficulty of performance in obligations to do.
- Note: The court will decide whether the partial loss is such as to be equivalent to a complete or total loss.

EFFECTS OF PARTIAL LOSS

Article 1265. Whenever the thing is lost in the possession of the debtor, it shall be presumed that the loss was due to
his fault, unless there is proof to the contrary, and without prejudice to the provisions of article 1165. This
presumption does not apply in case of earthquake, flood, storm, or other natural calamity.

GENERAL RULE
- Whenever the thing is lost in the possession of the debtor, it shall be presumed that the loss was due to his fault.

69
Article 1266. The debtor in obligations to do shall also be released when the prestation becomes legally or physically
impossible without the fault of the obligor.

KINDS OF IMPOSSIBILITY

1. Legal Impossibility
- Can be performed physically but prohibited by law.

2. Physical Impossibility
- Physically incapacitated to perform obligation.

Article 1267. When the service 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.

EFFECT OF DIFFICULTY OF PERFORMANCE

- Rule: The court is authorized to release the obligor in whole or in part.
- Application: Real and personal obligations.

Article 1268. When the debt of a thing certain and determinate proceeds from a criminal offense, the debtor shall not
be exempted from the payment of its price, whatever may be the cause for the loss, unless the thing having been
offered by him to the person who should receive it, the latter refused without justification to accept it.

EFFECT OF FORTUITOUS EVENT WHERE OBLIGATIONS PROCEEDS FROM A CRIMINAL OFFENSE

- The obligation still exists except when the creditor refused to accept the thing offered to him.

Article 1269. The obligation having been extinguished by the loss of the thing, the creditor shall have all the rights of
action which the debtor may have against third persons by reason of the loss.

RIGHTS OF CREDITOR
1. Given the right to proceed against the third person responsible for loss.
- Note: no need of assignment by the debtor.
2. The rights fo the debtor are transferred to the creditor from the moment the obligation is extinguished due to the
third person’s fault.

SECTION 3 — CONDONATION OR REMISSION OF DEBT

Article 1270. Condonation or remission is essentially gratuitous, and requires the acceptance by the obligor. It may be
made expressly or impliedly. One and the other kind shall be subject to the rules which govern inofficious donations.
Express condonation shall, furthermore, comply with the forms of donation.

CONDONATION
- Is the gratuitous abandonment by the creditor of his right against the debtor.

70
REQUISITES OF CONDONATION
1. It must be gratuitous.
2. It must be accepted by the obligor.
3. The parties must have capacity.
4. Must not be inofficious.
5. If made expressly, it must comply with the forms of donations.

REMISSION
- the cancellation of a debt, charge, or penalty.

KINDS OF REMISSION

AS TO EXTENT
1. Complete - when it covers the entire obligation.
2. Partial - when it does not cover the entire obligation.

AS TO FORM
1. Express - when it is made either verbally or writing.
2. Implied - when it can only be inferred from conduct.

AS TO DATE OF EFFECTIVITY
1. Inter vivos - when it will take affect during the lifetime of the donor.
2. Mortis causa - when it will become effective upon the death of the donor.

INOFFICIOUS REMISSION
- Excess of donation
- A person cannot give more than which he can give by will.
- The inofficious shall be reduced by the court accordingly.

Article 1271. The delivery of a private document evidencing a credit, made voluntarily by the creditor to the debtor,
implies the renunciation of the action which the former had against the latter. If in order to nullify this waiver it
should be claimed to be inofficious, the debtor and his heirs may uphold it by proving that the delivery of the
document was made in virtue of payment of the debt.

Article 1272. Whenever the private document in which the debt appears is found in the possession of the debtor, it
shall be presumed that the creditor delivered it voluntarily, unless the contrary is proved.

FOR 1271 – 1272. TINAMAD SI SIR MAGTURO

71
NOTE: The presumption is applicable only to a private document.

Article 1273. The renunciation of the principal debt shall extinguish the accessory obligations; but the waiver of the
latter shall leave the former in force.

Article 1274. It is presumed that the accessory obligation of pledge has been remitted when the thing pledged, after
its delivery to the creditor, is found in the possession of the debtor, or of a third person who owns the thing.

GENERAL RULE
- If the thing pledged is later found in the hands of the debtor or the third person, only the accessory obligation of the
pledge is presumed remitted, not the obligation itself.

SECTION 4 — CONFUSION OR MERGER OF RIGHTS

Article 1275. The obligation is extinguished from the time the characters of creditor and debtor are merged in the
same person.

CONFUSION OR MERGER
- Meeting in one person of the qualities of creditor and debtor with respect to the same obligation.

REQUISITES
1. It must take place between the principal debtor and creditor.
2. It must be complete.

72
Article 1276. Merger which takes place in the person of the principal debtor or creditor benefits the guarantors.
Confusion which takes place in the person of any of the latter does not extinguish the obligation.

Article 1277. Confusion does not extinguish a joint obligation except as regards the share corresponding to the
creditor or debtor in whom the two characters concur.

FOR ARTICLE 1276 AND 1277.

SECTION 5 — COMPENSATION

Article 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of each
other.

COMPENSATION
- is a mode of extinguishing to the concurrent amount, the obligations of those persons who in their own
right are reciprocally debtors and creditors of each other.

KINDS OF COMPENSATION

73
DISTINCTION BETWEEN COMPENSATION AND CONFUSION

Article 1279. In order that compensation may be proper, it is necessary:

1. That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the
other;
2. That 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. That the two debts be due;
4. That 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.

REQUISITES OF LEGAL COMPENSATION (Memorize, always have been the topic of exams)
1. The parties are principal debtors and principal creditors of each other.
2. Both debts consists in a sum of money, or of consumable things of the same kind and quality.
3. The two debts are due and demandable.
4. The two debts are liquidated.
5. No retention or controversy commenced by a third person.

Article 1280. Notwithstanding the provisions of the preceding article, the guarantor may set up compensation as
regards what the creditor may owe the principal debtor.

This is the exception to article 1279.

NOTE
- The guarantor may set up compensation as regards to what the creditor may owe the principal debtor.
- Reason: Third person is given the right to set up compensation because extinguishment of principal obligation as a
consequence of compensation carries with it the accessory obligations.

74
Article 1281. Compensation may be total or partial. When the two debts are of the same amount, there is a total
compensation.

TOTAL COMPENSATION
- Results when there are two debts of the same amount.

If amounts are different, compensation is total as regards to the smaller debt, and partial only with respect to the
larger debt.

Article 1282. The parties may agree upon the compensation of debts which are not yet due.

The parties may agree upon the compensation of debts which are not yet due.

VOLUNTARY OR CONVENTIONAL COMPENSATION

- Includes any compensation which takes place by agreement and has no special requisites.
- It is sufficient that its contract is valid.

Article 1283. If one of the parties to a suit over an obligation has a claim for damages against the other, the former
may set it off by proving his right to said damages and the amount thereof.

JUDICIAL COMPENSATION
- A party may set off his claim against his obligation to the other by proving his right to damages and the amount
thereof.

Article 1284. When one or both debts are rescissible or voidable, they may be compensated against each other before
they are judicially rescinded or avoided.

RESCISSIBLE AND VOIDABLE CONTRACTS

- Are valid until they are judicially rescinded or avoided.
- Prior to rescission, debts may be compensated.

Article 1285. The debtor who has consented to the assignment of rights made by a creditor in favor of a third person,
cannot set up against the assignee the compensation which would pertain to him against the assignor, unless the
assignor was notified by the debtor at the time he gave his consent, that he reserved his right to the compensation. If
the creditor communicated the cession to him but the debtor did not consent thereto, the latter may set up the
compensation of debts previous to the cession, but not of subsequent ones. If the assignment is made without the
knowledge of the debtor, he may set up the compensation of all credits prior to the same and also later ones until he
had knowledge of the assignment.

ME
MO
RI
ZE

75
Article 1286. Compensation takes place by operation of law, even though the debts may be payable at different
places, but there shall be an indemnity for expenses of exchange or transportation to the place of payment.

Applies to legal compensation.

INDEMNITY
- Refers to expenses of monetary exchange and expenses of transportation which once liquidated also become
compensable; to be paid by the person who raises the defense of compensation.

Article 1287. Compensation shall not be proper when one of the debts arises from a depositum or from the
obligations of a depositary or of a bailee in commodatum. Neither can compensation be set up against a creditor who
has a claim for support due by gratuitous title, without prejudice to the provisions of paragraph 2 of article 301.

Article 1288. Neither shall there be compensation if one of the debts consists in civil liability arising from a penal
offense.

FOR ARTICLE 1287 AND 1288.

Article 1289. If a person should have against him several debts which are susceptible of compensation, the rules on
the application of payments shall apply to the order of the compensation.

Rules of application of payments apply to order of the compensation.

Debtor with various debts susceptible to compensation must inform the creditor which shall be the object of
compensation.

If he fails, compensation shall be applied to the most onerous.

76
Article 1290. When all the requisites mentioned in article 1279 are present, compensation takes effect by operation of
law, and extinguishes both debts to the concurrent amount, even though the creditors and debtors are not aware of
the compensation.

Consent of the parties are not required in legal compensation.

Compensation takes place automatically by mere operation of law.

Full legal capacity of parties are not required.

SECTION 6 — NOVATION

Article 1291. Obligations may be modified by:

1. Changing their object or principal conditions;

2. Substituting the person of the debtor;
3. Subrogating a third person in the rights of the creditor.

NOVATION
- Extinguishment or modification of an old obligation to a new one.

Legal compensation and Novation are the most important provisions in Extinguishment of Obligations, so remember
these concepts as this has always been the subject of exams.

KINDS OF NOVATION ACCORDING

TO ORIGIN
1. Legal – takes place by operation of law.
2. Conventional – takes place by agreement of parties.

TO HOW IT IS CONSTITUTED
1. Express – it is so declared in unequivocal terms.
2. Implied – when old and new obligations are essentialy incompatible with each other.

TO EXTENT OR EFFECT
1. Total/Extinctive – when the old obligation is completely extinguished.
2. Partial/Modificatory – when the old obligation is merely modified, the change is merely incidental to the main
obligation.

TO SUBJECT
1. Real/Objective – when the object or principal conditions of the obligation are changed.
2. Personal/Subjective – when the person of the debtor is substituted or when a third person is subrogated in the rights
of the creditor.
3. Mixed – when the object or principal conditions of obligation and the debtor or creditor are changed.

77
Article 1292. In order that an obligation may be extinguished by another which substitute the same, it is imperative
that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible
with each other.

REQUISITES OF NOVATION (Memorize)

1. Previous valid obligation.
2. Agreement to modify or extinguish the obligation.
3. Extinguishment of old obligation.
4. Validity of new obligation.

Article 1293. Novation which consists in substituting a new debtor in the place of the original one, may be made even
without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment by the
new debtor gives him the rights mentioned in articles 1236 and 1237.

REMEMBER THIS DIAGRAM

Article 1294. If the substitution is without the knowledge or against the will of the debtor, the new debtor's
insolvency or non-fulfillment of the obligations shall not give rise to any liability on the part of the original debtor.

Article 1295. The insolvency of the new debtor, who has been proposed by the original debtor and accepted by the
creditor, shall not revive the action of the latter against the original obligor, except when said insolvency was already
existing and of public knowledge, or known to the debtor, when the delegated his debt.

FOR ARTICLE 1294 AND 1295. (Take note of these distinctions)

78
Article 1296. When the principal obligation is extinguished in consequence of a novation, accessory obligations may
subsist only insofar as they may benefit third persons who did not give their consent.

GENERAL RULE
- Extinguishment of principal obligation carries with it the accessory obligations.
- Exception: If the accessory obligation was created in favor of third person who did not give his consent to the
novation.

Article 1297. If the new obligation is void, the original one shall subsist, unless the parties intended that the former
relation should be extinguished in any event.

GENERAL RULE
- There is no novation if the new obligation is void and the original one shall subsist.
- Exception: If the parties intended the extinguishment of the old obligation in any event.

Article 1298. The novation is void if the original obligation was void, except when annulment may be claimed only by
the debtor or when ratification validates acts which are voidable.

VOID ORIGINAL OBLIGATION = VOID NOVATION

VOIDABLE ORIGINAL OBLIGATION = VALID NOVATION

Article 1299. If the original obligation was subject to a suspensive or resolutory condition, the new obligation shall be
under the same condition, unless it is otherwise stipulated.

IN NOVATION, UNLESS OTHERWISE STIPULATED, IF THE ORIGINAL OBLIGATION IS

Article 1300. Subrogation of a third person in the rights of the creditor is either legal or conventional. The former is
not presumed, except in cases expressly mentioned in this Code; the latter must be clearly established in order that it
may take effect.

SUBROGATION
- Subrogee (new creditor) subsitutes the subrogor (old creditor) in which he may use all means which the creditor
could employ to enforce payment from the debtor.

KINDS OF SUBROGATION
1. Conventional – by express agreement of the contracting parties and the third person.
2. Legal – without the agreement but by operation of law, not presumed.
79
Article 1301. Conventional subrogation of a third person requires the consent of the original parties and of the third
person.

ASSIGNMENT OF CREDIT
- Process of transferring the right of assignor (old creditor) to the assignee (new creditor) to proceeds of debt without
the consent of debtor.
- May be done gratuitously or onerously which has an effect to that of sale.

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

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

This article talks about the causes of legal subrogation. Read the three reasons.

Article 1303. Subrogation transfers to the persons subrogated the credit with all the rights thereto appertaining,
either against the debtor or against third person, be they guarantors or possessors of mortgages, subject to
stipulation in a conventional subrogation.

The effect of legal subrogation is to transfer to the new creditor the credit and all the rights of the creditor either
against the debtor or against the third persons, be they guarantors or mortgagors.

The effect of legal subrogation may not be modified by agreement.

Article 1304. A creditor, to whom partial payment has been made, may exercise his right for the remainder, and he
shall be preferred to the person who has been subrogated in his place in virtue of the partial payment of the same
credit.

PARTIAL SUBROGATION
- The old creditor remains to be a creditor only up to the extent of the balance of the debt.

80
TITLE 2 – CONTRACTS

CHAPTER 1 – GENERAL PROVISIONS

Article 1305. A contract is a meeting of minds between two persons whereby one binds himself, with
respect to the other, to give something or to render some service. (1254a)

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

CLASSIFICATION OF CONTRACT

1. According to name or designation:

1.1 Nominate – specific name or designation in law.
1.2 Innominate – no specific name or designation in law.

2. According to perfection:
2.1 Consensual – perfected by mere consent.
2.2 Real – perfected by delivery.
2.2.1 – PDCM or Pledge (sangla), Depositum, Commodatum and Mutuum.
2.3 Formal – perfected by conformity to essential formalities.
2.3.1 – Contract of donations, public instrument.

81
3. According to cause:
3.1 Onerous – with valuable consideration, reciprocal obligation.
3.2 Remuneratory – service or benefit which is remunated.
3.3 Gratuitous – founded on liberality. (contract of donations)

4. According to form:
4.1 Informal – may be entered into w/e form provided all the essential requisites for validity are present.
4.2 Formal – required by law for its efficacy to be in a certain specified form.

5. According to validity:
5.1 Valid – meet all legal requirements.
5.2 Rescissible – valid but due to economic injury, contract may be rescinded.
5.3 Voidable – valid until annulled unless are ratified.
5.4 Unenforceable – cannot be sued unless ratified.
5.5 Void – absolute null and void.

6. According to parties obliged:

6.1 Unilateral – only one of the parties has an obligation.
6.2 Bilateral – both parties render a reciprocal obligation.

7. According to risk:
7.1 Commutative – one party is considered equivalent to other.
7.2 Aleatory – depends on uncertain event or contingency both or loss.

8. According to status:
8.1 Executory – not yet completely performed.
8.2 Executed – fully performed.

9. According to dependence on other contracts:

9.1 Preparatory – entered into as means.
9.2 Accessory – depend upon another contract it secures.
9.3 Principal – does not depend for its existence and validity.

10. According to parts:

10.1 Indivisible – each part is dependent upon the parts for satisfactory performance.
10.2 Divisible – one part may be satisfactory performed independently.

The kind of contract is not determined by its name but by its nature or character determined by law (the
intention of contracting parties).

82
Article 1306. 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. (1255a)

VALID CONTRACTS
- meet all legal requirements and limitations for the type of agreement involved.

CONTRACT MUST NOT BE CONTRARY TO

1. Law
2. Morals
3. Good customs
4. Public order
5. Public policy

FREEDOM OF CONTRACT
- both a constitutional and statutory right.
- an individual does not have an absolute right to enter into any kind of contract.

Article 1307. Innominate contracts shall be regulated by the stipulations of the parties, by the provisions of
Titles I and II of this Book, by the rules governing the most analogous nominate contracts, and by the
customs of the place. (n)

KINDS OF INNOMINATE CONTRACTS

Do ut des is now not an innominate contracts, it is now known as “Barter or Exchange”.

Article 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the
will of one of them. (1256a)

Without the equality between the parties, it cannot be said that the contract has the force of law.

Article 1309. The determination of the performance may be left to a third person, whose decision shall not
be binding until it has been made known to both contracting parties. (n)

83
Article 1310. The determination shall not be obligatory if it is evidently inequitable. In such case, the courts
shall decide what is equitable under the circumstances. (n)

Article 1311. 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.

If a contract should contain some stipulation in favor of a third person, he may demand its fulfillment
provided he communicated his acceptance to the obligor before its revocation. A mere incidental benefit or
interest of a person is not sufficient. The contracting parties must have clearly and deliberately conferred a
favor upon a third person. (1257a)

GENERAL RULE
- party’s rights and obligations derived from a contract are transmissible to the successors.
- exceptions:
- if effective only between the parties and not transmissible.
- by their nature (personal qualifications), stipulation (freedom of contracts), provision of law.

GENERAL RULE
- a third person has no rights and obligations under a contract to which he is a stranger, he has no standing
to demand enforcement of contract or question its validity.
- exceptions:
- stipulation.
- creating real rights.
- entered into to defraud creditors.
- which have been violated at the inducement of a third person.

Stipulation pour autrui

- contract clearly and deliberately conferring a favour upon third person has rights to demand its fulfillment.

84
Article 1312. In contracts creating real rights, third persons who come into possession of the object of the
contract are bound thereby, subject to the provisions of the Mortgage Law and the Land Registration Laws.
(n)

Article 1313. Creditors are protected in cases of contracts intended to defraud them. (n)

Article 1314. Any third person who induces another to violate his contract shall be liable for damages to the
other contracting party. (n)

The inducer cannot be sued more than the debtor who acted in bad faith (they are solidary liable).

Article 1315. Contracts are perfected by mere consent, and from that moment the parties are bound not
only to the fulfillment of what has been expressly stipulated but also to all the consequences which,
according to their nature, may be in keeping with good faith, usage and law. (1258)

Article 1316. Real contracts, such as deposit, pledge and commodatum, are not perfected until the delivery
of the object of the obligation. (n)

STAGES IN LIFE OF A CONTRACT

1. Preparation – includes all steps taken by parties leading to perfection of the contract.

2. Perfection – parties have come to a definite agreement.

3. Consummation – parties have performed their respective obligations.

Article 1317. No one may contract in the name of another without being authorized by the latter, or unless
he has by law a right to represent him. A contract entered into in the name of another by one who has no
authority or legal representation, or who has acted beyond his powers, shall be unenforceable, unless it is
ratified, expressly or impliedly, by the person on whose behalf it has been executed, before it is revoked by
the other contracting party. (1259a)

UNAUTHORIZED CONTRACTS
- unenforceable.
- can be cured only by ratification (agreement to adopt an act performed by another)

A PERSON IS BOUND BY THE CONTRACT OF ANOTHER WHEN

1. Person entering into the contract must be duly authorized.
2. He must act within his power.

85
CHAPTER 2 – ESSENTIAL REQUISITES OF CONTRACT

Article 1318. There is no contract unless the following requisites concur:

(1) Consent of the contracting parties;

(2) Object certain which is the subject matter of the contract;

(3) Cause of the obligation which is established. (1261)

REQUISITES OF A CONTRACT
1. Consent
2. Object
3. Consideration

CLASSES OF ELEMENTS OF CONTRACT

1. Essential - no contract can validly exist regardless of the parties' intentions.
2. Natural - presumed to exist in certain contracts.
3. Accidental - particular stipulations, clauses, terms, or conditions established by the parties in their contract.

SECTION 1 – CONSENT

Article 1319. Consent is manifested by the meeting of the offer and the acceptance upon the thing and the
cause which are to constitute the contract. The offer must be certain and the acceptance absolute. A
qualified acceptance constitutes a counter-offer.

Acceptance made by letter or telegram does not bind the offerer except from the time it came to his
knowledge. The contract, in such a case, is presumed to have been entered into in the place where the offer
was made. (1262a)

CONSENT
- conformity or concurrence of wills and with respect to contracts, it is the agreement of the will of the
contracting party.

OFFER
- proposal made by one party to another.

ACCEPTANCE
- manifestation by the offeree of his assent to all the terms of offer.

COUNTER-OFFER
86
 - rejection of the original offer and an attempt by parties to enter into a contract on a different basis.

Offers made in jest, anger or when emotionally upset is not a valid offer.

Article 1320. An acceptance may be express or implied. (n)

FORMS OF ACCEPTANCE
1. Express – oral or written.
2. Implied – inferred from a conduct.

Article 1321. The person making the offer may fix the time, place, and manner of acceptance, all of which
must be complied with. (n)

Article 1322. An offer made through an agent is accepted from the time acceptance is communicated to
him. (n)

Article 1323. An offer becomes ineffective upon the death, civil interdiction, insanity, or insolvency of either
party before acceptance is conveyed. (n)

OFFER BECOMES INEFFECTIVE UPON

1. Death.
2. Insanity.
3. Civil Interdiction (accessory penalty imposed by court when a person is convicted of a crime w/in 12 years of
imprisonment).
4. Insolvency of either party.

OTHER GROUNDS WHICH RENDER OFFER INEFFECTIVE

1. Failure to comply with the condition to offer as a time, place and manner.
2. Expiration.
3. Destruction of the thing due.

87
Article 1324. When the offerer has allowed the offeree a certain period to accept, the offer may be
withdrawn at any time before acceptance by communicating such withdrawal, except when the option is
founded upon a consideration, as something paid or promised. (n)

OPTION
- priviledge given to the offeree to accept an offer w/in a certain period.

OPTION CONTRACT
- giving a person for a consideration a certain period w/in which to accept the offer of the offerer.

OPTION PERIOD
- the period given w/in which the offeree must accept the offer.

OPTION MONEY
- money paid or promised to be paid in consideration for the option.

GENERAL RULE
- the offer may be withdrawn as a matter of right at any time before acceptance.

Article 1325. Unless it appears otherwise, business advertisements of things for sale are not definite offers,
but mere invitations to make an offer. (n)

BUSINESS ADVERTISEMENTS
- not definite offers.
- an invitation to the reader to make an offer.

Article 1326. Advertisements for bidders are simply invitations to make proposals, and the advertiser is not
bound to accept the highest or lowest bidder, unless the contrary appears. (n)

BIDDERS
- advertisements for bidders are not definite offers.
- one making the offer in which the advertiser is free to accept or reject.

GENERAL RULE
- the advertiser is not bound to accept the highest bidder or lowest bidder unless the contrary appears.

88
Article 1327. The following cannot give consent to a contract:

(1) Unemancipated minors;

(2) Insane or demented persons, and deaf-mutes who do not know how to write. (1263a)

Capacity to give consent is presumed.

PERSONS WHO CANNOT GIVE CONSENT

1. Unemancipated minors.
2. Insane or demented persons.
3. Deaf-mutes who do not know how to read and write (if able, they can give).

REASON FOR DISQUALIFICATION

- these persons may easily be the victims of fraud as they are not capable of understanding or knowing the
import of their actions.

Article 1328. Contracts entered into during a lucid interval are valid. Contracts agreed to in a state of
drunkenness or during a hypnotic spell are voidable. (n)

LUCID INTERVAL
- temporary period of insanity.

DRUNKENNESS; HYPNOTIC SPELL

- impair the capacity of persons to give intelligent consent.

Article 1329. The incapacity declared in article 1327 is subject to the modifications determined by law, and
is understood to be without prejudice to special disqualifications established in the laws. (1264)

MODIFICATIONS DECLARED FOR INCAPACITY

1. Necessaries – when sold and delivered to a person with no capacity to act, he must still pay a reasonable
price.
2. Life, health and accident insurance – beneficiary must be the minor’s estate.
3. If entered into a guardian or legal representative.
4. If other party believe the legal capacity of a minor, who misrepresented age.
5. Minor voluntarily pays a sum of money or delivers fungible thing and obligee has spent and consumed it in
good faith.

89
Article 1330. A contract where consent is given through mistake, violence, intimidation, undue influence, or
fraud is voidable. (1265a)

CHARACTERISTICS OF CONSENT
1. Intelligent – there is capacity to act.
2. Free and voluntary – no violence and intimidation.
3. Conscious and spontaneous – no mistake, undue influence or fraud.

VICES OF CONSENT (FIVUM)

1. Fraud or deceit
2. Intimidation or threat or duress
3. Violence or force
4. Undue influence
5. Mistake or error

Article 1331. In order that mistake may invalidate consent, it should refer to the substance of the thing
which is the object of the contract, or to those conditions which have principally moved one or both parties
to enter into the contract.

Mistake as to the identity or qualifications of one of the parties will vitiate consent only when such identity
or qualifications have been the principal cause of the contract.

A simple mistake of account shall give rise to its correction. (1266a)

MISTAKE
- false notion of a thing or a fact material to the contrary.

MISTAKE OF FACT
- arise from ignorance or lack of knowledge.

MISTAKE OF LAW
- substantial mistake of fact.

KINDS OF MISTAKE

90
Article 1332. When one of the parties is unable to read, or if the contract is in a language not understood by
him, and mistake or fraud is alleged, the person enforcing the contract must show that the terms thereof
have been fully explained to the former. (n)

The burden to prove that the contract is well explained to the person, who is unable to read and write or
cannot understand the language used, is the person enforcing the contract.

Article 1333. There is no mistake if the party alleging it knew the doubt, contingency or risk affecting the
object of the contract. (n)

If the person is aware of the risk affecting the contract and still accept it, it is presumed that he is willing to
take chances or risk. There will be NO MISTAKE.

Article 1334. Mutual error as to the legal effect of an agreement when the real purpose of the parties is
frustrated, may vitiate consent. (n)

Article 1335. There is violence when in order to wrest consent, serious or irresistible force is employed.

There is intimidation when one of the contracting parties is compelled by a reasonable and well-grounded
fear of an imminent and grave evil upon his person or property, or upon the person or property of his
spouse, descendants or ascendants, to give his consent.

To determine the degree of intimidation, the age, sex and condition of the person shall be borne in mind.

A threat to enforce one's claim through competent authority, if the claim is just or legal, does not vitiate
consent. (1267a)

VIOLENCE
- requires the employment of physical force.

REQUISITES OF VIOLENCE, INTIMIDATION OR THREAT

91
Article 1336. Violence or intimidation shall annul the obligation, although it may have been employed by a
third person who did not take part in the contract. (1268)

Violence or intimidation may be employed by a third person.

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

UNDUE INFLUENCE
- influence of a kind that so overpowers the mind of a party as to prevent him from acting understandingly
and voluntarily to do what he would have done if he had been left to exercise freely his own judgment.

CIRCUMSTANCES TO BE CONSIDERED
1. Confidential, family, spiritual and other relations b/w parties.
2. Mental weakness.
3. Ignorance.
4. Financial distress.

Article 1338. There is fraud when, through insidious words or machinations of one of the contracting
parties, the other is induced to enter into a contract which, without them, he would not have agreed to.
(1269)

CAUSAL FRAUD
- committed by one party before or at the time of the celebration of the contract to secure the consent of
the other.

REQUISITES OF CAUSAL FRAUD (MEMORIZE)

1. There must be misinterpretation or concealment of a material fact with knowledge of its falsity.
2. Must be serious.
3. Must have been employed by only one of the contracting parties.
4. Must be made in bad faith.
5. Must have induced the consent of other contracting party.
6. Must be alleged and proved by clear and convincing evidence.

92
Article 1339. Failure to disclose facts, when there is a duty to reveal them, as when the parties are bound by
confidential relations, constitutes fraud. (n)

FRAUD BY CONCEALMENT
- Failure to disclose facts when there is a duty to reveal them.

Article 1340. The usual exaggerations in trade, when the other party had an opportunity to know the facts,
are not in themselves fraudulent. (n)

Article 1341. A mere expression of an opinion does not signify fraud, unless made by an expert and the
other party has relied on the former's special knowledge. (n)

GENERAL RULE
- a mere expression of an opinion does not signify fraud.
- requisites for exception:
- must be made my experts.
- the other party has relied on the expert’s opinion.
- the opinion turned out to be false.

Article 1342. Misrepresentation by a third person does not vitiate consent, unless such misrepresentation
has created substantial mistake and the same is mutual. (n)

FRAUD BY A THIRD PERSON

- presumption is that both contracting parties are acting in good faith.

93
Article 1343. Misrepresentation made in good faith is not fraudulent but may constitute error. (n)

FRAUD MADE IN GOOD FAITH

- if the misinterpretation is not intentional but made in good faith, it is considered a mere mistake or error.
- fraud is definitely more serious than mistake; hence, the party guilty of fraud is subject to greather liability.
- effect:
- voidable on ground of mistake.

Article 1344. In order that fraud may make a contract voidable, it should be serious and should not have
been employed by both contracting parties.
Incidental fraud only obliges the person employing it to pay damages. (1270)

TAKE NOTE OF THIS GRAPH

When fraud is made by both parties, neither may ask for annulment as the fraud of one neutralizes the
fraud of another. In such case, the contract is valid.

Article 1345. Simulation of a contract may be absolute or relative. The former takes place when the parties
do not intend to be bound at all; the latter, when the parties conceal their true agreement. (n)

Article 1346. An absolutely simulated or fictitious contract is void. A relative simulation, when it does not
prejudice a third person and is not intended for any purpose contrary to law, morals, good customs, public
order or public policy binds the parties to their real agreement. (n)

SIMULATION OF CONTRACT
- act of deliberately deceiving others by feigning or pretending by agreement, the appearance of a contract
which is either non-existent or concealed.

KINDS OF SIMULATION

94
SECTION 2 – OBJECT OF CONTRACTS

Article 1347. All things which are not outside the commerce of men, including future things, may be the
object of a contract. All rights which are not intransmissible may also be the object of contracts.

No contract may be entered into upon future inheritance except in cases expressly authorized by law.

All services which are not contrary to law, morals, good customs, public order or public policy may likewise
be the object of a contract. (1271a)

Article 1348. Impossible things or services cannot be the object of contracts. (1272)

OBJECT
- is the second essential element of a valid contract.
- may be things, rights or services.

REQUISITES OF THING AS OBJECT OF A CONTRACT

1. Within the commerce of men.
2. Not to be legally or physically impossible.
3. In existence of capable of coming into existence.
4. Either determinate or indeterminate.

GENERAL RULE
- all things, services or rights may be the object of a contract.
- exceptions:
- in transmissible rights by their nature, or by stipulation or of provision of law.
- things outside commerce of man.
- impossible things or services.
- future inheritance except in cases expressly authorized by law.
- object which are not possible of determination to their kind.

Article 1349. The object of every contract must be determinate as to its kind. The fact that the quantity is
not determinate shall not be an obstacle to the existence of the contract, provided it is possible to
determine the same, without the need of a new contract between the parties. (1273)

95
SECTION 3 – CAUSE OF CONTRACTS

Article 1350. In onerous contracts the cause is understood to be, for each contracting party, the prestation
or promise of a thing or service by the other; in remuneratory ones, the service or benefit which is
remunerated; and in contracts of pure beneficence, the mere liberality of the benefactor. (1274)

CAUSE (causa)
- essential or more proximate purpose which the contracting parties have in view at the time of entering the
contract.

Article 1351. The particular motives of the parties in entering into a contract are different from the cause
thereof. (n)

MOTIVE
- purely personal or private reason which a party has in entering a contract.

Article 1352. Contracts without cause, or with unlawful cause, produce no effect whatever. The cause is
unlawful if it is contrary to law, morals, good customs, public order or public policy. (1275a)

Article 1353. The statement of a false cause in contracts shall render them void, if it should not be proved
that they were founded upon another cause which is true and lawful. (1276)

REQUISITES OF CAUSE
1. It must exist at the time contract is entered.
2. It must be lawful.
3. It must be true or real.

Article 1354. Although the cause is not stated in the contract, it is presumed that it exists and is lawful,
unless the debtor proves the contrary. (1277)

Article 1355. Except in cases specified by law, lesion or inadequacy of cause shall not invalidate a contract,
unless there has been fraud, mistake or undue influence. (n)

PRESUMPTION IN CONTRACT AS TO CAUSE

1. Every contract is presumed to have a cause.
2. The cause is valid.

96
CHAPTER 3 – FORMS OF CONTRACT

Article 1356. Contracts shall be obligatory, in whatever form they may have been entered into, provided all
the essential requisites for their validity are present. However, when the law requires that a contract be in
some form in order that it may be valid or enforceable, or that a contract be proved in a certain way, that
requirement is absolute and indispensable. In such cases, the right of the parties stated in the following
article cannot be exercised. (1278a)

FORM OF CONTRACTS
- refers to the manner in which a contract is executed or manifested.

RULES REGARDING FORM OF CONTRACTS

- As a General Rule, contracts are binding and enforceable reciprocally by the contracting parties, w/e the
may be the form in which the contract has been entered into, provided all the three essential requisites for
their validity are present.
- exceptions:
- the law requires that a contract be in some form to be valid.
- the law requires that a contract be in some form to be enforceable or proved in a certain way.
- the law requires that a contract be in some form for the convenience of the parties or for the purpose of
affecting third persons.

LIST OF CONTRACTS REQUIRED TO BE EXECUTED IN A CERTAIN FORM FOR ITS VALIDITY

97
Article 1357. If the law requires a document or other special form, as in the acts and contracts enumerated
in the following article, the contracting parties may compel each other to observe that form, once the
contract has been perfected. This right may be exercised simultaneously with the action upon the contract.
(1279a)

The law may require a certain form for the convenience of the parties in order to make effective, as against
third persons.

The special form is not indispensible since they are allowed by law to compel the other to observe the proper
form and this right may be exercised simultaneously with the action to enforce the contract.

Article 1358. The following must appear in a public document:

(1) Acts and contracts which have for their object the creation, transmission, modification or
extinguishment of real rights over immovable property; sales of real property or of an interest therein are
governed by articles 1403, No. 2, and 1405;

(2) The cession, repudiation or renunciation of hereditary rights or of those of the co njugal partnership of
gains;

(3) The power to administer property, or any other power which has for its object an act appearing or which
should appear in a public document, or should prejudice a third person;

(4) The cession of actions or rights proceeding from an act appearing in a public document.

All other contracts where the amount involved exceeds five hundred pesos must appear in writing, even a
private one. But sales of goods, chattels or things in action are governed by articles, 1403, No. 2 and 1405.

MEMORIZE THESE REQUISITES.

CONTRACTS THAT MUST BE REGISTERED

1. Sale or transfer of large cattle.
2. Chattel mortgage.

98
CHAPTER 6 – RESCISSIBLE CONTRACTS

Article 1380. Contracts validly agreed upon may be rescinded in the cases established by law. (1290)

RESCISSIBLE CONTRACTS
- those validly agreed upon because all essential elements exist therefore legally effective but remedy of
rescission is granted in interest of equity.

RESCISSION
- remedy granted by law in order to secure reparation of damages, by means of restoration of things to their
same condition prior to the celebration of the said contract.

REQUISITES OF RESCISSION (MEMORIZE)

1. The contract must be validly agreed upon.
2. There must be lesion or pecuniary prejudice to one of the parties or to a third person.
3. The rescission must be based upon a case especially provided by law.
4. There must be no other legal remedy to obtain reparation for the damage.
5. The party asking for rescission must be able to return what he is obliged to restore by reason of contract.
6. The object of the contract must not legally be in the possession of third persons who acted in bad faith.
7. The period for filing the action for rescission must not have prescribed.

Article 1381. The following contracts are rescissible:

(1) Those which are entered into by guardians whenever the wards whom they represent suffer lesion by
more than one-fourth of the value of the things which are the object thereof;
(2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding
number;
(3) Those undertaken in fraud of creditors when the latter cannot in any other mann er collect the claims
due them;
(4) Those which refer to things under litigation if they have been entered into by the defendant without the
knowledge and approval of the litigants or of competent judicial authority;
(5) All other contracts specially declared by law to be subject to rescission. (1291a)

TYPES OF RESCISSIBLE CONTRACTS

99
REQUISITES OF RESCISSION OF CONTRACTS UNDERTAKEN IN FRAUD OF CREDITORS

OTHER INSTANCES WHERE CONTRACTS ARE RESCISSIBLE

1. Partition – when any of the co-heirs received things valued at least one-fourth than the share he is entitled.
2. If the lessor or lessee should not comply with their obligations.
3. Vendee may rescind when the real estate sold is less than or exceeds one-tenth of the agreed price.

Article 1382. Payments made in a state of insolvency for obligations to whose fulfillment the debtor could
not be compelled at the time they were effected, are also rescissible. (1292)

When a debtor is insolvent, it must be judicially declared.

Article 1383. The action for rescission is subsidiary; it cannot be instituted except when the party suffering
damage has no other legal means to obtain reparation for the same. (1294)

RESCISSION IS ONLY SUBSIDIARY – can be availed only when proved that there is no other legal means aside
from rescinding, even such contract is covered by Article 1381.

NOTE: If the damage is repaired, rescission cannot take place.

Article 1384. Rescission shall be only to the extent necessary to cover the damages caused. (n)

EXTENT, EFFECT AND REASON OF RESCISSION

100
Article 1385. Rescission creates the obligation to return the things which were the object of the contract,
together with their fruits, and the price with its interest; consequently, it can be carried out only when he
who demands rescission can return whatever he may be obliged to restore.

Neither shall rescission take place when the things which are the object of the contract are legally in the
possession of third persons who did not act in bad faith.

In this case, indemnity for damages may be demanded from the person causing the loss. (1295)

EFFECT OF RESCISSION
- there is no obligation to restore if nothing has been received. When the court declares a contract
rescinded, the parties must return to each other the object of the contract with its fruits and the price thereof
with legal interest.

WHEN RESCISSION NOT ALLOWED

1. If the party who demands rescission cannot return what he is obliged to.
2. If the party is legally in possession of a third person who acted in good faith.

Article 1386. Rescission referred to in Nos. 1 and 2 of article 1381 shall not take place with respect to
contracts approved by the courts. (1296a)

In contracts entered into in behalf of ward or absentee, rescission cannot take place when the court
approved its validity even if there is lesion or not – REASON: Law presumes that court acts in the interest of
the ward or absentee.

Article 1387. All contracts by virtue of which the debtor alienates property by gratuitous title are presumed
to have been entered into in fraud of creditors, when the donor did not reserve sufficient property to pay all
debts contracted before the donation.

Alienations by onerous title are also presumed fraudulent when made by persons against whom some
judgment has been rendered in any instance or some writ of attachment has been issued. The decision or
attachment need not refer to the property alienated, and need not have been obtained by the party seeking
the rescission.

In addition to these presumptions, the design to defraud creditors may be proved in any other manner
recognized by the law of evidence. (1297a)

ALIENATIONS PRESUMED IN FRAUD OF CREDITORS

1. Alienations by gratuitous title.
2. Alienations by onerous title.

101
CIRCUMSTANCES DENOMINATED AS BADGES OF FRAUD
1. The consideration of conveyance is fictitious or inadequate.
2. A transfer made by a debtor after suit has begun and is pending against him.
3. A sale upon credit by an insolvent debtor.
4. The transfer of all the property by a debtor when he is insolvent or greatly embarassed financially.
5. The transfer is made between father and son, when there are present some or any of the above
circumstances.
6. The failure of the vendee to take exclusive possession of all the property.
7. It was known to the vendee that the vendor had no property other than that sold.

Article 1388. Whoever acquires in bad faith the things alienated in fraud of creditors, shall indemnify the
latter for damages suffered by them on account of the alienation, whenever, due to any cause, it should be
impossible for him to return them. If there are two or more alienations, the first acquirer shall be liable first,
and so on successively. (1298a)

Article 1389. The action to claim rescission must be commenced within four years. For persons under
guardianship and for absentees, the period of four years shall not begin until the termination of the
former's incapacity, or until the domicile of the latter is known. (1299)

GENERAL RULE
- The action to claim rescission must be commenced within 4 years from the date the contract was entered
into.

EXCEPTIONS TO THE GENERAL RULE

PERSONS ENTITLED TO BRING ACTION

1. The injured party or the defrauded creditor.
2. His heirs, assigns or successors in interest.
3. The creditors of the above entitled to subrogation.

102
CHAPTER 7 – VOIDABLE CONTRACTS

Article 1390. The following contracts are voidable or annullable, even though there may have been no
damage to the contracting parties:

(1) Those where one of the parties is incapable of giving consent to a contract;
(2) Those where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud.

These contracts are binding, unless they are annulled by a proper action in court. They are susceptible of
ratification. (n)

VOIDABLE OR ANNULLABLE CONTRACTS

- valid contract but one of the parties is incapable of giving consent, or consent is vitiated by fraud,
intimidation, violence, undue influence or mistake. (FIVUM)

ANNULMENT
- remedy given by law for the declaration of the inefficacy of a contract based on a defect or vice of consent
in order to restore them to their original position as when the contract was executed.

Article 1391. The action for annulment shall be brought within four years.

This period shall begin:

In cases of intimidation, violence or undue influence, from the time the defect of the consent ceases.

In case of mistake or fraud, from the time of the discovery of the same.

And when the action refers to contracts entered into by minors or other incapacitated persons, from the
time the guardianship ceases. (1301a)

DIFFERENT TYPES OF VICES

103
Article 1392. Ratification extinguishes the action to annul a voidable contract. (1309a)

RATIFICATION
- one voluntarily adopts or approves some defective or unathorized act or contract w/o his approval or
consent, would not be binding him.
- cleanses the contract from all its defects from the moment it was constituted.

Article 1393. Ratification may be effected expressly or tacitly. It is understood that there is a tacit
ratification if, with knowledge of the reason which renders the contract voidable and such r eason having
ceased, the person who has a right to invoke it should execute an act which necessarily implies an intention
to waive his right. (1311a)

TWO KINDS OF RATIFICATION

1. Express – ratification is manifested in words or in writing.
2. Implied – may take in diverse forms.

REQUISITES OF IMPLIED RATIFICATION

1. There must be knowledge of the reason which renders the contract voidable.
2. Such reason must have ceased.
3. The injured party must have executed an act which implies waiver.

Expressed ratification has the same requisites except that it is effected expressly.

DIVERSE FORMS OF RATIFICATION

1. By silence or acquiesces.
2. By acts showing adoptation or approval of the contract.
3. By acceptance and retention of benefits flowing there from.

Article 1394. Ratification may be effected by the guardian of the incapacitated person. (n)

WHO MAY RATIFY A CONTRACT ENTERED INTO BY AN INCAPACITATED PERSON?

1. Guardian.
2. Injured party himself provided that he is already capacitated.

Article 1395. Ratification does not require the conformity of the contracting party who has no right to bring
the action for annulment. (1312)

The consent or conformity of the guilty party to ratification is not required, REASON: Ratification is
unilateral.

104
Article 1396. Ratification cleanses the contract from all its defects from the moment it was constituted.
(1313)

EFFECT OF RATIFICATION
1. Retroactive – it makes the contract valid from its inception subject to the prior rights of third persons.

Article 1397. The action for the annulment of contracts may be instituted by all who are thereby obliged
principally or subsidiarily. However, persons who are capable cannot allege the incapacity of those with
whom they contracted; nor can those who exerted intimidation, violence, or undue influence, or employed
fraud, or caused mistake base their action upon these flaws of the contract. (1302a)

REQUISITES TO BRING AN ACTION FOR ANNULLMENT

1. Plaintiff must have an interest in the contract.
2. Victim must assert the same.

A third person has no legal capacity to challenge the validity of the contract.

Also, the guilty party cannot ask for annulment, PRINCIPLE: He who comes to court must come with clean
hands.

Article 1398. An obligation having been annulled, the contracting parties shall restore to each other the
things which have been the subject matter of the contract, with their fruits, and the price with its interest,
except in cases provided by law. In obligations to render service, the value thereof shall be the basis for
damages. (1303a)

GENERAL RULE
- if the contract is annulled, the parties must restore to each other what they had received.

Article 1399. When the defect of the contract consists in the incapacity of one of the parties, the
incapacitated person is not obliged to make any restitution except insofar as he has been benefited by the
thing or price received by him. (1304)

EXCEPTION
- an incapacitated person is not obliged to restore what he had received unless he benefited. The other party
is still bound to return what he had received whether he has benefited or not.

105
Article 1400. Whenever the person obliged by the decree of annulment to return the thing can not do so
because it has been lost through his fault, he shall return the fruits received and the value of the thing at
the time of the loss, with interest from the same date. (1307a)

EFFECTS OF THE LOST OF THE THING

Article 1401. The action for annulment of contracts shall be extinguished when the thing which is the object
thereof is lost through the fraud or fault of the person who has a right to institute the proceedings.

If the right of action is based upon the incapacity of any one of the contracting parties, the loss of the thing
shall not be an obstacle to the success of the action, unless said loss took place through the fraud or fault of
the plaintiff. (1314a)

EXTINGUISHMENT OF ACTION FOR ANNULMENT

1. Thing is lost through the plaintiff’s fault or fraud.
2. Right of action is based upon the incapacity of one of the contracting parties.

Article 1402. As long as one of the contracting parties does not restore what in virtue of the decree of
annulment he is bound to return, the other cannot be compelled to comply with what is incu mbent upon
him. (1308)

106
CHAPTER 8 – UNENFORCEABLE CONTRACTS

Article 1403. The following contracts are unenforceable, unless they are ratified:

(1) Those entered into in the name of another person by one who has been given no authority or legal
representation, or who has acted beyond his powers;

(2) Those that do not comply with the Statute of Frauds as set forth in this number. In the following cases an
agreement hereafter made shall be unenforceable by action, unless the same, or some note or
memorandum, thereof, be in writing, and subscribed by the party charged, or by his agent; evidence,
therefore, of the agreement cannot be received without the writing, or a secondary evidence of its
contents:

(a) An agreement that by its terms is not to be performed within a year from the making thereof;

(b) A special promise to answer for the debt, default, or miscarriage of another;

(c) An agreement made in consideration of marriage, other than a mutual promise to marry;

(d) An agreement for the sale of goods, chattels or things in action, at a price not less than five hundred
pesos, unless the buyer accept and receive part of such goods and chattels, or the evidences, or some of
them, of such things in action or pay at the time some part of the purchase money; but when a sale is made
by auction and entry is made by the auctioneer in his sales book, at the time of the sale, of the amount and
kind of property sold, terms of sale, price, names of the purchasers and person on whose account the sale is
made, it is a sufficient memorandum;

(e) An agreement for the leasing for a longer period than one year, or for the sale of real property or of an
interest therein;

(f) A representation as to the credit of a third person.

(3) Those where both parties are incapable of giving consent to a contract.

MEMORIZE THESE PARAGRAPHS.

UNENFORCEABLE CONTRACTS
- cannot be enforced or given effect in a court of law or sued upon by reason of certain defects provided by
law until and unless they are ratified.

107
KINDS OF UNENFORCEABLE CONTRACTS

STATUTE OF FRAUDS
- enacted only to prevent fraud but also to guard against the mistake of honest men by requiring that certain
agreements must be in writing.

FUNDAMENTAL PRINCIPLES OF STATUTE OF FRAUDS (MEMORIZE)

1. It is not applicable in actions which are neither for damages because of a violation of a contract.
2. Applicable only to completely executory contract where no performance has yet been made by both
parties.
3. Not applicable where the contract is admitted expressly or impliedly by the failure to deny specifically its
existence.
4. Not applicable where a writing does express the true agreement of the parties.
5. Does not declare that the contract is void but merely unenforceable.
6. Defense of the Statute of Fraud may be waived.
7. Defense of the Statute of Fraud is personal to the parties and cannot be interposed by strangers to the
contract.

AGREEMENTS WITHIN THE SCOPE OF THE STATUTE OF FRAUD (MEMORIZE)

1. Agreement not to be performed within one year the making thereof.
2. Promise to answer for the debt, default or miscarriage of another.
3. Agreement in consideration of marriage other than mutual promise to marry.
4. Agreenet for sale of goods at price not less than P500.00
5. Agreement for leasing for a longer period than one year.
6. Agreement for the sale of real property or of an interest therein.
7. Representation as to the credit of a third person.

Article 1404. Unauthorized contracts are governed by article 1317 and the principles of agency in Title X of
this Book.

108
Article 1405. Contracts infringing the Statute of Frauds, referred to in No. 2 of article 1403, are ratified by
the failure to object to the presentation of oral evidence to prove the same, or by the acceptance of benefit
under them.

MODES OF RATIFICATION UNDER THE STATUTE OF FRAUD

1. By failure to object to the presentaion of oral evidence to prove the contract.
2. By acceptance of benefits under the contract.

Article 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.

Article 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.

Article 1408. Unenforceable contracts cannot be assailed by third persons.

Stranger cannot question the unenforceability of the contract since the benefit of Statute can only be
claimed by one who is a party to the oral contract.

109
CHAPTER 9 – VOID AND INEXISTENT CONTRACTS

Article 1409. The following contracts are inexistent and void from the beginning:

(1) Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public
policy;

(2) Those which are absolutely simulated or fictitious;

(3) Those whose cause or object did not exist at the time of the transaction;

(4) Those whose object is outside the commerce of men;

(5) Those which contemplate an impossible service;

(6) Those where the intention of the parties relative to the principal object of the contract cannot be
ascertained;

(7) Those expressly prohibited or declared void by law.

These contracts cannot be ratified. Neither can the right to set up the defense of i llegality be waived.

Article 1410. The action or defense for the declaration of the inexistence of a contract does not prescribe.

Article 1411. When the nullity proceeds from the illegality of the cause or object of the contract, and the act
constitutes a criminal offense, both parties being in pari delicto, they shall have no action against each
other, and both shall be prosecuted. Moreover, the provisions of the Penal Code relative to the disposal of
effects or instruments of a crime shall be applicable to the things or the price of the contract.

This rule shall be applicable when only one of the parties is guilty; but the innocent one may clai m what he
has given, and shall not be bound to comply with his promise. (1305)

Article 1412. If the act in which the unlawful or forbidden cause consists does not constitute a criminal
offense, the following rules shall be observed:

(1) When the fault is on the part of both contracting parties, neither may recover what he has given by
virtue of the contract, or demand the performance of the other's undertaking;

(2) When only one of the contracting parties is at fault, he cannot recover what he has given by reason of
the contract, or ask for the fulfillment of what has been promised him. The other, who is not at fault, may
demand the return of what he has given without any obligation to comply his promise. (1306)

Article 1413. Interest paid in excess of the interest allowed by the usury laws may be recovered by the
debtor, with interest thereon from the date of the payment.

110
Article 1414. When money is paid or property delivered for an illegal purpose, the contract may be
repudiated by one of the parties before the purpose has been accomplished, or before any damage has
been caused to a third person. In such case, the courts may, if the public interest will thus be subserved,
allow the party repudiating the contract to recover the money or property.

Article 1415. Where one of the parties to an illegal contract is incapable of giving consent, the courts may, if
the interest of justice so demands allow recovery of money or property delivered by the incapacitated
person.

Article 1416. When the agreement is not illegal per se but is merely prohibited, and the prohibition by the
law is designed for the protection of the plaintiff, he may, if public policy is thereby enhanced, recover what
he has paid or delivered.

Article 1417. When the price of any article or commodity is determined by statute, or by authority of law,
any person paying any amount in excess of the maximum price allowed may recover such excess.

Article 1418. When the law fixes, or authorizes the fixing of the maximum number of hours of labor, an d a
contract is entered into whereby a laborer undertakes to work longer than the maximum thus fixed, he may
demand additional compensation for service rendered beyond the time limit.

Article 1419. When the law sets, or authorizes the setting of a minimum wage for laborers, and a contract is
agreed upon by which a laborer accepts a lower wage, he shall be entitled to recover the deficiency.

Article 1420. In case of a divisible contract, if the illegal terms can be separated from the legal ones, the
latter may be enforced.

Article 1421. The defense of illegality of contract is not available to third persons whose interests are not
directly affected.

Article 1422. A contract which is the direct result of a previous illegal contract, is also void and inexistent.

111