OBLIGATIONS and CONTRACTS Nature of Obligation in Art 1156; Civil vs Natural Obligations:

SBM SYLLABUS C2022 ● Present article refers to civil obligations – enforceable in court when breached
● Does not cover natural obligations (Art 1423-1430) – cannot be enforced in court,
Note: Based on SBM’s syllabus, and note-takers used Mercado and Hard Notes reviewer, based on equity
SBM’s ppts, and Accountability class notes. No copyright infringement intended.
Kinds of Obligation
A. Juridical Enforceability
Basic Principles of Obligations (Art 1156)
CIVIL NATURAL OBLIGATION MORAL OBLIGATION
Art 1156. An obligation is a juridical necessity to give, to do, or not to do. OBLIGATION

If not fulfilled Special kind of obligation which cannot Arises not from positive
Meaning of Obligation:
when due and be enforced in court law but from the moral
● In case of noncompliance, there will be legal sanctions
demandable"may ● Authorizes retention of law, not enforceable in
● Legal relation established between one party and another where by the latter is
be enforced in voluntary court
bound to the fulfillment of a prestation which the former may demand of him
court through payment/performance by the ● Spiritual
action debtor obligation of a
Elements of an Obligation: ● ie. If A voluntary pays amount person in
owed to B despite prescription, relation to his
1. Active Subject – one who is demanding performance of the obligation (creditor, he cannot recover what he had God or Church
obligee) paid.
2. Passive Subject – one bound to perform the prestation to give, to do, or not to do
(debtor, obligor) B. Subject Matter
3. Prestation/Object – subject matter of the obligation, has economic value or 1. Real Obligation - obligation to give
susceptible of pecuniary substitution in case of noncompliance 2. Personal Obligation - obligation to to do or not to do
4. Efficient Cause – juridical tie by virtue of which the debtor is bound to perform
the prestation C. Number of persons bound to perform
1. Unilateral Obligation
● Only one of the parties is bound to fulfill a prestation
RIGHT OBLIGATION ● Family code provisions on parent having to support/rear their children
2. Bilateral Obligation
When there is a right … there is a corresponding obligation ● Both parties are bound to perform a part in the obligation ! ie. Reciprocal
obligations, contracts of sale
Right is an active aspect Obligation is the passive aspect
D. Capability of Fulfillment
1. Possible Obligation - Capable of accomplishment or fulfillment in nature or in law
Obligation to give
2. Impossible Obligation - Not capable of accomplishment or fulfillment in nature or in
● Delivery of movable or immovable thing
law
○ ie. Sale, deposit, pledge, donation, antichresis
E. Susceptibility of Partial Fulfillment
Obligation to do
1. Divisible Obligation - Susceptible of partial performance
● all kinds of works or services whether physical or mental
2. Indivisible Obligation -Not susceptible of partial performance
○ ie. Painting, modelling, singing
F. Dependence upon one another
Obligation not to do
1. Principal Obligation - Main obligation created by the parties
● Refraining from doing some acts
2. Accessory Obligation -Secondary obligation created to guarantee the fulfillment of
● Includes obligation not to deliver
the principal obligation
○ ie. Refraining from committing nuisance through noise
G. Existence of a burden or condition
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 1. Pure Obligation – immediately due and demandable
2. Conditional Obligation- subject to a condition (suspensive or resolutory) Examples of sources of obligation
3. Obligation with a term – subject to the happening of an event which will surely
happen, although the date may not be known as of the moment. 1. Arising from law
a. Suspensive (from a day certain) – demandable only after the expiration of a. Duty of spouses to render mutual support and respect to one another
the term/period (Art 68, FC)
b. Resolutory (to a day certain) – terminates upon the expiration of the b. Duty of taxpayer to pay taxes to the government (Internal Revenue
term/period Code)
2. Arising from contract
H. Nature of Performance a. Payment of loan with interest
1. Positive Obligation – debtor is obliged to give or do something in favor of the 3. Arising from quasi-contract
creditor a. Duty of recipient to return what was delivered to him by mistake
2. Negative Obligation – debtor is obliged not to do something, or refrain from doing (solutio indebiti)
something 4. Arising from quasi-delict/ tort negligence
a. Duty of tortfeasor to pay damages for injuries or damages due to his
I. Nature of creation of the obligation fault, omission,
1. Legal Obligation – imposed by law
2. Conventional Obligation – established by agreement of the parties ie. Contracts
Sources of Obligations
J. Character of Responsibility or Liability
1. Joint Obligation – each debtor is liable only for a party of the whole liability and to 1. Law — Art. 1158
each creditor shall belong only a part of the correlative rights 2. Contracts – Arts. 1159, 1305
2. Solidary Obligation – debtor is answerable for the whole obligation without 3. Quasi-contracts — Arts. 1160, 2142-2175
prejudice to his right to collect from his co-debtors the latter’s shares in the 4. Acts or omissions punished by law — Arts. 1162, 2177, Arts. 100 &104 RPC
obligation 5. Quasi-delicts — Arts. 1162, 2176

K. Grant of right to choose one prestation out of several, or substitute the first one
1. Alternative Obligation – obligor may choose to completely perform one out of
several prestations
2. Facultative Obligation – only one prestation has been agreed upon, but the obligor
may render one in substitution of the first one
Art 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.

L. Imposition of penalty
1. Simple Obligation – no penalty imposed for violations of the terms thereof
2. Obligations with a penal clause – imposes a penalty for violation of the terms
thereof
● Obligations derived from law - NEVER presumed
● Unless such obligations are expressly provided by law, they are not enforceable and
demandable.
● Obligations arising from law – The Civil Code is applicable suppletorily

Art 1156. Obligations arise from:

(1) Law OBLIGATIONS ARISING
(2) Contracts FROM LAW
(3) Quasi-contracts
(4) Acts or omissions punished by law When the law creates the obligation,
(5) Quasi-delicts and the act upon which it is based is
nothing more than a mere factor for
● List is exclusive determining the moment when it
becomes demandable, then the
source of obligation is from law
itself.
OBLIGATIONS ARISING FROM OTHER
SOURCES
When the law merely acknowledges the existence
of an obligation generated by an act which
constitutes a contract, quasi-contract, delict, or
quasi-delict, and its only purpose is to regulate such
obligation which did not arise from it, the act itself
is the source of the obligation and NOT the law

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Art 1159. Obligations arising from contracts have the force of law between the contracting
parties and should be complied with in good faith.
Art. 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.
OBLIGATION CONTRACT
a juridical meeting of the minds between two persons whereby one binds himself
necessity to give, with respect to
to do, or not to the other, to give something, or to render some service
do ● May establish such stipulations, clauses, terms and
conditions provided they are not contrary to law, morals,
good customs, public order, public policy
● Perfected by mere consent
● Has the force of law between parties
● Exception: some contracts are valid and do not violate Art
1306, yet they may not be enforced totally, if their
prestations are unconscionable or unreasonable (ie. Atty’s
fees, penalties, liquidated damages may be reduced by the
court)
● In case of unauthorized insertions in a contract, the part
which is valid will subsist. o Interpretation of a contract
involves a question of law
Art 1160. Obligations derived from quasi-contracts shall be subject to the provisions of
Chapter 1, Title XVII, of this Book.
Quasi Contract, Concept:
● A juridical relation which arises from a lawful, voluntary, and unilateral act or acts
executed by somebody for the benefit of another and for which the former must be
indemnified to the end that no one shall be enriched or benefited at the expense of
another.
● Kind of contract created without consent of one party but whose missing consent is
given by law.
Characteristics of a Quasi-Contract
1. Act or acts executed must be lawful (to distinguish it from a delict)
2. Act or acts executed must be voluntary (to distinguish from quasi-delict which
involved fault, negligence, or lack of foresight)
3. Act or acts executed must be unilateral (to distinguish it from an ordinary
contract where there is a meeting of the minds between two parties)
Principal Kinds of Quasi-Contracts:
1. Negotiorum Gestio
● A juridical relation which takes place when somebody takes charge of the
agency or management of the business or property of another without any
power from the latter.
● The owner of the business or property shall reimburse the gestor for the
necessary and useful expenses incurred by the latter, and for the damages
suffered by him in the performance of his functions as gestor.
2. Solutio Indebiti
● A juridical relation which takes place when somebody received something
from another without any right to demand for it, and the thing was unduly
delivered to him through mistake.\
● The obligation to return the thing arises on the part of the recipient.
Presumptive Consent:
● Since a quasi-contract is a unilateral contract created by the sole act or acts of the
gestor, there is no express consent given by the other party. (the consent is provided
by law through presumption)
Art 1161. Civil obligations arising from criminal offenses shall be governed by the 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 XVIII of this Book, regulating
damages.
Applicability of the Article:
● Refers to civil obligations arising from criminal offenses anchored on the well
accepted principle that “every person criminally liable for a felony is also civilly
liable”
○ Exception: Offenses without civil liability"treason, rebellion, illegal
possession of firearm, etc.
● As a necessary consequence of criminal responsibility, civil liability must be
enforced in the criminal case where the accused is being prosecuted EXCEPT:
1. Offended party filed the civil action ahead of the criminal case
2. Independent civil action is allowed by law and the offended party made a
reservation to pursue it separately.
3. Offended party waived the civil liability
Rules Governing Civil Obligations Arising from Criminal Offenses:
1. Revised Penal Code
2. Art 2176 (Quasi-Delict) ; New Civil Code
3. Pertinent provisions of Chapter 2 on Human Relations – Art 26, 29, 30, 32, 33,
34, 35, 36 of NCC
4. Title XVII of NCC on Damages
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 Civil Liability under the Revised Penal Code and injury. (proximate cause)

1. Restitution
Fault or Negligence:
● The thing itself shall be restored, even though it be found in the
● Omission of that diligence which is required by the nature of the obligation and
possession of third person who has acquired it by lawful means, saving
corresponds with the circumstances of the person, of the time, and of the place.
to the latter his action against the proper person who may be liable to
● Failure to observe for the protection of the interests of another person, that degree of
him
care, precaution and vigilance which the circumstances justly demand, whereby such
● Not applicable in case in which the thing has been acquired by the third
other person suffers injury.
person in the manner and under the requirements which by law, bar an
● Want of care as required by the attending circumstances (relative not absolute term)
action for its recovery.
2. Reparation
Doctrine of Proximate Cause:
● Court shall determine the amount of damage, taking into consideration
● Used in determining the liability of the tortfeasor in a quasi-delict.
the price of the thing, whenever possible, and its special sentimental
● Such adequate and efficient cause as, in the natural order of events, and under the
value to the injured party
particular circumstances surrounding the case, would necessarily produce the event.
3. Indemnification
● The result must be the natural and probable consequence such as ought to have been
● Consequential damages shall include not only those caused the injured
foreseen as likely to flow from the act complained of.
party, but also those suffered by his family or a by a third person by
reason of the crime.
Doctrine of Vicarious Liability:
4. Several and Subsidiary Liability of Principals, Accomplices and Accessories of a
● Obligations arising from quasi-delicts are demandable in certain cases, for the fault
felony
or negligence of others whom they are responsible for as parents, guardians,
● Shall be liable severally (in solidum) among themselves for their
teachers, or employers.
quotas, and subsidiary for those of other persons liable.
● Exception: To excuse themselves from liability, they must prove that they observed
all the diligence of a good father of a family to prevent damage.
Art 1162. Obligations derived from quasi-delicts shall be governed by the provisions of
Chapter 2, Title XVII of this Book, and by special laws. Basis Quasi-Delict Crime

Legal Basis There can be a quasi-delict as long There can be no crime unless there
Quasi Delict (Culpa Aquiliana), Concept: Of Liability as there is fault or negligence is a law clearly punishing such act.
● Art 2176. Whoever by act or omission causes damage to another, there being fault or resulting in damage/injury to
negligence, is obliged to pay for the damage done. Such fault or negligence, if there another. Broader is scope than
is no pre-existing contractual relation between the parties, is called a quasi-delict crime.
and is governed by the provisions of this Chapter.
● Equivalent of a tort in Anglo-American Law
Criminal Not necessary. Fault or negligence Essential for criminal liability to
Intent will suffice exist.
Basis of Civil Liability in Quasi-Delict:
● Founded on the principle of equity
● The consequences of the fault or negligence of a person shall not be borne by him, Nature Of Right violated is a private right. It Right violated is a public one. A
who without fault or negligence on his party, becomes the victim thereof. Right is against a private individual. crime is a wrong against the State.
● Offender must be held liable for the consequences of his acts or omissions which Violated
cause damage or injury to another.
Liability For Every quasi-delict gives rise to Some crimes (ie. Contempt, illegal
Damages liability for damages. possession of firearms) do not give
Elements of a Quasi-Delict rise to damages.

1. Fault or Negligence on the part of the defendant resulting in a wrongful Proofs Preponderance of evidence Proof beyond reasonable doubt
act/omission, whether voluntary or not, and whether criminal or not. Needed
2. Damage and injury suffered by another person.
3. Direct causal relation between the fault or negligence and the resulting damage
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Sanction Or Reparation or indemnification of Imprisonment or fine, or both;
Penalty damages sometimes with accessory penalties
Civil and Natural (Art. 1423-1430)
Art. 1423. Obligations are civil or natural. Civil obligations give a right of action to compel
their performance. Natural obligations, not being based on positive law but on equity and
natural law, do not grant a right of action to enforce their performance, but after voluntary
fulfillment by the obligor, they authorize the retention of what has been delivered or
rendered by reason thereof. Some natural obligations are set forth in the following articles.
Natural Obligations, Basis:
● Natural obligations are not based on positive law like statues. They are not written
or promulgated laws, but derived merely from reason and nature.
● They are based on equity and natural law. They are based on good conscience and
compliance to which is anchored on some moral grounds. Consequently, if not
fulfilled, there is no cause of action based on the breach thereof. Their performance
cannot be enforced in court as they are not legal obligations.
Nature of Natural Obligations:
● Natural obligations are obligations without sanction susceptible of voluntary
fulfillment and not through compulsion by legal means.
● Compliance with natural obligations is discretionary. If a person chose to fulfill, he
cannot recover what he had delivered in compliance therewith. This is the juridical
effect of such obligations. Fulfillment places the debtor into estoppel from
recovering what had been paid or delivered.
Conditions For Natural Obligations:
● For natural obligations to arise, it is necessary that what has been fulfilled as an
obligation is not prohibited by law, nor contrary to morals and good customs.
● If it is prohibited by law, or contrary to morals and good customs, there can be a
recovery of what has been delivered or paid provided the supposed debtor is not
privy to the unlawful or immoral act.
● There must be a previous juridical relationship between two persons for a natural
obligation to arise, but due to certain intervening circumstances like prescription or
invalidity of a will, it lost its legal enforceability leaving its fulfillment entirely to
the free will or discretion of the supposed debtor.
● While equity urges its fulfillment, the law does not put any sanction for its
non-fulfillment, thereby leaving its compliance solely to the will of the supposed
debtor. The law comes into operation only after the voluntary fulfillment, by
preventing the supposed debtor from recovering what has been paid or delivered.
Fulfillment of Natural Obligations:
● Fulfillment does not refer alone to delivery of things, but also to the performance in
any manner that settles a claim. It covers the full extent of the juridical concept of
“payment” in Article 1232 which provides, “Payment means not only delivery of
money but also performance, in any manner, of an obligation.”
Voluntary Fulfillment:
● For fulfillment to be voluntary, it must be spontaneous, free from any infirmity
which vitiates consent. It is done with full knowledge of the debtor that he cannot be
compelled to pay the alleged obligations, and performance is free from error and
infirmity of consent.
● If there is a mistake in the payment, there is no fulfillment of a natural obligations.
The amount paid may be recovered under the principle of solutio indebiti.
● Payment made through coercive process, such as by writ of execution issued at the
instance of the prevailing party, is not voluntary fulfillment and as such the
provisions of natural obligations cannot be applied thereto.
May Natural Obligations Be Converted into Civil Obligations?
● Natural obligations may be converted into civil obligations by acts of novation.
● Thus, a prescribed debt is turned into a civil obligation when the debtor renounces
the defense of prescription, or he signed a document recognizing it with a promise to
pay it at some future time. The natural obligation becomes a valid cause for a civil
obligation after it has been affirmed or ratified anew by the debtor.
Effect of Partial Performance:
● If only a part of the natural obligation has been fulfilled, this partial payment cannot
be recovered. It is converted into civil obligation if it is legally susceptible of
confirmation or ratification.
● However, if the fulfilled portion is not susceptible of confirmation or ratification,
this portion can be the basis of a cause of action for recovery of what has been
delivered because it has not been converted into a legal obligation.
Enumerated Natural Obligations, Not Exclusive:
● The enumeration in the code is not limitative. Consequently, there are still others
that may that may be considered natural obligations which satisfy the requirements
of the definition or concept of natural obligations.
● The following also constitute natural obligations:
1. Support given to unrecognized illegitimate children by their putative
parents, including support given to illegitimate children by the putative
parents despite a judgment denying their recognition.
2. Interest voluntarily paid for the use of money, even if not interest is agreed
upon in writing.
3. Support given to relatives for whom the law made no provision for their
support.
4. Indemnification given to a woman seduced, although the seduce was
acquitted of the charge of seduction.
Art. 1424. When a right to sue upon a civil obligation has lapsed by extinctive prescription,
the obligor who voluntarily performs the contract cannot recover what he has delivered or
the value of the service he has rendered.
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Extinctive Prescription of Civil Obligation; Consequences:
● If an obligee fails to pursue a cause of action based on a civil obligation within the
period fixed by law, the obligation is extinguished. It cannot anymore be enforced in
court. It becomes a stale claim.
● While the prescribed claim cannot be asserted anymore in court, nevertheless, under
the rule on performance of natural obligations, it is indirectly resurrected when the
obligor voluntarily pays the stale claim.
● The payment is a valid payment because of the obligor’s recognition of his debt. He
cannot recover what he paid or the value of the service he had rendered in cases of
obligations to do.
● Example: Prescribed debt may give rise to new obligations if acknowledged. Thus,
the promisor who acknowledged a promissory note made in 1940, was ordered to
pay the same. Also, an obligation originally contracted by the mother of the
defendant which he assumed after the obligation had prescribed, is revived as a new
obligation. The written promise of the defendant to pay for the obligation is
enforceable.
Art. 1425. When without the knowledge or against the will of the debtor, a third person
pays a debt which the obligor is not legally bound to pay because the action thereon has
prescribed, but the debtor later voluntarily reimburses the third person, the obligor cannot
recover what he has paid.
Payment By A Third Person; Effects:
● A third person may pay the prescribed debt of a debtor either with the latter’s
consent or without his consent or even against his will.
● The article presupposes that the payment of the third person is not intended to be a
donation under article 1238, otherwise, it would not have made the implication for
the need for reimbursement which when made could no longer be recovered by the
debtor.
Fulfillment of Voluntary Obligation By Debtor; Effect:
● If the debtor voluntarily reimburses the third person, he cannot recover anymore
what he has paid. This is a fulfillment of a voluntary obligation.
Art. 1426. When a minor between eighteen and twenty-one years of age who has entered
into a contract without the consent of the parent or guardian, after the annulment of the
contract voluntarily returns the whole thing or price received, notwithstanding the fact that
he has not been benefited thereby, there is no right to demand the thing or price thus
returned.
Minority, Concept, and R.A. No. 6809:
● Since the effectivity of R.A. No. 6809, legal age is now 18 years instead of 21 years.
● The said R.A. No. 6809 modifies the article, in such a way that the article cannot
apply anymore to persons who are between 18 years and below 21 years because
such persons are now possess of full civil capacity with certain exceptions.
● The article now applies only to those below 18 years. Thus, a minor who enters into
a contract renders the contract voidable. If thereafter, the contract was annulled due
to his minority but later after reaching the majority age, he voluntarily returned what
he received from the other party, he cannot recover anymore what he had returned.
Benefit to the Minor is Immaterial:
● If the contract entered into by a minor without the consent of his parent or guardian
is annulled due to his minority, and he voluntarily returned the whole thing or price
he received therefor, even if he had not been benefited thereby, he can no longer
demand the return of the thing or price. There is a performance of a natural
obligation, which authorizes the retention of what has been delivered or paid.
● However, it must be stressed, the return of the thing or price must be voluntary.
Otherwise, the minor can recover what he returned or paid.
Rule When Minor Is Guilty Of Active Misrepresentation:
● A minor who actively misrepresented himself to be of legal age and for this matter
he looks as a matured person, thus inducing the other party to contract with him, is
estopped from disavowing his own contract.
Art, 1427. When a minor between eighteen and twenty-one years of age, who has entered
into a contract without the consent of the parent or guardian, voluntarily pays a sum of
money or delivers a fungible thing in fulfillment of the obligation, there shall be no right to
recover the same from the obligee who has spent or consumed it in good faith. (1160a)
Modification of Article:
● The present article just like the preceding article had been modified by R.A. No.
6809. It can apply only to persons below 18 years. If a minor entered into contract
without parental or guardian’s consent the contract is obviously voidable. If this
contract is annulled, the court may order the restoration of what had been paid or
delivered by the minor.
● In other words if in the fulfillment of his commitment the minor delivered a
consumable thing or paid a sum of money, he has a right of recovery from the other
party, even if the latter be in good faith and had consumed the thing or spent the
money.
● However, if the minor, upon reaching the age of majority, failed to cause the
annulment of the contract within four years, he cannot recover anymore what he
paid or delivered because of prescription of the action.
Art. 1428. When, after an action to enforce a civil obligation has failed, the defendant
voluntarily performs the obligation, he cannot demand the return of what he has delivered
or the payment of the value of the service he has rendered.
Winning Party In A Case Who Delivers Or Pays The Claim; Consequences:
● In the ordinary course of human interactions, a party defendant who won his case
will be very glad and happy about his legal victory for he is freed from the liability
imputed to him.
● Nevertheless, if the winning party, through the urges of his good conscience, paid
the losing party despite his knowledge of the dismissal of the latter’s claim, what has
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 been voluntarily delivered or paid by the former to the latter cannot be recovered
anymore. The retention is authorized by law as a fulfillment of a natural obligation.
Prescription of action to recover movables and immovables

Art. 1429. When a testate or intestate heir voluntarily pays a debt of the decedent Movable Immovable
exceeding the value of the property which he received by will or by the law of intestacy
from the estate of the deceased, the payment is valid and cannot be rescinded by the payer. 4 years with good faith & just 10 years with good faith & just title

Payment of Decedent’s Debts by an Heir: 8 years if without 30 years if without

● Under the law on succession, an heir cannot be burdened with obligations of the
decedent which exceed the value of the inheritance he inherits. Who May Acquire by Prescription
● However, if the heir voluntarily pays the indebtedness of the decedent the value of 1. Person who is capable of acquiring property by other legal modes
which exceeds the value of the property or money he received from the estate 2. State
whether by will or by intestacy, he cannot rescind whatever he paid or performed for 3. Minors (through guardians or personally) (Art. 1108)
the law considers it a valid payment.
● Rationale: The heir has a moral duty to clear the name or credit of the decedent to Against Whom Prescription May Run
whom he is related either by blood or by other filial relationship. There is a moral 1. Minors and incapacitated person who have parents, guardians or other legal
duty to protect and maintain the good name of the deceased. representatives;
2. Absentees who have administrators;
Art. 1430. When a will is declared void because it has not been executed in accordance 3. Persons living abroad who have managers or administrators
with the formalities required by law, but one of the intestate heirs, after the settlement of the 4. Juridical persons, except the state with regard to property not patrimonial in
debts of the deceased, pays a legacy in compliance with a clause in the defective will, the character (Art. 1108);
payment is effective and irrevocable. 5. Between husband and wife (only if specifically provided for by law);
6. Between parents and children (during minority/insanity) (prescription may run)
7. Between guardian and ward (during guardianship) (prescription may run)
PRESCRIPTION 8. Between co-heirs/co-owners (there must be definite repudiation first)
Acquisitive v. Extinctive Prescription 9. Between owner of property and person in possession of property in concept of
owner
Acquisitive Prescription Extinctive Prescription
Against Whom Prescription Does Not Run
Requires positive action of possesor who is Requires inaction of the owner out of 1. Between husband and wife, even though there be a separation of property agreed
not the owner possession or neglect of one with a right to upon in the marriage settlements or by judicial decree.
bring his action 2. Between parents and children, during the minority or insanity of the latter.
3. Between guardian and ward during the continuance of the guardianship. (Art. 1109)
Applicable to ownership and other real Applicable to all kinds of rights, whether
rights real or personal Things Not Subject to Prescription
1. Property of public dominion (Art. 1113)
Vests the property and raise a new title in Vests the property and raise a new title in 2. Intransmissible rights
the occupant the occupant 3. Movables possessed through a crime (Art. 1133)
4. Registered land; lands covered by title (P.D. 1529, Sec. 47)
Results in the acquisition of ownership or Merely results in the loss of a real or
other real rights in a person as well as the personal right, or bars the cause of action to
loss of said ownership or real rights in enforce said right When Prescription is Inapplicable
another
By Offender The offender can never acquire, through prescription, movables
Can be proven under the general issue Should be affirmatively pleaded and proved possessed through a crime (Art. 1133).
without its being affirmatively pleaded to bar the action or claim of the adverse
party The action to recover from the offender is imprescriptible.

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Registered lands Title to lands registered under the Torrens System cannot be 8 years Action to recover movables – from time possession is lost (Art.
acquired by prescription or adverse possession as against the 1140)
registered owner or hereditary successor (PD 1529). Action to
recover registered land is imprescriptible. 30 years Real action over an immovable property – from time possession is
lost (Art. 1141)
Actions to demand Imprescriptible
right of way; to 10 years Mortgage action (Art. 1142)
abate nuisance
Upon written contract
Actions to quiet Imprescriptible Obligations arising from law
title if plaintiff is Court judgment (Art. 1144)
in possession
Reconveyance based on implied constructive trust
Void contracts Action to declare a contract void is imprescriptible
6 years Oral Contract
Note: An action to annul a voidable contract prescribes after 4 years Quasi Contract (Art. 1145)

Actions to demand Action to demand partition is imprescriptible or cannot be barred by 4 years Injury to rights
partition; laches, absent a clear repudiation of the co-ownership by a Quasi Delict (Art. 1146)
distinguished from co-owner. (De Leon, p. 253) Rescission/Annulment of contract
laches
1 year Forcible entry
Property of public Property of public dominion cannot be acquired by prescription for Illegal detainer
dominion they are outside the commerce of men. Defamation (Art. 1147)

Right of reversion or reconveyance to the State of things which are
not susceptible of being appropriated is not barred by prescription.
(De Leon, p. 758)
Land of the public domain must be declared alienable and
disposable either by the President or the Secretary of the DENR to
be the subject of appropriation. The period of possession prior to the
reclassification of the land as disposable cannot be considered in
reckoning the prescriptive period in favor of the possessor.
(Republic v. De Guzman Vda. De Joson, GR No. 163767, 2014)
Other Actions; Prescriptive Periods (Art. 1140-1149)
None Right of way
Abatement of nuisance
5 years Other actions whose periods are not fixed by law (Art. 1149)
Rules in Computation of Period
1. Present possessor may tack his possession to that of his grantor or predecessor in
interest
2. Present possessor presumed to be in continuous possession even with intervening
time unless contrary is proved
3. First day excluded, last day included
Tacking Period
1. There must be privity between previous and present possessor
2. Possible when there is succession of rights
3. If character of possession different:
a. predecessor in bad faith / possessor in good faith – use extraordinary
prescription
Interruption of prescription of actions
1. When they are filed before the court
2. When there is a written extrajudicial demand by the creditors
3. When there is any written acknowledgement of the debt by the debtor (Art. 1155)

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 KINDS OF OBLIGATIONS
Class Notes:

Obligations Kinds of Obligations

1. Operative word: Juridical Necessity 1. As to perfection and extinguishment: pure, conditional, with a term or period:
● Juridical: created by law pure, conditional, with a term or period.
● Necessity: sense of compulsion/obligation that you need to deliver a 2. As to plurality or prestation: alternative, facultative
certain prestation 3. As to rights and obligations of multiple parties: joint, solidary
2. To give, to do, not to do 4. As to performance of prestation: divisible or indivisible
● Not object, not subject matter 5. As to the presence of an accessory undertaking in case of breach
● These are PRESTATIONS
3. Active and Passive Actors
As to Perfection and Extinguishment
● Active: interested in the fulfillment of the obligation (CR)
● Passive: Waiting fro some kind of demand, if necessary (DR) Existence of a burden or condition
1. Pure Obligation – immediately due and demandable
Sources of Obligation 2. Conditional Obligation- subject to a condition (suspensive or resolutory)
Law 3. Obligation with a term – subject to the happening of an event which will surely
● Expressly determined by the Code and special laws happen, although the date may not be known as of the moment.
● Not presumed (Art. 1158) ● Suspensive (from a day certain) – demandable only after the
● Requirement of Publication (Art. 2, CC) expiration of the term/period
○ Laws shall take effect after 15 days following the completion of their ● Resolutory (to a day certain) – terminates upon the expiration of the
publication in the OG, unless it is otherwise provided, it shall take term/period
effect one year after such publication.

Contracts Pure — Arts. 1179, 1197

● Art. 1159 Article 1179. Every obligation whose performance does not depend upon a future or
● Force of law between the contracting parties uncertain event, or upon a past event unknown to the parties, is demandable at once.
● Complied with good faith
○ Honesty or fairness in conduct in trying to comply with obligations Every obligation which contains a resolutory condition shall also be demandable, without
○ Note: Diligence of a Good father pertains to diligence that's presence or prejudice to the effects of the happening of the event.
absence of negligence; not pertaining to GF.

Quasi Contracts Pure Obligation

● Chapter I, Title XVII 0 Unjust Enrichment ● No condition or term upon which the fulfillment of the obligation is made to depend.
● Negotiorum Gestio ● Immediately demandable by the creditors and debtor cannot be excused from
● Solutio Indebiti complying.
● Other quasi-contracts ● Demandability is different from fulfillment, thus, when the court gives a grace
○ By reason of equity law will provide such concept period, this cannot be seen as impairing the attribute of immediate demandability.
● If debtor does not fulfill, he is in default (after a demand has been made)
Delicts
● Civil obligations arising from criminal offense governed by the penal laws, Examples:
subject to the provisions of: ● Bare acknowledgement of a debt by the debtor
○ Article 2177 ● Period originally given in a contract is cancelled by mutual agreement
○ Chapter 2, Prelim Title on Human Relations
■ Determine if certain act can give rise not only to liability for HSBC vs. The RTC is correct in ruling that since the Promissory Notes do not
criminal offense, negligent act, or even civil liability arising Spouses contain a period, HSBCL-SRP has the right to demand immediate
from Chapter 2 (Art 19, 20) Broqueza payment. Article 1179 of the Civil Code applies. The spouses Broqueza’s
○ Title 18 CC, regulating damages obligation to pay HSBCL-SRP is a pure obligation. The fact that
HSBCL-SRP was content with the prior monthly check-off from Editha
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 Broqueza’s salary is of no moment. Once Editha Broqueza defaulted in
her monthly payment, HSBCL-SRP made a demand to enforce a pure
obligation.
Kinds and Effects of Conditions, Suspensive vs. Resolutory:
Conditional Obligations
● Obligation which is subject to a condition.
● The effectivity of the conditional obligation is subjected to the fulfillment or the
non-fulfillment of a future and uncertain event.
● Futurity and uncertainty must concur. If event is not uncertain, then it is a
period/term.
● Ex. An obligation subjected upon death is not a conditional obligation because death
is certain.
Suspensive Condition – Fulfillment of the condition gives rise to the obligation.
● Ex. I’ll buy your land if you pass the 2014 bar examinations
Resolutory Condition – Fulfillment of the condition extinguishes an already existing
obligation.
● Ex. In donation propter nuptias, marriage is a resolutory condition.
Note: If condition is made to be dependent upon past events, it is not a condition because the
element of uncertainty is no longer present. Proof of the past event can become a condition,
but not the past event itself.
Santiago vs. Two units of tickets for the sweepstakes draw and race were given to
Millar Santiago as a gift for his birthday. However, he lost them along with the
winning ticket that it contained. As the ticket bears the notation “prizes of
tickets sold locally will be paid to holder of ticket upon surrender of
same”, PCSO is under no obligation to pay Santiago if he is not able to
present the required ticket. This is because the contract is aleatory in
nature (Art. 1790 Civil Code) and the contracting parties may establish
any agreements, terms, and conditions they may deem advisable,
provided that they are not contrary to law, morals, or public order.
Obligations arising from contracts have the force of law between the
contracting parties (Art 1091).
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.
Note:
● The status of the obligation is suspended before the period of compliance had been
fixed.
● Rationale for fixing a period is to prevent debtors from not fulfilling their
obligations forever without being liable for delay.
● Prescriptive period for filing an action to fix the period is 10 years from the
perfection of the contract.
Situations When The Court Will Fix A Period
1. When no period is mentioned, but it is inferrable from the nature and circumstances
of the obligation that a period was intended.
Examples:
● Contract of sale on credit without any time fixed for the payment
● Contract for construction where the period of completion was not stated
but intended
● Contract of lease that states “as long as the tenant pays the stipulated rent”
● When the period is for a “reasonable time” agreed upon, there is a period
fixed. The court will determine whether the reasonable time had elapsed.
● When the seller of a property is given the right to redeem but no period
was stipulated for the redemption, the court may fix the period.
2. When the period is dependent upon the will of the debtor.
Examples:
● When the debtor binds himself to pay when his means permit him to do so
● When the debtor binds himself to pay as soon as possible or little by little
● When the debtor shall pay as soon as he has the money
● When the duration of the lease is left to the will of the lessee
Significance of The Court’s Fixing of The Period
● It is the duty of the court to fix the period if the parties intended it.
● When the court fixes the period, it merely ascertains the will of the parties and gives
effect thereto.
● The court does not modify or amend the obligation but carries out an implied
stipulation in the contract.
● It is essential that it be alleged that a period was clearly intended by the parties.
● Specific performance cannot be demanded simultaneously with the petition for
fixing a period because the former is premature, unless the latter action will only be
a formality and serves no purpose but to delay.
Period Fixed By The Court Cannot Be Extended
● Once the court has fixed the period, the period cannot be changed or extended.
Cases Where Article Was Not Applied
● A stipulation in a contract that the agent will turn over the proceeds of the sale of the
tobacco as soon as the same was sold, does not fall under this article.
● When the duration of the lease is left to the sole will of the lessor.
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 ● Contract of lease had not been renewed, there could be no contract on which a
period could be fixed.
● When the obligation agreed upon is payable on demand.
● When the obligation is pure, simple and unconditional.
● Duration of contracts of employment or service is implicitly fixed by the period for
the payment of the salary of the employee. This article is inapplicable in such a case.
Barretto vs. When the terms of the donation do not fix the time of the performance of a
City of condition, the proper period will be determined by the court. Once the court
Manila has fixed the period , such period acquires the nature of the contract,
becoming the law governing the contract and once it has been agreed upon
by the parties, IT CANNOT BE CHANGED OR MODIFIED through any
subsequent action.
People’s It was expressly stipulated in that the obligation contracted by Odom shall
Bank vs. expire and be due upon demand of the petitioner, and in view of the fact
Odom that the latter deed was incorporated in Exhibit D and that Odom was
required by the petitioner to pay all his indebtedness, it is plain that the
obligation was without a term and that it became due and is demandable.
Gonzales vs. The Court held that such are governed by Article 1128 (Art.1197 NCC) of
Jose the Civil Code because under the terms thereof, the plaintiff (Gonzales)
intended to grant the benefit of the period to De Jose. As the PNs do not fix
the period, it is for the court to fix. But, the action to ask the court to fix the
period has already prescribed (10-year prescription period) in accordance
with Sec. 43 (1) of the Code of Civil Procedure.
Eleizegui vs. In this case, a conventional term was established. That being the case, it
Manila erases the assumption that the lease was terminated by the notice given by
Lawn the plaintiffs. Notice is only necessary when it becomes necessary to
Tennis Club recourse to the legal term. It was apparent that the lessors did not intend to
reserve to themselves the right to rescind the contract when they expressly
conferred upon the lessee this right by stipulating it in the contract.
Generally, if the term of the lease whose termination is at the sole will of
the lessee, the courts must fix the period according to the character and
conditions of the mutual undertakings.
Araneta vs. According to Art. 1197, the courts cannot set the period arbitrarily. As the
Phil Sugar parties must have known that they could not take the law into their own
hands, but must resort to legal processes in evicting the squatters, they must
have realized that the duration of the suits to be brought would not be under
their control nor could the same be determined in advance. The conclusion
is thus forced that the parties must have intended to defer the performance
of the obligations under the contract until the squatters were duly evicted,
as contended by the petitioner Gregorio Araneta, Inc.
Conditional — Arts. 1181-1190
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.
Coronel v. WON an action for specific performance to execute the sale between
CA Coronel and Alcaraz is meritorius? YES. Since the condition contemplated
by the parties which is the issuance of a certificate of title in petitioner’s
names was fulfilled on February 6, 1985, the respective obligations of the
parties under the contract of sale became mutually demandable, that is,
petitioners, as sellers, were obliged to present the transfer certificate of title
already in their names to private respondent Ramona P. Alcaraz, the buyer,
and to immediately execute the deed of absolute sale, while the buyer on
her part, was obliged to forthwith pay the balance of the purchase price
amounting to P1,190,000.00.
The third party is not a buyer in good faith because a notice of a pending
suit was attached in the TCT which was impossible to have been
overlooked by the buyer.
Heirs of In a contract to sell, the buyer’s full payment of the price is a positive
Atienza vs. suspensive condition to the coming into effect of the agreement.
Espidol Admittedly, Espidol was unable to pay the second installment of
P1,750,000.00 that fell due in December 2002. That payment, said both the
RTC and the CA, was a positive suspensive condition failure of which was
not regarded a breach in the sense that there can be no rescission of an
obligation (to turn over title) that did not yet exist since the suspensive
condition had not taken place. Since Espidol failed to pay the installment on
a day certain fixed in their agreement, the Atienzas can afterwards validly
cancel and ignore the contract to sell because their obligation to sell under it
did not arise. Since the suspensive condition did not arise, the parties stood
as if the conditional obligation had never existed. The Court directs
petitioner Heirs of Atienza to reimburse the P130,000.00 down payment to
respondent Espidol.
Effects of Potestative, Casual or Mixed Conditions:
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.
This provision applies only to suspensive conditions. If the resolutory condition is dependent
upon the sole will of the debtor, the condition may be valid.
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This article speaks of three conditions:
1. Potestative or Facultative Condition – The fulfillment of the condition depends on
the exclusive will of one of the parties, that is either the debtor or creditor. However,
this article refers only to the debtor.
● Ex. I promise to pay when my house is sold.
2. Casual Condition – The fulfillment of the condition depends upon chance or the
will of a third person.
● Ex. I’ll buy your house if you win the lotto.
3. Mixed Condition – The fulfillment of the condition depends partly upon the will of
the parties and partly upon chance or the will of a third person.
● Ex. I’ll pay as soon as I received funds derived from the sale of my car in
Spain.
Effect of Potestative (Facultative) Condition:
● The conditional obligation is void, that is, both the obligation and the condition are
void. This is to prevent the establishment of obligations which are illusory.
- Ex. A promises to sell if A finds it convenient to do so. B would pay her
shares after she had harvested from her fishpond.
● If the fulfillment depends upon the will of the creditor, the condition and obligation
are valid. This is because a creditor is naturally interested in the fulfillment of the
condition which will benefit him.
Cases:
Parks vs. It is true that this condition has not been complied with. The
Province of characteristic of a condition precedent is that the acquisition of the right
Tarlac is not effected while said condition is not complied with or is not deemed
complied with. In the present case the condition that a public school be
erected and a public park made of the donated land, work on the same to
commence within six months from the date of the ratification of the
donation by the parties, could not be complied with except after giving
effect to the donation. Also, action to revoke donation has already
prescribed.
Class Notes:
● Suspensive: condition precedent | no contract whatsoever |
suspend it
○ "If"
● Resolutory: there is contract but entitlement can be
extinguished if condition arises
○ "For as long as" "until"
● If condition attached can only be fulfilled by accepting or
receiving the object of the obligation - condition subsequent
○ How to build a car in a parcel of land unless you get
land first.
○ I give parcels of land to be used exclusively for a
school and a park, how can one do it if you cannot
have it.
○ Case tell us: even if used the word IF not necessarily
suspensive!
● If there is an intent to pay or implied understanding that parties
agree to have an obli, but payment is subject to a time element
but not clearly stated → 1197 comes in.
○ 1197: court will fix the period
Osmena vs. Is the condition valid? It was suggested during the discussion of the
Rama case in this court that, in the acknowledgment above quoted of the
indebtedness made by the defendant, she imposed the condition that she
would pay the obligation if she sold her house. If that statement found in
her acknowledgment of the indebtedness should be regarded as a
condition, it was a condition which depended upon her exclusive will,
and is therefore, void. (Art. 1115, Civil Code.) The acknowledgment,
therefore, was an absolute acknowledgment of the obligation and was
sufficient to prevent the statute of limitation from barring the action upon
the original contract
Trillana vs. Indeed, the need for express acceptance on the part of the Quezon
Quezon College, Inc. becomes the more imperative, in view of the proposal of
Damasa Crisostomo to pay the value of the subscription after she has
harvested fish, a condition obviously dependent upon her sole will and,
therefore, facultative in nature, rendering the obligation void. It cannot be
argued that the condition solely is void, because it would have served to
create the obligation to pay.
Hermosa vs. If the condition were "if he decides to sell his house." or "if he likes to
Longara pay the sums advanced," or any other condition of similar import
implying that upon him (the debtor) alone payment would depend, the
condition would be protestativa, dependent exclusively upon his will or
discretion. In the form that the condition was found by the Court of
Appeals however the condition implies that the intestate had already
decided to sell his house, or at least that he had made his creditors believe
that he had done so, and that all that we needed to make his obligation (to
pay his indebtedness) demandable is that the sale be consummated and
the price thereof remitted to the islands. Note that if the intestate would
prevent or would have prevented the consummation of the sale
voluntarily, the condition would be or would have been deemed or
considered complied with (article 1119, old Civil Code)
Smith Bell vs Contract: “In the month of September 1918 or as soon as possible” and
Matti "Approximately within 90 days – this is not guaranteed”
Interpretation: Under these stipulations, it cannot be said that any definite
date was fixed for the delivery of the goods. As to the tanks, the
agreement was that the delivery was to be made "within 3 or 4 months,"
but that period was subject to the contingencies referred to in a
subsequent clause. With regard to the expellers, the contract says "within
the month of September, 1918," but to this is added "or as soon as
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possible." And with reference to the motors, the contract contains this
expression, "Approximate delivery within ninety days," but right after
this, it is noted that "this is not guaranteed." And as the export of the
machinery in question was, as stated in the contract, contingent upon the
sellers obtaining certificate of priority and permission of the United
States Government, subject to the rules and regulations, as well as to
railroad embargoes, since this was done during the world war, then the
delivery was subject to a condition the fulfillment of which depended not
only upon the effort of the herein plaintiff, but upon the will of third
persons who could in no way be compelled to fulfill the condition.
Lao Lim vs. Contrary to the ruling of respondent court, the disputed stipulation "for as
Court of long as the defendant needed the premises and can meet and pay said
Appeals increases" is a purely potestative condition because it leaves the
effectivity and enjoyment of leasehold rights to the sole and exclusive
will of the lessee. It is likewise a suspensive condition because the
renewal of the lease, which gives rise to a new lease, depends upon said
condition. The continuance, effectivity and fulfillment of a contract of
lease cannot be made to depend exclusively upon the free and
uncontrolled choice of the lessee between continuing the payment of the
rentals or not, completely depriving the owner of any say in the matter.
Catungal vs. Was the condition void for being potestative? No. Was the rescission
Rodriguez valid? No. Such a condition is not purely potestative as petitioners
contend. It is not dependent on the sole will of the debtor but also on the
will of third persons who own the adjacent land and from whom the road
right of way shall be negotiated. In sum, Rodriguez's option to rescind the
contract is not purely potestative but rather also subject to the same
mixed condition as his obligation to pay the balance of the purchase price
- i.e., the negotiation of a road right of way. In the event the condition is
fulfilled (or the negotiation is successful), Rodriguez must pay the
balance of the purchase price.
Effects of Possible or Impossible Conditions:
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.
Impossible conditions
● This article applies only to cases where the condition was already impossible from
the time of the constitution of the obligation. Hence, any supervening possibility will
not make the impossible condition possible unless the parties agree again, nor will a
supervening impossibility make the possible condition an impossible one.
● Possible Condition – If it is capable of realization according to nature, law, public
policy or good customs. Otherwise, it is an impossible condition. When the
condition is impossible, the obligation is void.
a. Physically impossible – Contrary to the law of nature
- Drink the water of the Pasig River until it runs dry.
b. Juridically impossible – Contrary to law, public policy, morals, and good
customs.
- Ex. I’ll give you money if you kill X. Condition is contrary to
law, hence impossible
● Condition not to do an impossible thing shall be considered as not written, because
the rule has always been that no person is allowed to commit an unlawful act. The
obligations will then stand as simple, pure and immediately demandable.
● Impossible conditions differ from those found in obligations and in donations and
wills. In the latter, it is considered as not written but the will remains valid.
Luneta Motor Are Abad’s sureties still bound? No more, because Luneta Motor can
vs. Abad never win, the case having been dismissed. The condition has become a
legal impossibility. Therefore, the obligation dependent upon this
condition must be deemed extinguished, according to article 1116 of our
Civil Code.
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.
This refers to positive conditions, while 1185 refers to negative conditions.
Ex. A binds himself to give B, a 3rd year law student, a car if he becomes a lawyer in 2016.
Year 2016 has lapsed and B is still not a lawyer, obligation is extinguished. If B travels abroad
on a 5-year contract of employment in 2014, then obligation is also extinguished due to the
certainty that it will not take place.
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.
The condition that some event will not happen at a specified time will make the
obligation effective only when:
a. Specified time has already lapsed without the event occurring
b. Or if it has become definite that the event will not occur
Ex. A binds himself to give B a parcel of land if B does not run for Mayor in their City within
6 years. Time elapsed and B did not run for Mayor, obligation to deliver land becomes
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effective. Also, if the City was erased due to a nuclear bomb, B can no longer run for Mayor in
that City, hence, obligation becomes effective too.
Constructive Fulfillment of Condition:
Article 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents
its fulfillment.
● The Article refers to a constructive and not an actual fulfillment of the condition.
Mere intent to prevent the fulfillment is not enough without actual prevention of
fulfillment. The prevention must be consummated. These are the 2 requisites.
● When an obligor committed an act voluntarily which is not intended to prevent the
fulfillment of the condition, but nevertheless resulted in the frustration of the
condition, there shall be no constructive fulfillment.
● This article is brought about by the principle that no person shall profit by his own
wrong.
● If the parties stipulate that the obligation shall be extinguished if the condition could
not be fulfilled for “any reason,” then even if the obligor prevents its fulfillment, the
obligation shall still be extinguished.
Cases:
PLDT vs When PLDT abrogated the pension plan after the war, it voluntarily
Jeturian prevented the fulfillment of its obligation to provide pension plans to its
employees, thus, whether or not the employees have reached the age of
50, their rights are reserved for such benefits.
Valencia vs. Valencia is liable for damages. The putting up of a performance bond is
RFC not a condition before he could be compelled to make the installation.
Assuming that the bond is a condition, it was he who voluntarily
prevented its fulfillment. In either case, the existence of the contractual
relation between the parties did not depend upon the posting the
performance bond. Although, the latter was essential to the birth of some
of the rights stipulated in favor of petitioner herein, those of respondent
were not conditioned upon the giving of said performance bond.
Labayan vs. There is another aspect to the case which has to do with the tenth
Talisay paragraph of the mutual obligations of the contract and which concerned
the securing of the right- of-way for the proposed railroad. To get from
the Hacienda Esmeralda No. 2 to the Hacienda Dos Hermanos, the
railroad would have to pass through the haciendas of Esteban de la Rama.
But he would not grant permission to use his land for this purpose in
1920, and only consented to do so in 1924. Here then was a clear case of
such a condition of affairs as was contemplated by the contract.
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 only applies to suspensive conditions where there was fulfillment.
● Since the condition is merely an accidental element of the obligation, the effect of a
conditional obligation to give, once the suspensive condition is fulfilled, shall
retroact to the date of the constitution of the obligation. This is similar to the
legitimation of a natural child.
● If the object of the obligation is the delivery of a determinate thing, obligor should
not be allowed to alienate the property during the pendency of the suspensive
condition. If the obligor alienates the property, alienation will be abrogated upon the
happening of the condition unless the third person acted in good faith. If that is the
case, the only remedy then is to file for damages against the debtor. If the third
person acted in bad faith, he can be compelled to deliver upon the happening of the
suspensive condition.
● If it is the obligee who alienates the property before the condition is fulfilled, then
fulfillment of the condition will convalidate the alienation.
● For practical reasons, delivery of fruits and interests accruing before the fulfillment
of the suspensive conditions is not required. When the obligation imposes reciprocal
prestations, the fruits and interests they receive during the pendency of the condition
shall be deemed to have been mutually compensated.
● If obligation is unilateral like in donation, debtor is allowed to appropriate the fruits
and interests received since the debtors has not received anything from the creditor.
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
Pending the happening of the suspensive condition, the creditor cannot compel the
debtor to perform the prestation.
Article does not grant any preference of credit but only allows the bringing of proper action
for its preservation.
However, the creditor may avail himself of some remedies such as:
1. Action for Prohibition restraining alienation of the thing during pendency
2. Petition for the Annotation of the creditor’s right
3. Action to demand security if 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 time of prescriptive
periods.
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Rules in Cases of Improvement, Deterioration, or Loss:
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:
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;
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;
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 to obligations to deliver a determinate or specific thing. No
application to generic objects. Also, it applies only when the suspensive condition is fulfilled.
During pendency, the thing can undergo some changes:
a. Loss
b. Deterioration or Impairment
c. Improvement or Betterment
● Gone out of commerce means that it is used to be sold in the market but is not a
prohibited good. Ex. A land where a public plaza is built can no longer be alienated.
● Deterioration is making worse the condition of the thing. It is the impairment or reduction
of its value.
● Improvement is anything which increases the value of the thing.
a. If improvement is due to nature/time, it belongs to the creditor.
b. If at the expense of the debtor, cannot claim indemnification but may enjoy
usufructuary rights.
● Inure means “belong”
● Usufructuary means the right to enjoy the use and advantages of another person’s
property.
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 refers to the fulfillment of a resolutory condition. If the event happens,
the obligation is considered as if it did not exist. Thus, the parties are bound to return
what they have received from each other and return to the status quo.
● In reciprocal restitutions, the fruits and interests shall be compensated against each
other.
● Same rules for loss, deterioration, or improvement in Art. 1189 will be applicable
except the party bound to return something shall be considered as the debtor under
the present article.
● Retroactivity of the fulfillment of the condition shall be determined by the courts,
taking into consideration the intention of the parties if they are determinable.
With a term or period — Arts. 1180, 1193-1198
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.
Patente vs. WON the obligation is pure or the courts may fix a period? – Omega’s
Omega promissory note to Patente contained the condition that he will pay as
soon as he has the money. This is a void condition for its fulfillment is
left solely to the will of the debtor. Still, the original intention was to
grant the debtor a deadline for the payment, and to make it a pure and
unconditional obligation is to impose a completely different approach
than agreed upon. Thus, when the time for payment of an obligation is
left to the sole will of the debtor, and the condition is annulled, the
obligation does not become a pure and unconditional obligation. The
recourse of the creditor is to go to court and ask for setting a time limit
for the payment.
Gaite vs. WON the obligation of Fonacier to pay Gaite is an obligation with a
Fonacier suspensive term or condition? The shipment or sale of the iron ore is
not a condition or suspensive to the payment of the balance of
P65,000.00, but was only a suspensive period or term. It was intended
Merely to fix the future date of the payment. It is certain that the payment
will be made. What is uncertain is the exact date at which it will be made.
Nothing is found in the contract that Gaite assumed to run a risk of losing
his right over the ore without getting paid for it. This is proved by the fact
that Gaite insisted on a bond to guarantee the payment of P65,000.00.
Obligations with a Period
Classification, In diem vs. Ex die, Legal, Conventional, Judicial,
Article 1193. Obligations for whose fulfillment a day certain has been fixed, shall be
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 demandable only when that day comes. While a period has a suspensive or The former is known as a
resolutory effect, nonetheless, in the suspensive condition and the
Obligations with a resolutory period take effect at once, but terminate upon arrival of the former, it cannot prevent the birth of latter a resolutory condition.
day certain. the obligation in due time, and in the
latter, does not militate against its
A day certain is understood to be that which must necessarily come, although it may not be existence.
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
Arrival of the Term/Period is either Definite or Indefinite
a. Definite – Exact date or time is known
b. Indefinite – Exact date or time is not known but is sure to come or happen.*
- *Uncertainty of the date does not convert it into a condition as long as
there is no uncertainty as to whether it will happen or not.
Other Classifications
1. Legal – Period is fixed by law
2. Conventional/Voluntary – Period is agreed upon by the parties
3. Judicial – Period is fixed by the courts for the performance of the obligation or for
its extinguishment
“On or About” – Fulfillment may be made on the date, or a few days after, but not on a
remote date.
“On or Before” – Fulfillment may be made before the date, but the deadline is fixed.
PNB vs. Defendant spouses entered into a mortgage contract with PNB payable in
Lopez Vito 10 installments. The mortgage contact has a condition stating that if the
mortgagors at any time neglect, fail or refuse to comply with any or all
the stipulations or conditions of the contract., the mortgagee shall have
the right to declare such stipulations or condition violated and to proceed
for the foreclosure of the mortgage. However, the Lopez Vito were not
able to pay the sums corresponding to six annual installments. Thus, PNB
instituted an action demanding the defendants to pay the installments due
and unpaid, and the spouses contended that such action is premature. The
trial court ordered the spouses to pay PNB the unpaid installments but
reserved to PNB the proper action on the last installment since it is not
yet demandable, hence the recourse to the Supreme Court.
To determine whether the obligation is demandable, it has to be resolved
first whether the obligation was with a period or an obligation subject to a
resolutory condition. The Court ruled that it is an obligation subject to a
resolutory condition. The non-fulfillment of the conditions of the contract
renders the period ineffective, and makes the obligation demandable at
the will of the creditor.

Requisites for a Valid Term/Period Victorias The seventh paragraph of one of the contracts, quoted by the appellant in
1. It must be future Planters vs. its brief, where the parties stipulated that in the event of flood, typhoon,
2. It must be certain, that is, sure to come but may be extended by mutual agreement Victorias earthquake, or other force majeure, war, insurrection, civil commotion,
3. It must be possible physically and legally Milling organized strike, etc., the contract shall be deemed suspended during said
period, does not mean that the happening of any of those events stops the
running of the period agreed upon. It only relieves the parties from the
Period Distinguished from Condition
fulfillment of their respective obligations during that time — the planters
Basis Period Condition from delivering sugar cane and the central from milling it.

Time Period always refers to the future.
Fulfillment Sure to happen at an exact date known
from the start, or at an indefinite time,
but is sure to arrive.
Influence on No effect or influence upon the
the Obligation existence of the obligation but only in
to be Fulfilled its demandability or performance.
or Performed
Condition can refer to a past
event unknown to the parties.
May or may not happen
being an uncertain event.
May cause the arising of an
obligation, or the cessation of
one already existing.
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
Loss
● Through the fault of debtor – Obligor to pay damages "
● Without the fault of debtor – Obligation extinguished
Deterioration
● Through the fault of debtor – Creditor may choose between rescission or fulfillment,
with damages
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 ● Without the fault of debtor – Impairment to be borne by the creditor
Improvement
● By its nature or time – Inure to the creditor
● At the expense of the debtor – No other right than usufructuary
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 only applies to obligations to give because it speaks of payment or delivery.
Effects of Good and Bad Faith
● If debtor was not aware of the period or he was of the belief that the obligation has
become due and demandable, he can recover what he paid or delivered including
fruits and interest.
● If debtor was aware of the period and he paid voluntarily, he cannot recover the
payment or delivery he made. He is deemed to have waived the benefit of the term
and the obligation is considered as already matured. Hence, recovery is barred.
● Good faith or Bad faith of the Creditor is immaterial, since it is unfair if the creditor
will be allowed to hold on the thing when it is not yet due and leave the debtor
without any relief.
Comparison with Solutio Indebiti
● In Solutio Indebiti, where there is payment of what is not due, the recipient will pay
legal interest only if money is involved. If he acted in bad faith, he will be liable for
the fruits or fruits which he might have received. If he acted in good faith, no
interests or fruits will be returned, only the thing received.
● The big difference is that in the present article, the debtor already has an existing
debt or obligation to the creditor which will become demandable upon the arrival of
the period; While in solutio indebiti, the payer has no debt or obligation to pay the
recipient.
Exceptions
● Even if the conditions in the Article are present, there can be no recovery in the
following situations:
a. Obligation is reciprocal and there has been premature performance on both
sides.
b. Obligation is a loan on which the debtor is bound to pay interest.
c. Period is exclusively for the benefit of the creditor because debtor paying
in advance loses
Benefit of the Period
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.
Applicability:
● Applies only when the parties themselves have fixed a period on the performance of
the obligation.
● Does not apply to a case where the Court was authorized by the parties to fix a
reasonable term.
Effects of the Presumption:
● Creditor cannot demand the performance of the obligation before the expiration of
the designated period.
● Debtor cannot perform the obligation before the expiration of the period.
● This is because the creditor is interested in the interest, and the debtor is interested in
the time given him within which to pay the obligation.
● Debtor has no right, unless the creditor consents, to accelerate the time for the
payment, even if the payment includes not only the principal but also the interests in
full.
Presumption is Rebuttable:
● If it can be shown that the period was established for the benefit of the creditor, he
can compel performance even before the arrival of the period. He may also waive
this right if he so desires.
● If it can be shown that the period was established for the benefit of the debtor, he
can oppose the premature demand for the performance of the obligation. He may
also waive the benefit of the period by paying the creditor in before the arrival of the
period.
Reasons why Creditor cannot be compelled to accept before period arrives:
1. Payment of Interest:
● The interest expected to be realized will be lessened if premature payment
is done.
2. Desire of the creditor to have his money invested safely instead of having it in his
hands:
● By the fixing of the period, he is able to protect himself against the sudden
decline in the purchasing power of the currency loaned specially at a time
when there are many facts that influence the fluctuation of the currency.
Ponce de The benefit of the period is both for the debtor and the creditor hence the
Leon vs. debt owed by de Leon to Syjuco is not yet due and demandable.
Syjuco Furthermore, it may be argued that the creditor has nothing to lose but
everything to gain by the acceleration of payment of the obligation
because the debtor has offered to pay all the interests up to the date it
would become due, but this argument loses force if we consider that the
payment of interests is not the only reason why a creditor cannot be
forced to accept payment. One of them is that the creditor may want to
keep his money safely invested instead of having it in his hands. Another
is that the creditor wants to protect himself from sudden decline in the
purchasing power.
When Courts May Fix a Period:
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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.
Note:
● The status of the obligation is suspended before the period of compliance had been
fixed.
● Rationale for fixing a period is to prevent debtors from not fulfilling their
obligations forever without being liable for delay.
● Prescriptive period for filing an action to fix the period is 10 years from the
perfection of the contract.
Situations When The Court Will Fix A Period
1. When no period is mentioned, but it is inferrable from the nature and
circumstances of the obligation that a period was intended.
Examples:
- Contract of sale on credit without any time fixed for the payment
- Contract for construction where the period of completion was not stated
but intended
- Contract of lease that states “as long as the tenant pays the stipulated rent”
- When the period is for a “reasonable time” agreed upon, there is a period
fixed. The court will determine whether the reasonable time had elapsed.
- When the seller of a property is given the right to redeem but no period
was stipulated for the redemption, the court may fix the period.
2. When the period is dependent upon the will of the debtor.
Examples:
- When the debtor binds himself to pay when his means permit him to do so
- When the debtor binds himself to pay as soon as possible or little by little !
- When the debtor shall pay as soon as he has the money
- When the duration of the lease is left to the will of the lessee
Significance of The Court’s Fixing of The Period
● It is the duty of the court to fix the period if the parties intended it.
● When the court fixes the period, it merely ascertains the will of the parties and gives
effect thereto.
● The court does not modify or amend the obligation but carries out an implied
stipulation in the contract.
● It is essential that it be alleged that a period was clearly intended by the parties.
● Specific performance cannot be demanded simultaneously with the petition for
fixing a period because the former is premature, unless the latter action will only be
a formality and serves no purpose but to delay.
Period Fixed By The Court Cannot Be Extended
● Once the court has fixed the period, the period cannot be changed or extended.
Barretto vs. WON the Court can validly modify a period it has fixed. When the terms
City of of the donation do not fix the time of the performance of a condition, the
Manila proper period will be determined by the court. Once the court has fixed
the period , such period acquires the nature of the contract, becoming the
law governing the contract and once it has been agreed upon by the
parties, IT CANNOT BE CHANGED OR MODIFIED through any
subsequent action.
WON the petitioner should have first brought an action to fix the date of
People’s Bank payment as provided by Article 1228 of the Civil Code
vs. Odom − It was expressly stipulated in that the obligation contracted by Odom
shall expire and be due upon demand of the petitioner, and in view of the
fact that the latter deed was incorporated in Exhibit D and that Odom was
required by the petitioner to pay all his indebtedness, it is plain that the
obligation was without a term and that it became due and is demandable.
Gonzales vs. “I promise to pay ... as soon as possible.” - The Court held that such are
Jose governed by Article 1128 (Art.1197 NCC) of the Civil Code because
under the terms thereof, the plaintiff (Gonzales) intended to grant the
benefit of the period to De Jose. As the PNs do not fix the period, it is for
the court to fix. But, the action to ask the court to fix the period has
already prescribed (10-year prescription period) in accordance with Sec.
43 (1) of the Code of Civil Procedure.
Eleizegui vs. In this case, a conventional term was established. That being the case, it
Manila Lawn erases the assumption that the lease was terminated by the notice given
Tennis Club by the plaintiffs. Notice is only necessary when it becomes necessary to
recourse to the legal term. It was apparent that the lessors did not intend
to reserve to themselves the right to rescind the contract when they
expressly conferred upon the lessee this right by stipulating it in the
contract. Generally, if the term of the lease whose termination is at the
sole will of the lessee, the courts must fix the period according to the
character and conditions of the mutual undertakings. Legal term will not
be applied in this case as to the existence of an express stipulation stating
a conventional term at the sole will of the lessee.
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;
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 4. When the debtor violates any undertaking, in consideration of which the creditor
agreed to the period;
5. When the debtor attempts to abscond.
Applicability:
● Applies only if the parties have designated or fixed a period for the fulfillment of the
obligation.
● It cannot apply to a case where no period is fixed by the parties. (Article 1197 shall
apply)
Elaboration on the Five Instances
a. Insolvency
● Insolvency terminates the period. Obligation becomes due and demandable unless
the debtor gives a guaranty or security for the payment of the debt.
● Insolvency does not have to be declared by the insolvency court. It is enough that
the debtor could not pay his financial obligations due to lack of money or funds.
● Insolvency must be one occurring after the fixing of the term.
b. Failure to Provide Guaranties or Securities
● When the debtor failed to provide the creditor the guaranties or securities he had
promised, he loses the right to use the period.
● Thus, failure of the mortgagors to register the mortgage they had executed in favor
of the mortgagee, and in mortgaging the same parcel of land to another entity, there
is a non-fulfillment of the promise to furnish the creditor with the agreed security.
Obligation becomes due and demandable.
c. Impairment of the Guaranties or Securities
● When there is an impairment of the guaranties or securities caused thereon by the
fault of the debtor, or got lost by fortuitous event, the obligation becomes due and
demandable immediately- unless the debtor immediately provides the creditor with
new guaranties or securities equally satisfactory as the first ones.
d. Violation of any undertaking
● If the debtor has violated any undertaking, which undertaking is the reason for the
creditor to agree to the contract, the term is terminated and the obligation becomes
due and demandable at once.
● Thus, the employer may terminate the employment of an employee who made a
substantial breach of his employment contract, even if there was a fixed duration for
the job.
e. Attempt to Abscond
● The debtors’ act of absconding (leaving hurriedly and secretly, escaping) with the
intention to hide from and defraud creditors is an indication of bad faith. The term is
thus terminated.
● Mere attempt to abscond is enough to render the obligation pure and immediately
demandable.
Gaite vs. The period granted wherein Gaite should wait for the sale or shipment of
Fonacier the ore before receiving payment was lost because of their failure to
renew the bond of the Far Eastern Surety Company or else replace it with
an equivalent guarantee. The expiration of the bonding company's
undertaking substantially reduced the security of the vendor's rights as
creditor for the unpaid P65,000.00. All the alternatives, therefore, lead to
the same result: that Gaite acted within his rights in demanding payment
and instituting this action one year from and after the contract was
executed, either because the appellant debtors had impaired the securities
originally given and thereby forfeited any further time within which to
pay; or because the term of payment was originally of no more than one
year, and the balance of P65,000.00 became due and payable thereafter.
The obligation between the parties was a reciprocal one, Woodcraft to
Abesamis vs. furnish the vessel and Abesamis to furnish the logs. It was also an
Woodcraft obligation with a term, which obviously was intended for the benefit of
both parties. The obligation being reciprocal and with a period, neither
party could demand performance nor incur in delay before the expiration
of the period. Consequently, when the typhoon struck on May 5, 1951
there was yet no delay on the part of Abesamis, and the corresponding
loss must be shouldered by Woodcraft.
However, after the storm of May 5, 1951, Woodcraft was advised of the
quantity of logs ready for shipment. Woodcraft gave assurance that a
vessel was coming to load on June 25, 1951. Abesamis readied the
necessary quantity of logs but the vessel did not arrive. In this respect,
although the obligation would not become due until July 31, 1951,
Woodcraft waived the benefit of the period by assuring Abesamis that it
would take delivery of the logs on June 25, 1951. On that date Abesamis
was ready to comply, but Woodcraft failed on his commitment, without
any satisfactory explanation for such failure. Therefore, Woodcraft
should bear the corresponding loss.
Song Fo vs. The security for the payment of the purchase price of the launch itself
Oria having disappeared as a result of an unforeseen event (vis major), and no
other security having been substituted therefor, the plaintiffs were clearly
entitled to recover judgment not only for the installments of the
indebtedness due under the terms of the contract at the time when the
instituted their action, but also for all installments which, but for the loss
of the vessel had not matured at that time.
As to Plurality of Prestation (alternative — Arts. 1199-1205 -, facultative — Art. 1206)
Grant of right to choose one prestation out of several, or substitute the first one
1. Alternative Obligation – obligor may choose to completely perform one out of
several prestations
2. Facultative Obligation – only one prestation has been agreed upon, but the
obligor may render one in substitution of the first one
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 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
Classification Of Obligations with Plurality of Prestations or Objects
a. Conjunctive Obligation – Debtor has to perform all the prestations to extinguish
the obligation
b. Alternative Obligation – Debtor has to completely perform only one of several
prestations
Example: A promised to give B a land, or a painting, or 500 pesos. The delivery of
one is enough.
c. Facultative Obligation – Debtor is bound to perform one prestation or deliver one
thing with a reserved right to choose another prestation or thing as substitute for the
principal
Creditor Cannot Be Compelled To Receive Parts of the Prestations
● In the above example, the creditor cannot be compelled to receive part of the car,
part of the painting, or part of the money.
● However, if the creditor agrees to accept part of one and part of the other, there is no
prohibition. In that case, there is a novation in the prestation.
Reyes vs. An election once made is binding on the person who makes it, and he will
Martinez not thereafter be permitted to renounce his choice and take an alternative
which was at first open to him.
By this contract Reyes was to be given the parcel described in clause 8,
but in a proviso to said clause, the parties contracting with Reyes agreed
to assure to him certain other land containing an equivalent number of
trees in case he should so elect. The prior history of the litigation shows
that the herein plaintiff elected to take and hold the parcel described in
clause 8, and his right thereto has all along been recognized in the
dispositions made by the court with respect to said land. Reyes must be
taken to have, elected to take that particular parcel and he is now
estopped from asserting a contrary election to take the five parcels of
land described in paragraph IX of his complaint. But the facts show that
the title of this paragraph 8 parcel is still in the heirs of Inocente Martines
and have not yet been transferred to Reyes. Reyes then must now have a
claim for damages for the value of the aforesaid property which we now
have established, should be his. The Martinez heirs are allowed a period
of 3 months, extendible, to procure the execution of a sufficient deed
conveying to Reyes, the paragraph 8 parcel.
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.
Right of Choice:
● The general rule is that the right of choice belongs to the debtor unless that right had
been expressly granted to the creditor.
● Implied grant of the right to the creditor is not allowed.
● If it does not appear on the agreement as to who of the debtor and creditor has the
right of choice, it is the debtor who can choose the prestation. The creditor shall
have it only when expressly granted to him.
● The debtor must choose and fulfill only one of the prestations which does not belong
to any of the above unacceptable kinds.
Purpose of Choice:
Article 1201. The choice shall produce no effect except from the time it has been
communicated.
Effectivity of the Choice
● Choice produces no legal effect until it has been communicated to the other party.
● Notice of choice may be effected in any form in the absence of any specific
requirement under the law.
● Hence, it can be done in writing, verbally, impliedly, or by any other unequivocal
means.
● If the debtor, without announcing to the creditor his choice of the prestation simply
performed one of them, the performance is not binding. The debtor can recover what
he had delivered, performed, or paid, under the law on quasi-contracts.
Effect of Choice or Selection
● Once the choice has been communicated, the effects are the following:
1. Obligation becomes limited to the prestation chosen and all its natural
consequences.
2. The choice is irrevocable, otherwise, the other party might be exposed to
damages which may arise for instance, from costly preparations in
anticipation of the performance of the announced prestation.
Consent of the Other Party Not Required in the Making of Choice
● In the making of the choice, the law does not require that the choosing party first
secure the conformity of the other party. Otherwise, that will in effect frustrate the
clear intention of the law and the alternative nature of the obligation. The decision in
Ong Guan in holding that the purpose of the notice is to give the other party the
opportunity to express his consent is erroneous.
Effect of Delay in Choosing and Rules in Case of Plurality of Debtors/Creditors
● If there is delay in the making of the choice, the right to make the choice is not lost.
● The code is silent on what will happen when a case is filed before any choice is
made, hence three possibilities may arise:
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 a. The Court will make the choice
b. The Court may order the Debtor or
c. Creditor to make the choice within a certain period
● If the debtor is in delay, the court should authorize the creditor to make the choice
because the debtor is deemed to have waived his right. The same applies if the
creditor has the choice but incurred delay.
● If there are several debtors or creditors all must give their consent in the making of
the selection. This is because if the obligation is joint, none of then can extinguish
the entire obligation.
● If the obligation is solidary, the choice of one is binding to all.
Ong Guan The defendant may build the house as an alternative prestation, freeing him
Chan vs. from the payment of the sum in which the building was insured. This
Century conclusion is in line with The Civil Code’s Article 1131.
Insurance
Paying the sum in which the building was insured is one of the 2 prestations
provided in one of the clauses stipulating the conditions of the policies.
Based on the same Article of the Civil Code, the complete performance of
one of them is sufficient to extinguish the obligation. While there are several
prestations, only one is due.
Article 1202. The debtor shall lose the right of choice when among the prestations whereby
he is alternatively bound, only one is practicable.
Applicability:
● Applies only to debtors with right of choice.
● If creditor is expressly given the right to choose, Article 1205 will apply.
● Practicable means possible or lawful.
● If only one of the prestations is practicable, debtor loses his right of choice and the
obligation loses its alternative character. The prestation becomes a simple obligation.
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.
When Debtor Cannot Make A Choice Due to The Creditor’s Acts; Consequences:
● If the debtor cannot make any choice due to the creditor’s fault, he may rescind the
contract with damages.
● However, if the debtor is being prevented to choose only a particular prestation, and
there are others available, he is free to choose any of the others, after notifying the
creditor of his decision.
● The rescission mentioned in the law does not take place ipso facto but only upon the
debtor’s initiative.
Example: A agreed to paint the house or the building of B at 100 pesos. B sold his commercial
building. Painting the building is now impossible due to a change of ownership. Debtor has
now the option to paint the house or rescind the contract with damages, if he suffered any.
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.
Applicability:
● The article applies only when the right to choose belongs to the debtor.
● It is Article 1205 which applies when the right to choose belongs to the creditor.
● All prestations must have been rendered impossible due to the fault of the debtor.
When only one or some of the prestations had been lost or become impossible, the
creditor cannot claim indemnity for damages because the debtor, who has the right
of choice, may still perform any of the remaining alternative prestations.
● If the impossibility is caused by the fault of the debtor, the creditor is entitled to
indemnity for damages.
● If all things which are alternatively the object of the obligation have been rendered
impossible of performance by fortuitous event, obligation is extinguished and the
debtor is released from responsibility unless the contrary had been stipulated by the
parties.
Example: A agreed to deliver B his 2020 model car with Plate Number 337 or his diamond
ring worth 200 pesos, or his condominium at Makati City. If A burned his car, threw his
diamond ring into boiling lava, and sold his condo, nothing is left of the prestations. B is
entitled to indemnity for damages under 1204.
Indemnity for Damages, Mode of Determination
● The basis for the amount of indemnity is the value of the last thing whish
disappeared or that of the service which has become impossible last.
● Additional damages may be awarded to the creditor if there is any justification
therefor.
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.
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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.
Applicability:
● Applies only when the right of choice has been expressly granted to the creditor.
● The obligation of the debtor ceases to be alternative from the day the selection of the
specific prestation out of the two or several, had been communicated by the creditor.
From that moment on, the obligation is converted into a simple one.
● If the creditor is guilty of delay, the debtor will not incur any delay for the reason
that until the obligation shall have become a simple obligation, the debtor would
know now what prestation to perform. If there is any period in the obligation, the
creditor is deemed to have waived the same.
3) As to rights & obligations of multiple parties — Arts. 1207-1222 (Joint or Solidary
— Arts. 927, 1824, 1911, 1915, 1945, 2157, 2194, 2146 Arts. 94, 121 FC ; Art. 90 RPC)
Character of Responsibility or Liability
1. Joint Obligation – each debtor is liable only for a party of the whole liability and
to each creditor shall belong only a part of the correlative rights
2. Solidary Obligation – debtor is answerable for the whole obligation without
prejudice to his right to collect from his co-debtors the latter’s shares in the
obligation
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. (1138a)
Concept of Joint Obligation
● A joint obligation is one in which each debtor is liable only for proportionate part of
the debt, and the creditor is entitled to demand only a proportionate part of the credit
from each debtor.
Concept of Solidary Obligation:
● A solidary obligation is one in which each of the debtors is liable for the entire
obligation and each of the creditors is entitled to demand the satisfaction of the
whole obligation form any of all of the debtors.
Classification of Obligations According to Number of Parties:
1. Individual Obligation – One debtor and one creditor.
2. Collective Obligation – Two or more debtors and two or more creditors. Has 2
kinds:
a. Joint Obligation – Entire obligation is paid proportionately by the debtors.
b. Solidary Obligation – Each debtor is obliged to pay the entire obligation and
creditors may demand from any of the debtors the payment of the entire
obligation. Has 2 kinds:
1. Passive Solidarity – Solidarity on the part of the debtors.
2. Active Solidarity – Solidarity on the part of the creditors.
Presumption in Collective Obligation and its Rationale:
● An obligation is presumed joint unless the contrary appears from the:
1. Law (Legal Solidarity) – The law has its own legal reason.
2. Nature of the obligation (Real Solidarity) – The obligation requires
solidarity.
3. Stipulation of the parties (Conventional Solidarity) – Burden of solidarity is
assumed voluntarily.
● If the obligation is silent, on the nature or character of the rights of creditors and
debtors, it is joint.
● The presumption is there because solidarity is burdensome on the debtors. It
increases their responsibilities and liabilities as against the solidary creditors whose
rights are correspondingly increased at the burden of the debtors. To favor the
debtors, the law recognizes the existence of solidarity only in the situations
mentioned above.
Consequences of a Joint Obligation:
1. Each debtor is liable only for a proportionate part of the entire debt, the reason being
that there are as many separate debts as there are debtors.
2. Each creditor, if there are several, is entitled only to a proportionate part of the
credit. The reason is, there are as many separate credits as there are creditors.
3. Demand made by one creditor upon one debtor produces the effects of default only
as between them.
4. Interruption of prescription caused by the demand made by one creditor upon one
debtor will not benefit the co-creditors; neither will that demand interrupt the
prescription of the obligation as to the other debtors.
5. Insolvency of a debtor will not increase the liability of his co-debtors, meaning, his
co-debtors will not answer for him. Neither will it allow a creditor to demand
anything from the co-creditors.
6. The vices of each obligation emanating from the personal defect of a particular
debtor or creditor will not affect the obligation or rights of the others.
7. As the credit or debt is presumed divided into as many shares as there are creditors
and debtors, a joint creditor cannot act in representation of the other creditors. A
debtor cannot be compelled to answer for the liability of other debtors.
8. If there is a breach of the obligation arising from the act of one of the debtors, he
alone must bear the damages caused.
9. An acknowledgement made by one of the joint debtors as to the existence of the
debt will not stop the running of the period of prescription as to the others. Same
rule applies if only one of the debtors paid.
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 10. If the consent of one debtor is vitiated by the creditors, this will not affect the
liability of the other debtor whose consent is not vitiated.
11. Defenses available to one debtor is not necessarily useful for the others.
Practical Problems:
"A and B bind themselves in a promissory note to pay C and D the sum of 100,000. It is now
due and demandable, and no voluntary payment was made by A and B.
1. Can C alone proceed against A and B for the payment of the whole obligation?
● No. Obligation is silent on the character of credit and the liability of the
debtors. It is presumed joint. C can only collect his proportionate share,
which is 25,000 from A and 25,000 from B.
2. Can C and D proceed against A alone?
● No. The explanation is the same as above. C and D can only collect
25,000 each from A.
3. If A is insolvent, can B be compelled to pay for the share of A?
● No. The obligation being joint, the debt is presumed to be divided into as
many equal shares as there are debtors. The share of A is distinct from the
share of B.
4. A’s prescription of the action is nearing. C wrote a demand letter to A alone. Did this
letter interrupt the running of the prescriptive period as against B?
● No. The obligation being merely joint, the prescriptive period insofar as B
is concerned is not interrupted. After 10 years, the obligation of B will
become stale due to prescription.
Consequences of Solidarity:
1. Passive Solidarity – Several Debtors
● This arises when any one of the several debtors can be made liable for the
payment of performance of the entire obligation without prejudice to his
right to seek reimbursement from his co-debtors as to their respective
shares in the obligation in accordance with their internal arrangement – of
which they are allowed to enter into.
● Full payment made by anyone of the solidary debtors extinguishes the
obligation.
● The debtor who made the payment may claim reimbursement from his
co-debtors as regards their corresponding shares in the obligation.
● Example: A, B, and C, are solidary debtors of X. If X filed a case against
all of them when the debt becomes due and demandable, he can execute
the judgment against anyone of them to compel satisfaction of the entire
judgment.
2. Active Solidarity – Several Creditors
● Where any one of the solidary creditors can demand the payment or
performance of the entire obligation from the debtor or any of the debtors
if there are several of them. Among them, there is mutual representation
with power to exercise the rights of others in the same manner as their
own rights.
● The creditor who received the entire amount will be liable to pay the
corresponding shares of his co-creditors in accordance with their internal
agreement. If there is no agreement, it is presumed that each creditor is
entitled to receive equally.
● Example: A is indebted to X, Y, and Z who are solidary debtors. A can pay
either to X, Y, or Z. The full payment to any of them extinguishes the
obligation.
Legal, Real, and Conventional Solidarity:
1. Legal Solidarity – From Law
Example: All partners are liable solidarily with the partnership for everything chargeable to
the partnership under articles 1822 and 1823. (Article 1824 of the NCC)
*Solidarity may also arise if imposed by final judgment by a court upon several defendants
2. Real Solidarity – From Nature of the Obligation
Example: Solidary liability may arise if two or more persons acting together in violation of
Articles 19, 20, 21, and 22 of the Code under the Chapter on Human relations shall be liable
solidarily be reason of the nature of the obligation incurred. According to Manresa, the
mentioned articles have a comment element – they are morally wrong. A moral wrong cannot
be divided into parts; hence, the liability for it must be solidary
3. Conventional Solidarity – From Stipulation of Parties
When the parties expressly agreed on solidary liability, the precise word “solidary” need not
be used. It is sufficient if the obligation states that each one of the debtors can be compelled to
pay the entire obligation, or that each of them is obligated for the entire value of the
obligation.
● The following terms are used to convey the idea of solidary obligation:a
a. Mancomunada Solidaria (if mancomunada only, then it is joint)
b. De Mancomun e Insolidum
c. In Solidum
d. Juntos or Separadamente
e. Jointly and severally
f. Individually and collectively
g. Each to pay the whole value
h. “I promise to pay” signed by 2 or more debtors
Cases:
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.
Applicability:
● This article applies to a Joint Indivisible Obligation – because solidarity is not
provided and the prestation or object is not susceptible of division.
● According to Manresa, the peculiarity of a joint indivisible obligation is that on the
part of the debtors, its fulfillment requires the concurrence of all the debtors,
although, each for his part. On the part of the creditors, there must be a collective
action for acts which are prejudicial to the rights of the creditors.
● In case of the insolvency of a debtor, his co-debtors shall not be liable for his share.
Otherwise, the joint character of the obligation will be disregarded.
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Effect of Breach of A Joint Indivisible Obligation
● In a joint indivisible obligation where there is plurality of debtors, compliance can Basis Indivisibility Solidarity
only be enforced by proceeding against all of them.
● If one of them failed in his undertaking, the obligation could no longer be fulfilled Nature Refers to the prestation or object of Refers to the vinculum or tie
because the prestation or object is an indivisible one. Division is not possible in the contract existing between the subjects or
indivisible prestation. Accordingly, the obligation is converted into one of indemnity parties to the obligation
for damages. (See Article 1224)
● If there is plurality of creditors but there is only one debtor, the obligation can be Number of It does not require plurality of It requires plurality of subjects or
performed only be the delivery of the thing to all the creditors jointly. Debtor may Subjects subjects or parties parties
only deliver to one if that one is authorized by all the other creditors.
● The debtor can refuse to make delivery if only one creditor or some, but not all, are Effect of Converted into one of indemnity for The liability of the solidary debtors
making the demand. Meaning of “Right of the Creditors May Be Prejudiced Only by Breach of damages. As a result, indivisibility although converted into one of
Collective Acts...” Obligation of the obligation is terminated and indemnity for damages shall
● The collective action required of creditors in acts which may be prejudicial to them so each debtor is liable only for his remain solidary
clearly implies the opposite that if the act is beneficial to the others, the act of one part of the indemnity
creditor is sufficient to benefit all other creditors.
● As long as the obligation is joint, the act of one creditor cannot have any effect as to Effect of Heirs of the debtor remain bound to Terminates the solidarity, the tie or
the other creditors because the credit of each is separate from the credits of others. Death of a perform the same prestation vinculum being intransmissible to
Indivisibility requires collective action to be effective. Debtor the heirs
● In the old code, shall was used instead of may. The court is now given the discretion
to determine when an act of one creditor which is beneficial to the others would be
Indivisibility and solidarity are not identical. They need not exist together, but they can
binding upon all of them.
also exist together.
a. Solidary Divisible – X and Y to pay Z $100. $100 is divisible but is made indivisible
Article 1210. The indivisibility of an obligation does not necessarily give rise to solidarity. by agreement.
Nor does solidarity of itself imply indivisibility. b. Solidary Indivisible – X and Y to deliver a plane to Z. In case of breach, both liable
for entire indemnity.
c. Joint Indivisible – X and Y to deliver horse to Z worth $100. In case of breach, $50
Indivisible Obligation: indemnity each.
● An indivisible obligation is one where the prestation or object cannot be performed d. Joint Divisible – X and Y to pay Z $100. In case of breach, $50 indemnity each.
by parts without altering its essence or substance.
Example: Delivering a horse. If this obligation is made divisible, the horse will be delivered in
pieces, which destroys the essence of the object. 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.
Kinds of Indivisibility:
1. Legal Indivisibility – Indivisibility by operation of law, whereby a law declares as
Solidarity Not Affected by Differences in Terms and Conditions
indivisible an obligation which has for its object a prestation that is not divisible by
● The solidarity of the debtors, whether active or passive, is not affected even if
nature. Example: Delivery of definite things like a car (Art. 1225)
different terms and conditions are assumed or made applicable to them.
2. Conventional Indivisibility – Indivisibility by the agreement of the parties whereby
● Enforcement may be made at different times. Obligations which have matured can
an obligation which is divisible in nature is made indivisible by the will of the
be enforced while those still undue will have to be awaited. A particular debtor is
parties. Example: Accomplishment of work by metrical units – but by agreement is
answerable for all prestations which fall due although chargeable to the other
made indivisible.
co-debtors. Thus, the essence of solidarity remains.
3. Solidary Obligation - One where each debtor is liable for the entire obligation, and
Example: A, B, and C got a loan of $150 from D. They bound themselves solidarily under the
each creditor is entitled to demand the fulfillment of the whole obligation. It refers
terms that A will pay the following month, B a month after that, and C another month after
to the vinculum or tie or relationship existing between the parties representing the
that. Once A’s obligation becomes due, D may claim from him, but only A’s share until B and
same interest. Thus there are solidary debtors as well as solidary creditors. The tie is
C’s share matures. Once they do, D may claim again from A the shares of B and C. The
within the group.
solidarity between A, B, and C was not affected by the difference in terms and conditions.
Forms of Passive Solidarity
1. Uniform Solidarity – when the debtors are bound by the same terms and conditions
or stipulations.
CIVREV C2022 COMPILATION - DBN & MKG | SBM SYLLABUS | 24
 2. Varied Solidarity – when the debtors, while bound under the same obligation, are
not subject to the same terms and conditions of payment but to different secondary
stipulations or clauses. The example above shows a varied solidarity.
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.
Beneficial and Prejudicial acts of Solidary Creditor:
● Relationship of mutual agency exists among solidary creditors. Acts of one will
affect the others because of their relationship. Solidary creditors may perform acts
which are useful or beneficial to the others.
● Every solidary creditor is benefited by the useful acts of any one of them.
● Example: Act of a solidary creditor in filing a complaint so that the obligation may
bear legal interest.
● Demand of a solidary creditor which interrupts the running of the prescriptive period
of filing the action.
● If a solidary creditor performs an act which is prejudicial to his co-creditors, the act
may have valid legal effects, but the performing creditor shall be liable to his
co-creditors.
Article 1213. A solidary creditor cannot assign his rights without the consent of the others.
Rationale:
● There is a mutual agency among the solidary creditors. This mutual agency is the
essence of their active solidarity which is based on mutual trust and confidence.
● Thus, this agency cannot just be assigned to a third person without the consent of the
other creditors.
● With the consent of all, the rights may be assigned.
● Without the consent, the assignee does not become a solidary creditor. Any payment
made to him by the debtor does not extinguish the obligation. He is considered a
stranger. His acts will not bind other creditors.
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.
To Whom Payment Shall Be Made:
● The debtor can actually pay any one of the solidary creditors! Can you believe that?
● Payment, when accepted by any of the solidary creditors, will extinguish the
obligation.
● HOWEVER, once there has been a demand, payment shall be made to the
demanding creditor.
● Payment to another creditor, once a demand has been made, will not extinguish the
obligation except insofar as the share of the payor is concerned.
● If there are other debtors to whom no demand was made, they are free to pay any of
the other solidary creditors – unless the first debtor had already fully paid the entire
obligation. This is without prejudice to the debtor’s respective liability to the paying
debtor.
● In case of two or more demands were made, the first demand must be given
preference.
● If the first demanding creditor made only an extrajudicial demand, but neglected to
pursue it to the prejudice of the other creditors, judicial demand may still be resorted
by the latter against the debtor.
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 - There is novation when obligations are 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 (Art. 1291)
Compensation
● Takes place when two persons, in their own right, become creditors and debtors of
each other. (Art. 1278)
Confusion
● Takes place when the characters of creditor and debtor are merged in the same
person. (Art. 1275)
Remission
● Gratuitous abandonment by the creditor of his right. Acceptance by the obligor is
necessary. (Art. 1270)
Effects of Execution of the Specified Four Modes of Extinguishing:
● These four modes are prejudicial to other solidary co-creditors, because said acts
have the effect of extinguishing the debt or obligation which is due to all of them.
● The co-creditors are not left without any recourse. The one who had collected the
debt shall be liable for the shares corresponding to all his co-creditors.
● The remission made by a solidary co-creditor to 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. (Art. 1219)
● If there is no such previous payment, all the solidary debtors are released from the
obligation. The solidary debtor who accepted the remission cannot seek
reimbursement from his co-debtors.
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
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 been fully collected. granted the extension obligation

Against whom will the creditor’s action be addressed?

● When there is passive solidarity, the creditor can proceed against:
a. Any of the solidary debtors
b. Some of the solidary debtors, or
c. All of the solidary debtors simultaneously
No Bar to Subsequent Actions:
● If a solidary creditor made an extrajudicial demand on a solidary debtor and the
latter did not pay despite such demand, the former may direct similar demands to
any or all of the other co-debtors. The first demand shall not preclude subsequent
demands on the other co-debtors.
● If demand is judicial and a judgment was rendered by the court, the rules are
different:
a. If the decision is favorable to the solidary creditor, judgment will benefit all of
them.
b. If the solidary co-debtor happens to be insolvent and the case was filed only
against him, judgment cannot be executed against the other co-debtors who
were not made parties in the complaint. A new action is necessary to make
them liable and this new action is not barred by the first action. There is no
waiver against those not sued.
c. If the solidary creditor lost the case, the judgment will constitute res judicata
between the co- creditors and co-debtors. The judgment will constitute a bar to
the filing of the same case by any or some or all of the solidary creditors. The
remedy of the co-creditors is to go after the creditor who filed the case for not
informing them of the complaint. If they knew about it, it is their duty to join in
the case.
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.
Effect of Full Payment By A Solidary Debtor:
● Payment – The delivery of the thing or the rendition of the service which is the
object of the obligation.
● Payment made by one of the solidary debtors extinguishes the obligation. The
release of the paying solidary debtor results in the simultaneous release from the
same liability of the other co-debtors.
● When a solidary debtor fully pays the obligation, the resulting obligation of the
co-debtors to reimburse becomes a joint one
● If one of the debtors is insolvent, all solidary debtors including the paying debtor
shall share proportionately in the settlement of the corresponding share of the
insolvent debtor in the obligation.
● Co-debtors shall pay their shares with the corresponding interest at the legal rate if
there is no specification, from the time the debt has become due and not from the
date of payment.

Passive Solidarity and Suretyship are not Identical:
Basis Passive Solidarity
Nature of the Obligation Primary
Extent of the Liability Solidary debtor liable for his
own obligation and that of his
co-debtors
Right to Reimbursement Solidary debtor is entitled to be
reimbursed for what he has
paid, minus his own share
Effect of Grant of If granted extension of time to
Extension of Time to the pay, the co-debtors are not
Debtor to pay the released but shall remain liable
Creditor for the whole obligation minus
the share of the debtor who was
Suretyship
Subsidiary
Surety is responsible only
for the principal debtor
Surety is entitle to be
reimbursed for everything
that he has paid
If principal debtor is
granted extension of time
without the consent of the
surety, the surety is
released from the
Effect of Partial Payment:
● If the payment made by the solidary debtor is only partial, he is entitled to be
reimbursed only for such amount of money which he had paid in excess of his own
share in the obligation.
● If there is no excess, he cannot seek reimbursement.
Payor May Be Substituted as Party Plaintiff:
● Solidary debtor who paid the entire obligation may be substituted as plaintiff in the
same action for the purpose of enforcing the payment of the contributions of the
co-debtors to which the former is entitled.
● This is not subrogation, as the right is not based on the original obligation but upon
his payment.
● He does not step into the shoes of the creditor because he is entitled to collect only
the corresponding contribution of his co-debtors and not the whole amount.
● If payment was made before maturity of the debt, there shall be interests for the
period between the date of payment and the date of maturity which the law refers to
as “intervening period.” [This is how it is written in the Pineda book. (Page 184,
bottom portion) I believe it should have read, “there shall be NO interests”.]
CIVREV C2022 COMPILATION - DBN & MKG | SBM SYLLABUS | 26
When Offer To Pay is Made by Two or More Solidary Debtors
● When two or more solidary debtors offer to pay, the creditor may choose which of
the offers to accept. The law gives him the option.
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.
Applicability:
● Applicable if payment of the obligation was made under the following situations:
a. Obligation had already prescribed due to the lapse of time required by law:
- Example: A, B, and C are solidary debtors of D in the amount of $150. The creditor
did not make any demand for more than 10 years. Obligation already prescribed in
accordance with Article 1144. Still, A paid the entire obligation because he felt a
sense of fairness within him. A is now precluded from seeking reimbursement from
B and C based on Art. 1218.
b. Obligation has become illegal before it could be performed
- Example: A, B, and C solidarily bound themselves to make and deliver 100 air rifles
to D. Before the air rifles could be finished and delivered, an ordinance was passed
prohibiting the manufacture and sale of such rifles. Being the lil bitch that he is, A
still delivered the prohibited rifles to D. A cannot seek reimbursement from B and C
for the expenses he incurred in the manufacture and delivery, in accordance with
Article 1218.
○ The payor is not entitled to reimbursement in such situations.
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.
Applicability:
● This article applies to a situation where one of the solidary debtors paid the entire
obligation to the creditor. Subsequently, the creditor remitted the share of one of the
solidary debtors. The one whose share had been belatedly remitted is not released
from his responsibility as to his co-debtors. This is to prevent the commission of
fraud and unfairness to the co-debtor/s who paid the entire obligation.
● The creditor cannot, by his act of belated remission, exempt any debtor from the
latter’s obligation to his co-debtors. Thus, if one of them is insolvent, the one whose
share was remitted remains liable for the share of the insolvent who is bound to
make reimbursement for what had been paid by the paying debtor.
● In passive solidarity, a dual relationship exists: the relationship of the solidary
debtors to the creditor, and the relationship that exists between or among the
solidary debtors themselves. The creditor is not privy to the second relationship.
Any belated remission by the creditor of the share of any debtor has no effect on the
internal relationship of the co-debtors.
Example: A, B, and C solidarily owe D $150. A paid the entire obligation. Thereafter, D
remitted the share of C. Can A seek reimbursement from B and C? The answer is yes. A can
collect $50 each from B and C even if the share of C in the obligation had been belatedly
remitted. The reason is that after the prior payment of the entire obligation, there is nothing
more to remit because the obligation had already been extinguished.
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.
Applicability:
● This article applies only when remission covers the whole or entire obligation and
the remission is obtained by one of the solidary debtors without spending anything
for its grant.
● In case the remission is only partial, the solidary debtor who paid the unremitted part
of the obligation is entitled to reimbursement with respect only to the amount he
actually paid.
Example: A, B, and C are solidarily liable to D in the sum of $150. When A offered to pay the
entire obligation, D, by an impulse of sudden kindness, remitted the entire obligation resulting
in the extinguishment thereof. A is not entitled to reimbursement from B and C because A did
not spend anything for the remission granted by D, the remission being a gratuitous one.
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.
Effect of Loss of Thing or Impossibility of Prestation:
● In case of loss of the thing or the impossibility of the prestation, the following rules
apply:
1. If there is no fault on the part of the solidary debtors, liability is extinguished.
2. If there is fault on the part of anyone of them, all will be liable because of their
mutual agency, without prejudice to their action against the guilty or negligent
solidary debtor.
3. If the loss or impossibility is due to a fortuitous event, there is no liability
unless there is delay. In which case, all will be liable without prejudice to their
right to go against the guilty or negligent solidary debtor.
● If the thing was lost due to the fault of one and the creditor sued the guilty debtor
and fortunately the latter fully paid him, the guilty solidary debtor cannot get any
contribution from his co-debtors because he as the one who caused the loss. The one
at fault will shoulder all the consequences.
● However if the thing was not lost, but there is merely a delay, fraud, or negligence
on the part of one of the solidary debtors, all will share in the payment of the
principal prestation. If there are damages and interest imposed, the debtor who was
guilty of delay, fraud, or negligence, will shoulder not only his share in the
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 prestation but also, will be liable alone to pay the amount of damages and interest
imposed.
● When the thing is lost or becomes impossible due to the fault of all of the debtors, or
anyone of them, the obligation is converted into one of indemnity for damages. This
indemnity includes the price or value of the thing or prestation due plus damages
and interest.
● Article 1221 is just a repetition of 1174, 1262, and 1266.
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.
Defenses Which a Solidary Debtor May Avail Himself Of:
● When a creditor files a complaint against a solidary debtor, whether the case is filed
solely against him or simultaneously against all of the solidary debtors, he may set
up as defenses the following:
a. Defenses arising from the nature of the obligation such as payment,
prescription, remission, statute of frauds, presence of vices of consent, and
similar others.
b. Defenses which are personal to him or which pertains to his own share
along such as minority, insanity and others purely personal to the solidary
debtor.
c. Defenses personal to the other solidary debtors but only as regards that
part of the debt for which the latter are liable.
Illustrative Cases:
● A mother and her two minor children signed a promissory note binding themselves
solidarily to pay Villa Abrille 10,000 pesos in legal currency of the Philippines two
years after the war. The money was used for the support of the children who are
minors. For failure to pay the indebtedness, the lender sued the mother and her
minor children. The minority of the children was pleaded as defense. It was held that
the minority of the children did not completely release the mother from
responsibility, because such defense is a personal defense of the minors. (Braganza
vs. De Villa Abrille)
● If a solidary debtor is granted an extension of time within which to pay the
obligation, the solidary debtor against whom the action is filed for the enforcement
of the entire obligation, may interpose as defense the extension of time granted to
one of the solidary debtors but only with respect to that portion of the debt the
payment of which was extended. (Inchausti vs. Yulo)
Other solidary obligations:
Article 927. If two or more heirs take possession of the estate, they shall be solidarily liable
for the loss or destruction of a thing devised or bequeathed, even though only one of them
should have been negligent
Article 1824. All partners are liable solidarily with the partnership for everything
chargeable to the partnership under articles 1822 and 1823.
Article 1911. Even when the agent has exceeded his authority, the principal is solidarily
liable with the agent if the former allowed the latter to act as though he had full powers
Article 1915. If two or more persons have appointed an agent for a common transaction or
undertaking, they shall be solidarily liable to the agent for all the consequences of the
agency.
Article 1945. When there are two or more bailees to whom a thing is loaned in the same
contract, they are liable solidarily.
Article 2175. Any person who is constrained to pay the taxes of another shall be entitled to
reimbursement from the latter.
Article 2194. The responsibility of two or more persons who are liable for quasi-delict is
solidary.
Article 2146. If the officious manager delegates to another person all or some of his duties,
he shall be liable for the acts of the delegate, without prejudice to the direct obligation of
the latter toward the owner of the business.
The responsibility of two or more officious managers shall be solidary, unless the
management was assumed to save the thing or business from imminent danger.
Art. 94, FC. The absolute community of property shall be liable for:
1. The support of the spouses, their common children, and legitimate children of
either spouse; however, the support of illegitimate children shall be governed by
the provisions of this Code on Support;
2. All debts and obligations contracted during the marriage by the designated
administrator-spouse for the benefit of the community, or by both spouses, or by
one spouse with the consent of the other;
3. Debts and obligations contracted by either spouse without the consent of the other
to the extent that the family may have been benefited;
4. All taxes, liens, charges and expenses, including major or minor repairs, upon the
community property;
5. All taxes and expenses for mere preservation made during marriage upon the
separate property of either spouse used by the family;
6. Expenses to enable either spouse to commence or complete a professional or
vocational course, or other activity for self-improvement;
7. Ante-nuptial debts of either spouse insofar as they have redounded to the benefit
of the family;
8. The value of what is donated or promised by both spouses in favor of their
common legitimate children for the exclusive purpose of commencing or
completing a professional or vocational course or other activity for
self-improvement;
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 9. Ante-nuptial debts of either spouse other than those falling under paragraph (7) of
this Article, the support of illegitimate children of either spouse, and liabilities
incurred by either spouse by reason of a crime or a quasi-delict, in case of absence
or insufficiency of the exclusive property of the debtor-spouse, the payment of
which shall be considered as advances to be deducted from the share of the
debtor-spouse upon liquidation of the community; and
10. Expenses of litigation between the spouses unless the suit is found to be
groundless.
If the community property is insufficient to cover the foregoing liabilities, except those
falling under paragraph (9), the spouses shall be solidarily liable for the unpaid balance with
their separate properties.
Art. 121, FC. The conjugal partnership shall be liable for:
1. The support of the spouse, their common children, and the legitimate children of
either spouse; however, the support of illegitimate children shall be governed by
the provisions of this Code on Support;
2. All debts and obligations contracted during the marriage by the designated
administrator-spouse for the benefit of the conjugal partnership of gains, or by
both spouses or by one of them with the consent of the other;
3. Debts and obligations contracted by either spouse without the consent of the other
to the extent that the family may have benefited;
4. All taxes, liens, charges, and expenses, including major or minor repairs upon the
conjugal partnership property;
5. All taxes and expenses for mere preservation made during the marriage upon the
separate property of either spouse;
6. Expenses to enable either spouse to commence or complete a professional,
vocational, or other activity for self-improvement;
7. Ante-nuptial debts of either spouse insofar as they have redounded to the benefit
of the family;
8. The value of what is donated or promised by both spouses in favor of their
common legitimate children for the exclusive purpose of commencing or
completing a professional or vocational course or other activity for
self-improvement; and
9. Expenses of litigation between the spouses unless the suit is found to groundless.
If the conjugal partnership is insufficient to cover the foregoing liabilities, the spouses shall
be solidarily liable for the unpaid balance with their separate properties.
4) As to performance of prestation (Divisible or indivisible)
Susceptibility of Partial Fulfillment
1. Divisible Obligation - Susceptible of partial performance
2. Indivisible Obligation -Not susceptible of partial performance
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.
Divisibility and Indivisibility (Of an Obligation):
1. Divisibility refers to the susceptibility of an obligation to be performed partially.
- Example: Obligation to deliver 500 television sets
2. Indivisibility refers to the non-susceptibility of an obligation to partial performance.
- Example: Obligation to deliver a particular car
True Test of Divisibility:
● The true test is whether or not the prestation is susceptible of partial performance.
● Partial performance should not be taken in the sense of possibility or impossibility
of performance in separate or divided parts, but in the sense of the possibility of
realizing the purpose which the obligation seeks to obtain.
● If a thing could be divided into parts and is divided, its value is impaired
disproportionately, that thing is indivisible. Otherwise, it is divisible.
● Example: A car may be divided into major parts but this will not serve the purpose
of the obligation. Hence, the obligation to deliver a car is indivisible, that is, it must
be delivered as a whole thing to suit its purpose.
Kinds of Indivisibility: There are three kinds of indivisibility:
1. Legal Indivisibility – Indivisibility provided by law.
2. Conventional Indivisibility – This is the indivisibility agreed upon by the
contracting parties.
3. Natural Indivisibility – This is the indivisibility by reason of the nature of the
object or subject matter of the obligation. Example: A contract to sing in a wedding.
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
Applicability:
● This article applies to a Joint Indivisible Obligation. The object is indivisible but the
liability of the parties is joint. The action for enforcement of the obligation must be
pursued against all the debtors.
● From the time any one of the debtors fails to comply with his part of the
undertaking, he will be liable for damages sustained by the creditor and even by his
co-creditors. The unfulfilled undertaking is converted into a monetary obligation
which is now divisible.
Example: A and B undertook to deliver to C a valuable painting displayed for sale. The
painting was valued at $100. At the maturity date of the obligation, A was ready with his
$50 but B could not produce his share. Hence, they failed to comply with their joint
indivisible obligation to deliver the painting to C. The obligation to deliver the painting is
converted into money obligation, meaning, A and B will be liable to pay C $100. A is
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liable to pay C the amount of $50. But, he is not liable for the share of B. On the other
hand, B is now indebted to C in the sum of $50. Damages may be imposed against B the
erring debtor if warranted by the circumstances.
Based on the same facts but with the modification that A and B are solidarily (not jointly)
liable to deliver the painting to C, A can be made liable for the entire monetary obligation
of $100 without prejudice to his right to go after B for the latter’s share in the obligation in
the amount of $50.
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.
Indivisibility or Divisibility of a Thing, Different from Divisibility of Obligation
● The test of divisibility of an object is its susceptibility to physical division.
● The test of divisibility of an obligation is its susceptibility of partial performance or
compliance.
● The divisibility of an object does not necessarily carry with it the divisibility of an
obligation, unlike the indivisibility of an object which carries with it the
indivisibility of the obligation.
● While a divisible thing is that which can be physically divided without impairing its
usefulness or value and therefore is considered divisible, nevertheless, the obligation
to deliver it will be considered indivisible under two situations:
a. When the law so provides
b. When the parties intended that the obligation be indivisible
Indivisible Obligations
1. Obligations to give definite things – A specified diamond ring
2. Obligations which are not susceptible of partial performance – Creation of a
wedding dress
3. If the law provides or if the parties intended it to be indivisible.
Divisible Obligations
1. Object of the obligation is the execution of a certain number of days of work (such
as the employment of a carpenter to work for a week)
2. Object of the obligation is the accomplishment of work measured by metrical units
(such as the irrigation of ten hectares of agricultural land)
3. Object of the obligation is susceptible of partial compliance (such as stage-by-stage
construction of a building)
4. Object of the obligation is the accomplishment of analogous things (such as when
the debtor is required to pay in installments)
Effect of Illegality of a Part of a Contract
1. Divisible Contract – If contract is divisible and a part of it is illegal, the illegal part
is void and is not enforceable. The legal part remains valid and is enforceable.
2. Indivisible Contract – If the contract is indivisible and a part is illegal, the entire
contract is void and is not enforceable.
Effect of Partial Performance of an Indivisible Obligation:
● In an indivisible obligation, partial performance is tantamount to non-performance.
● Thus, a debtor who abandoned work he had started, cannot recover payment based
on quatum meruit for the partial works done. When an obligation is indivisible, it is
not susceptible to partial performance.
Supra 1209-1210
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.
Article 1210. The indivisibility of an obligation does not necessarily give rise to solidarity.
Nor does solidarity of itself imply indivisibility.
5) As to the presence of an accessory undertaking in case of breach (With a Penal
Clause — Arts. 1226-1230 or Liquidated Damages)
Imposition of penalty
1. Simple Obligation – no penalty imposed for violations of the terms thereof
2. Obligations with a penal clause – imposes a penalty for violation of the terms
thereof
Concept and Purpose of 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.
Penalty Clause:
● An accessory obligation or undertaking attached to a principal obligation, which
imposes an additional liability in case of breach of the principal obligation.
● If the debtor fails to perform his obligation, he suffers a fixed civil penalty without
need of proving the damages of the other party.
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 ● It is attached to assume greater liability in case of breach and to secure the ● In the former, the accessory obligation is dependent upon the non-performance of
performance of the obligation. If the stipulation is found contrary to law for being the principal obligation; while in the latter, the principal obligation is dependent
usurious, it can be nullified by the courts without affecting the principal obligation. upon the happening of an uncertain event, which may or may not happen.

Nature of Penalty:
● Penalty imposable is a substitute for the indemnity for (a) damages, and (b) payment Basis Obligation with a Penal Clause Alternative Obligation
of interests in case of breach of the obligation, unless there is a contrary stipulation,
unless there is a contrary stipulation, in which case additional damages may further Number of There is only one principal There are two or more obligations,
be recovered. Obligations obligation, the non-performance the fulfillment of one of which is
● It can be in the form of money or any other thing agreed upon, including an act, or of which makes the stipulated sufficient to satisfy the obligation.
an abstention. penalty enforceable.

Examples: Impossibility The impossibility of the principal The impossibility of one of the
1. In a contract for the sale of a subdivision lot, there was a stipulation that the buyer of Obligation obligation extinguishes the obligations, without fault of the
would complete a house within a year on the said lot, otherwise, the buyer will pay penalty. debtor, leaves the other prestation
the sum of 100 pesos to the seller. As the buyer failed to construct 50% of the subsisting.
proposed house, within the period stipulated, the penalty is demandable. However,
there being partial performance, the obligation of the debtor may be mitigated. Freedom to Obligor cannot choose to pay the The obligor can choose which
2. A penalty of 15% interest on the unpaid installment is a valid penal clause. Choose penalty to excuse himself from prestation or obligation to fulfill.
3. Imposition of attorney’s fees in case of breach is a valid penal clause. the principal obligation, unless
4. A stipulation that an employee shall be liable to his employer for damages if he given that right explicitly.
would engage in any business similar to that conducted by the employer is a valid
penal clause.
Example: A obligated himself to deliver a specific Mercedes Benz to B, or to pay B the sum
When Additional Damages May Be Recovered Aside From The Stipulated Penalty: of 2 million pesos. This obligation is an alternative obligation. A can choose which one to
● General Rule: Penalty takes place of indemnity for damages and for payment of deliver. However, if the obligation of A is to deliver the said car to B, and in case he fails to
interests. deliver, he will pay 2 million with 15% interests, the obligation is now with a penal clause.
● However, the rule is subject to certain exceptions where additional damages are A has no choice. He will deliver the money with interest, if he fails to deliver the car.
recoverable:
Distinctions Between Obligations With A Penal Clause and Facultative Obligation:
1. If the obligor refuses to pay the penalty
2. If the obligor is guilty of fraud in the fulfillment of the obligation; In case
of fraud, the difference between the proven damages and the stipulated Basis Obligation with a Penal Clause Facultative Obligation
damages may be recovered
3. If there is an express stipulation that other damages or interests are Power to make The obligor cannot substitute the The power of the obligor to
demandable in addition to the penalty in the penal clause. Substitution payment of penalty for the principal make substitution is absolute.
obligation, unless expressly allowed.
Penalty Clause Compared With Liquidated Damages:
● Penal clause is strictly penal in nature or cumulative in character and does not Demand for The creditor may demand both the Creditor cannot demand both
partake the nature of liquidated damages. fulfillment of principal and accessory obligations. prestations or obligations.
● However, in so far as legal results are concerned, there is no difference between both
penalty and liquidated damages, and either may be recovered without proving actual prestations
damages, and both may be reduced when found unconscionable or iniquitous.

Obligation with a Penal Clause Distinguished from Obligation with Suspensive

Example: A is obliged to deliver a specific car to B, or if A so desires, to deliver as a
Condition:
substitute a specific yatch to B. This is a facultative obligation. However, if A, who is a car
● In an obligation with a penal clause, there is already an existing obligation; in an
dealer, obliged himself to deliver a specific car to B within 10 days and if he fails to do so,
obligation with a suspensive condition, there is no obligation yet, until the condition
he will pay 1,000 pesos per day of delay, there is an accessory obligation in the form of a
shall have been fulfilled.
penalty.

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Are All Penalties Inserted In Contracts Demandable or Recoverable?
● The answer is no, my friend. The second paragraph of Article 1226 reads: “The
penalty may be enforced only when it is demandable in accordance with the
provisions of this Code.” Thus, when the penalty imposed is unlawful, immoral, or
against public order it should not be enforced.
Manila This clause regarding the forfeiture of what has been partially paid is
Racing Club valid. It is in the nature of a penal clause which may be legally established
vs. Manila by the parties.. In its double purpose of ensuring compliance with the
Jockey Club contract and of otherwise measuring beforehand the damages which may
result from non-compliance, it is not contrary to law, morals or public
order because it was voluntarily and knowingly agreed upon by the
parties.
In the present case, the amount forfeited constitutes only eight per cent of
the stipulated price, which is not excessive if considered as profit which
would have been obtained had the contract been complied with.
SSS vs. When is the penalty deemed demandable in accordance with the
Moonwalk provisions of the Civil Code? We must make a distinction between a
positive and a negative obligation. With regard to obligations which are
positive (to give and to do), the penalty is demandable when the debtor is
in mora; hence, the necessity of demand by the debtor unless the same is
excused.
Despite the provision in the promissory note that “(a)ll amortization
payments shall be made every first five (5) days of the calendar month
until the principal and interest on the loan or any portion thereof actually
released has been fully paid,” petitioner is not excused from making a
demand. Nowhere in this case did it appear that SSS demanded from
Moonwalk the payment of its monthly amortizations. Neither did it show
that petitioner demanded the payment of the stipulated penalty upon the
failure of Moonwalk to meet its monthly amortization.What is clear,
therefore, is that Moonwalk was never in default because SSS never
compelled performance.
Caridad The provisions in point, as the parties themselves have indicated in the
Estate vs. contract, is a penal clause which carries the express waiver of the vendee
Santero to any and all sums he had paid when the vendor, upon his inability to
comply with his duty, seeks to recover possession of the property, a
conclusive recognition of the right of the vendor to said sums, and avoid
unnecessary litigation designed to enforce fulfillment of the terms and
conditions agreed upon. Said provision are not unjust or inequitable and
does not, appellant contends, make the vendor unduly rich at his cost and
expense.
Exception to the Purpose of Penal Clause:
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.
Restriction on the Right of the Creditor:
● General Rule: The creditor cannot demand the fulfillment of the principal obligation
and the stipulated penalty at the same time.
● Exceptions to the Rule:
a. When the creditor was clearly given the right to enforce both the principal
obligation and the penalty
b. When the creditor has demanded fulfillment of the obligation, but the same
could no longer be fulfilled due to the debtor’s fault, he may demand the
penalty agreed upon
● If the fault is due to the creditor’s own act, he cannot claim the penalty.
● If the impossibility of fulfillment is due to fortuitous events, both the principal
obligation and the penalty shall be extinguished.
Example: If a contractor, who obligated himself to finish the construction of a building for
the owner, was negligent and failed to finish the building on time, the owner is not allowed
to claim the stipulated penalty and at the same time confiscate the balance of the contract
price not yet paid to the contractor.
Bachrach vs. Article 1226 permits the agreement upon a penalty apart from the
Espiritu interest. Should there be such an agreement, the penalty does not include
the interest and as such the two are different and distinct things which
may be demanded separately. The penalty is not to be added to the
interest for the determination of whether the interest exceeds the rate
fixed by law, since said rate was only fixed for the interest.(But
considering that the obligation was partially performed, and by virtue of
Article 1229 the penalty is hereby reduced to 10% of the unpaid debt.)
Cabarroguis In obligations with a penal clause however, as provided in Art. 1226 of
vs. Vicente the NCC, the penalty shall substitute the indemnity and payment of
interests. This is backed up by exceptions:
a. When the contrary is stipulated
b. When debtor refuses to pay the penalty imposed in the
obligation, in which case creditor is entitled to interest on the
amount of the penalty in accordance with Art. 2209
c. When obligor is guilty of fraud in the fulfillment of the
obligation.
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Proof of Actual Damages:
Article 1228. Proof of actual damages suffered by the creditor is not necessary in order that
the penalty may be demanded.
Proof of Actual Damages Not Necessary:
● If the contracting parties had fixed the penalty for the purpose of compensating or
substituting the indemnity for damages as well as the payment of interests, proof of
actual damages suffered by the creditor is not necessary to enforce penalty whether
or not damages had been suffered as long as the agreement or contract had been
breached.
● The presentation of proofs for the enforcement of a penal clause after establishing
the breach of the contract will be superfluous.
● Thus, in this sense, penalty and liquidated damages are the same in cases where
there is no partial or irregular performance by the debtor.
● However, when the debtor refuses to pay the agreed penalty despite demands and
the creditor was compelled to litigate to collect the penalty, additional damages may
be claimed by the creditor, but these latter damages must be proved with sufficient
evidence to justify their grant by the court.
● Mere nonfulfillment of the principal obligation entitles the creditor to the penalty
stipulated. The purpose of the penalty clause is precisely to avoid proving damages.
● Thus, a bond of 10,000 which is penal in nature may be forfeited to its full amount
even if the amount involved in its violation is considerably much lesser in amount.
Lambert v. Penalties provided in contracts of this character are enforced. Parties who
Fox are competent to contract may make such agreements within the
limitations of the law and public policy as they desire, and that the courts
will enforce them according to their terms. The only case recognized by
the Civil Code in which the court is authorized to intervene for the
purpose of reducing a penalty stipulated in the contract is when the
principal obligation has been partly or irregularly fulfilled and the court
can see that the person demanding the penalty has received the benefit of
such part or irregular performance.
In this jurisdiction, there is no difference between a penalty and
liquidated damages, so far as legal results are concerned. Whatever
difference exists between them as a matter of language, they are treated
the same legally. In either case, the party to whom payment is to be made
is entitled to recover the sum stipulated without the necessity of proving
damages. Indeed one of the primary purposes in fixing a penalty or in
liquidating damages, is to avoid such necessity.
Reduction of Penalty
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, When Proper - Court can order reduction of the penalty
under the following circumstances:
1. When the principal obligation had been partly complied with by the debtor
2. When the principal obligation had been complied with but not in accordance with
the tenor of the agreement thus rendering the compliance irregular
3. When, although there is no performance, the penalty is iniquitous or unconscionable
4. When the penalty interest is patently iniquitous and unconscionable as to warrant the
exercise by the Supreme Court of its judicial discretion
Limitation of the Judge’s Power to Reduce Penalties
● Power to reduce penalties applies only to penalties agreed upon in private contracts.
It cannot cover the collection of surcharges on taxes already due, as the same is
mandatory on the collector.
When Penalty Is Iniquitous or Unconscionable
● A penalty is iniquitous when it is revolting to the conscience or common sense, or
when it is grossly disproportionate to the damage suffered.
● A contract with an unconscionable penalty is not void. However, the penalty must be
reduced.
● In exercising the power to determine what is iniquitous and unconscionable, courts
must consider the circumstances of each case.
Situations When Penalty is Not Enforceable A penalty will not be enforceable under the
following situations:
1. When the principal obligation has become impossible of performance due to
fortuitous events
2. When the debtor is prevented by the creditor to fulfill the obligation
3. When the penalty agreed upon is contrary to morals or good customs. (Example:
Penalty of forfeiture of future support is contrary to law, morals, and good customs.
It is void.)
4. When both parties are guilty of breach of contract
5. When none of the contracting parties committed any willful or culpable violation of
the agreement, no one can invoke the penalty clause against each other
6. When the breach of the contract is committed by the creditor
Interest on the Penalty May be Stipulated Separately From the Penalty
● The civil code allows an agreement on the payment of interest in case of breach of
contract, in addition to the penalty agreed. In such a case, the two may be demanded
separately from the debtor.
Jison v. The Court's decision to reduce the amount forfeited finds support in the Civil
CA Code. As stated in paragraph 3 of the contract, in case the contract is cancelled,
the amounts already paid shall be forfeited in favor of the vendor as liquidated
damages. The Code provides that liquidated damages, whether intended as an
indemnity or a penalty, shall be equitably reduced if they are iniquitous or
unconscionable [Art. 2227.] Further, in obligations with a penal clause, the
judge shall equitably reduce the penalty when the principal obligation has been
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 partly or irregularly complied with by the debtor. ○ Potestative and left in the sole will of DR → when the time for payment
of an obligation is left to the sole will of the debtor, and the condition is
Umali The penalty takes the place of the interests only if there is no stipulation to the annulled, the obligation does not become a pure and unconditional
v. contrary, and even then, damages may still be collected if the obligor refuses to obligation. The recourse of the creditor is to go to court and ask for
Miclat pay the penalty. In this case not only is there an express stipulation to pay setting a time limit for the payment.
damages in addition to the penalty, but appellant has failed to pay his obligation ● The fact remains that payment does not depend on debtors will for indeed he had
as well as the penalty. promised payment
● The original intention was to grant the debtor a deadline for the payment, and to
make it a pure and unconditional obligation is to impose a completely different
Article 1230. The nullity of the penal clause does not carry with it that of the principal approach than agreed upon.
obligation.
How to determine if the clause counts as 1180 or 1182?
The nullity of the principal obligation carries with it that of the penal clause. ● Basically the obligation was NOT dependent on the will of the debtor BUT the
TIME OF PAYMENT of the obligation is left to the will of the debtor
○ If the obligation is recognized and juridical tie is NOT negated - term
Effect of nullity of the Penal Clause Upon the Principal ○ If it negates the juridical tie - 1182 potestative
● If the penal clause is void, the principal obligation will remain subsisting. ■ Example : I will pay If I want
● The efficacy of the principal obligation does not depend upon the efficacy of the
penal clause, hence, the nullity of the penal clause does not carry with it the nullity SBM GUIDELINES ON 1180, 1182, v. 1197
of the principal 1. When there is an acknowledgement of the debt (it's just the mere implementation)
2. If there is some sort of time element – potestative → conditional obligation
Effect of nullity of the Principal Obligation VOID (unless resolutory and if dependent on will of CR)
● The nullity of the principal obligation carries with it the nullity of the penal clause as
the latter is just an accessory to the former. Obligation with a Period
● The accessory cannot exist also. ● A period must be future, certain, and possible..
● When it comes to possible and impossible conditions, what is the effect if
Class Notes: attached to obligation? Art 1183
● At what point the condition is impossible? At the point of agreement or at
Kinds of Obligation the supposed happening of condition? Point of agreement / Perfection
1. Pure obligation - no term/condition upon which depends the fulfillment of the
obligation; immediately demandable. Solidary Obligation
2. Conditional obligation ● What Are the special riles for solidary CR?
○ A condition is a future AND uncertain event – upon which the (a) ○ As to Demanding
ACQUISITION or (b) RESOLUTION of the rights is made to depend ○ As to Assigning
by ● Each one of the solidary creditors may do whatever may be useful to the others,
○ Acquire those right if suspension happened but not anything which may be prejudicial to the latter.
○ Loses rights if resolutory condition happened ○ Example: remission (prejudicial)
○ A solidary creditor cannot assign his rights without the consent of the
Resolutory vs. Suspensive Condition others.
Example: ● If you have multiple demands, whoever demands first should be paid ahead.
● X entered into COS for a car with a friend. ○ Judgment against a solidary creditor can be set up against the other
○ Suspensive condition: Downpayment creditors in a subsequent case
○ Resolutory condition: If he doest go to my house on March 20, and if it
doesn’t happen obli extinguished Obligation with a Penal Clause
Take note in some of the annotations:
Patente case: Not potestative; considered as a term only GR: penalty substitute indemnity for damages
● when his means permit him to do so = subject to period (1180) ● EXCN: if there is stipulation and
● How to distinguish? 1180 (period) vs 1182 (sole will of DR) ○ EXCN to EXCN: Obligor refuses penalty or guilty of fraud

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If no penal clause can still claim damages? Yes.
With or without penal clause can claim damages so why bother?
● Liquidated damages - fixed already no need to prove actual damages
● Liquidated = known
● It is to the advantage of both parties since they would know that if no compliance,
no need to submit proof of damages are agreed at the onset
Even if there is liquidated damages/penal clause with payment of interest, you can still
claim BEYOND what was provided in the enal clause:
1. Obligor refuses to pay
2. Guilty of fraud
COMPLIANCE
Compliance (Arts. 19, 1163-66, 1244, 1246, 1460, 442)
ARTICLE 19. Every person must, in the exercise of his rights and in the performance of
Duty of the Trustees to account for Fruits
his duties, act with justice, give everyone his due, and observe honesty and good faith.
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. (1094a)
Duty of an Obligation obliged to deliver a determinate thing
● If the obligation to take care of this thing is not imposed upon the obligor until it is
finally delivered, the obligation to deliver may become illusory because the obligor
may not mind even if the thing is destroyed or lost
Notes:
Kind of Diligence Required
● Standard of diligence required in the preservation or maintenance of the thing is that
kind of ordinary diligence, AKA “diligence of a good father of a family”
● Exception:
○ if by law, or Acquisition of a Real Right
○ by agreement, extraordinary diligence is required, then the obligor shall
exercise the same. ie, a common carrier is bound to exercise extraordinary
diligence in carrying passengers to their destination.
● The loss of things while in the custody of the obligor, but without negligence or fault
on his party, does not make him liable therefor.
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. (1095)
● The credit shall have the right to claim the fruits of the determinate thing which the
obligor is bound to deliver to him only from the moment the obligation to deliver
arises.
When does the Debtor’s obligation to deliver arise?
1. Obligation based on law, quasi-delict, quasi-contract or crime
a. The specific provisions of the applicable law shall determine when the
delivery shall be done ie. obligation to give support which is based on
law shall arise from demand (Family Code)
2. Obligation is subject to a suspensive condition – upon the happening of the
condition
3. Obligation is subject to a suspensive term or period – upon the lapse of the term
or period
4. No condition or term – from the constitution, creation or perfection of the
obligation
● Possession of lots which produce fruits should make an accounting thereof to the
beneficiaries from the time they become aware that they were only trustees of the
property in accordance with Art 1164.
ARTICLE 442. Natural fruits are the spontaneous products of the soil, and the young and
other products of animals.
Industrial fruits are those produced by lands of any kind through cultivation or labor.
Civil fruits are the rents of buildings, the price of leases of lands and other property and the
amount of perpetual or life annuities or other similar income. (355a)
● No Delivery → No transfer of ownership is effected
● Remedy of buyer when there is no delivery despite demand → specific performance
and delivery
● No real right over the property until it shall have been delivered to him.
● A real right is a power over specific property and is binding against the whole world
as compared to a personal right, which is a power demandable by one person against
another person, for the latter to give, to do, or not to do.
Basis Real Right Personal Right
Creation Created by both title Created by title alone – save when the title
and mode. Directly is also the mode. It is not directly created
created over a thing. over a thing. It is exercised through another
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 against whom the action is to be brought.
The requisite that a thing be determinate is satisfied if at the time the contract is entered
Object Generally → tangible. Intangible into, the thing is capable of being made determinate without the necessity of a new or
Object is specific further agreement between the parties. (n)
property or thing.

Kinds of Thing
Subject Definite active Active subject (creditor) and definite
subject (owner) and passive subject (debtor) 1. Determinate (specific) thing → Susceptible of particular designation or
Indefinite passive specification
subject (whole world) ○ Example: Mercedez Benz Model 2000 Chassis no 1234 Plate number
ABC 123
Enforceability Against the whole Enforceable only against the original debtor 2. Indeterminate (generic) thing → Not particularized or specified but has reference
world or his transferees charged with notice of the only to a class or genus
personal right ○ Example: car, chair, table

Limit Usefulness, value, or No such limit

Effect of Fortuitous Event on Determinate or Indeterminate Thing
productivity
● General Rule: obligation to deliver a determinate thing is extinguished if lost due to
fortuitous event
Extinguishment Loss of destruction of Claim for damages may still be pursued in ● General Rule: obligation to deliver a generic thing is not so extinguished by
the thing case of the loss or destruction of the thing. fortuitous events, genus never perishes

Example: A is obliged to give B on Dec. 3, 2004, a particular parcel of land.
● Before Dec. 3: B has no right whatsoever over the fruits.
● After Dec. 3: B, the creditor is entitled as of right to the fruits.
● But if the fruits and the land are actually or constructively delivered only on Dec.
15, 2004, B becomes owner of said fruits and land only from said date.
● Between Dec. 3 and Dec. 15: B had only a personal right enforceable against A.
● After Dec. 15: B has a real right over the properties, a right that is enforceable
against the whole world.
ARTICLE 1165. When what is to be delivered is a determinate thing, the creditor, in
addition to the right granted him by article 1170, may compel the debtor to make the
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. (1096)
ARTICLE 1460. A thing is determinate when it is particularly designated or physically
segregated from all others of the same class.
Remedies of Creditor when Debtor fails to deliver a Determinate Thing
1. Specific Performance
2. Rescission (Art 1380)
3. Resolution (Art 1191)
4. Damages – guilty of fraud, negligence, delay, contravene the tenor of the contract
Note: The creditor may also resort to action for specific performance against the debtor,
even if the obligation involves the delivery of an indeterminate thing. The compliance
being borne by the debtor.
Liability of Debtor for loss of the thing due to Fortuitous Event
● General Rule: no person shall be responsible for those events which could not be
foreseen, or which, though foreseen, were inevitable
● Exceptions:
1. Expressly specified by law
2. Stipulated by the parties
3. Nature of the obligation requires an assumption of risk
● Art 1165 (third paragraph) is an example of an exception provided by law – if the
debtor is guilty of delay or has promised to deliver the same to two or more persons
who do not have common or the same interest, he shall be liable for the loss of the
thing by reason of the fortuitous event until he has effected the delivery thereof. (bad
faith on the part of the debtor)
● However, if the debtor bound himself to deliver generic things, he is not exempted
from complying with his obligation (again, genus never perishes)
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 Kinds of Delay
1. Ordinary Delay – mere failure to perform an obligation at the appointed time
2. Extraordinary delay or legal delay – tantamount to non-fulfillment of the
obligation and arises after an extrajudicial or judicial demand had been upon the
debtor. Debtor is said to be in default at this point.
ARTICLE 1166. The obligation to give a determinate thing includes that of delivering all
its accessions and accessories, even though they may not have been mentioned.
Accession, Meaning:
● The fruits of, or additions to, or improvements upon, a thing (the principal), e.g.,
house or trees on a land; rents of a building; air conditioner in a car; profits or
dividends accruing from shares of stocks; etc.
● Includes everything which is produced by a thing, and all those incorporated or
attached thereto, either naturally or artificially (fruits).
● Includes accession natural such as alluvial deposits
● Includes accession industrial such as those built, planted, sowed on the land of the
landowner
Accessories, Meaning
● Things which are united or attached as ornaments to the principal thing ( ie. spare
tire of a car, chairs in a moviehouse)
● Things joined to, or included with, the principal thing for the latter’s embellishment,
better use, or completion, e.g., key of a house; frame of a picture; bracelet of a
watch; machinery in a factory; bow of a violin.
Delivery of Determinate Thing includes all its Accessions and Accessories
● However, the parties may stipulate that certain accessions or accessories shall be
excluded as they have freedom to stipulate such (Art 1306)
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)
No payment or delivery of a different thing:
● General Rule: Creditor shall be paid ONLY hat has been stipulated upon because
the contract between the parties is the law between them. This applies even if the
thing offered is worth more than the thing agreed to.
● However, it is the compulsion that is barred. If the creditor consents, his acceptance
of the substitute extinguishes the obligation. This happens in novation, and also in
dacion en pago.
○ The same applies to obligations to do and not to do.
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.
Rule in Delivering Indeterminate or Generic Things - Rule of Medium Quality
● When the quality and circumstances of an indeterminate or generic thing supposed
to be delivered had not been stated, only the “ordinary” kind or category of said
thing should be delivered.
○ Example: if the obligation consists in delivering a car of a particular brand
(latest model), and there are three kinds of that brand with different costs,
the one to be delivered is the second most powerful in the row.
● The purpose and other circumstances shall be considered. Thus, in the example
earlier, if the purpose is to secure the most powerful to be used in a race, then the car
with the superior quality should be delivered.
● The law speaks of quality. Quantity is not mentioned. The reason is because if both
quantity and quality are not determined, then the contact is considered void (Art.
1349 and 1409)
Breach of Obligations (Art 1170)
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.
Note: Article 1170 refers to incidental fraud (dolo incidente) committed in the performance of
an obligation already existing because of contract. It is to be differentiated from causal fraud
(dolo causante) or fraud employed in the execution of a contract under Article 1338, which
vitiates consent and makes the contract voidable and to incidental fraud under Article 1344
also employed for the purpose of securing the consent of the other party to enter into the
contract but such fraud was not the principal inducement to the making of the contract.
Grounds for liability for damages in the performance of obligations
1. Fraud – intentional evasion of the faithful performance of the obligation. (bad
faith/dolo)
2. Negligence – omission of that diligence required by the nature of the obligation
and commensurate with the demands of the subsisting circumstances of time,
place, condition of the persons involved.
3. Delay – default or tardiness in the performance of the obligation after it has
become due and demandable.
a. Obligation is demandable and already liquidated
b. Debtor delays performance
c. Credit requires performance because it must appear that the tolerance of
the credit must have ended
4. Violation of the terms of the contract – act of contravening the tenor or terms
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 ● In fraud, the will of a person is maliciously misled by means of a false appearance of
or conditions of the contract. reality resulting in his damage and prejudice. Fraud does not necessarily need to
amount to estafa or felony to be considered as a fraud.
Use of the word “Fraud” in Article 1170 ● The article did not define fraud. This is because the circumstances evidencing fraud
● Fraud in this article means “bad faith” or malice (obligation is already in existence are as varied as the men who schemed the fraud in each case. Fraud is manifested in
as opposed to deceit in executing a contract) illimitable degrees or gradations. The causal fraud (efficient cause to the giving of
consent) or dolo causante is a ground for annulment of a contract while the
Damages for monetary obligations incidental fraud is a ground for damages.
● Shall consist in stipulated damages like when there is penalty clause, or when ● It is fraud to conceal fraud.
liquidated damages have been agreed upon.
● If no stipulation or agreement, the legal rate of interest will be imposed which is Requisites of Fraud (Dolo Causante)
pegged at 6% per annum.
1. Fraud is applied or utilized by one contracting party upon the other. (If both
Fortuitous Events; Exception
committed fraud, contract is valid) (Art. 1344)
● Generally, the debtor will be exempted
2. It must be serious deception or misrepresentation. (Art. 1344)
● Exceptions:
3. It must have induced the victim to enter into the contract. (Art. 1338)
a. Law expressly provides liability
4. It must have resulted in damage or injury to the victim.
b. Stipulation between the parties
c. Nature of obligation requires assumption of risk
Kinds of Fraud:
Manner of Breach: Fraud (Arts 1171, 1338, 1344) ● The civil code speaks of two different kinds of fraud which have no similarities.
a. The first kind is treated in Article 1170-71 centering on the performance
ARTICLE 1171. Responsibility arising from fraud is demandable in all obligations. Any
of the prestation
waiver of an action for future fraud is void.
b. The second kind is treated in Article 1338 centering on the celebration or
perfection of the contract
Fraud Referred to in the article: ● Fraud that justifies a prayer for annulment of contracts is different from the fraud
● Refers to the fraud in the performance of the obligation and not to the fraud in the that justifies a liability for damages
execution of the contract. It is intentional evasion of the normal fulfillment of the ● Fraud under 1338 refers to all kinds of deception, whether through insidious
obligation. machination, manipulation, concealment or misrepresentation to lead another party
into error.
Responsibility Arising from this kind of fraud is demandable in all obligations:
● The contract itself will remain intact and valid. The problem lies only in the
Basis Fraud in Performance Fraud in Perfection
implementation and not in the execution. Contract will not be void.
● The law does not allow any waiver of any action for future fraud. Such waiver is
void. Parties can simply disregard their commitments without fear of reprisals. Time of It occurs after the valid execution of It occurs before or simultaneous
There will be no obligatory force. However, the law does not prohibit waiver of an Occurrence the contract. It is employed in the with the creation or perfection
action for damages based on fraud already committed. (he can forgive the party, the performance of a pre-existing of the obligation.
law will not stop him). obligation.

Consent Consent is free and not vitiated. Consent is vitiated by serious

ARTICLE 1338. There is fraud when, through insidious words or machinations of one of deception or misrepresentation
the contracting parties, the other is induced to enter into a contract which, without them, he
would not have agreed to. (1269) Effect It is not a ground for annulment of It is a ground for annulment of
the contract. the contract.
Concept of Fraud; Reason for Lack of Definition:
● Fraud is every kind of deception or misrepresentation designed or schemed to lead a Remedy Action for damages only. Action for annulment with
party into substantial mistake or error, and relying thereon, he executes a particular damages.
act leading to his damage or prejudice

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Classes of Fraud in the Perfection:
1. Dolo Causante/Causal Fraud – The essential cause of the consent without which
the party would not have agreed to enter into the contract.
2. Dolo Incidente/Incidental Fraud – Not the efficient cause for the giving of the
consent to the contract, as it refers merely to an incident therein and, which even if
not present, the contracting party would have still agreed to the contract.
Basis Dolo Causante Dolo Incidente
Nature It is the efficient cause to the It is not the efficient cause for the
giving of consent to the contract. giving of consent to the contract.
Effect It renders the contract voidable. It does not affect the validity of the
contract.
Remedy Annulment with damages. Contract remains valid. Remedy is
claim for damages only.
Distinctions Between Dolo Incidente and Fraud in the Performance:
● In so far as effects and remedies are concerned, they have no differences. In both,
the contract remains valid and the remedy is to claim for damages.
● They differ only on the time of occurrence of the fraud. Dolo Incidente occurs prior
to or at the time of perfection, while fraud in the performance obviously occurs after
the perfection of the contract.
○ Example: Yanna wanted to insure herself. Afraid that she might not pass
the medical examination, she requested Ida to pose for her. The insurance
company executed the insurance due to the favorable results. Yanna then
passed away, and the world wept. The contract is voidable, since the deceit
exerted being of serious nature, thus Ida cannot claim for the insurance
now.
○ Another example: Marlo stated in the deed of sale she executed that she
is married, when in fact she is actually single and free on Valentines day.
This is not a sufficient evidence of fraud as this fact is not the inducing
factor that led to the sale.
Law furnishes No Protection to the Inferior Simply Because he is Inferior:
● If a person enters into ridiculous contracts and had a bad bargain, the law does not
necessarily come to his succor.
Error Resulting from Fraud Distinguished from Error/Mistake as Separate Ground:
● The insidious words or machinations referred to in Art. 1338 leads the complaining
party into error and acting along this error, he suffers prejudice or damage. This
error must not be confused with the error or mistake in Article 1331 which is
another vice of consent.
● To be clear, error induced by fraud will always vitiate consent if it is the influencing
factor for the party to enter into the contract. (Art. 1338)
● Whereas, the mistake or error in 1331 will only vitiate consent if it refers to the
substance of the thing which it is the object of the contract or to those which have
principally moved one or both parties to enter the contract or it refers to the identity
or qualification of one of the parties which have been the principal cause of the
contract.
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.
Character of Fraud to Render a Contract Voidable:
● The fraud must be serious to vitiate consent. Moreover, it must not be mutual.
● When fraud is sufficient to induce an ordinary prudent person into error, the fraud is
said to be serious. If it cannot deceive an ordinary prudent man, it is not serious.
● Personal circumstances of the victim should be weighed and considered in
determining the influence of the fraudulent act upon a person.
● If both parties are in pari-delicto, the law will leave them where it finds them.
Neither of the parties could seek the annulment of the contract.
Incidental Fraud:
● Incidental fraud is not the reason why the party has entered into the contract; it does
not vitiate consent. Even without it, the party just the same, would still have agreed
to the contract.
Negligence (Arts 1172-73)
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 the circumstances.
Responsibility arising from negligence; Liability may be regulated:
● In determining the liability of a party for damages resulting from his negligence, the
courts have discretionary power to moderate the liability according to the
circumstances of the case. Good or bad faith of the debtor may be considered as well
as the conduct or misconduct of the creditor.
● When both parties are mutually negligent, the fault of one cancels the negligence of
the other.
Good and Bad Faith of Obligor:
● Good faith – responsible for the natural and probably consequences of the breach of
contract and which the parties have foreseen or could have reasonably foreseen at
the time of the constitution of the obligation.
● Bad faith – in case of fraud, bad faith, malice, he shall be responsible for all
damages which may be reasonably attributed to the nonperformance of the
obligation.
Mitigation of Damages in contracts, quasi-contracts, and quasi-delicts:
1. Plaintiff himself has contravened the terms of the contract
CIVREV C2022 COMPILATION - DBN & MKG | SBM SYLLABUS | 39
 ● Omission of that diligence which is required by the nature of the particular
2. Plaintiff has derived some benefit as a result of the contract obligation and corresponds with the circumstances of the persons, of the time, and of
3. In case of exemplary damages, the defendant acted upon the advice of counsel the place.
4. Loss would have resulted in any event ● Failure to observe for the protection of the interests of another person that degree of
5. Since the filing of the action, the defendant has done his best to lessen the care, precaution and vigilance which the circumstances justly demand.
plaintiff’s loss or injury. ● Gross negligence – breach of duty is flagrant and palpable.
● Not determined by absolute standards
Effect of Contributory Negligence on the liability of the debtor: ○ ie. when human life is involved, care and vigilance demanded will be
● Creditor’s own negligence contributed to his own injury or damage – mitigation of greater (common carriage)
liability for damages of the debtor.
Delay (Arts 1169, 1165, 1786, 1788, 1896, 1942)
Test of Negligence:
ARTICLE 1169. Those obliged to deliver or to do something incur in delay from the time
● Reasonable foresight of harm, followed by the ignoring of the admonition born of the obligee judicially or extrajudicially demands from them the fulfillment of their
this prevision obligation.
● “Would a prudent man, in the position of the person to whom negligence is
attributed, foresee harm of the person injured as a reasonable consequence of the However, the demand by the creditor shall not be necessary in order that delay may exist:
court to be pursued?” (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
Negligence Fraud 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; or
No deliberate intention to cause damage or Deliberate intention to cause damage or (3) When demand would be useless, as when the obligor has rendered it beyond his
injury (liability may be mitigated), waiver injury (liability cannot be mitigated), waiver power to perform.
for future negligence may be allowed in for future fraud is not allowed.
certain situations. 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 the other begins. (1100a)
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 Kind of Delay Contemplated: Legal Delay
circumstances of the persons, of the time and of the place. When negligence shows bad ● The delay contemplated in this Article is legal delay, not ordinary delay.
faith, the provisions of Articles 1171 and 2201, paragraph 2, shall apply. ● To put an obligor in default (mora), there must be a demand made upon him for the
performance of the obligation either judicially or extrajudicially.
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.
Demand is not necessary under the following circumstances

Diligence: 1. When the law obligation so expressly declares

● The attention and care required of a person in a given situation and is the opposite of
negligence
● Due Diligence: Measure of prudence to be expected from and ordinarily exercised
by a reasonable and prudent man under the particular circumstances, not measured
by any absolute standard. (case to case basis)
Necessary Diligence:
● Degree of diligence which a person placed in a particular situation must exercise in
order to entitle him to the protection of the law in respect to rights or claims growing
out of that situation, or to avoid being left without redress on account of his own
culpable carelessness or negligence.
Negligence, Concept:
○ ie. parties agreed in the contract that the performance shall be done on a
specific date
2. When from the nature of the contract, it appears that time is of the essence and
this is the motivating factor in the establishment of the contract
○ ie. seller is selling his property to be able to raise funds to pay debt due
on a day certain the phrase time is of the essence need not be expressly
stated.
3. When demand would be useless
○ Obligor had rendered the prestation impossible of performance when he
destroyed the very thing he was supposed to deliver
4. When the debtor admits he is in default
○ His acknowledgement of being default is sufficient.
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 ○ However, if debtor was merely asking for an extension, this alone is not
an acknowledgement of default on his part.
Effects of Lack of Demand when it is necessary:
● Without demand, the effects of default shall not arise.
● Demand can be judicial (effected by filing a complaint in court) or extrajudicial
(done outside of court such as through a demand letter)
● Illustration: In a contract of sale where there is a provision for the cancellation of the
contract and forfeiture of what has already been paid in case of non-payment of any
installment due, there is no right to cancel and forfeit unless there has first been a
demand which places buyer in default.
When no date is fixed for delivery:
● When there is no date fixed, time is considered as not essential in which case,
delivery must be effected within a reasonable time to be fixed by court in
accordance with the circumstances of the case.
● When date is fixed, no further demand or notice by plaintiff to the defendant is
necessary.
● In case of doubt on whether debtor has incurred in delay the fulfillment of the
obligation, the doubt shall be resolved in favor of the debtor.
Classes of default (mora):
1. Mora Solvendi – default on part of the debtor (inapplicable to natural and
negative obligations)
a. Obligation pertains to the debtor
b. Obligation is determinate or liquidated; due and demandable
c. Obligation has not been performed on its maturity date
d. There is demand (judicial or extrajudicial)
2. Mora Accipiendi – default on part of the creditor (unjustifiably refuses to accept
payment/performance)
○ When obligation arose from a crime, the culprit is liable for the price of
the thing even if the loss of the thing subject of the crime was due to a
fortuitous event unless the creditor is guilty of mora accipiendi.
3. Compensatio Morae – default on the part of both the debtor and creditor which
arises in reciprocal obligations. The effect is the default of one party neutralized
the other.
ARTICLE 1165. When what is to be delivered is a determinate thing, the creditor, in
addition to the right granted him by article 1170, may compel the debtor to make the
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. (1096)
supra, Compliance.
ARTICLE 1786. Every partner is a debtor of the partnership for whatever he may have
promised to contribute thereto.
He shall also be bound for warranty in case of eviction with regard to specific and
determinate things which he may have contributed to the partnership, in the same cases and
in the same manner as the vendor is bound with respect to the vendee. He shall also be
liable for the fruits thereof from the time they should have been delivered, without the need
of any demand. (1681a)
ARTICLE 1788. A partner who has undertaken to contribute a sum of money and fails to
do so becomes a debtor for the interest and damages from the time he should have complied
with his obligation.
The same rule applies to any amount he may have taken from the partnership coffers, and
his liability shall begin from the time he converted the amount to his own use. (1682)
ARTICLE 1896. The agent owes interest on the sums he has applied to his own use from
the day on which he did so, and on those which he still owes after the extinguishment of the
agency. (1724a)
ARTICLE 1942. The bailee is liable for the loss of the thing, even if it should be
through a fortuitous event:
(1) If he devotes the thing to any purpose different from that for which it has been
loaned;
(2) If he keeps it longer than the period stipulated, or after the accomplishment of the
use for which the commodatum has been constituted;
(3) If the thing loaned has been delivered with appraisal of its value, unless there is a
stipulation exempting the bailee from responsibility in case of a fortuitous event;
(4) If he lends or leases the thing to a third person, who is not a member of his
household;
(5) If, being able to save either the thing borrowed or his own thing, he chose to save
the latter. (1744a and 1745)
In Contravention
ARTICLE 1170. Those who in the performance of their obligations x x x those who in any
manner contravene the tenor thereof, are liable for damages.
EXCUSES
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 Excuses: 7. When the obligation consists in the delivery of a generic thing
1. Acts of God and Fortuitous Events 8. Acceptance in bad faith of undue payment
2. Acts of Creditor
3. Rescission
Cases:

Acts of God and Fortuitous Events (Article 1174, 552, 1165, 2127, 2159) Nakpil v. The negligence of United Construction Inc. and Juan Nakpil and Sons Inc.
CA in the planning, specification, and construction of the Philippine Bar
ARTICLE 1174. Except in cases expressly specified by the law, or when it is otherwise Association Building led to its collapse during an unusually powerful
declared by stipulation, or when the nature of the obligation requires the assumption of risk, earthquake. This is evidenced by the fact that many other buildings older
no person shall be responsible for those events which could not be foreseen, or which, than it remained standing. If the happening of the fortuitous event or an act
though foreseen, were inevitable. (1105a) of God, there concurs a corresponding fraud, negligence, delay or violation
or contravention in any manner of the tenor of the obligation as provided
in Article 1170 which results in the loss or damage, the obligor cannot
Fortuitous Event escape liability.
● An occurrence or happening which could not be foreseen, or even if foreseen, is
inevitable.
Sia v. CA The bank’s negligence aggravated the injury or damage to the stamp
● Events beyond the control of the obligor. Must be impossible to foresee or to avoid.
collection. SBTC was aware of the floods of 1985 and 1986; it also knew
that the floodwaters inundated the room where the safe deposit box was
Essential Conditions: located. In view thereof, it should have lost no time in notifying the
petitioner in order that the box could have been opened to retrieve the
1. Cause of the breach must be independent of the debtor’s will stamps, thus saving the same from further deterioration and loss. In this
2. Event must either be unforeseeable or unavoidable respect, it failed to exercise the reasonable care and prudence expected of a
3. Event must be such as to render it impossible for the debtor to fulfill his good father of a family, thereby becoming a party to the aggravation of the
obligation in a normal manner injury or loss. As correctly held by the trial court, Security Bank was guilty
4. Debtor must be free from any participation in, or aggravation of, the injury to the of negligence.
creditor
RP v. Luzon The collision of Luzon Stevedoring’s barge with the supports of the
Stevedoring Nagtahan Bridge was not caused by a fortuitous event or force majeure.
Exceptions: The Nagtahan bridge was an immovable and stationary object provided
with openings for the passage of water craft, thus, it is undeniable that the
1. Specified by law unusual event that the barge rammed the bridge raises a presumption of
2. Express stipulation by the parties that there is liability even though negligence on the part of its employees manning the barge or the tugs that
non-performance is due to fortuitous events towed it. Luzon Stevedoring voluntarily entered the swollen stream
3. Nature of the obligation requires assumption of risk knowing the dangers that it posed. It therefore assured the risk and cannot
shed responsibility merely because the precautions it adopted turned out
insufficient.
Situations when the Law makes the Obligor liable even if due to Fortuitous Events:
NPC v. Strikes are included in the definition of force majeure since it is an event
Philipp which takes place by accident and could not have been foreseen and by
1. Obligor is in delay
Brothers law and by stipulation of the parties as per their agreement, Philipp
2. Obligor promised the same thing to 2 or more persons who do not have the same
Brothers is exempted from the liability of the effects of the delay in
interest
delivery of the coal. The Court stressed that even considering force
3. Possessor in bad faith and thing is lost or deteriorated due to fortuitous event
majeure as the reason for the delay in the first shipment, which exempted
4. Obligor contributed to the loss of the thing
Philipp Brothers from liability does not mean NAPOCOR is bound under
5. Obligor is guilty of fraud, negligence, delay, or violation of the tenor of the
any contract to approve Philipp Brothers pre-qualification for subsequent
agreement
biddings as it expressly reserved its right to reject bids.
6. If the adverse consequence is found to be partly the result of a person’s
participation or neglect to act and take steps in forestalling the damage/injury.

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ARTICLE 552. A possessor in good faith shall not be liable for the deterioration or loss of
the thing possessed, except in cases in which it is proved that he has acted with fraudulent
intent or negligence, after the judicial summons.
A possessor in bad faith shall be liable for deterioration or loss in every case, even if caused
by a fortuitous event. (457a)
ARTICLE 1165. When what is to be delivered is a determinate thing, the creditor, in
addition to the right granted him by article 1170, may compel the debtor to make the
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. (1096)
supra, Compliance.
ARTICLE 2127. The mortgage extends to the natural accessions, to the improvements,
growing fruits, and the rents or income not yet received when the obligation becomes due,
and to the amount of the indemnity granted or owing to the proprietor from the insurers of
the property mortgaged, or in virtue of expropriation for public use, with the declarations,
amplifications and limitations established by law, whether the estate remains in the
possession of the mortgagor, or it passes into the hands of a third person. (1877)
UP BOC: Article 2127 is modified by the PPSA with regard to property included in a Real
Estate Mortgage. Under Art. 2127, a REM “extends to natural accessions, to the
improvements, growing fruits and the rents or income not yet received when the [principal]
obligation becomes due.” These personal properties are no longer covered by Art. 2127
ARTICLE 2159. Whoever in bad faith accepts an undue payment, shall pay legal interest
if a sum of money is involved, or shall be liable for fruits received or which should have
been received if the thing produces fruits.
He shall furthermore be answerable for any loss or impairment of the thing from any cause,
and for damages to the person who delivered the thing, until it is recovered. (1896a)
Acts of Creditor (this is mora accipiendi)
● Mora Accipiendi – default on part of the creditor (unjustifiably refuses to accept
payment/performance)
REMEDIES FOR BREACH (Arts. 1165-1168, 1170, 1177-1178, 1191-1192, 2236, 302,
1708; Arts. 153, 155 FC; Rule 39 Sec. 13)
ARTICLE 1165. When what is to be delivered is a determinate thing, the creditor, in
addition to the right granted him by article 1170, may compel the debtor to make the
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. (1096)
ARTICLE 1166. The obligation to give a determinate thing includes that of delivering all
its accessions and accessories, even though they may not have been mentioned.
supra, Compliance Arts. 1165-1166
ARTICLE 1167. If a person obliged to do something fails to do it, the same shall be
executed at his cost.
This same rule shall be observed if he does it in contravention of the tenor of the obligation.
Furthermore, it may be decreed that what has been poorly done be undone. (1098)
Coverage of the Article:
1. Obligor failed to fulfill a positive personal obligation (ie. to do something)
2. Obligor fulfilled the obligation but in contravention of the agreement.
3. There was fulfillment but the same was poor or inadequate.
Remedies of the Creditor
1. If the debtor failed to fulfill the obligation, the same may be done by the creditor
himself or by another person, but at the expense of the debtor.
2. If the obligation was done in violation of the agreement, the creditor or another
may execute the obligation at the expense of the debtor. (Same as #1)
3. If the performance is poor, the creditor may undo the same at the expense of the
debtor.
No Specific Performance allowed under this article:
● Present article refers to an obligation which ought to be done by the debtor himself,
therefore a positive personal obligation. Specific performance cannot be availed of
by the creditor because to do so will mean the compulsion of the debtor to do an act
which he refuses to do which is tantamount to involuntary servitude (not allowed by
our Constitution).
Remedy when only the Obligor can do the act or obligation:
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 ● If the obligor alone can do the act or prestation (ie. Black Eyed Peas to sing in a
concert). He cannot be compelled by force to perform for that will violate his civil
liberty.
● The remedy is indemnification for damages.
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. (1099a)
● This article refers to a negative personal obligation.
● The thing done or act performed shall be undone at the expense of the obligor.
● Damages may be claimed against him.
● Illustration: lessee obligated himself not to make any improvements without consent
of the lessor. In making improvements unilaterally, the improvements may be
undone at his expense in addition to damages. If the act could no longer be undone
physically or legally without doing injustice to third persons, the only remedy is
indemnification for damages against the obligor.
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.
supra, Compliance Arts. 1170
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. (1111)
Extrajudicial Remedies:
● Ex. A demand letter, extrajudicial rescission
Judicial Remedies:
● Ex. Action for performance, damages, rescission
Principal Remedies:
a. Action for Performance (Specific Performance or Obtain Compliance)
b. Action for Damages (Exclusively or in addition to either of the first actions)
c. Action for Rescission (In a reciprocal obligation)
Subsidiary Remedies:
a. Accion Subrogatoria – Creditor steps in the position of the debtor to collect valid
and demandable credit from those who owe the debtor. May be done extrajudicially.
○ Limits: Not allowed to pursue actions which are personal to the debtor Ex.
The right to revoke a donation, right to exercise parental authority.
b. Accion Pauliana – Action for the rescission of acts/contracts entered into by the
debtor designed 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. (1112)
General rule:
● Rights of obligations or those rights which are acquired by virtue of an obligation
are transmissible in character.
Exceptions:
1. Where they are not transmissible in their very nature (i.e. purely personal rights);
2. Where there are stipulations by the parties that they are not transmissible;
3. Where they are not transmissible by operation of law.
Rescission (Art. 1191-1192) - Power to Rescind in Reciprocal Obligations
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. (1124)
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. (n)
Resolution v. Rescission
● Article 1191 Rescission is different from Article 1381 Rescission.
● The original term used for the Rescission in 1191 is RESOLUTION:
○ Rescission is a resolution or a cancellation of a contract.
Power to Rescind
● Means the right to cancel or resolve the contract or reciprocal obligations in case of
non-fulfillment on the part of one of the contracting parties.
● Failure without legal reason to comply with the terms of a contract is called a breach
of contract.
● There can be no rescission of an obligation that is non-existent, hence when a
suspensive condition has not happened yet, then there cannot be a rescission.
● The right to rescind is implied even absent any provision providing for a right to
rescind.
CIVREV C2022 COMPILATION - DBN & MKG | SBM SYLLABUS | 44
Breach of Faith:
● Resolution is predicated on a breach of faith by the other party, a failure to comply 1. Sales of real property by installments (Maceda Law governs)
with an obligation already existing, that violates the reciprocity between them. 2. Sales of personal property by installments (Recto Law governs. If not by
● This article applies only to reciprocal obligations where two parties are mutually installment, 1191 governs.)
debtor and creditor. Reciprocity must arise from identity of cause. This means 2 3. Contracts of partnerships (Governed by 1786 and 1788)
obligations are created at the same time.
● Does not apply to non-reciprocal obligations.
○ Ex. Non-payment of the purchase price of a property. Basis Art. 1191 (Resolution) Art. 1381 (Rescission)

Effect of Rescission: Nature A principal action which seeks the A subsidiary action limited to cases
● General rule: to rescind a contract is not merely to terminate it, but to abrogate and resolution or cancellation of the or rescission for lesion as
undo it from the beginning. contract; resorted to when there is enumerated in Art. 1381; when
● Annuls the contract and restores the parties to the relative positions which they substantial breach of contract. creditor cannot collect from debtor
would have occupied if no such contract had ever been made. because of fraudulent
● Mutual restitution of the benefits received is required. Prescriptive period: 10 years schemes

Who has the Right to Rescind: Prescriptive period: 4 years

● The party who can demand rescission is the one who is ready, willing, and able to
comply with his own obligations while the other is not capable to perform his own. Grounds Only ground is the Five grounds enumerated in Art.
● Also, he must be in a position to return whatever he may be obliged to return. non-performance of one’s 1381. Non- performance by the
● A party who has not performed his part of the obligation cannot rescind. obligation or what is incumbent other party is not important.
● A guilty party cannot rescind because he has unclean hands. upon him.
● Power to rescind is given to the injured party in reciprocal obligations.
Applicability It applies only to reciprocal Applies to both unilateral and
obligations. reciprocal obligations.
Remedies available to Aggrieved Party:
Persons who Only the a party to the contract Even a third person who is
1. Specific performance or fulfillment of the obligation WITH damages may institute may demand the fulfillment or prejudiced by the contract may
2. Rescission of the contract WITH damages the action seek the rescission (cancellation) demand the rescission of the
of the contract. contract.
Notes:
● Injured parties CANNOT seek BOTH remedies.
Fixing the Court may fix a period or grant Court cannot grant extension of
● Specific performance and rescission are ALTERNATIVE remedies, not
period by the extension of time for the time for the fulfillment of the
conjunctive.
court fulfillment of the obligation. obligation.

Purpose To cancel the contract. To seek reparation for the damage

Exceptions: or injury caused, thus allowing
partial rescission of contract.
1. If fulfillment was chosen but the same had become impossible, rescission may
still be sought. Effect Completely cancels the contract; Granted only to the extent
2. If there is a valid basis for the extension of the performance of the reciprocal “as if it never happened” necessary to obtain payment'
obligation, the court will not decree rescission but will rather fix a period for the
fulfillment of the obligation.
3. Partial rescission and partial fulfillment may be allowed.
Example based on Hardnotes: Resolution v. Rescission

Resolution: Contract of Sale

Not applicable in the following cases:

CIVREV C2022 COMPILATION - DBN & MKG | SBM SYLLABUS | 45

 ● S entered into Contract of Sale. S sold his property to B for a price. B incurred
default. S can therefore sure B for resolution. Hence, there will be cancellationof
obligation.
Rescission: Loan Contract
● Day 1: Creditor entered into a loan agreement with' Debtor. Debtor was obliged to
pay the principal + interest on Day3.
● Day 2: However, on day 2, Debtor conveyed his only asset to X for a nominal
amount. The only asset of D amounted to P20M and he sold it for around P5M.
(Let us assume that the transaction is fraudulent)
● Day 3: Debtor defaults. Assets of Debtor is 0 and Debtor has squandered away the
payment he received from X (P5M).
● Remedy of creditor: Rescission (accion pauliana). The creditor can go after the
assets sold to C, when the transaction is fraudulent or with the intent to defraud.
Restrictions on the Power
1. Due process must be observed:
● Rescission authorized under 1191 is a judicial rescission.
● Other party must be given his day in court, hence, the aggrieved party
must not take justice in his own hands and decide by himself along the
right of the parties on the matter.
● In the absence of a contrary stipulation, the power to rescind an
obligation must be invoked in court.
2. Right to rescind is subordinated to the rights of 3rd persons who acquired
the thing in GOOD FAITH.
● If the 3rd person acquired the thing in accordance with 1385 and 1388
of the Civil Code, the innocent party can no longer recover the
property.
● The remedy is to seek indemnification for the value of the thing and
damages.
3. Power of the Court to fix period in lieu of decreeing Rescission.
● If the court finds a just cause for giving the debtor time to perform his
obligation, such as when the default was not willful or is excusable
under the circumstances, then rescission will not be granted.
4. Slight breaches of the contract will not justify Rescission.
● Rescission will not be permitted for slight and casual breach, but only
for substantial or fundamental breach.
5. A judicial or notarial act is necessary before a valid rescission can take place,
whether or not automatic rescission has been stipulated.
● Proof of violation of the agreement is a condition precedent to
declaration of rescission.
Necessity of Judicial Approval
● In specific performance, there is always a need for judicial action if the other party
refuses to make the delivery of the thing promised.
However in rescission, the rule is different:
1. If there is an express stipulation of automatic rescission without need of
judicial action, rescission is authorized without court intervention.
a. Where the contract provides that it may be revoked and cancelled for
violation of any of its terms and conditions, no judicial action is
necessary.
b. Where the contract provides a resolutory provision by which the
obligation may be resolved or extinguished in case of a violation of the
terms, judicial action is not necessary.
Notes:
● A stipulation of automatic rescission is in the nature of a facultative resolutory
condition
● Rescission shall take effect only after the creditor has notified the debtor of his
choice of rescission, as the creditor may choose between rescission or
performance.
● Cancellation of a contract based on such stipulation is provisional, and still
subject to judicial scrutiny. This means that the party must proceed at his own
risk, as only the final judgment of the corresponding court shall conclusively
settle whether the action taken was correct in law.
2. If there is no express stipulation of automatic rescission in case of breach
a. When the object has already been delivered, judicial approval is needed
- unless the debtor voluntarily returned the thing.
b. Not yet delivered, judicial approval is needed to rescind the contract.
Notes:
● If there is an arbitration clause, breaches by a party arising from the contract must
be brought first and resolved by arbitration, not through extrajudicial rescission or
judicial action.
● Rescission of contract is a power vested in the Regional Trial Courts, not
Municipal Trial Courts.
● Courts have no power to relieve parties from obligations voluntarily assumed,
simply because their contracts turned out to be disastrous or unwise investments.
Effects of Slight Breaches:
● The breach of the contract should be substantial and fundamental as to defeat the
object of the parties in entering into the contract.
● Non-substantial breach of a contract cannot give rise to a rescission.
● The aggrieved party cannot seek the rescission of the contract based merely on slight
infractions committed by the other party. The law is not concerned with trifles.
Cases:
Ang v. CA Rescission may be had only for such breaches that are so substantial
and fundamental as to defeat the object of the parties in making the
agreement. The Court holds that when petitioners refused to proceed
CIVREV C2022 COMPILATION - DBN & MKG | SBM SYLLABUS | 46
 with the sale unless private respondent agreed to pay the higher price
of P2,340,000.00, the petitioners thereby committed a serious breach
of the agreement. Private respondent had the right to rescind the
agreement as petitioners committed a serious breach of the terms of
the same.
Gaite v. The Rhogen Builders failed to secure a proper and sufficient permit in due
Plaza to non-compliance with the provisions of the National Building Code,
it had committed a serious breach in the terms of contract with the
Plaza for the purposes of constructing a restaurant in Makati. Gaite‘s
failure to build the structure in accordance with the approved plans
and non-observance of laws and regulations affecting the construction
constitute a substantial violation of the contract, which entitles The
Plaza to terminate the same without obligation to make further
payment to Rhogen.
Lalicon v. NHA Resolution applies only to reciprocal obligations such that a breach on
the part of one party constitutes an implied resolutory condition which
entitles the other party to rescission. Resolution grants the injured
party the option to pursue, as principal actions, either a rescission or
specific performance of the obligation, with payment of damages in
either case.
The four-year prescriptive period provided in Article 1389 applies to
rescissions under Article 1381. Here, the NHA sought annulment of
the Alfaros’ sale to Victor because they violated the five-year
restriction against such sale provided in their contract. Thus, the CA
correctly ruled that such violation comes under Article 1191 where
the applicable prescriptive period is 10 years from the time the right
of action accrues. NHA filed within the 10 year limit.
Viloria v. While CAI’s refusal to allow Fernando to use the value of Lourdes’
Continental ticket as payment for the purchase of a new ticket is unjustified as the
non-transferability of the subject tickets was not clearly stipulated, it
cannot, however be considered substantial. The endorsability of the
subject tickets is not an essential part of the underlying contracts and
CAI’s failure to comply is not essential to its fulfillment of its
undertaking to issue new tickets upon Spouses Viloria’s surrender of
the subject tickets.
Cruz v. HR The right to rescind may be waived, expressly or impliedly. In spite of
Construction the existence of dispute or controversy between the parties during the
course of the Subcontract Agreement, HRCC had agreed, via a
stipulation in the subcontract, to continue the performance of its
obligations pursuant to the Subcontract Agreement. In view of such
provision, HRCC is deemed to have effectively waived its right to
effect extrajudicial rescission of its contract with FFCCI.
Accordingly, HRCC, in the guise of rescinding the Subcontract
Agreement, was not justified in implementing a work stoppage.
Tan v. CA It is a settled principle of law that rescission will not be permitted for
a slight or casual breach of the contract but only for such breaches as
are so substantial and fundamental as to defeat the object of the
parties in making the agreement. A court, in determining whether
rescission is warranted, must exercise its discretion judiciously
considering that the question of whether a breach of a contract is
substantial depends upon the attendant circumstances
JBL Reyes v. CA The law on obligations and contracts does not prohibit parties from
entering into agreement providing that a violation of the terms of the
contract would cause its cancellation even without judicial
intervention. This is what petitioners and respondent entered into, a
lease contract with stipulation that the contract is rescinded upon
violation of its substantial provisions, which MMB, Inc. does not
deny they violated.
Song Fo v. GR is rescission will not be permitted for a slight or casual breach of
Hawaiian the contract, but only for such breaches as are so substantial and
fundamental as to defeat the object of the parties in making the
agreement. A delay in payment for a small quantity of molasses for
some twenty days is not such a violation of an essential condition of
the contract warrants rescission for non-performance. Not only this,
but the Hawaiian-Philippine. waived this condition when it arose by
accepting payment of the overdue accounts and continuing with the
contract. Thereafter, Song Fo was not in default in payment so that
the Hawaiian-Philippine co. had in reality no excuse for writing its
letter cancelling the contract. The appellant had no legal right to
rescind the contract of sale because of the failure of Song Fo to pay
for the molasses within the time agreed upon by the parties.
Filoil vs. An examination of the lease contract reveals that there is no express
Mendoza prohibition against the assignment of the leasehold right. Under the
law, when there is no express prohibition, the lessee may sublet the
thing leased and all rights acquired by virtue of an obligation are
transmissible, if there has been no stipulation to the contrary.
Arguments are moot and academic for the lease of contract has
already expired, and the petitioners are ordered to vacate the
premises.
ARTICLE 2236. The debtor is liable with all his property, present and future, for the
fulfillment of his obligations, subject to the exemptions provided by law. (1911a)
ARTICLE 302. Neither the right to receive legal support nor any money or property
obtained as such support or any pension or gratuity from the government is subject to
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attachment or execution. (n)
ARTICLE 1708. The laborer’s wages shall not be subject to execution or attachment,
except for debts incurred for food, shelter, clothing and medical attendance.
ARTICLE 153, FC. The family home is deemed constituted on a house and lot from the
time it is occupied as a family residence. From the time of its constitution and so long as
any of its beneficiaries actually resides therein, the family home continues to be such and is
exempt from execution, forced sale or attachment except as hereinafter provided and to the
extent of the value allowed by law. (223a)
ARTICLE 155, FC. The family home shall be exempt from execution, forced sale or
attachment except:
(1) For nonpayment of taxes;
(2) For debts incurred prior to the constitution of the family home;
(3) For debts secured by mortgages on the premises before or after such constitution;
and
(4) For debts due to laborers, mechanics, architects, builders, materialmen and others
who have rendered service or furnished material for the construction of the
building. (243a)
RULE 39, SEC. 13. Property exempt from execution. — Except as otherwise expressly
provided by law, the following property, and no other, shall be exempt from execution:
a. The judgment obligor's family home as provided by law, or the homestead in
which he resides, and land necessarily used in connection therewith;
b. Ordinary tools and implements personally used by him in his trade, employment,
or livelihood;
c. Three horses, or three cows, or three carabaos, or other beasts of burden, such as
the judgment obligor may select necessarily used by him in his ordinary
occupation;
d. His necessary clothing and articles for ordinary personal use, excluding jewelry;
e. Household furniture and utensils necessary for housekeeping, and used for that
purpose by the judgment obligor and his family, such as the judgment obligor
may select, of a value not exceeding one hundred thousand pesos;
f. Provisions for individual or family use sufficient for four months;
g. The professional libraries and equipment of judges, lawyers, physicians,
pharmacists, dentists, engineers, surveyors, clergymen, teachers, and other
professionals, not exceeding three hundred thousand pesos in value;
h. One fishing boat and accessories not exceeding the total value of one hundred
thousand pesos owned by a fisherman and by the lawful use of which he earns his
livelihood;
i. So much of the salaries, wages, or earnings of the judgment obligor for his
personal services within the four months preceding the levy as are necessary for
the support of his family;
j. Lettered gravestones;
k. Monies, benefits, privileges, or annuities accruing or in any manner growing out
of any life insurance;
l. The right to receive legal support, or money or property obtained as such support,
or any pension or gratuity from the Government;
m. Properties specially exempted by law.
But no article or species of property mentioned in this section shall be exempt from
execution issued upon a judgment recovered for its price or upon a judgment of foreclosure
of a mortgage thereon.
Extra-judicial remedies as expressly granted by law - Arts. 1786, 1788, 1526 or as
stipulated
ARTICLE 1786. Every partner is a debtor of the partnership for whatever he may have
promised to contribute thereto.
He shall also be bound for warranty in case of eviction with regard to specific and
determinate things which he may have contributed to the partnership, in the same cases and
in the same manner as the vendor is bound with respect to the vendee. He shall also be
liable for the fruits thereof from the time they should have been delivered, without the need
of any demand. (1681a)
ARTICLE 1788. A partner who has undertaken to contribute a sum of money and fails to
do so becomes a debtor for the interest and damages from the time he should have complied
with his obligation.
The same rule applies to any amount he may have taken from the partnership coffers, and
his liability shall begin from the time he converted the amount to his own use. (1682)
ARTICLE 1526. Subject to the provisions of this Title, notwithstanding that the ownership
in the goods may have passed to the buyer, the unpaid seller of goods, as such, has:
(1) A lien on the goods or right to retain them for the price while he is in possession
of them;
(2) In case of the insolvency of the buyer, a right of stopping the goods in transitu
after he has parted with the possession of them;
(3) A right of resale as limited by this Title;
(4) A right to rescind the sale as likewise limited by this Title.
Where the ownership in the goods has not passed to the buyer, the unpaid seller has, in
addition to his other remedies, a right of withholding delivery similar to and coextensive
with his rights of lien and stoppage in transitu where the ownership has passed to the buyer.
Judicial Remedies
Principal (Arts. 1191, 1170)
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.
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 Entitlement to Damages
The court shall decree the rescission claimed, unless there be just cause authorizing the ● Fraud → extent of damages covers all no need to establish BF, GF little
fixing of a period. necessity of the need to establish such correlation
● Negligence → must establish if GF or BF and still need to establish reasonable
This is understood to be without prejudice to the rights of third persons who have acquired connection or proximate cause of the damages to the act committed
the thing, in accordance with articles 1385 and 1388 and the Mortgage Law.
Diligence required hierarchy
ARTICLE 1170. Those who in the performance of their obligations are guilty of fraud, 1. Extraordinary
negligence, or delay, and those who in any manner contravene the tenor thereof, are liable 2. Ordinary or diligence of good father
for damages.
Can there be an instance where a party can stipulate diligence lower than that of
supra, Remedies for Breach (Art. 1191) and Breach of Obligations (Art. 1170). diligence of a good father?
● No. Law prohibits this to protect parties against waiver of fraud and one party
Subsidiary remedies (Arts. 1380, 1177) taking advantage of the other
ARTICLE 1380. Contracts validly agreed upon may be rescinded in the cases established
by law. (1290) Diligence of a good father is for obligation
a. to do,
ARTICLE 1177. The creditors, after having pursued the property in possession of the b. not to do,
debtor to satisfy their claims, may exercise all the rights and bring all the actions of the c. give determinate things
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. (1111) How to establish negligence if no diligence is required?
● 1163: only to give indeterminate things.
supra, Remedies for Breach. ● If to do or not to do, how to say if you are negligent or not?
○ By comparing the facts, meaning the acts or omissions of the debtor, as
Ancillary remedies (Rules of Court) against the relevant standards of care

Class Notes Delay

How to say no need for demand? “Without need for a demand”
Obligation to take care: duty of diligence → obligation to give ● April 14, 2022 without need for further demand.
● Determinate things only; not applicable to generic things since genus never
perishes Contravention → failure to comply with the terms of the obligation, and will require dolo,
● GR: Diligence of good father of a family culpa, delay as the cause of the failure to comply, in order to constitute as a breach.
- XPN: Other levels of diligence possible like extraordinary diligence ● GR: Substantial compliance in GF
(common carriers) ○ XPN: Substantial compliance in good faith. (In case where Dane is
supposed to deliver 100 sacks of mangoes to Kayla but she only
Duties of the DR delivered 99. Substantial compliance, still)
When the thing is determinate
1. To deliver the thing itself Can a party resort to both rescission and specific performance? It depends on the order.
2. Preserve or take care
3. Deliver fruits GR: You need court intervention for rescission.
4. Deliver accessions and accessories ● XPN: stipulated + with notice.

When the thing is generic Specific performance cannot be done extrajudicially.

1. Deliver the thing of the quality intended ● In obligation to give → successive – SP then rescission
2. Pay damages in case of breach ● In obligation to do → cannot be judicially demanded since it would be
involuntary servitude
Compare real v. personal right (See Table above) ● In obli not to do → injunction, reversal, damages

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Extrajudicial Remedies Fortuitous Event (FE)
● Demand letters ● Can traffic jams be considered an unforeseeable or unavoidable event? No.
○ What if only one route and traffic jam caused by road accident, will it
Judicial Remedies qualify? (Student: NO)
a. Principal Remedies ● COVID-19 pandemic: yes for the 1st and 2nd elements; look closely at 3rd and
i. Action for Performance (SP or Obtain Compliance) 4th.
ii. Action for Damages (exclusive or in addition to SP)
iii. Action for Rescission/Resolution (in a reciprocal obligation)
b. Subsidiary Remedies (exhausting all first) EXTINGUISHMENT OF OBLIGATIONS
i. Accion subrogatoria
ii. Accion Pauliana - action for the rescission of acts/contracts entered into Obligations are extinguished by the ff:
by the debtor designed to defraud the creditor. 1. by payment or performance;
○ There's a successive order → Exact payment, attach 2. by the loss of the thing due;
properties, subrogatoria or pauliana 3. by the condonation or remission of the debt;
○ Can be availed at the same time → writ of attachment, 4. by the confusion or merger of rights of debtor and creditor;
subrogatoria 5. by compensation; and
Rescission 6. by novation.
● SP or fulfillment of obligation with damages Obligations may also be extinguished by annulment, rescission, fulfillment of a resolutory
● Rescission with damages condition and prescription.
● Injured parties cannot seek both remedies
● SP and rescission are ALTERNATIVE remedies
EXTINGUISHMENT 1: PAYMENT
For other actions Arts. 1232-1244
● In contravention → anything not done in full compliance or in satisfactory Art. 1232. Payment means not only the delivery of money but also the performance, in
compliance with claim for damages any other manner, of an obligation.
● When there is breach → always with claim of damages (art. 1170)

In rescission Definition
● GR: To rescind a contract is not merely to terminate it, but to abrogate and undo ● Payment is the satisfaction or fulfillment of a prestation that is due, resulting in the
it from the beginning. extinguishment of the obligation of the debtor.
● Mutual restitution is required.
○ If one cannot give back, cannot exercise. Kinds of Payment
1. Voluntary - when the debtor willingly pays in money or performs the prestation
Due process → no deprivation of rights without following reqs under the law stipulated.
● Notified and opportunity to be heard 2. Involuntary - when the debtor is forced to deliver or perform by order of the court.

Substantial breach
● The only party who may invoke resolution is the injured/aggrieved party.
● Reciprocal or not, any party can exercise (1191 v 1381)
○ In 1191: reciprocal: inherent even if not stipulated
Specific Performance
Necessity of Judicial Approval (Heirs of JBL Reyes v. CA)
● In SP, there is always a need for judicial action if other party refuses to make the
delivery of the thing promised.
● In rescission, if there is an express stipulation of automatic rescission without
need of judicial action, rescission is authorized without court intervention.
Requisites of Valid Payment
1. Capacity of the person paying
2. Capacity of the person receiving the payment
3. Delivery of the full amount or the full performance of the prestation
4. Propriety of the time, place, and manner of payment
5. Acceptance of the payment by the creditor
Article 1233. A debt shall not be understood to have been paid unless the thing or service
in which the obligation consists has been completely delivered or rendered, as the case
may be.

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Elaboration:
● A debt is considered paid when the full amount has been delivered, or the service
has been rendered.
● To extinguish the indebtedness, performance must be complete – unless otherwise
stipulated.
● A receipt is a good proof of payment, and the debtor can demand the issuance of a
receipt when the debt is paid.
● Burden of proving payment rests upon the debtor, after the creditor has shown that
the debt exist
Substantial Performance in Good Faith
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.
Rationale
● In case of substantial compliance of the obligation, the obligee is benefited. So the
obligor should be allowed to recover as if there had been a strict and complete
performance.
● There is substantial compliance by the debtor when in good faith, he has attempted
to perform the contract or prestation, but through excusable neglect, failed to make a
full and complete performance.
● The omission or defect contemplated in the article must be slight and unimportant. It
must not be so material as to frustrate the accomplishment of the intended work.
● There must also be no willful or intentional deviation from the contract.
● Having received the benefits of the substantial compliance, the creditor cannot
require the performance of the unperformed portion of the obligation as a condition
precedent to the payment of his own liability.
● Right to rescind cannot be availed of when there is substantial performance.
Case:
Angeles vs. Unilateral cancellation is unwarranted if there is only a slight or casual
Calasanz breach on the fulfillment of the obligation. Apart from the initial down
payment of 392 pesos, Calasanz received and accepted the aggregate
amount of 4,533 pesos. Angeles have paid the monthly installments for 9
years and full payment will be made in such a short time, thus not
amounting to a substantial breach thereof. Courts should only order the
payment of the few remaining installments but not uphold the cancellation
of the contract.
Pagsibigan Aside from the fact that the respondent bank was estopped from enforcing
vs. CA its right to foreclose by virtue of its acceptance of the delayed payments for
a period of more than six years, the application of such payment to the
interest and the principal during the first three payments constitutes a virtual
waiver of the acceleration clause provided in the contract. We cannot
sustain the legality of the foreclosure under the peculiar facts of this
case, because there is substantial performance of the obligation on the
part of petitioner. Under Article 1235 of the Civil Code, when the
creditor accepts performance, knowing its incompleteness and
irregularity without protest or objection, the obligation is deemed
complied with. The bank is bound by estoppel and has no right to rescind.
JM Tuason If the obligation has been substantially performed in good faith, the obligor
vs. Javier may recover as though there had been as strict and complete fulfillment, less
damages suffered by the obligee Apart from the initial installment paid upon
the execution of the contract, Javier religiously satisfied the monthly
installments for a period of almost 8 years. Javier offered to pay all the
installments overdue including the stipulated interest, which the CFI
sentenced to pay.
Completeness by Estoppel
Article 1235. When the obligee accepts the performance, knowing its incompleteness or
irregularity, and without expressing any protest or objection, the obligation is deemed
fully complied with.
Reason
● Although the obligation is not completely executed, the same is deemed fully
fulfilled or performed because the obligee is placed under estoppel in accepting the
payment or performance with actual knowledge of its incompleteness or irregularity.
● He has waived his right to question the defect when he made the acceptance without
any protest or objection thereto.
Example:
● Owner accepted and occupied a newly constructed house without protest. This
would amount to an acknowledgement of the performance of the work by the
contractor. He is also estopped from setting up the claim that the material used in the
construction of said house was not in accordance with the plans and specifications.
“Accept” - meaning
● “Accept” means to take as “satisfactory or sufficient,” or to give assent or to agree
or to accede to an incomplete performance.
● The law does not require the creditor to protest or object in a particular manner or at
a particular time, so long as the acts of the creditor at the time of the payment or a
reasonable time thereafter, shows that he is not satisfied with the said payment or
performance. If this is the case, obligation is not extinguished.
● When by the acts of the creditor himself caused the appearance of the defects in the
performance, he is estopped from objecting to the performance.
Effect of Payment by and to Third Persons
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.
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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.
Rationale
● The creditor should not be compelled to accept payment from a third person whom
he may dislike or distrust. Creditor may also have personal reasons not to have any
business dealings with a third person, such as lack of confidence in the honesty of
the third person.
Exceptions
1. If there is a stipulation that the creditor shall accept the payment made by a third
person
2. If the third person has an interest in the fulfillment of an obligation such as the
interest of sa surety, a guarantor or a mortgagee.
Right of the Third Person who Paid the Obligation:
● Payment may be made with consent of the debtor or without the knowledge or
against the will of the debtor.
● If payment is made with the knowledge and consent of the debtor, the payor is
entitled to be reimbursed for the full amount he paid. Same rule applies if the debtor
knows about the payment but did not object.
● If payment is made without the knowledge or against the debtor’s will,
reimbursement shall be only up to the amount or extent by which the debtor was
benefited. If the debt had already been prescribed, payment cannot beneficial to the
debtor, thus the payor is not entitled to reimbursement.
● Debtor’s knowledge of the payment may be proved inferentially or by his act or
conduct.
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
Art. 1302 - Legal Subrogation
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.
Consequences of Payment without knowledge or against the will of the Debtor:
1. He can recover only insofar as the payment has been beneficial to the debtor.
2. He cannot compel the creditor to subrogate him in his rights, such as those arising
from mortgage, guaranty, or penalty.
Subrogation Elaborated:
● This is the juridical act of putting somebody into the place of the creditor by virtue
of which, the former is enabled to exercise all the rights and actions appertaining to
the latter.
● Subrogation transfers to the person subrogated the credit with all the right thereto
appertaining, either against the debtor.
Example: Bianca got a loan of 1 million from a bank using as collateral a parcel of land.
Without the consent of Bianca, her friend Kosh paid the obligation, whereby Bianca
benefited to the full amount of 1 million.
● Kosh can claim form Bianca full reimbursement of the amount she paid to the bank.
However, if Bianca could not make the reimbursement, Kosh has no right to
foreclose the mortgage because Kosh had not been given the right to subrogate the
bank — as the payment was done without the consent of Bianca.
● If Kosh made the payment with the consent of Bianca, Kosh is entitled to full
reimbursement of the amount paid and to subrogation, such that if the debtor fails to
reimburse Kosh, the latter can foreclose the mortgage as the payor is subrogated to
the rights of the bank.
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.
Applicability:
● The donation and the acceptance of the thing/money must comply with the formal
requisites to make it valid. (See Articles 748 and 749 of the New Civil Code)
Reason why consent of the Debtor is required:
● The reason is that no one should be compelled to accept the generosity of another.
● When the payor does not intend to be paid back, the presumption arises that such
payment is a donation.
● The debtor’s consent is necessary to perfect the donation. When the debtor has given
his consent, the law on ordinary donation will apply.
● If the debtor did not give his consent to the presumed donation, nonetheless, the
payment if accepted by the creditor will have the effect of extinguishing the
obligation.
● The consent of the debtor is immaterial insofar as the extinguishment of the
obligation is concerned.
Article 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 valid, without prejudice to
the provisions of article 1427 under the Title on "Natural Obligations."
Valid Payment in Obligations to Give:
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 ● In an obligation to give, the payor must have the free disposal of the thing paid,
otherwise, the payment is not valid. Payment made by a payor who does not have
the capacity to alienate the thing, such as when he is insane, is not valid.
● Article 1427 (which refers to minors aged 18-21 being able to recover what is paid
due to incapacity) is no longer applicable since R.A. 1609 reduced the age of
majority to 18.
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 to whom payment shall be made:
● Payment shall be valid and effective if it is paid to:
1. The creditor himself in whose favor the obligation was constituted. If the credit had
been transferred or assigned to a third person, payment shall be made to the latter.
The term creditor shall refer to the creditor at the time of the payment.
2. To the successor or successors in interest (like the heirs) in default of the creditor.
3. To any person duly authorized to receive the payment. He may be an attorney-in-fact
or an agent. The authority may be granted by law such as the authority of the
guardian in relation to his ward; liquidator of a partnership or corporation; the
administrator or executor of an estate.
● Payment to an unauthorized person is not valid payment (Exception: Article 1241)
● The phrase “a person authorized to receive it” means not only those who are authorized
by law to do so (such as guardian, executor, etc.) but also any other person who may be
authorized to do so by law.
Illustrations:
1. Payment to unauthorized persons:
a. Payment to an alleged agent who is not authorized is not valid payment.
Payment was made at one’s risk.
b. Payment made to the second wife instead of the children of the first wife
who are the ones authorized to receive payment, was void. The payor’s
obligation was not extinguished.
2. Payment to authorized persons:
a. Payment of an account with the China Banking Corp through its liquidator
is a valid payment.
b. Payment made to the administrative officer of PRRA, a government
agency, for certain goods sold by the agency to the defendants, was
considered valid since said officer had been allowed to receive payment
from the buyers of such goods.
Tanguilig vs. Payment made to a third person shall also be valid insofar as it has
CA redounded to the benefit of the creditor. Such benefit to the creditor need
not be proved in the following cases: If by the creditor’s conduct, the
debtor has been led to believe that the third person had authority to
receive the payment.
PNB vs. CA Under Art. 1233 of the Civil Code, a debt shall not be understood to have
been paid unless the thing or service in which the obligation consists has
been completely delivered or rendered, as the case may be.
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.
Applicability:
● The article refers to payment made by the debtor with the intention to extinguish his
debts to an:
a. Incapacitated Creditor, or
b. Third Person who is not a successor in interest of the creditor nor an authorized
representative
Effects:
1. If the payment made to the incapacitated creditor who cannot administer his
property did not benefit him or he has not kept the thing delivered, the debtor may
be compelled by the creditor to pay anew when he regains capacity, or by the latter’s
representative during the time of the incapacity.
2. If the incapacitated creditor has kept the thing delivered or he benefited from the
payment he received, the debtor is released from his obligation by virtue of the
payment. There is benefit if the thing or the money received was used for payment
of medical expenses, taxed, or indebtedness of the creditor. Benefit may be in the
form of financial, moral or intellectual advantages which must be proved.
● The rationale behind this is that because the creditor is incapacitated and cannot
administer his own property, payment to him should, in the ordinary course of things, be
coursed to the legal representative or guardian; if there is none, the debtor may consign
the thing in court so that he will be released from the obligation.
Exception to the rule in Article 1240
● This article is an exception to the rule that payment made to a third person who is not a
successor in interest nor an authorized representative shall be invalid.
● In this article, payment to such a third person is also valid IF the creditor was benefited
thereby. The validity of the payment is co-extensive to the benefit which the creditor
achieved. This requires evidence to establish the extent of the benefit enjoyed.
Article 1242. Payment made in good faith to any person in possession of the credit shall
release the debtor.
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Character of Payment
● Payment made by the debtor must be made in good faith.
● It is immaterial whether the creditor acted in good faith or bad faith, since the law is
intended to protect the debtor from being required to pay again, and not to protect
the creditor.
Meaning of Possessor of Credit
● The one in possession of the credit does not refer to the real creditor or his heirs, or
person authorized by him or by law.
● It refers rather to a person who has the appearances of the creditor but who actually
is not.
● This article is an exception to the rule that payment shall be made to the persons
enumerated therein.
● Example: A holder of a negotiable instrument payable to bearer who merely stole it
is the apparent creditor. Payment to the bearer made in good faith will release the
debtor from the obligation. The remedy of the creditor then is to go against the
person who received the payment.
True Possession of Credit vs. Document Representing the Credit
True Possession of Credit Document Representing the Credit
defendant-debtor, the payment is not valid. Thus, if the plaintiff- creditor finally
wins the case, he can execute the judgment against the forced intervenor to the
extent of the amount paid.
Example: “A is creditor of B. B is creditor of C. A filed to collect from B. A issued writ of
garnishment against B. Writ was served upon C. C shall not pay to B without consent of
A and the Court. If he does, and A wins the case, A can compel C to pay again the sum
representing the debt garnished.
● In the illustration given above, C may consign (deposit) the money in court for his
own convenience. If this is properly done, he will be freed from further
responsibility.
● An interpleader is not within the ambit of the article.
● An interpleader, a person who possesses a certain property, interest or credit is
confronted by two or more persons laying conflicting claims on the same thing, files
a case against all claimants that the latter may litigate among themselves their
conflicting claims.
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.

Refers to the very credit itself, that is, the Refers merely to the document representing
No payment or delivery of a different thing:
monetary prestation. or evidencing the credit.
● General Rule: Creditor shall be paid ONLY that has been stipulated upon because
the contract between the parties is the law between them. This applies even if the
In true possession of credit there must be an Ex: If a document which is payable to order thing offered is worth more than the thing agreed to.
actual and legal relation between the credit or to a definite person is in the possession of ● However, it is the compulsion which is barred. If the creditor consents, his
and the possessor of the document. someone but without any indorsement, the acceptance of the substitute extinguishes the obligation. This happens in novation,
possession is not of the credit but only of and also in dacion en pago.
Ex: An instrument payable to bearer is held the title, and payment to the holder is not a ● The same applies to obligations to do and not to do.
by the person to whom it is intended. This is valid payment
true possession of credit. Arts. 1246-1251
Article 1246. When the obligation consists in the delivery of an indeterminate or generic
Article 1243. Payment made to the creditor by the debtor after the latter has been judicially thing, whose quality and circumstances have not been stated, the creditor cannot
ordered to retain the debt shall not be valid. 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.
Applicability:
● The article applies to debts or credits and not to property.
● Properties are attached, while a credit on the other hand is garnished. Rule in Delivering Indeterminate or Generic Things:
● The law contemplates a situation where the debtor had been sued by his creditor and ● When the quality and circumstances of an indeterminate or generic thing supposed
a writ of garnishment was issued by the court enforced against another person who to be delivered had not been stated, only the “ordinary” kind or category of said
is the debtor of the defendant- debtor. The debtor of the defendant-debtor, who was thing should be delivered.
served the notice of garnishment, should not pay the credit garnished to the ● For example, if the obligation consists in delivering a car of a particular brand (latest
defendant-debtor because that credit is now subject to the outcome of the case and is model), and there are three kinds of that brand with different costs, the one to be
earmarked for the plaintiff-creditor in case of victory. By the garnishment, the delivered is the second most powerful in the row.
stranger becomes a forced intervenor. The garnished credit is deemed in custodia
legis. If the forced intervenor violates the writ of garnishment by paying the
CIVREV C2022 COMPILATION - DBN & MKG | SBM SYLLABUS | 54
 ● The purpose and other circumstances shall be considered. Thus, in the example
earlier, if the purpose is to secure the most powerful to be used in a race, then the car
with the superior quality should be delivered.
● The law speaks of quality. Quantity is not mentioned. The reason is because if both
quantity and quality are not determined, then the contact is considered void (Art.
1349 and 1409)
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.
Note:
● If there is no agreement regarding extrajudicial expenses, debtor shall bear the
expenses because he is the one principally benefited as he is freed from the
obligation by reason of the payment.
Effects of Partial Payment
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.
Partial Performance can be Refused:
● The debtor cannot make a partial payment or partial performance to the creditor
unless there is an express agreement to that effect. The creditor therefore can refuse
partial payment or performance. Conversely, the debtor cannot be compelled to
make partial payments if he is ready to make a full payment.
● The reason behind this is that a debt is not understood to have been paid unless the
thing or service in which the obligation consists has been completely delivered or
rendered as the case may be.
○ Example: A obligated himself to finish the construction of the house of B
with 7 bedrooms in a period of 8 months. A cannot compel B to receive
the house where only 4 bedrooms had been finished, unless B agrees.
● When the prestation is partly liquidated and partly unliquidated, the creditor may
demand the fulfillment of the liquidated portion, without waiting for the liquidation
of the unliquidated portion.
○ Example: A borrowed money 100 pesos from B with interests based on
the prevailing bank rates. The loan matured after one year. B can collect
the 100 pesos which is liquidated without waiting for the liquidation of the
interests which have yet to be computed and determined.
Nasser v. Did the clause “upon full payment of the corresponding liability of
Cuevas party the lien on his/her share is extinguished” in the agreement
connote payment of fees in installments? The meaning of the proviso
only connotes that the heirs will pay at different times but does not
connote that of a separate payment in installments. The creditor cannot be
compelled to partially receive the prestations in which the obligations
consist unless there is an express stipulation to that effect.
Currency of Payment:
Art. 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. (This portion has been repealed)
All monetary obligations shall be settled in the Philippine currency which is the legal
tender in the Philippines. However, parties may agree that the obligation or transaction
shall be settled in any other currency at the time of payment. (new provision)
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.
RA 529, RA 8183
RA 529 (this is amended my RA 8183): Every provision contained in, or made with
respect to, any obligation which provision purports to give the obligee the right to require
payment in gold or in a particular kind of coin or currency other than Philippine currency
or in an amount of money of the Philippines measured thereby, be as it is hereby declared
against public policy, and null, void and of no effect, and no such provision shall be
contained in, or made with respect to, any obligation hereafter incurred. Every obligation
heretofore or hereafter incurred, whether or not any such provision as to payment is
contained therein or made with respect thereto, shall be discharged upon payment in any
coin or currency which at the time of payment is legal tender for public and private debts:
Provided, That, if the obligation was incurred prior to the enactment of this Act and
required payment in a particular kind of coin or currency other than Philippine currency, it
shall be discharged in Philippine currency measured at the prevailing rates of exchange at
the time the obligation was incurred, except in case of a loan made in a foreign currency
stipulated to be payable in the same currency in which case the rate of exchange prevailing
at the time of the stipulated date of payment shall prevail. All coin and currency, including
Central Bank notes, heretofore or hereafter issued and declared by the Government of the
Philippines shall be legal tender for all debts, public and private.
RA 8183 (the new rule) - An Act Repealing RA. No 529 As Amended, Entitled “An Act
To Assure the Uniform Value of Philippine Coin and Currency”: All monetary
obligations shall be settled in the Philippine currency which is legal tender in the
Philippines. However, the parties may agree that the obligation or transaction shall be
settled in any other currency at the time of payment.
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Evolution of this Article:
● Article 1249 was amended by R.A. No. 529 in 1950 (prohibited transactions in
foreign currency), further amended by R.A. No. 4100 (provided exceptions to RA
529 to encourage foreign investments) in 1964, and recently amended by R.A. No.
8183 in 1996.
● Section 1 of R.A. No. 8183 provides: “All monetary obligations shall be settled in the
Philippine currency which is the legal tender in the Philippines. However, parties
may agree that the obligation or transaction shall be settled in any other currency at
the time of payment. ”
● Today, there is no more legal impediment to having obligations paid in a foreign
currency as long as the parties agree to such an arrangement.
PD 72, Secs. 31-32 - Legal Tender
Section 31. Section fifty-four of the same Act is hereby amended to read as follows:
"Sec. 54. Legal tender power. All notes and coins issued by the Central Bank shall fully
guaranteed by the Government of the Republic of the Philippines and shall be legal tender
in the Philippines for all debts, both public and private: Provided, however, That coins
shall be legal tender in amounts not exceeding fifty pesos for denominations from ten
centavos to one peso, and in amounts not exceeding twenty pesos for denominations of
five centavos or less."
Section 32. Section sixty-three of the same Act is hereby amended to read as follows:
"Sec. 63. Legal character. Checks representing deposit money do not have legal tender
power and their acceptance in the payment of debts, both public and private, is at the option
of the creditor: Provided, however, That a check which has been cleared and credited to the
account of the creditor shall be equivalent to a delivery to the creditor of cash in an amount
equal to the amount credited to his account."
DN and MKG notes: The recent rule: Under Circular No. 537 Series of 2006 issued by the
Bangko Sentral ng Pilipinas (BSP), payment, particularly in the form of coins, shall be
“legal tender” or must be accepted for as long as it does not exceed a certain limit.
For P1, P5, P10 denominations, they must not exceed P1,000 while 1, 5, 10 or 25 cents
must not exceed P100 in total.
Legal Tender, Concept:
● Legal tender refers to such currency which may be used for payments of debts
whether public or private, and which the creditor cannot refuse to accept.
● Legal tender in the Philippines covers all notes and coins issued by the Central Bank
of the Philippines.
● However, P.D. No. 72 set a limit in the use of coins as legal tender:
a. 1 centavo coins and 5 centavo coins are legal tender up to 20 pesos
[current law: centavo coins must not exceed P100]
b. Other coins are legal tender up to 50 pesos [current law (P1,5,10): other
coin denominations must not exceed P1,000]
● The reason for the limit is to avoid burdening the creditor with the work of counting
huge amounts of coins and carrying the same. He can refuse the acceptance of coins
which go beyond the limits.
Payment in Negotiable Documents:
● Negotiable documents like checks, promissory notes payable to order, or bill of
exchange, are not legal tenders. Creditor has the right to refuse such even if they
happen to be good.
● Payment in such medium does not produce the effect of payment. These papers shall
produce the effect of payment only when they have been encashed, meaning, they
had been exchanged with cash money like the honoring of checks by the drawee
bank.
● Section 62 of the Central Bank Act provides that checks representing deposit money
do have legal tender power and their acceptance in payment of debts, both public
and private, is at the option of the creditor. Provided, however, that a check which
has been cleared and credited to the account of the creditor shall be equivalent to
payment in cash.
Rule on Payment in Check:
● A check, whether it is ordinary or manager’s, is not legal tender. Creditor may refuse
payment of such.
● This rule applies even if the check was consigned in court.
Exceptions: Check is considered as valid payment when —
1. When the creditor has accepted the check. He cannot refuse to accept the check
as payment the following day. Creditor is under estoppel.
2. When the check had lost its value due to the fault of the creditor, such when he
unreasonably delayed the presentation of the check.
3. When the foreign bill of exchange lost its value for the reason that the creditor
had neglected to make a protest. Had the creditor protested to dishonor the bill,
the debtor could have pursued the right to recourse against the parties secondarily
liable therefor.
4. When a manager’s check is consigned with the court, endorsed to the provincial
treasurer which was honored by the bank and credited to the treasurer’s account.
5. When after the payment of the check in court by the debtor, the creditor petitions
to withdraw the amount in deposit.
Note: Mere delivery of a bill of exchange by the debtor does not immediately effect payment.
It however suspends the action arising from the original obligation. To finally extinguish the
obligation, the commercial instrument or check should be cashed.
Fortunado v. Redemption is not rendered invalid by the fact that the said officer
CA accepted a check for the amount necessary to make the redemption
instead of requiring payment in money. It goes without saying that if he
had seen fit to do so, the officer could have required payment to be made
in lawful money, and he undoubtedly, in accepting a check, placed
himself in a position where he could be liable to the purchaser at the
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 public auction if any damage had been suffered by the latter as a result of
the medium in which payment was made. But this cannot affect the
validity of the payment. The Court held that, while it is not sanctioning
the use of a check for the payment of obligations over the objection of the
creditor, a check may be used for the exercise of the right of redemption,
the same being a right and not an obligation. The tender of a check is
sufficient to compel redemption but is not in itself a payment that
relieves the redemptioner from his liability to pay the redemption
price.
Tibajia v. CA Is payment by means of a cashier’s check considered as payment in
legal tender? A check, whether a manager’s check or ordinary check, is
not legal tender, and an offer of a check in payment of a debt is not a
valid tender of payment and may be refused receipt by the obligee or
creditor.
General Was the agreement to pay in a foreign currency valid under
Insurance vs. Philippine Law? Whether General Insurance agreed to pay its obligation
Union in pounds sterling or in US dollars, “it is settled that,” if there is any
Insurance agreement to pay the obligation in a currency other than the Philippine
currency, the same is null and void as contrary to public policy (RA 529).
However, RA 529 does not invalidate the whole contract which gives the
obligee the right to demand payment in gold or other foreign currencies,
what it declares as null and void is the provision to such effect.
Extraordinary Inflation or deflation of currency
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.
Requisites (Lifted from JSP’s class)
1. There is an official declaration of extraordinary inflation or deflation from the
Bangko Sentral ng Pilipinas (BSP);
2. The obligation is contractual in nature; and
3. The parties expressly agreed to consider the effects of the extraordinary inflation
or deflation.
Applicability:
● Applies only to contractual obligations.
● Applies only if there is an extraordinary inflation or deflation of the currency
stipulated, and when there is an official pronouncement or declaration of the
existence of an extraordinary inflation or deflation.
● As a declaration by the competent authorities is needed, extraordinary inflation or
deflation cannot be presumed.
● If the inflation or deflation is just ordinary, that is, it is a universal trend which did
not spare the country, Article 1250 will not apply.
Illustration:
● Extraordinary inflation exists when there is a decrease or increase in the purchasing
power of the Philippine currency which is unusual or beyond the common
fluctuation in the value of said currency, and such decrease or increase could not
have been reasonably foreseen or was beyond the contemplation of the parties at the
time of the establishment of the obligation.
● An example would be Germany in 1921: Early in that year it was 4.2 mark to the US
dollar, by May it became 62 to the US dollar. On October of 1923, it was 4.2 trillion
mark to the US dollar.
● Example from FLJ’s class: D borrowed from C P20,000.00 payable after five (5)
years. On the maturity of the obligation, the value of P20,000.00 dropped to
P10,000.00 because of inflation (or increased to P40,000.00 because of deflation). In
this case (assuming there is extraordinary inflation or deflation declared by the
BSP), if the parties agree to the effects of extraordinary inflation or deflation, the
basis of payment shall be the equivalent value of the currency today to that five (5)
years ago. Hence, D is liable to pay B P40,000.00 (or P10,000.00).
Basis:
● There is a great deal of uncertainty and confusion as a result of contracts entered
into or payments made during the last war. It is thought that the foregoing rule
provides a just solution for future cases, so that the juridical relations of creditor and
debtor would be equitably adjusted in case of another war resulting in extraordinary
inflation.
Exception:
● As an exception, the parties may agree on another basis if they do not want the value
of the currency at the time of the establishment of the obligation as the basis of
payment.
Distinction between Article 1249 and Article 1250:
Article 1249 Article 1250
In Article 1249, the parties In Article 1250, the parties may also agree on a different
may agree on payment by currency, but the basis of the value of the stipulated
another currency and the currency is reckoned at the time of establishment of the
basis of the value shall be the obligations and not at the time of payment. But before this
value during the time of the applies, there must first be a supervening extraordinary
payment. inflation/deflation of the currency stipulated.
Velasco v. It can be seen from the employment of the words “extraordinary inflation
Meralco or deflation of the currency stipulated” that the legal rule envisions
contractual obligations where a specific currency is selected by the parties
as the medium of payment; hence it is inapplicable to obligations arising
from tort and not from contract, as in the case at bar.
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Filipino Pipe Extraordinary inflation exists "when there is a decrease or increase in the
Foundry vs. purchasing powerof the Philippine currency which is unusual or beyond
NAWASA the common fluctuation in the value said currency, and such decrease or
increase could not have reasonably foreseen or was manifestly beyond the
contemplation of the parties at the time of the establishment of the
obligation.
Example of extraordinary inflation: More recently, in the 1920's Germany
experienced a case of hyperinflation. In early 1921, the value of the
German mark was 4.2 to the U.S. dollar. By May of the same year, it had
stumbled to 62 to the U.S. dollar. And as prices went up rapidly, so that by
October 1923, it had reached 4.2 trillion to the U.S. dollar.
Gonzalo Thus, there is a difference between par value and rate of exchange: the first
Maluel Co. is defined by law, and (as in the case of the peso) is based upon its gold
vs. Central content. The second is conditioned by prevailing economic factors which
Bank bear upon the demand for a particular currency and its availability in the
market.
The par value of the peso is defined in the Central Bank Act, which is
seven and thirteen- twenty first (7-13/21) grains of gold, nineteenth
(0.900) fine. If the resolutions were meant to change the par value of the
peso, they were null and void for not having complied with the requisites
under the said act, which provides that any modification in the gold or
dollar value of the peso shall be made only by the President upon the
proposal of the Monetary Board and with the approval of Congress and the
proposal of the Monetary Board shall require the concurrence of at least
five of the members.
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.
If the debtor changes his domicile in bad faith or after he has incurred in delay, the
additional expenses shall be borne by him.
These provisions are without prejudice to venue under the Rules of Court.
Venue of Payment:
1. If there is a specific place designated, that place is where payment shall be made.
2. If there is no agreement on where payment shall be made, the following rules shall
apply:
a. If the undertaking is to deliver a determinate thing, place of payment is
where the thing might be at the time the obligation was constituted.
b. In other cases, such as to deliver a generic thing or to perform a specific
service, payment shall be made at the domicile of the debtor.
Effect of Debtor’s Change of Domicile:
● If done in bad faith or after having been in delay, additional expenses incurred by the
collecting party shall be borne by the debtor.
● These additional expenses do not cover the regular expenses incurred in going to the
original place of the debtor.
● If changing of domicile is done in good faith, such as for security reasons or for
being appointed as an officer in another place, the debtor will not be liable for
additional expenses.
Note: In case of conflict between the parties’ stipulation on the place of payment and the rules
on venue provided under the Rules of Court, the latter shall prevail.
EXTINGUISHMENT: SPECIAL FORMS OF PAYMENT
Special forms of payment:
1. Dation in Payment
2. Payment by Cession or Assignment
DATION IN PAYMENT - Art. 1245
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)
Concept:
● Dation in payment or dacion en pago is the alienation by the debtor of a particular
property in favor of his creditor, with the latter’s consent, for the satisfaction of the
former’s money obligation to the latter, with the effect of extinguishing the money
obligation.
● Dation in payment is a form of novation in which there is a change in the object
involved in the original contract.
● The thing offered as an accepted equivalent of the performance of the obligation is
considered as the object of the contract of sale, while the pre-existing debt is
considered as the purchase price.
● Dation in payment extinguishes the whole obligation, unless otherwise provided by
the parties.
● Example: A owes B. A could not pay his money obligations to B. A offered a
property as payment for his money obligations. If B agrees, there is dacion en pago.
Elements of Dation in Payment:
1. Existence of a money obligation
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 2. Alienation to the creditor of a property by the debtor with the consent of the Caltex and held that the Deed of Assignment was not a dation in payment.
former
3. Satisfaction of the money obligation of the debtor LDB v. A dacion en pago is governed by the law of sales. Contracts of sale come
Enriquez with warranties, either express (if explicitly stipulated by the parties) or
implied (under Article 1547 et seq. of the Civil Code). In this case,
● Since the law on sales governs, the creditor is deemed as the vendee and the debtor
however, the BANK does not even point to any breach of warranty by
as the vendor.
DELTA in connection with the Dation in Payment. To be sure, the Dation in
● The reason why law on sale governs is because the undertaking really partakes the
Payment has no express warranties relating to existing contracts to sell over
nature of a sale. The creditor is really buying the thing or property of the debtor,
the assigned properties. As to the implied warranty in case of eviction, it is
payment or which is to be charged against the debtor’s debt.
waivable and cannot be invoked if the buyer knew of the risks or danger of
● Adjudicacion en pago and datio in solutum are legal terms synonymous with dacio
eviction and assumed its consequences.
en pago.
Tan Shuy Dation in payment extinguishes the obligation to the extent of the value of
Basis Dacion en pago Sale vs. Spouses the thing delivered, either as agreed upon by the parties or as may be
Maulawin proved, unless the parties by agreement – express or implied, or by their
Existence of There is a pre-existing credit. There is no pre-existing silence – consider the thing as equivalent to the obligation, in which case
pre-existing credit. the obligation is totally extinguished.
credit
Application of Payments - Arts. 1252-1254, 1248
Effect It extinguishes the obligation completely or It gives rise to obligations,
partially depending upon the agreement of to deliver on the part of the ARTICLE 1252. He who has various debts of the same kind in favor of one and the same
the parties. seller and to pay on the creditor, may declare at the time of making the payment, to which of them the same must
part of the buyer. 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
Cause or From the viewpoint of the creditor, the From the viewpoint of the to debts which are not yet due.
consideration cause is the acquisition of the object buyer, the cause is the
offered as payment; from the viewpoint of object; from the viewpoint If the debtor accepts from the creditor a receipt in which an application of the payment is
the debtor, the cause is the extinguishment of the seller, the cause is made, the former cannot complain of the same, unless there is a cause for invalidating the
of his debt. the price. contract.

Freedom to There is less freedom to bargain in the There is greater freedom in Application of Payments Defined:
bargain determination of the price because if the the determination of the ● Application of payments is the designation of the particular debt being paid by the
creditor refuses, the debtor will suffer price as the parties stand debtor who has 2 or more debts or obligations of the same kind in favor of the same
more. The debtor is forced to yield to the on equal footing at the creditor to whom the payment is made.
dictates of the creditor to save himself from bargaining table.
more inconvenience and embarrassment.
Right to Make Application of Payments Belongs Primarily to the Debtor:
Cases:
a. Debtor has the right to choose which debt of the several debts due shall be paid.
Caltex vs. After the execution of the Deed of Assignment, petitioner continued to b. Designation of the debt to which payment shall be made must be made at the
IAC charge respondent with interest on its overdue account. This was pursuant moment of payment.
to the Deed of Assignment which provides for respondent's obligation for c. If the debtor fails to exercise such right, the creditor may exercise it by issuing a
"applicable interest charges on overdue account." The charges for interest receipt wherein the debt paid is indicated. If the debtor accepts the receipt without
were made every month and not once did respondent question or take objection, payment is deemed applied to the debt indicated in the receipt.
exception to the interest. The foregoing subsequent acts of the parties d. If the assent or the acceptance of the receipt by the debtor is tainted with fraud,
clearly show that they did not intend the Deed of Assignment to have the intimidation, violence, or undue pressure, the application of payment shall be
effect of totally extinguishing the obligations. The Court rules in favor of invalid.
e. If both do not exercise the right, or if the application is void, Articles 1253 and
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 1254 shall apply.
f. By mutual agreement, application of payment already made may be changed,
unless a third person is adversely affected. i.e., when payment is applied to a debt
for the release of a mortgage, and subsequently, a third party caused the
inscription of a lien over the property which was just released. Changing such
application of payment would then adversely affect the third party.
Requisites for a Valid Application of Payment by the Debtor:
1. There is only one debtor and one creditor.
2. The debtor owes the creditor two or more debts which are of the same kind or
identical specie such as money obligations obtained on different dates.
3. All the debts are due and demandable, except when there is a stipulation to the
contrary or when the application is made by the party for whose benefit the term
has been constituted.
4. The payment made by the debtor is not sufficient to cover or settle all the debts.
Requisites for a Valid Application of Payment by the Creditor:
1. The debtor did not make any designation on which debt should be paid when he
made the payment.
2. The creditor issued a receipt expressing the application of the payment to a
particular debt.
3. The debtor assented to the application made by the creditor by accepting the
receipt w/o objections.
Contract means Assent in the Last Paragraph:
● In the last paragraph, the term ‘contract’ was used. It actually refers to the assent
given by the debtor in accepting the receipt. It must be noted that the debtor may or
may not accept the receipt where the application is made. When the debtor rejects
such application, Article 1254 will apply.
Limitations on the Right of the Debtor to Choose the Debt to be Paid:
1. Debtor cannot apply payment to a debt not yet liquidated or due, unless there is a
contrary stipulation or he is the one given the benefit of the period or term.
2. If creditor is given the benefit of the period or term, application of payment
cannot be made by the debtor.
3. If there is an agreement as to which debts shall be paid first, debtor cannot change
it without consent of the creditor.
4. If there is a principal obligation which bears interests, the debtor cannot pay the
interests without first paying the principal (Article 1253)
5. A debtor cannot choose to pay a bigger debt partially when the payment can be
applied as full payment to a smaller debt. The reason is that he is not allowed to
make partial payment for the bigger debt unless there is an agreement to the
contrary. (Art. 1248)
Not Applicable to a Surety:
● Articles 1252 to 1254 do not apply to a person whose obligation as a mere surety is
both contingent and singular. His liability is confined to such obligation.
● He is entitled to have all payments applied exclusively to said obligation and to no
other.
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.
Article is Directory and not Mandatory:
● The Supreme Court has ruled that this article applies only if there is no verbal or
written agreement to the contrary; this means that the article is merely directory and
not mandatory.
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.
Applicability
● Applies only in the following circumstances:
a. When application of payment cannot be made in accordance with Art.
1252 and 1253, or
b. The application of payment cannot be inferred from other circumstances.
● The rule to follow is then is that the debt which is the most onerous to the debtor
shall be deemed to have been satisfied.
● If the debts happen to be of the same nature and burden, the payment shall be
applied to all proportionately.
Onerous Debt Defined:
● An onerous debts is one with a burden. i.e., a loan secured with a mortgage. The
mortgage is a burden.
● A contract is onerous when it has responsibilities or obligations which outweigh its
advantages.
● Determining the most burdensome debt is a question of fact and must be resolved on
the basis of the surrounding circumstances.
Guides in Determining Which Debt is More Onerous:
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 Supra, Effect of Partial Payment.
1. A debt that bears interest is more burdensome than a debt which does not.
2. Older debts are more onerous than recent debts. PAYMENT BY CESSION OR ASSIGNMENT - Art. 1255
3. A mortgage obligation is more burdensome than a debt arising from a current
account.
4. A mortgage debt is more burdensome than unsecured advances. ARTICLE 1255. The debtor may cede or assign his property to his creditors in payment of
5. Debts covered by a guaranty are more onerous because the creditor & guarantor his debts. This cession, unless there is stipulation to the contrary, shall only release the
may sue the debtor. debtor from responsibility for the net proceeds of the thing assigned. The agreements
6. In a bond where the surety is bound solidarily with the debtor but for a lesser which, on the effect of the cession, are made between the debtor and his creditors shall be
amount, the principal debtor’s portion is more onerous. governed by special laws.
7. Debts subject to a penal clause is more onerous than debts subject to the general
rules on damages. Concept of Payment By Cession:
8. An exclusive debt is more burdensome than a solidary debt. ● Payment by cession is the same as payment by assignment.
● A special form of payment where the debtor cedes his property to his creditors so
the latter may sell the same and the proceeds realized by applied to the debts of the
More Burdensome Rule’s Applicability: debtor.
● Only applicable if the two preceding articles are not applicable. ● No cession or assignment if the creditors do not agree. Without the creditor's
● Will not apply where there has been an application of payment! acceptance, it has no effect.
● When it cannot be determined which debt is more onerous, they must be treated as ● Properties covered by this provision are those not exempt from execution.
equally onerous. Payments must then be applied to all the debts proportionately.
● If debts are of the same nature and burden, payment shall also be applied Classes of Cession or Assignment:
proportionately. 1. Voluntary or Contractual – This is cession or assignment by agreement of the
parties.
Cases: 2. Involuntary or Legal – This is cession or assignment which is governed by the
Insolvency Law.
Magdalena Article 1253 only applies to a person owing several debts of the same
Estates vs. kind to a single creditor. It cannot be made applicable to a person whose
Rodriguez obligation as a mere surety is both contingent and singular; his liability is Requisites of Voluntary Cession or Assignment:
confined to such obligation and he is entitled to have all payments made
applied exclusively to said application only. 1. There is plurality of debts
2. There is complete or partial insolvency on the part of the debtor
Baltazar vs. The Corporation Law and the by-laws of the defendant Corporation do 3. There are at least two creditors
Lingayen not contain any provision, prohibiting the application of stockholders' 4. There is acceptance of the cession or assignment by the creditors
Gulf Inc. payments to the full par value of a corporation's capital stock, ahead of 5. Property ceded or assigned is not exempt from execution
the payment of accrued interest for unpaid subscriptions. A corporation
may, upon request of an interested stockholder, as his option, apply
payment by them to the full par value of shares of capital leaving its Effect of Valid Cession or Assignment:
collection later of the accrued interest on unpaid subscriptions, and that ● If there is a valid cession or assignment, the debtor is released from responsibility up
once such option has been exercised and the corresponding stock to the extent of the net proceeds of the property, unless there is a contrary
certificates have been issued, the corporation cannot, by a unilateral act, stipulation.
legally nullify and cancel the capital stock certificates so issued.
Payment by Cession contemplates existence of Two or More Creditors:
● There is no payment by cession under Art. 1255 where there is only one creditor for
the plain reason that the Article contemplates the existence of two or more creditors
ARTICLE 1248. Unless there is an express stipulation to that effect, the creditor cannot be to whom the property of the debtor is assigned.
compelled partially to receive the prestations in which the obligation consists. Neither may
the debtor be required to make partial payments.
Basis Cession or Assignment Dacion en Pago
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 Object What is ceded is the universality of What is delivered is only a particular
liquidation of the latter. all the debtor’s property excluding property considered as an equivalent
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 ● Consignation will not release the debtor from the obligation unless it has been first
those exempt from execution of the performance of the obligation announced to the creditor.
● The purpose of the announcement is to give the creditor the opportunity to accept
Number of There is plurality of creditors There may be only one creditor the tender of payment and avoid unnecessary litigation.
Parties

Financial Debtor is necessarily in a state of Debtor is not necessarily in a state of ARTICLE 1258. Consignation shall be made by depositing the things due at the disposal
Condition insolvency insolvency of judicial authority, before whom the tender of payment shall be proved, in a proper case,
of Debtor and the announcement of the consignation in other cases.

Effect Ownership is not transferred to the Ownership is transferred to the
creditors creditor upon delivery
Concept of Tender of Payment and Consignation:
Novation It is not an act of novation of the It is an act of novation of the
contract contract
Tender of Payment and Consignation - Arts. 1256-1261
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: [TENDER OF
PAYMENT NOT NECESSARY]
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.
Presence of Creditor-Debtor Relationship is Required:
● If there is no creditor-debtor relationship, consignation cannot apply.
● The debtor must be willing to pay or deliver, but the creditor unjustifiably refuses to
accept.
● To shield himself from responsibility, debtor should make a tender of payment,
which if refused, should be followed by a complaint for consignation.
● The second paragraph lists situations when tender is dispensable.
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.
Consignation must first be Announced to the Creditor:
The consignation having been made, the interested parties shall also be notified thereof.
● Tender of payment – is the voluntary act of the debtor whereby he offers to the
creditor for acceptance the immediate performance of the former’s obligation to the
latter.
● Consignation – is the act of depositing the object of the obligation with the court or
competent authority after the creditor has unjustifiably refused to accept the same or
is not in a position to accept it due to certain reasons or circumstances.
● Tender of payment is an antecedent of consignation, it is a preliminary act for the
consummation of consignation. Consignation generally requires tender of payment,
subject to exceptions provided in the second paragraph of Article 1256.
● Before the consignation has been accepted by the creditor or before it has been
judicially declared as properly made, the debtor is still the owner of the thing or
amount deposited. Other parties have no right to oppose the withdrawal of such
thing or amount.
Requisites of Consignation and their explanations:
1. There is an existing valid debt which is already due
○ Tender of payment not yet due may be refused by the creditor.
○ When there is no debt due, deposit of the thing with the court is not
necessary.
2. There is a prior valid tender of payment to the creditor (except when tender
is dispensable)
○ The tender of payment must be a valid one to be an effective antecedent
of consignation; Reqs:
i. Made before the act of consignation
ii. Unconditional
iii. Full amount including interests due must have been offered in
legal tender
○ Mere sending of letters expressing intent to pay without any payment is
not a valid tender of payment.
○ Tender made must be proved by evidence. A formal complaint must be
commenced before the trial court to provide the proper venue for the
determination if there is a valid tender of payment.

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3. There is a refusal to accept the payment tendered without any valid reason
on the part of the creditor
○ Refusal must be without a valid cause.
○ If refusal to accept is with a valid cause, the consignation will not
extinguish the obligation.
○ A tender to pay part of the full obligation may be refused.
○ Payment of a debt which is due must be in full and complete.
4. There is a prior notice of consignation given to the persons interested in the
fulfillment of the obligation
○ Before depositing, there must be a prior notice of consignation to the
creditor and to other persons interested in the fulfillment of the
obligation.
○ Without this notice, the consignation is void.
○ Purpose is to give the creditor the opportunity to withdraw the money
deposited and to make use of it or to allow them the opportunity to
reconsider their previous refusal to accept the tender of payment so as
to avoid unnecessary litigation.
5. That the amount or the thing due is deposited with the court or competent
authority
○ It is necessary to file a consignation case in court. Without a suit, there
can be no valid consignation.
○ In certain cases, the deposit may be made with a competent authority
other than a court, i.e., payment of rentals due may be made by
consigning the same to a bank in the name of the lessor with due notice
to the latter.
○ Not knowing whom to pay the rentals does not justify the failure of the
lessees to pay because they can avail of the remedy of consignation.
6. Subsequent notice of consignation is given to the persons interested in the
fulfillment of the obligation
○ Mandatory, made after the filing of the complaint and after the deposit
has been made.
○ May be made in the form of a letter properly addressed to the creditor.
○ Not required if amount is due as a consequence of a final judgment,
since the law contemplates only contractual obligations.
○ Consignation is void if the notices required had not been complied
with.
Requirement of Notices Explained:
● When the creditor is absent or is unknown, the notice may be effected through
publication.
● The reason for requiring the notices is to enable the creditor to withdraw the goods
or money deposited. It would be unjust to make him suffer the risk for any
deterioration, depreciation or loss of such goods or money by reason of lack of
knowledge of the consignation.
No Automatic Cancellation, and the Retroactive Effect of Cancellation
● Once consignation has been effected, the debtor may by motion ask the court to
order the cancellation of the obligation. In other words, there is no automatic
cancellation of the obligation.
● A judicial order is still necessary because there might be some factual issues which
may be raised in the court needing presentation of evidence.
● The obligation is deemed cancelled from the time the amount or thing has been
placed at the disposal of the court or at the disposal of the competent authority.
Consequences of the Deposit:
1. The amount or property is placed in custodia legis
○ Property cannot be alienated or disposed of without judicial approval. If
the property is perishable, the court may order its sale.
2. The property is exempted from attachment or execution.
3. When the property consigned consists of real estate which cannot actually be
placed in the hands of the court, the debtor becomes the agent of the court. To
effect a valid consignation, a receiver should be appointed by the court upon the
initiative of the debtor.
4. Consignation has a retroactive effect and the payment is deemed to have been
made at the time of the deposit of the thing in court or when it was placed at the
disposal of the judicial authority.
Cases where Consignation Does Not Apply:
1. Where the filing of the complaint is the equivalent of an offer to redeem,
consignation is not necessary.
2. In a contract of lease where the lessee is granted the option to buy the property
leased, the latter is not obliged to consign the price in court, if the lessor refused
to sell. The lessee is merely exercising a right.
3. Consignation does not apply to an exercise of a right but to the discharge of a
debt.
4. Consignation is not a remedy to determine the relation between a landlord and a
tenant.
5. There is no valid tender of payment when the payment is tendered is in check,
unless the creditor accepts it. Payment in check produces effect only upon
encashment. Creditor may always insist on payment in cash.
6. A debtor does not incur any default in failing to make a fruitless tender of
payment after the creditor had notified him that he would not accept or receive
the money.
7. Tender of payment is dispensed with where the buyer of the land acquired under a
free patent refused to permit the repurchase of the property.
8. Articles 1256 and 1257 do not apply to a money judgment. In case of a refusal of
a tender of payment of the amount due on a judgment, the court may direct the
money to be paid into court.
9. When there is no creditor-debtor relationship, consignation will have no legal
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 b. The court had not yet made a judicial declaration that the consignation had
effect. been properly made
● The reason why the debtor may still withdraw the thing deposited is that he still
owns the money or thing deposited at that precise time.
Basis Tender of Payment Consignation ● Before the consignation has been accepted or judicially declared as properly made,
the debtor is still the owner of the thing or amount deposited.
Nature Antecedent of consignation or the Principal or consummating act for ● Pineda opines that since a declaration will be made in a formal order, it will be
preliminary act to consignation the extinguishment of the obligation subject to a 15-day period before it becomes final and executory, hence the debtor
may still withdraw the thing during this time.
Effect It does not by itself extinguish the It extinguishes the obligation when ● In case of partial acceptance by the creditor, withdrawal by the debtor is still proper.
obligation declared valid ● The obligation will remain in place if the debtor decides to withdraw the thing or
amount deposited.
Character It is extrajudicial It is judicial for it requires the filing ● It can happen that the thing deposited may be lost or depreciated pending the hearing
of a complain in court. of the case. If the consignation is finally found to have been done properly, the loss
shall be borne by the creditor. If it is improperly made, the loss shall be at the risk of
the debtor.
ARTICLE 1259. The expenses of consignation, when properly made, shall be charged
against the creditor.
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
Creditor to Bear the Expenses of Consignation: thing. The co-debtors, guarantors and sureties shall be released.
● The creditor, who by reason of his unjustifiable acts has prompted the filing of the
suit, must bear the expenses of the consignation – like storage fees, filing fees,
Effect of Withdrawal After Creditor’s Acceptance or Judicial Approval of Consignation:
attorney’s fees and other related expenses.
● Withdrawal under this article is not a matter of right unlike the preceding article, but
a privilege.
ARTICLE 1260. Once the consignation has been duly made, the debtor may ask the judge ● Without the consent of the creditor, the withdrawal is not allowable.
to order the cancellation of the obligation. ● For allowing such withdrawal, the creditor shall lose any preference or priority of
right over the thing previously consigned.
Before the creditor has accepted the consignation, or before a judicial declaration that the ● Solidary co-debtors, guarantors and sureties of the debtor who are benefited by the
consignation has been properly made, the debtor may withdraw the thing or the sum consignation are released from their obligations. The solidary co-debtors are
deposited, allowing the obligation to remain in force. released from their liability in relation to the creditor but not from their individual
liability to one another. Thus, they are still liable for their share.
● The withdrawal of what has been consigned has the effect of reviving the obligation
Effect of a Valid Consignation: of the debtor.
● When the consignation is properly effect, the court will order the cancellation of the Cases
obligation upon motion duly filed by the debtor.
● When the validity of the consignation has been affirmed or declared by the court, the Adelfa Mere sending of letters expressing intent to pay do not constitute a valid
consignation shall have a retroactive effect. Properties vs. tender of payment. A mere tender of payment is not sufficient to
● The obligation is deemed paid from the moment the amount or the thing due has CA compel private respondents to deliver the property and execute the deed
been actually placed at the disposal of the court. of absolute sale. It is consignation which is essential in order to
● The running of interest if stipulated is also deemed suspended at the same time. extinguish petitioner's obligation to pay the balance of the purchase
● If the consignation is improperly made, the obligation stays. price. A contract to sell, as in the case before us, involves the
● If the consignation case is dismissed by the court, it will have no favorable effect performance of an obligation, not merely the exercise of a privilege of a
upon the debtor. right. Consequently, performance or payment may be affected not by
tender of payment alone but by both tender and consignation.
Withdrawal of the Thing or Sum Deposited, When Allowable:
● The debtor may still withdraw the thing he deposited in court provided that: Soco vs. Substantial compliance is not enough for that would render only a
a. The creditor has not yet accepted the thing or sum deposited Militante directory construction to the law. We hold that the essential requisites of
a valid consignation must be complied with fully and strictly in

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 accordance with the law.
Ponce De Leon The consignation made by de Leon failed in the 1st and 3rd requisites.
vs. Syjuco
Loss of the Thing Due, Meaning:
Regarding the first requisite, the obligation was not yet due and
demandable when the money was consigned and was thus made
prematurely. Regarding the 3rd requisite, there was no previous notice
of consignation given by Ponce de Leon to Syjuco, thus invalidating the
consignation.
Federation of The storage charges that became due from the date the goods had to
United remain in the warehouse because of the refusal of NAMARCO to
NAMARCO deliver the same to the FEDERATION which had been demanding the
Distributors vs. surrender thereof to it, can not be charged to the FEDERATION, but to
National NAMARCO as the one who, in the performance of its obligation under
Marketing the contract, has been guilty of delay in the delivery of the goods
subject matter
PNCC v. CA PNCC cannot successfully take refuge in Article 1266 as well as Article
1267 because both contemplate obligations to do. The obligation to pay
rentals constitutes obligations to give in which the doctrine of rebus sic
stantibus cannot be validly invoked.
Naga Tel v. CA Article 1267 speaks of "service" which has become so difficult. Taking
into consideration the rationale behind this provision, the term "service"
should be understood as referring to the "performance" of the
obligation. In the present case, the obligation of private respondent
consists in allowing petitioners to use its posts in Naga City, which is
the service contemplated in said article.
Article 1267 states in our law the doctrine of unforeseen events. This is
said to be based on the discredited theory of Rebus Sic Stantibus in
public international law; under this theory, the parties stipulate in the
light of certain prevailing conditions, and once these conditions cease to
exist the contract also ceases to exist. Considering practical needs and
the demands of equity and good faith, the disappearance of the basis of
a contract gives rise to a right to relief in favor of the party prejudiced.
EXTINGUISHMENT 2: LOSS OF THE THING DUE OR IMPOSSIBILITY OF
PERFORMANCE
(Arts. 1262- 1269, 1189, 1174, 1165, 1268, 1942, 1979, 2147, 2159)
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.
● Article 1189 states that “a 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.”
● Not confined to the strict legal meaning of loss, but extends to causes which render
impossible the performance of the prestation.
● This is not limited to obligations to give but also extends to personal obligations.
● To extinguish the obligation, the impossibility of performance must arise subsequent
to the execution of the contract and that the debtor has not incurred any delay in the
delivery thereof when the loss happened.
Effects:
● If the debtor is at fault for the loss or destruction of the thing, obligation is
converted to an indemnity for damages. (Art. 1170)
● If the debtor is not at fault but he is in delay, he will be liable for damages. (Art.
1170)
● If there is a stipulation, or when the law mandates that the obligor is liable for the
loss even if it is due to fortuitous events, or when the nature of the obligation
requires assumption of risk, the obligor is liable. (Art. 1174)
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:
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;
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;
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 to obligations to deliver a determinate or specific thing. No
application to generic objects.
● Also, it applies only when the suspensive condition is fulfilled.
● During pendency, the thing can undergo some changes:
a. Loss
b. Deterioration or Impairment
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 c. Improvement or Betterment
● Gone out of commerce means that it is used to be sold in the market but is not a
prohibited good. Ex. A land where a public plaza is built can no longer be alienated.
● Deterioration is making worse the condition of the thing. It is the impairment or
reduction of its value.
● Improvement is anything which increases the value of the thing.
a. If improvement is due to nature/time, it belongs to the creditor.
b. If at the expense of the debtor, cannot claim indemnification but may
enjoy usufructuary rights.
● Inure means “belong”
● Usufructuary means the right to enjoy the use and advantages of another person’s
property.
Situations when the Law makes the Obligor liable even if due to Fortuitous Events:
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.
ARTICLE 1942. The bailee is liable for the loss of the thing, even if it should be through
a fortuitous event:
1. If he devotes the thing to any purpose different from that for which it has been
loaned;
2. If he keeps it longer than the period stipulated, or after the accomplishment of
the use for which the commodatum has been constituted;
3. If the thing loaned has been delivered with appraisal of its value, unless there is a
stipulation exempting the bailee from responsibility in case of a fortuitous event;
4. If he lends or leases the thing to a third person, who is not a member of his
household;
5. If, being able to save either the thing borrowed or his own thing, he chose to save
the latter.
ARTICLE 1979. The depositary is liable for the loss of the thing through a fortuitous
event:
1. If it is so stipulated;
2. If he uses the thing without the depositor’s permission;
3. If he delays its return;
4. If he allows others to use it, even though he himself may have been authorized
to use the same.
ARTICLE 2147. The officious manager shall be liable for any fortuitous event:
1. If he undertakes risky operations which the owner was not accustomed to
embark upon;
2. If he has preferred his own interest to that of the owner;
3. If he fails to return the property or business after demand by the owner;
4. If he assumed the management in bad faith.
ARTICLE 2159. Whoever in bad faith accepts an undue payment, shall pay legal interest
if a sum of money is involved, or shall be liable for fruits received or which should have
been received if the thing produces fruits.
He shall furthermore be answerable for any loss or impairment of the thing from any
cause, and for damages to the person who delivered the thing, until it is recovered.
Situations when the Law makes the Obligor liable even if due to Fortuitous Events:
1. Art. 1165 – When the debtor is in default, or when the debtor has promised to
deliver the same thing to two or more persons with different interests
2. Art. 1174 – When the nature of the obligation requires assumption of risk
3. Art. 1263 – When the obligation consists in the delivery of a generic thing
4. Art. 1268 – Obligation to deliver a determinate object arising from a criminal act
5. Art. 1942 – Liability of Bailee
6. Art. 1979 – Liability of Depositary
7. Art. 2147 – Liability of Officious Manager
8. Art. 2159 – Acceptance in bad faith of undue payment
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.
Consequences:
● When the obligation is to deliver a generic thing, the loss or destruction of anything
of same kind does not extinguish the obligation. i.e., obligation to pay money, to
deliver sugar without regard to origin, etc.
● Obligation subsists under the principle “genus never perishes.”
Exceptions:
● If the generic thing has been delimited, that is, where there has been a limitation of
the generic object to a particular group of things, the obligation is extinguished by
the loss of that particular group from which the prestation has to be taken. i.e.,
obligation to deliver mangoes from a specific mango tree, and the harvest was
damaged by a typhoon. Obligation is then extinguished.
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 May Extinguish the Obligation:
● Even if the loss is partial, if it is so important to the obligee that without it, he would
not have entered into the contract, the partial loss may be considered a sufficient
reason to extinguish the obligation.
● Illustration: A man buys a house and lot due to its swimming pool and garden. The
said pool and garden were expropriated by the government before the man was able
to pay for the property. Obligation to pay is now extinguished.
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 ● Partial loss may be considered total by the court after considering the intention of
the parties.
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.
ARTICLE 1165. When what is to be delivered is a determinate thing, the creditor, in
addition to the right granted him by article 1170, may compel the debtor to make the
delivery.
If the thing is indeterminate or generic, he may ask that the obligation be complied with at
the expense of the debtor.
Presumption of Negligence on the part of the Debtor:
● The presumption is rebuttable. The debtor may prove that he was not at fault.
● However if he has incurred delay, or that he had promised to deliver the thing to two
or more persons with different interests, he will be liable even if the loss is due to
fortuitous events.
● The last sentence refers to the applicability of Art. 1174, the rule on fortuitous
events where the presumption of negligence shall not apply.
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.
Applicability:
● Applies only to obligations to do.
● Impossibility of performance must exist only after the execution of the contract.
Otherwise, the contact is void if it existed from its inception.
● Where a person by his contract charges himself with an obligation possible to be
performed, he must perform it, unless performance is rendered impossible by the act
of God, by the law, or by the other party.
Kinds of Impossibility:
1. Legal Impossibility – Arises when the act to be performed is subsequently
prohibited by law. I.e., construction of a 30 story building but then a law is passed
limiting maximum stories to 3 in that area.
2. Physical Impossibility – Arises when the act could not be physically performed due
to reasons subsequent to the execution of the contract. i.e., painter agreeing to paint
but gets his hand cut-off in an accident.
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.
Applicability:
● Applies only to personal obligations but not to obligations to give.
● This article does not refer to impossibility but to difficulty of service or performance
manifestly beyond the intention of the parties.
● If considered favorably, the obligor is released from his prestation totally or partially
depending upon the degree of difficulty or performance.
● Not applicable if the debtor had merely suffered minor or insignificant losses which
are normal risks in contractual relationships.
● The reason behind this is that the intention of the parties should govern, and if it
appears that the service turns out to be so difficult as to have been beyond their
contemplation, it would be doing violence to that intention to hold the obligor still
responsible.
Limitation:
● The court cannot modify or revise the terms and conditions stipulated in the
contract. i.e., cannot modify terms and conditions in a subdivision contract, cannot
fix a sharing ratio different from the one contractually stipulated, etc.
Principle of Unforeseen Difficulty Of Service:
● The article may be referred to as the principle of unforeseen difficulty of service, is
said to have been based on the principle of rebus sic stantibus used in international
law which provides that a treaty remains valid only if the same conditions existing
and prevailing at the time of its execution shall continue to exist at the time of
performance. Otherwise, the treaty shall not be enforceable.
● However, this principle cannot be absolutely applied in contractual relations, as to
do so would undermine the stability of contracts. It is only in extremely unusual
change of circumstances that equity shall come to the succor of the debtor.
● Unforeseen events or circumstances must be greatly beyond what could have been
reasonably anticipated by diligent persons at the time of the execution of the
contract.
● The debtor cannot be required to overcome the difficulties if to do so would mean
economic ruin on his part and unjust enrichment on the part of the creditor.
Illustration:
● Kevin contracted Eden for the latter to construct a deep well. The contract price was
pegged at only 50 pesos considering that on the neighboring areas, Eden was able to
strike the water basin at the depth of only 5 feet. In Kevin’s area, Eden was
confronted by an unusual problem for she could only extract water at a depth of 10
feet which is beyond the contemplation of the parties. Thus, Eden is released from
her prestation. Otherwise, she will be prejudiced as the contract price of 50 pesos
will not be enough to cover the expenses for the deep well.
● X agreed to construct a road near a mountain. A very strong typhoon caused an
avalanche making the construction of the road dangerous to human lives. (Note: The
obligation is not impossible of performance)mIn this case, X may be released, in
whole or in part, from his obligation to continue with the construction.
ARTICLE 1268. When the debt of a thing certain and determinate proceeds from a
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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.
Applicability:
● Applies only to an obligation to deliver a certain thing which is determinate, and
which obligation arose out of the commission of a criminal offense committed by
the debtor. If the thing is lost for whatever reason, the debtor shall pay for the value
of the thing.
● Exception: If the obligor had offered or tendered the delivery of the thing to the
obligee, but the latter had unjustifiably refused to accept it, and the thing got lost, the
former is not liable anymore because the latter is in mora accipiendi.
Remedies of Debtor if Creditor Refuses without just cause to Receive the Thing:
● If debtor offers the thing but the creditor refuses to receive, debtor has two options:
a. Consign the thing in court and seek the cancellation of the obligation
b. Keep the thing and preserve it using due diligence, but obligation will
subsist. But if the thing is then lost through a fortuitous event, the obligor
is no longer liable.
Illustration:
● A commits the crime of theft, and is asked to return the car stolen to its owner B. If,
before the car is delivered to B, it is destroyed by fortuitous event, is A’s liability
extinguished? No, A’s liability is not extinguished.
● Suppose, A had previously asked the owner to accept the car, but the owner without
any justifiable reason refuses to accept the car, do you believe A to still be
responsible if, let us say, the car is lost later by a fortuitous event? In this case, the
criminal could no longer be liable because here the creditor is in mora accipiendi.
This is the exception to the rule.
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.
Consequences of Extinguishment By Loss:
● There shall be a sort of subrogation whereby the creditor shall have all the rights of
action which the debtor may have against third persons by reason of the loss.
● The transfer of rights is by operation of law starting from the moment of
extinguishment of the obligation. i.e., thing due is insured by the debtor, but then it
got lost due to reasons allowable by under the policy. The creditor can collect the
insurance indemnity from the insurer.
● Example: when the thing due is expropriated, the creditor can collect the
compensation paid by the authorities for the taking of the property for public use.
● Example: S is obliged to deliver his car to B. But X destroys the car. B has a right to
sue X. The right is given to B instead of S because otherwise S would unduly profit
in that he will gain two things: first, his obligation to give the car or its value is
already extinguished; second, he would be allowed to recover from X. It is obvious
that S must not unduly profit at the expense of B.
Cases:
Yu Tek Co. No sugar was delivered by Gonzales, because according to him, his sugar
vs. Gonzales plantation was unable to yield enough sugar to fulfill his obligation. The
dry weather destroyed his growing sugar cane. Gonzales claimed that his
obligation was extinguished because of the loss of the thing (the sugar)
due, especially because its loss was not his fault.
SC: After a careful examination of the contract, Court found that there was
no clause written even remotely suggesting a condition that the sugar must
exclusively come from Gonzales’ plantation. It meant Gonzales could
have bought 600 piculs of sugar or could have gotten it someplace else to
fulfill his obligation. His plantation might have been the best place to
source out the sugar, but the contract had not implicated such limit.
Labayen vs. The contract was a general contract of the form used by the central and
Talisay-Silay various proprietors of sugarcane fields. It was intended to be limited in
Milling particular application to haciendas where not impeded by physical
impossibility.
The contract was qualified by an implied condition which, if given
practical effect, results in absolving the central from its promise. Not to
sanction an exception to the general rule would run counter to public
policy and the law by forcing the performance of a contract undesirable
and harmful.
Class Notes:
Rules on Payment
1. Integrity of Payment
2. Made by the proper person
3. Capacity to make the payment of proper person
4. It has to be made to the proper person
5. Creditor has legal capacity to accept payment
Rule No. 1 on Payment: Integrity of Payment
● Integrity of payment - the performance or the thing itself must be strictly
complied. If it was agreed upon and the thing imposed by law → the debtor may
compel the creditor to accept the payment. If the compliance is full, the creditor
refuses → REMEDY: still payment (consignation). It must be complete.
○ If not strictly complied, if only substantial compliance → the thing
itself is not really delivered as agreed upon, the creditor has the right to
refuse payment. Even if consignated, it is not valid since it is not what
is agreed upon.
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 ○ If partial, the creditor cannot be compelled to accept partial payment
unless there is stipulation to the contrary or it is partially liquidated or
partially unliquidated.
XPNs on Integrity of Payment:
● The moment the thing is delivered completely and accepted by the creditor, the
moment the service is fully performed and accepted by the creditor, it is the point
in time when obligation is extinguished.
● XPNs:
1. Substantial compliance - omission must be slight, not technical,
unimportant. The performance must be in good faith. Incomplete
performance is due to excusable neglect. There was an honest to
goodness effort to extinguish the obligation by payment but it was not
fully satisfied.
2. Waiver of the balance - the acceptance does not result to the
extinguishment of the obligation, unless the creditor waived his right
on the balance. If the creditor accepted as if it is full, then the
obligation is extinguished.
Rule No. 2: Made by the proper person (DR)
● There is juridical tie between debtor and creditor and debtor has obligation to
deliver a thing agreed upon. Usually, the creditor accepts and the obligation is
extinguished. Proper person may be:
1. Debtor,
2. Third person authorized by the parties,
3. Person who has an interest in the payment of the obligation → Take
note of the differences between third person and a person interested in
the fulfillment of the obligation
● What if done by a third party? The creditor cannot be compelled to accept the
payment of the 3rd party. If he accepts, it is valid and the obligation of the debtor
is extinguished.
Rule No. 3: Capacity to make the payment of the proper person (DR)
● What affects capacity? In Persons, when you have a legal impediment to enter
into contracts, if you do not have the free disposal of the thing due and capacity
to alienate it, the performance of such prestation is considered as void. Even if
you are the proper person who is paying. Creditors can refuse.
○ If creditor accepts, he bears the risk of accepting from a person who is
not capacitated to pay. Here, payment will be valid and obligation is
extinguished.
○ If the payor is not capacitated, the creditor cannot accept payment. If
the creditor refuses, the debtor will try to make that consignment,
which will have no effect because he has no legal capacity.
HOWEVER, if the creditor accepts, payment is valid.
○ If there is payment, even if debtor is incapacitated, obligation is
extinguished, payment is valid.
Rule No. 4: It has to be made to the proper person
● Aside from creditor, you can have a:
1. successor-in-interest, or
2. person authorized to receive such payment, or
3. person in possession of a particular credit.
● GR: pay only to CR, successor in interest, person with the credit.
If payment is made to 3rd party
● GR: Payment is not valid.
○ XPN: Payment to the wrong person can still be valid if it is redounded
to the benefit of the creditor.
Rule No. 5: CR has the legal capacity to accept payment
● Payment to incapacitated person - payment is not valid
○ XPN: Can be valid if the person kept the thing and it became beneficial
to him. It has the effect of extinguishing the obligation.
_________________________________________________________________________
Requisites of Valid Payment
1. Delivery of the full amount or the full performance of the prestation
2. Capacity of the person paying
3. Capacity of the person receiving payment
4. Propriety of the time, place, and manner of payment
5. Acceptance of the payment of the CR
Notes:
● Req 1 → integrity of payment
● Reqs 2 and 3 → capacity; you should know what affects legal capacity (age,
periods of hypnoticness, drunkenness, insanity)
● Req 4 → where and how
● Req 5 → delivery and acceptance
Payment
● Payment is the fulfillment or delivery of the prestation.
● GR: CR shall be paid on what is only agreed upon. DR cannot compel the CR to
accept other things.
○ XPN: But if CR consents, the same will extinguish the obligation.
Happens in novation or dacion en pago.
● Art. 1246 → talks about quality. Quantity not mentioned because if both not
determined, contract is void.
○ Quality → based on what is agreed upon by the parties (no compulsion
for something more or less)
How?
● If monetary obligation → by delivery of the money; amount must be paid in full,
unless otherwise stipulated in the contract
● To Give → by delivery of the thing
● To do → by performance of the said personal undertaking
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 ● Not to do → by refraining from doing the action
○ CR cannot be compelled to accept partial payment. Again, integrity of
payment. It has to be full and strictly complied with.
■ XPNs: Art. 1234 and 1235. Substantial compliance in good
faith and acceptance of performance knowing its
incompleteness or irregularity (waiver on the part of the
Creditor).
demand fulfillment of the obligation
2. Creditor’s successors-in-interest - this refers to the creditors at the time of
payment, NOT the original creditor at the time time obligation was constituted.
Such as the heirs of the CR.
3. Any person authorized to received the same - agent or legal rep
4. Court – in cases where consignation is proper. If the court decreed that it is a
valid consignation, the obligation is extinguished.

2 XPNs to integrity of Payment To whom Payment Should NOT be made

1. Substantially performed in GF → there is still claim of damages. Look at Art. ● Persons Incapacitated to Administer their Properties EXCEPT:
1107 (in contravention of the tenor of the obligation). ○ Such incapacitated person kept the thing delivered
○ Effect: But the obligation is extinguished (but entitled to damages). ○ Insofar as the payment has been beneficial to him
2. CR accepts the performance knowing its incompleteness or irregularity ● The Creditor IF debtor has been judicially ordered to retain the debt → ART.
○ Acceptance by silence is not art.1235 - CR has to know first that the 1243. Payment made to the creditor by the debtor after the latter has been
payment is incomplete (also known as acceptance by estoppel or by judicially ordered to retain the debt shall not be valid.
waiver)
Third Persons EXCEPT:
By Whom? Only the debtor himself may make payment a. It has redounded to the benefit of the creditor (but only up to the extent of such
● XPNs: benefit) (Art. 1241)
1. If there is a contrary stipulation b. If after the payment, the third person acquires the creditor's rights (Art. 1241)
2. 3rd person has an interest in the fulfillment of the obligation (ex. c. If the creditor ratifies the payment to the third person (Art. 1241)
Co-debtor or guarantor) d. If by the creditor's conduct, the debtor has been led to believe that the third
3. Creditor voluntary accepts payment from third person person had authority to receive the payment. (Art. 1241)
e. When without notice of the assignment of the credit, he pays to the original
Effects of Payment by Third Person creditor (Art. 1626)
Rule: Payment by third person and acceptance by the creditor produces the effect of f. When in good faith, he pays to one in possession of the credit (Art. 1242)
payment
If payment is made not to the creditor but to a third person, as a general rule, it will still
extinguish the obligation if it redounds to the benefit of the creditor. Extinguishment is UP
Third person a. Full reimbursement → 3rd person may recover from the TO THE EXTENT OF THE BENEFIT.
pays with DR what he has paid
consent of the b. Subrogation → 3rd person can compel CR to subrogate What can be a scenario whereby a third party accepts payment and the benefit will be
DR him in his rights up to the extent? (1241) Will there be partial extinguishment of the obligation?
● The moment there is acceptance of benefits of the creditor and it is redounded to
Third person a. Beneficial reimbursement → 3rd person may recover his benefit and di umabot sa usapan, there is only partial extinguishment unless
pays w/o consent only insofar as the payment has been beneficial to the the creditor says it’s okay na. With the additional element of good faith, we will
of debtor DR have an extinguishment of obligation.
b. No subrogation
Application of Payment
Third person a. Third person cannot recover if the debtor accepts → ● There is only one debtor and one creditor.
pays w/o intent deemed a donation (as to the relationship between the ● The debtor owes the creditor two or more debts which are of the same kind or
to be reimbursed DR and the 3rd party) identical specie such as money obligations obtained on different dates.
○ But as to the CR and the DR, obligation is ● All the debts are due and demandable, except when there is a stipulation to the
extinguished. contrary or when the application is made by the party for whose benefit the term
has been constituted.
To Whom? ● The payment made by the debtor is not sufficient to cover or settle all the debts.
1. Creditor himself (person in whose favor the obligation has been constituted) - he
may not be necessarily be a principal party to the contract but he has the power to Is Application of payments only apply to monetary obligation?

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 ● No. Example, Obligation to deliver rice. I owed the CR 50 cavans and 100
cavans.
Dation in payment
● Dation in payment only applies to monetary obligation. You are not paying in
money but you are making payment by way of a particular property. If creditor
consents, the obligation is extinguished.
● In most cases, the thing offered is considered the accepted equivalent of the
performance of obligation. It is considered as the object of the contract of sale.
Therefore, in most cases, when you have DIP, you have full extinguishment
obligation, unless otherwise provided by the parties.
Legal Tender - Check - not considered as legal tender
● XPN:
a. when they have been cashed, or
b. when through the fault of the creditor they have been impaired.
Why do you think there is that relevance for us to know what is legal tender?
Because payment of legal tender is meant to determine if payment is valid.
● If not considered as legal tender: creditor can refuse. Again: INTEGRITY OF
PAYMENT.
Legal tender refers to monetary obligation - currency of the payment of debts should be
made.
● Tender: - performing the obligation for acceptance. “show me the car” “show it
to you (creditor)”; then if CR refused, without due cause, the DR can consign it
to court.
● But when it comes to LEGAL tender, it talks about CURRENCY and MONEY
“SHOW ME THE MONEY”.
Consignation (check discussion above)
Extraordinary Inflation/Deflation
1. There must be a BSP proclamation of the existence of the extraordinary inflation
or deflation.
2. There must be a contractual obligation.
3. Parties recognize the effects of the extraordinary inflation or deflation.
4. Authorities must establish that the inflation/deflation must be
EXTRAORDINARY.
Student Q: Gcash payment
● If made electronically, it is not considered legal tender. It has to be in cash.
● Under e-commerce law, that currency in the form of electronic transmission is
considered as legal tender.
● When a check is credited to the account of the creditor, it was considered as legal
tender, there being no objection on the part of the creditor. - For sir, you can use
it by analogy but sir will look for the particular provision in E-commerce.
Currency transferred electronically should be considered as legal tender.
Student Q: 20 pesos as coin payment
● 20 peso coin limit - it will now be considered as part of the legal tender (BSP
Circular)
● 20 peso coins - now only until 1k
Student: Cryptocurrency as payment
● No legal prohibition regarding crypto currency as a currency. If parties allow in
whatever denomination, it should be considered as currency stipulated by the
parties.
Service: Difficulty v. Impossibility
Loss in obligations to do and even in not to do
● Impossible - extinguish. Impossibility should arise only after the constitution of
the obligation. If prior, obligation is not valid.
● Doctrine of difficulty - take note of keywords underlined: “Manifestly beyond
the contemplation of the parties”
○ It can be difficult for others, relatively. The gauge should be the one
used by the parties at the time the obligation was constituted.
Unforeseen difficulty of service
Rebus sic stantibus - a treaty remains valid only if the same conditions existing and
prevailing at the time of execution continue to exist at the time of performance.
● Note: It is more of an exception rather than a general rule.
● It is more of an equitable relief on the part of the debtor.
● Unforeseen - exception and equitable remedy in case of unforeseen events
beyond the contemplation of parties.
● Doctrine of impossibility ≠ Doctrine of unforeseen difficulty of service - 2
different things.
DRILL Q: BAR QUESTION (2000) FORCE MAJEURE
Kristina brought her diamond ring to a jewelry shop for cleaning. The jewelry shop
undertook to return the ring by February 1, 1999." When the said date arrived, the jewelry
shop informed Kristina that the Job was not yet finished. They asked her to return five days
later. On February 6, 1999, Kristina went to the shop to claim the ring, but she was
informed that the same was stolen by a thief who entered the shop the night before. Kristina
filed an action for damages against the jewelry shop which put up the defense of force
majeure. Will the action prosper or not?
Jewelry shop is in delay (on Feb 1, 1999)
There is loss, there is force majeure, and there is breach. Breach in obligation here is delay.
Before Kristina can have a proper action for damages, she has first to establish that the
defense of force majeure is inapplicable. Delay is irrelevant here. It should be expressly
provided that there is a demand
Requisites in order for debtor may be in default:
1. Obligation demandable and already liquidated
2. Debtor delays performance
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3. Creditor demands the performance judicially or extrajudicially
Can you not argue that the obligation was done in contravention? Agreement is to
deliver the ring on a certain date but when said date arrived, the debtor said it was not yet
finished. Would you not consider this as an obligation already breached?
Ring was supposed to be delivered on Feb 1, 1999. It will not exempt the debtor from
liability
● Sir: No demand and no delay but obligations can be breached when there is
contravention to the tenor of agreement. There was already breached here. I am
entitled to damages because the debtor was already in breach.
● If I were to dispose of the issue of FE that the same was stolen, it was not FE
because the DR, aggravated. Why? He did not return the ring on the agreed upon
date. Delay might be important, but that will not be the anchor of my answer.
Look at certain words and phrases to allow you to pinpoint the issue in the question. Will
the action prosper? Am I entitled to damages? 1170 will be your primary answer.
Parenthetically, that this is not FE because of #4, lacking of that requirement.
Not depositary because it was for repair and not safekeeping. But if the q would have
said deposited, then you may use that provision.
● ANSWER: It (defense of force majeure) will not prosper because Kristina is
entitled to damages as the obligor was already in breach. Regarding the
obligation of F, this is not available because #4 requisite is not present which is dr
is free from participation of aggravation. There is participation because he failed
to return the ring on time.
Can we not argue that there is no contravention because there is already extension of
term. Cr was informed and she went 5 days after which is an extension?
Sir: You can answer that there is novation. Kristina consented impliedly. FE is not
available as there was already a breach of obligation.
● That would be a good answer if the q says that Kristina agrees to return to shop 5
years after. There is express consent, so no more breach of obligation.
● Suggested answer: There was already entitlement to damages because the
obligor is already in delay. (UP suggested answer)
EXTINGUISHMENT 3: CONDONATION
Condonation or remission of the debt (Arts. 1270-1274, 748, 749)
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. (1187)
Concept of Condonation or Remission:
● Remission or Condonation is an act of liberality by which the creditor renounces the
enforcement of the obligation contracted without receiving any price or equivalent.
It is the gratuitous abandonment by the creditor of his right. To condone is to forgive
or remit a debt.
Essential Characteristic:
● The essential and inherent characteristic of condonation/remission is that it is
gratuitous.
● If the creditor receives something, it is not longer a condonation or remission but
rather a novation or a dation in payment.
Requisites of Condonation or Remission:
1. Existence of a demandable debt
2. Renunciation of the debt is purely gratuitous
3. Acceptance of the condonation or remission by the debtor
4. Formalities required by law on donation must be complied with
5. What has been condoned or remitted must not be inofficious
Express Condonation or Remission:
Article 748. The donation of a movable may be made orally or in writing.
An oral donation requires the simultaneous delivery of the thing or of the document
representing the right donated.
If the value of the personal property donated exceeds five thousand pesos, the donation and
the acceptance shall be made in writing. Otherwise, the donation shall be void. (632a)
Article 749. In order that the donation of an immovable may be valid, it must be made in a
public document, specifying therein the property donated and the value of the charges
which the donee must satisfy.
The acceptance may be made in the same deed of donation or in a separate public
document, but it shall not take effect unless it is done during the lifetime of the donor.
If the acceptance is made in a separate instrument, the donor shall be notified thereof in an
authentic form, and this step shall be noted in both instruments. (633)
● When the condonation is express, it is not enough that it be in writing.
● It must follow the formalities required of ordinary donations provided in Articles
748 and 749.
● When the condonation is oral and involves movable things, the same need not
follow the formalities.
● There is no need for delivery anymore because the thing is already in the possession
of the debtor.
● When the express condonation is defective for failure to follow the form of ordinary
contracts, it does not become an implied condonation with valid effect.
Implied and Legal Condonations:
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 ● Tacit condonations may be deduced from the acts of the parties confirming the
existence and acceptance of the condonation not reduced to writing. i.e., creditor
burning promissory note in front of the debtor.
● If the debtor does not accept the remission but does not pay, and the creditor does
not enforce payment within the prescriptive period, the abandonment will result in
the prescription of the credit.
● Remissions or waivers are not presumed. Their existence must be established by
convincing evidence.
Acceptance By Debtor Required:
Article 745. The donee must accept the donation personally, or through an authorized
person with a special power for the purpose, or with a general and sufficient power;
otherwise, the donation shall be void. (630)
Article 746. Acceptance must be made during the lifetime of the donor and of the donee. (n)
● Condonation is a donation of an existing credit in favor of the debtor.
● As the liberality of a person cannot just be imposed upon another, it is required that
the debtor gives his consent thereto by making an acceptance.
● Condonation or remission is not a unilateral act. It is a bilateral act.
● No acceptance, no remission.
● When accepted, subject to the rules on donation.
● Article 745 and 746 must be complied with to make the acceptance effective and
valid.
Limitation on Condonation:
Article 750. The donation may comprehend all the present property of the donor, or part
thereof, provided he reserves, in full ownership or in usufruct, sufficient means for the
support of himself, and of all relatives who, at the time of the acceptance of the donation,
are by law entitled to be supported by the donor. Without such reservation, the donation
shall be reduced in petition of any person affected. (634a)
Article 751. Donations cannot comprehend future property. By future property is
understood anything which the donor cannot dispose of at the time of the donation. (635)
Article 752. The provisions of article 750 notwithstanding, no person may give or receive,
by way of donation, more than he may give or receive by will. The donation shall be
inofficious in all that it may exceed this limitation. (636)
● It is subject to the rule that it shall not be inofficious.
● The creditor must reserve sufficient means for his own support and of all relatives
who are entitled to be supported by him at the time of the acceptance of the
condonation or remission. (Articles 750 and 752)
Subject to Revocation:
● If the condonation or remission is excessive or inofficious, it may be totally revoked
or reduced depending on whether or not it is totally or only partially inofficious.
● The grounds for revocation are found in Articles 760, 761, and 765 of the Code.
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. (1188)
Applicability and Coverage, Private Document Evidencing a Credit:
● Applies only to private documents evidencing credits like a private promissory note.
● Cannot apply to public instruments evidencing credits because such instruments
ordinarily have other copies in the hands of the Notary Public who had notarized
them.
Implied Renunciation of Action:
● It is implied that the action for the enforcement of the debt had been renounced or
remitted by the creditor when he voluntarily delivered to the debtor the private
document of credit.
● The law does not state specifically the remission of the credit. The credit has not yet
prescribed. It merely states the implication of renunciation of the action which the
creditor has against the debtor.
● This is because if the debt itself had already been renounced, subsequent payment
will be void. However, if only the right of action is renounced, and the debtor pays
even after the prescription of the action, the payment could not be recovered
anymore because it constitutes a performance of a natural obligation.
Defense of Debtor and His Heirs when Waiver of Action is Challenged:
● If the remission is claimed to be inofficious – meaning, it is excessive as it cannot be
totally covered by the disposable free portion of the estate of the deceased creditor,
or that is revocation is sought under Articles 750, 752, 760, and 761, the law
provides a defense for the debtor or his heirs.
● The defense is that “the delivery of the document was made in virtue of payment of
the debt.”
● According to Pineda, there is an absurdity in the article if this defense is pursued,
particularly because there is a presumption of renunciation of the action in the first
part of the article. This presumption is not being maintained if the defense proffered
by the debtor is payment.
● The solution to this absurdity is that if the debt had actually been paid, the debtor
must give up the presumption of renunciation in his favor. He might as well present
the proofs of payment rather than lean on a presumption of remission which is
rebuttable.
● If the debtor has no receipts to prove payment, there will be two presumption
available: either presumption of payment, or the presumption of remission. If they
are not rebutted, the action of the creditor shall fall.
● In the face of these two favorable presumptions, presumption of payment should be
stressed because there is greater reciprocity of interests in that presumption.
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 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. (1189)
Applicability and Presumption:
● Applies only when the subject document evidencing the credit is a private one.
● If the document evidencing the credit is found in the possession of the debtor, the
presumption that the said document was delivered voluntarily to the said debtor. The
presumption is rebuttable.
● The presumption of voluntary delivery of the document implies the remission of the
debt evidenced by the credit.
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. (1190)
Effect of the Remission of the Principal on the Accessory:
● If the principal debt has been remitted, the accessory obligation is extinguished.
● The reasons is that the existence of the accessory obligation is dependent upon the
principal.
● The principle “accessory follows the principal” applies.
● Example: Monica borrowed money from May, and Mikey guaranteed the payment
of the loan. May remitted the entire obligation of Monica. The guarantee of Mikey is
then also extinguished.
● On the other hand, if the accessory alone is extinguished by remission, the principal
stays.
● Thus, if May remitted the guarantee of Mikey, the loan of Monica remains.
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.
Coverage; Pledge:
● Article refers only to pledge. Pledge is a real contract. It is not valid unless the thing
pledged is delivered and placed in the possession of the creditor, or of a third person
by common agreement. (Article 2093)
Presumption When Thing Pledged Found in Possession of Debtor or 3rd Person Owner:
● If the thing pledged, after its delivery to the creditor, is found in the hands of the
debtor, it is presumed that the pledge had been remitted. The presumption does not
include the principal obligation (loan).
● The presumption also applies if thing pledged is found in the possession of a third
person, not just any third person, but a third person who is the owner of the thing.
This happens when the loan is secured by a property owned by a third person.
● Presumption is rebuttable as the creditor may prove that the thing was just stolen
from him, that he delivered it for repair purposes, etc.
Soria v. Is writing-off a loan equal to a condonation or release of a debt by the
COA creditors? No. As an accounting strategy, the use of write-off is a task that
can help a company maintain a more accurate inventory of the worth of its
current assets. In general banking practice, the write-off method is used
when an account is determined to be uncollectible and an uncollectible
expense is recorded in the books of account. If in the future, the debt appears
to be collectible, as when the debtor becomes solvent, then the books will be
adjusted to reflect the amount to be collected as an asset. In turn, income
will be credited by the same amount of increase in the accounts receivable.
Write-off is not one of the legal grounds for extinguishing an obligation
under the Civil Code. It is not a compromise of liability. Neither is it a
condonation, since in condonation gratuity on the part of the obligee and
acceptance by the obligor are required. In making the write-off, only the
creditor takes action by removing the uncollectible account from its books
even without the approval or participation of the debtor.
Furthermore, write-off cannot be likened to a novation, since the obligations
of both parties have not been modified. When a write-off occurs, the actual
worth of the asset is reflected in the books of accounts of the creditor, but
the legal relationship between the creditor and the debtor still remains the
same – the debtor continues to be liable to the creditor for the full extent of
the unpaid debt.
EXTiNGUISHMENT 4: CONFUSION
Confusion or Merger of Rights (Arts. 1275-1277, 1215, 1217)
Article 1275. The obligation is extinguished from the time the characters of creditor and
debtor are merged in the same person. (1192a)
Concept of Confusion or Merger of Rights:
● Confusion is also known as merger of rights, as it is a merger or convergence of the
characters of the creditor and debtor in the same person involving the same
obligation.
● Since it is nonsensical for the person to pursue a claim against himself, the merger
results in the extinguishment of the obligation.
● Example: Kara issued a check payable to cash in favor of Eunice in order to pay
Eunice the amount Kara loaned from the her. Instead of encashing the check, Eunice
endorsed it to her creditor Therese. Later, Therese indorsed it to Kara in payment of
her indebtedness to Kara. Kara issued the check and she received the same check.
There is a merger which is definite and complete.
Requisites for Confusion or Merger of Rights:
1. There is a merger in the same person the characters of a creditor and a debtor
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2. The merger must be in the characters of a principal creditor and a principal debtor
3. The merger is definite and complete. (Partial merger is allowed. It is definite and
complete up to the extent of the concurrent amount or value.)
Effect of Revocation of Merger or Confusion:
● The event the act which created the confusion is revoked for some causes (like
rescission of contracts), the confusion or merger is also revoked.
● The obligation is revived in the same condition as it was before the confusion.
During the interregnum, the running period of prescription of the obligation is
suspended since the creditor could not have made a demand for the fulfillment of the
obligation.
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. (1193)
Applicability:
● The article refers to two kinds of mergers: Merger in the person of the principal
debtor or creditor, and merger in the person of the guarantor.
a. the guaranty is also extinguished because it is just an accessory obligation
to the principal.
b. the principal obligation will not be extinguished because the efficacy of
the principal is not dependent upon the accessory obligation.
Illustration:
● Alyssa owes Kit 100 pesos. Kyrah was taken in as a guarantor. Kit assigned this
particular credit to Ira. Later, Ira assigned this credit to Alyssa. There is now a
merger in the characters of the principal debtor and creditor. Thusly, the principal
obligation of Alyssa is extinguished which carries the extinguishment too of Kyrah’s
obligation as guarantor.
● Continuing from the same scenario, if Ira assigned her credit to Kyrah, there is a
merger of the credit in the person of the guarantor. Kyrah is thus released from the
guaranty because of the merger of the credit in her person. However, the principal
obligation of Alyssa remains. So, Kyrah can collect from Alyssa the 100 pesos.
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. (1194)
Joint Obligation not Extinguished by Confusion, Exception:
● Generally, the emergence of confusion in one principal debtor or creditor will not
extinguish the joint obligation because the confusion is not definite and complete
with regard to the entire obligation. A part of the obligation still remains
outstanding.
● However, the law allows the merger as a mode of extinguishing the obligation with
respect only to the share corresponding to the debtor or creditor concerned, in whom
the two characters of debtor and creditor converge.
● If the confusion takes place in the person of the debtor, the effect is only with regard
to his share. In fine there is only partial extinguishment of the obligation. Thus, the
creditor can still go after the other debtors whose part of the debt had not been
affected by the extinguishment.
Illustration:
● Camille and Chloe jointly obtained a loan of 10 pesos from Georgia. Georgia later
assigned this whole credit to Camille. This extinguishes Camille’s share in the
obligation because of the merger of the characters in her person. However, Chloe
remains liable to the extent of her share which is 5 pesos, not to Georgia but to
Camille.
Solidary Obligation:
● The rule in solidary obligation is different. If a solidary debtor had paid the entire
obligation, the obligation is totally extinguished without prejudice to the rights of
the solidary debtor who paid, to proceed against his solidary co-debtors for the
latter’s individual contribution or liability.
Cases:
Sochayseng We must not lose sight of the provision of article 1192 of the Civil Code
vs. Trujillo (1275 NCC): "Whenever the characters of creditor and debtor are merged
in the same person, the obligation is extinguished." As regards to the
amount of P320, it is extinguished since it is to be paid out of the total
amount of property that now belongs to Paulina
Yek Ton Lin After the steamship Yusingco had been sold for the execution of the
vs. Court of judgment rendered in favor of Vicente Madrigal, the only right left to the
Appeals Yek Tong Fire and Marine Insurance was to collect its mortgage credit
from the purchaser thereof at public auction, inasmuch as the rule is that
a mortgage directly and immediately subjects the property on which it is
imposed, whoever its possessor may be, to the fulfillment of the
obligation for the security of which it was created; but it so happens that
it cannot take such steps now because it was the purchaser of the
steamship Yusingco at public auction, and it was so with full knowledge
that it had a mortgage credit on said vessel.
Thus, there is no need for Madrigal to turn over to Yek Tong Fire and
Marine Insurance the amount of money paid by him by the provincial
sheriff from the proceeds of the sale of steamship Yusingco. The
obligation was extinguished by virtue of Confusion or Merger of Rights.
Chittick vs. “When a party dies, the heirs of the deceased may be allowed to be
Court of substituted for the deceased without requiring the appointment of an
Appeals executor or administrator and the court may appoint a guardian for the
minor heirs.” In the case at bar, the counsel of Muriel failed to notify the
court instantly of Muriel’s death, therefore the substitution was
INVALID.
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 When the characters of creditor and debtor are merged in the same
person, the obligation is extinguished by virtue of a merger. A
creditor (mortgagee) who eventually owns the property of a debtor
(mortgagor) is an example of such merger.
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. (1143)
Novation
● There is novation when obligations are 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 (Art. 1291)
Compensation
● Takes place when two persons, in their own right, become creditors and debtors of
each other. (Art. 1278)
Confusion
● Takes place when the characters of creditor and debtor are merged in the same
person. (Art. 1275)
Remission
● Gratuitous abandonment by the creditor of his right. Acceptance by the obligor is
necessary. (Art. 1270)
Effects of Execution of the Specified Four Modes of Extinguishing:
● These four modes are prejudicial to other solidary co-creditors, because said acts
have the effect of extinguishing the debt or obligation which is due to all of them.
● The co-creditors are not left without any recourse. The one who had collected the
debt shall be liable for the shares corresponding to all his co-creditors.
● The remission made by a solidary co-creditor to 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. (Art. 1219)
● If there is no such previous payment, all the solidary debtors are released from the
obligation. The solidary debtor who accepted the remission cannot seek
reimbursement from his co-debtors. (Art. 1220)
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. (1145a)
Supra, Solidary Obligation.
EXTINGUISHMENT 5: COMPENSATION
Arts. 1278-1290, 1243, 1215
Article 1278. Compensation shall take place when two persons, in their own right, are
creditors and debtors of each other. (1195)
Concept:
● It is the off-setting of the respective obligations of TWO persons who stand as
principal creditors and debtors of each other, with the effect of extinguishing their
obligations to their current amount.
Example: Samantha borrowed 100 pesos from Bettina, and Bettina borrowed 50 pesos from
Samantha. Samantha now only owes Bettina 50 pesos, by reason of compensation. Kinds:
As to origin:
1. Conventional or Voluntary – By agreement of the parties
2. Legal – By operation of law from the time all requisites of compensation concur
3. Judicial – By judgment of the court when there is a counterclaim duly pleaded, and
the compensation is decreed.
4. Facultative – Takes place when it is claimed by one of the parties who has the right
to object to it, but waives his objection thereto such as when the object of litigation
of such party is with a period for his benefit alone, and he renounces the period to
make the obligation become due. i.e., Gem borrowed 100 pesos from Natasha
payable within 3 years. Natasha borrowed money from Gem for the same amount. If
Gem will renounce the term, there will be immediate compensation.
As to extent:
1. Total – Takes place when both obligations are totally extinguished because they
happen to be the same amount, or by agreement of the parties.
2. Partial – Takes place when after the operation of compensation, a balance still
remains because the obligations are not of the same amount.
Distinguished from Payment:
Compensation Payment
There can be partial extinguishment; The performance must be complete
unless waived by the creditor.
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 Takes place by operation of law without Payment involves delivery or action, while if stated.
simultaneous delivery. (legal) compensation. 3. The two debts are due.
4. Liquidated and demandable.
Compensation is simplified or abbreviate 5. No retention or controversy commenced by 3rd parties.
payment, because the two debts are
extinguished without requiring the transfer
Elaboration:
of money or property.
1. Principal creditor and debtor of each other.
● Relationship must be a principal one. Obligation to a guarantor is not a principal
debt.
Distinguished from Merger or Confusion: 2. Both are sums of money or consumable things of the same kind and same quality if
stated.
Compensation Merger/Confusion ● When the debts consist of things, it is necessary that the things are consumable
which must be understood as fungible and therefore susceptible of substitution.
There are at least two persons who stand as There is only one person involved who ● More than that they must be of the same kind, and if quality is stated, same quality.
principal creditors and debtors of each becomes the debtor and creditor. ● Compensation is not proper when one of the debts consists in civil liability arising
other. from a penal offense, as the satisfaction of such obligation is imperative.
3. The two debts are due.
There are two obligations; There is only one. ● Both are mature debts that is due for payment.
● The law does not require that the parties’ obligations be incurred at the same time,
Distinguished from Counterclaim: what it requires only is that the obligations be due and demandable.
● When an obligation is payable on demand, not yet due until there is a demand.
Compensation Counterclaim ● In voluntary compensation, parties may agree upon compensation of debts which are
not yet due.
Takes place by mere operation of law Must be pleaded as part of the answer 4. Liquidated and demandable.
● It is liquidate when its amount is clearly fixed, or if it is not specifically fixed, a
Counterclaim is judicial compensation. simple mathematical computation will determine its value.
● If the amount is not fixed because it is still the subject of dispute, it is unliquidated.
● Not enough that they are liquidated, they must also be demandable. A debt is
Article 1279. In order that compensation may be proper, it is necessary: demandable when it is not yet barred by prescription and it is not illegal or invalid.
1. That each one of the obligors be bound principally, and that he be at the same 5. No retention or controversy commenced by 3rd parties
time a principal creditor of the other; ● A debt or thing cannot be the subject of compensation if it is also the subject of a
2. That both debts consist in a sum of money, or if the things due are consumable, garnishment, or if the thing is placed under custodia legis.
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; Insular There can be a valid set off. both Insular and Capital were principal
4. That they be liquidated and demandable; Investment creditors of the other over debts which consist of consumable things or a
5. That over neither of them there be any retention or controversy, commenced by vs. Capital sum of money, Capital may validly set-off its claims for undelivered
third persons and communicated in due time to the debtor. (1196) One treasury bills against that of Insular’s claims.

Requisites of Legal Compensation: Second requisite only requires that the thing be of the same kind and
● All the requisites must be present before compensation can be effectual. quality, COEC T-Bills and IITC T- Bills are both government securities
● Their right as such creditors, or obligations such as debtors, need not spring from and the tripartite agreement recognized the monetary value and treated
one and the same contract or transaction. them as sums of money.

Both debts are due and remained unsatisfied, the existence and amount
Requisites: (SBM: Memorize this) are determined, and there was no retention or controversy commenced by
1. Principal creditor and debtor of each other. third persons. Therefore, in the case at bar, there was indeed a valid legal
2. Both are sums of money or consumable things of the same kind and same quality set-off/compensation

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In order that compensation may be proper, it is necessary that (1) each of
the obligors be bound principally (2) both debts must be of the same kind
and quality if stated (3) both debts are due (4) both are liquidated and
demandable (5) neither of them are subject to retention or controversy.
Purpose and Reason of Compensation:
● Purpose is to prevent unnecessary suits and payments.
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. (1197)
Exception to the rule:
● General Rule: For compensation, the parties must be the principal debtors and
creditors of each other.
● Exception: Guarantor is allowed to set up compensation for:
a. What the creditor owes the principal debtor whom the guarantor is
guaranteeing and/or
b. For what the creditor owes the guarantor himself.
● The reason for this is that the creditor shall not collect from the guarantor on the
basis of the guaranty, as long as the principal debtor is capable of paying his
obligation.
Garcia vs. A share of stock or certificate is not an indebtedness or an evidence of
Lim Chiu indebtedness of the owner to stockholder. Stockholders are not creditors of
Sing a corporation.
Domingo The court having jurisdiction of the estate had found that the claim of the
vs. Carlitos estate against the Government had been appropriated for the purpose of RA
2700. Both the claim of the government for inheritance taxes and the claim
of the intestate for services rendered have already became due and
demandable as well as fully liquidated Compensation in the case at bar
takes place by operation of law.
Soriano vs. Compania General cannot invoke the defense of automatic compensation
Compania since by virtue of Article 1278, compensation takes place when two
General persons in their own right are creditors and debtors of each other. As
defendant theorizes, the sugar was shipped to the US for its own account, it
cannot reverse its stand and consider Soriano as its creditor. Even if we
consider soriano as creditor of defendant to the extent of 35,528.01 piculs
of sugar which defendant exported without crediting soriano’s account, the
very act of fault and breach of the crop loan agreement would be the only
reason why soriano would be the creditor of compania general.
Republic vs. With respect to the forest charges, they are in the coffers of the government
Mambulao as taxes collected. The Republic of the Philippines and the Mambulao
Lumber Company are not creditors and debtors of each other.

Article 1281. Compensation may be total or partial. When the two debts are of the same
amount, there is a total compensation. (n)
Total/Partial:
● Total or partial compensation applies to all the different kinds of compensation.
● Total compensation results when the two debts are of the same amount. If they are of
different amounts, compensation is total as regards 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.
Voluntary Compensation
● Art. 1282 is an exception to the general rule that only debts which are due and
demandable can be compensated.
● Parties must have the capacity to dispose of their credits which they compensate,
otherwise, there will be no compensation.
● The requisites mentioned in Art. 1279 do not apply. The only requisites are:
1. Each of the parties has the right to dispose of the credit he seeks to
Mialhe vs.
compensate, and
Manalili
2. They agree to the mutual extinguishment of their credits.
Cases:
Gullas vs. As a rule, a bank has a right to set off the deposits in its hands for the
PNB payment of any indebtedness to it on the part of a depositor. The
relationship existing between a depositor and a bank is that of a creditor
and debtor.
Ong vs. Each one of the obligor be bound principally and that he be at the same
Court of time a principal creditor of the other. Mariano Ong, the private respondent,
Appeals is not a debtor of Fermin Ong, it is only the latter who is
indebted to Mariano Ong. Both debts consist in the sum of money, or if the
things due are consumable, they be of the same kind and of the same
quality, if the latter had been stated. Debts in the case at bar do not both
consist in a sum of money nor are they of the same quality or of the
same kind.
Perez vs. There was no legal compensation since the bills were not yet due and
Court of demandable as of the date of their assignment by MOJICA to MEVER nor
Appeals as of the date of surrender to CONGENERIC; for it to exist, the two debts,
among other requisites, must be due and demandable.
Compensation could not take place in this case because petitioners’ claim
against Halili was still being the subject of court litigation. It is a
requirement, for compensation to take place, that the amount involved be
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 certain and liquidated.
Dalton vs. The consignation made by Dalton is NOT VALID because it did not satisfy
FGR Realty the mandatory requirements of a valid consignation given in the NCC.
Dalton’s failure to notify the respondents regarding the consignation
rendered such INEFFECTIVE/VOID/NOT VALID .
Other kinds of Compensation
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. (n)
Judicial Compensation Based on Judgment:
● If a plaintiff filed a complaint against a defendant for collection of sum of money,
and the defendant has a claim for damages, the claim for damages if properly
pleaded and proven by evidence, will be converted into a liquidated claim payable in
money.
● When the adjudication of the court has become final and executory, assuming the
plaintiff’s claim for collection is justified, there will be a compensation between the
plaintiff’s claim as against the defendant’s claim for damages.
● The compensation retroacts to the date of the filing of the pleading where
compensation was alleged and claimed.
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. (n)
Effect of Subsequent Rescission:
● Until the debts are rescinded, they can be compensated against each other.
● If the debt is rescinded or annulled, the compensation is automatically cancelled and
there shall be restitution of what each party had received before the rescission.
● If the prescriptive period for the rescission or annulment of the debts had already
lapsed, there is automatic compensation and the same will not be disturbed.
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. (1198a)
Assignment of Debts Subject to Compensation:
● When all the requisites of compensation are present, compensation takes effect
automatically ipso jure whether the parties are aware of it or not.
● If after automatic compensation one of the debts is assigned to a third person, the
assignment is ineffective because there is nothing more to assign, except only the
excess amounts.
● Insofar as the excess is concerned, the assignment to 3rd person with the consent of
debtor constitutes subrogation of a third person in the rights of the creditor (Art.
1300)
Exception to the General Rule on Compensation:
● If compensation had already taken place ipso jure, but the parties nevertheless agreed to
waive, or not to pursue their rights under Art. 1290, then the effects will be in accordance
with the ff:
1. Assignment with consent of the debtor – Here, the debtor cannot avail himself
against the assignee, of any defense of compensation which he might have against
the assignor. Exception: If at the time of assignment, the debtor has notified the
assignor the he is reserving his right to the compensation.
2. Assignment made with knowledge but without the consent of the debtor –The
debtor retains his right to invoke against the assignee, the compensation of his debts
which fell due prior to the assignment. Debts falling due after the assignment are not
included.
3. Assignment made without the knowledge of the debtor – The debtor is allowed
by law to set up the compensation of all credits of the creditor prior to the
assignment as well as subsequent ones until the time that the debtor learns of the
assignment. The compensation is set up against the assignee – not against the old
creditor.
Assignment under the Article is Different from Cession under Article 1255:
● Article 1255 refers to cession or assignment of the property of the debtor to his
creditors in payment of his debts. In the present article, the one assigning rights is
the creditor in favor of a third person who need not be a creditor.
Limitation to Assignment of Rights:
● A solidary creditor cannot assign his rights without the consent of the others
Lifted from Vergara’s Reviewer:
Compensation Before Assignment
● When compensation takes effect by operation of law or automatically, the debts
are extinguished to the concurrent amount. If subsequently, the extinguished debt
is assigned by the creditor to a third person, the debtor can raise the defense of
compensation with respect to the debt.
● The remedy of the assignee is against the assignor. Of course, the right to the
compensation may be waived by the debtor before or after the assignment.
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 ● Example: A owes B P3,000.00 due yesterday. B owes A P1,000.00 due also
yesterday. Both debts are extinguished up to the amount of P1,000.00. Hence, A
still owes B P2,000.00 today. Now, if B assigns his right to C, the latter can
collect only P2,000.00 from A. However, if A gave his consent to the assignment
before it was made or subsequently (par. 1), A loses the right to set up the defense
of compensation. So A will be liable to C for P3,000.00 but he can still collect the
P1,000.00 owed by B. In other words, the compensation shall be deemed not to
have taken place.
Compensation After Assignment
1. Assignment with the consent of the debtor –
Example: A owes B P3,000.00 due November 15.
B owes A P1,000.00 due November 15.
B assigned his right to C on November 1 with the consent of A.
On November 15, A cannot set up against C, the assignee, the compensation
which would pertain to him against B, the assignor. In other words, A is liable to
C for P3,000.00 but he can still collect the P1,000.00 debt of B. However, if A,
while consenting to the assignment, reserved his right to the compensation, he
would be liable only for P2,000.00 to C. (par. 1)
2. Assignment with the knowledge but without the consent of debtor –
Example: A owes B P1,000.00 due November 1. B owes A P2,000.00 due
November 10. A owes B P1,000.00 due November 15.
A assigned his right to C on November 12. A notified B but the latter did not give
his consent to the assignment. How much can C collect from B?
B can set up the compensation of debts on November 10 which was before the
cession on November 12. (par. 2) There being partial compensation, the
assignment is valid only up to the amount of P1,000.00. But B cannot raise the
defense of compensation with respect to the debt of A due on November 15 which
has not yet matured. So, on November 12, B is liable to C for P1,000.00. Come
November 15, A will be liable for his debt of P1,000.00 to B.
3. Assignment without knowledge of the debtor –
Example: In the preceding example, let us suppose that the assignment was made
without the knowledge of B who learned of the assignment only on November 16.
In this case, B can set up the compensation of credits before and after the
assignment. The crucial time is when B acquired knowledge of the assignment
and not the date of the assignment. If B learned of the assignment after the debts
had already matured, he can raise the defense of compensation; otherwise, he
cannot.
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. (1199a)
Legal Compensation:
● Legal compensation takes place by operation of law. This rule applies even if the
debts are payable at different places.
● If debts are payable abroad and there is a need to use foreign currency, whoever
claims compensation must shoulder the expenses for the foreign exchange.
● Similarly, expenses for transportation to the place of payment will be borne by the
party claiming Compensation.
● Impliedly, other kinds of expenses incurred by the claiming party shall not be
charged against the other.
Compensation is Ipso Jure; Retroactive:
● Compensation takes effect by operation of law even without the consent or
knowledge of parties concerned as long as all the requisites mentioned are present.
● Compensation when used as a defense, retroacts to the date when all its requisites
are fulfilled.
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. (1200a)
Debts or Obligations not subject to Compensation:
1. Debts or obligations arising from contracts of depositum;
2. Debts arising from obligations of a depositary;
3. Debts arising from obligations of a bailee in commodatum;
4. Debts or claims for support due by gratuitous title.
5. Debts or obligations consisting in civil liability arising from penal offense. (Art.
1288)
6. Debts or obligations due to the government, like taxes, fees, duties, and similar
others.
7. Support in arrears like future support is no longer subject to compensation.
Parties who cannot claim Compensation, Exceptions:
● The parties who are not allowed to claim compensation are the depositary (a person
to whom something is lodged in trust) and bailee (a person to whom goods or
property are delivered for a purpose for example repair, but no transfer of ownership
occurs.)
● The reason for the prohibition is to prevent breach of trust. However, the depositor
and the bailor are allowed to claim compensation against the depositary and bailee
respectively. This is may be called a FACULTATIVE COMPENSATION.
Example: Sofia agreed to keep for safekeeping Elaine’s 100 pieces of 1k peso bills which
are newly printed. Elaine borrowed money from Sofia in the sum of 50k pesos. When
Elaine asks for the return of her 100 pieces, Sofia offers only 50 pieces of the money
claiming partial compensation as Elaine owes her 50k.
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 ● Sofia cannot refuse to return to Elaine the entire 100 pieces. This money is not
subject to compensation because it was specifically entrusted to Sofia for
purposes of deposit.
● However, if Elaine the depositor desires, she may set up compensation against
Sofia in which case Sofia will only owed Elaine 50 pieces of the bills. The
depositor is allowed to claim compensation but not the depositary.
Status of Money Deposited in the Bank
● A deposit of money with a bank is not really a depositum but a loan.
● The relationship of the depositor and the bank is one of creditor and debtor between
whom there can be compensation.
Article 1288. Neither shall there be compensation if one of the debts consists in civil
liability arising from a penal offense. (n)
● Debts arising from crime cannot be compensated by the criminal.
● Compensation is improper because the satisfaction of the obligation arising from
crime is imperative.
● However, the victim is allowed to claim compensation.
Lifted from Vergara’s Reviewer:
When Legal Compensation Not Allowed by Law
1. Where one of the debts arises from a depositum – A deposit is constituted from the
moment a person receives a thing belonging to another with the obligation of safely
keeping it and of returning the same. (Art. 1962)
Example: A owes B P1,000.00. B, in turn, owes A the amount of P1,000.00
representing the value of a ring deposited by A with B, which B failed to return.
In this case, B, who is the depositary, cannot claim legal compensation even if A
fails to pay his obligation. The remedy of B is to file an action against A for the
recovery of the amount of P1,000.00.
The relation of the depositary to the depositor is fiduciary in character since it is
based on trust and confidence. B’s claim for compensation against A would
involve a breach of that confidence.
But A can set up his deposit by way of compensation against B’s credit. This is an
example of facultative compensation. The benefit granted by law is available only
to A, as depositor, and can be waived by him. (Art. 6)
2. Where one of the debts arises from a commodatum – Commodatum is a gratuitous
contract whereby one of the parties delivers to another something not consumable so
that the latter may use the same for a certain time and return it. (Art. 1933)
Example: In the preceding example, if B borrowed the ring of A, B cannot refuse
to return the ring on the ground of compensation because no compensation can
take place when one of the debts arises from a commodatum. The purpose of the
law is to prevent a breach of trust and confidence on the part of the borrower (or
Time When Compensation Takes Effect:
depositary in a depositum). A, however, can assert compensation of the value of
the ring against the credit of B (facultative).
3. Where one of the debts arises from a claim for support due by gratuitous title –
Support comprises everything that is indispensable for sustenance, dwelling, clothing,
medical attendance, education and transportation, in keeping with the financial
capacity of the family. (Art. 194, Family Code).
Examples:
a. B is the father of A, a minor, who under the law is entitled to be
supported by B. Now A owes B P1,000.00. B cannot compensate his
obligation to support A by what A owes him because the right to
receive support cannot be compensated with what the recipient (A)
owes the obligor (B). The right to receive support cannot be
compensated because it is essential to the life of the recipient. However,
if B failed to support A say, for three months, the support in arrears may
be compensated with the debt of A. The reason is that A no longer
needs the support in arrears as he was able to exist even without the
support of B.
b. A donates to B an allowance of P1,000.00 a month for five (5) years for
the latter’s support. However, previous to the donation, B already owed
A P10,000.00 which was due and unpaid. In this case, A cannot say to
B ‘Inasmuch as you owe me P10,000.00, I will not pay your allowance
for ten months.
4. Where one of the debts consists in civil liability arising from a penal offense – If
one of the debts consists in civil liability arising from a criminal offense, compensation
would be improper and inadvisable because the satisfaction of such obligation is
imperative.
Example: A owes B P1,000.00. B stole the ring of A worth P1,000.00. Here,
compensation by B is not proper. But A, the offended party, can claim the right of
compensation. The prohibition in Article 1288 pertains only to the accused but
not to the victim of the crime.
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. (1201)
● It can happen that a debtor may have several debts to a creditor and vice versa.
● Under these circumstances, Articles 1252 to 1254 (application of payments) shall
apply.
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. (1202a)
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 ● When it is a legal compensation, the moment all five requisites become present,
compensation takes place by operation of law, even though the parties are not aware
thereof.
● When the compensation is voluntary, it will take effect from the time or day agreed
upon by the parties. If the compensation is judicial, it will be effective from the
moment the judgment becomes final and executory.
Cases:
Pioneer There is no dispute that the petitioner owes the private respondents the
Insurance vs. amount representing the proceeds of the insurance policy. The contention
Court of of private respondents that the petitioners cannot claim for
Appeals reimbursement because they have not paid Bureau of Customs yet cannot
be maintained since it was ruled in jurisprudence that stipulations in the
indemnity agreement allowing the surety to recover even before it paid
the creditor is enforceable and it has long been settled by courts in the
affirmative. Thus, legal compensation can take place because all
requisites for a valid compensation are present.
Sesbreno vs. Petitioner notified Delta of his rights as assignee after compensation had
Court of taken place by operation of law because the offsetting instruments had
Appeals both reached maturity. It is a firmly settled doctrine that the rights of an
assignee are not any greater than the rights of the assignor, since the
assignee is merely substituted in the place of the assignor and that the
assignee acquires his rights subject to the equities – i.e., the defenses –
which the debtor could have set up against the original assignor before
notice of the assignment was given to the debtor. At the time that Delta
was first put to notice of the assignment in petitioner’s favor on 14 July
1981, DMC PN No. 2731 had already been discharged by compensation.
Since the assignor Philfinance could not have then compelled payment
anew by Delta of DMC PN No. 2731, petitioner, as assignee of
Philfinance, is similarly disabled from collecting from Delta the portion
of the Note assigned to him.
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)
Applicability:
● The article applies to debts or credits and not to property.
● Properties are attached, while a credit on the other hand is garnished.
● The law contemplates a situation where the debtor had been sued by his creditor and
a writ of garnishment was issued by the court enforced against another person who
is the debtor of the defendant- debtor. The debtor of the defendant-debtor, who was
served the notice of garnishment, should not pay the credit garnished to the
defendant-debtor because that credit is now subject to the outcome of the case and is
earmarked for the plaintiff-creditor in case of victory. By the garnishment, the
stranger becomes a forced intervenor. The garnished credit is deemed in custodia
legis. If the forced intervenor violates the writ of garnishment by paying the
defendant-debtor, the payment is not valid. Thus, if the plaintiff- creditor finally
wins the case, he can execute the judgment against the forced intervenor to the
extent of the amount paid.
Example: “A is creditor of B. B is creditor of C. A filed to collect from B. A issued writ of
garnishment against B. Writ was served upon C. C shall not pay to B without consent of A
and the Court. If he does, and A wins the case, A can compel C to pay again the sum
representing the debt garnished.
● In the illustration given above, C may consign (deposit) the money in court for his
own convenience. If this is properly done, he will be freed from further
responsibility.
● An interpleader is not within the ambit of the article.
● An interpleader, a person who possesses a certain property, interest or credit is
confronted by two or more persons laying conflicting claims on the same thing, files
a case against all claimants that the latter may litigate among themselves their
conflicting claims.
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. (1143)
Supra, Extinguishment of Obligation.
EXTINGUISHMENT 6: NOVATION (Arts. 1291-1304, 1215)
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.
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.
Concept:
● Novation is the extinguishment of an obligation by substitution or change of the
obligation by a subsequent one which terminates the first, either by changing the
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 object or principal conditions, substituting the persons of the debtor or subrogating a
third person with the rights of the creditor.
● The animus novandi, whether partial or total, must appear by the express agreement
of the parties, or by their acts that are too clear and unequivocal to be mistaken.
Two-Fold Function of Novation:
1. It extinguishes an obligation
2. Creates a new obligation in lieu of the old one
● If novation is partial, modificatory, or an imperfect one, it will operate
only as a relative extinction.
● Novation need not be absolute, thus the beginning of the article reads
“Obligations may be modified” implying clearly that it may be partial.
● The term principal conditions should be construed to include a change in
the period to comply with the obligation, which change would only be a
partial novation, since the period merely affects the performance, not the
creation of the obligation
As to essence 1. Objective or Real Novation – This is the novation effected by
changing the object or principal conditions of the obligation.
2. Subjective or Personal Novation – This is the novation effected
by either substituting the person of the debtor or subrogating a
third person to the rights of the creditor. The first kind is also
called passive novation and the second active novation.
3. Mixed Novation – This is the novation which arises when there is
a combination of the objective and subjective novations.
As to the form 1. Express – It is express when the parties declared in unequivocal
of constitution terms that the old obligation is extinguished by the new obligation,
the latter thusly superseding the old one.
2. Implied – It is implied when there are no express declarations that
the old obligation is extinguished by the new one. However, the
old and new obligations are incompatible on every material point
such that they cannot co-exist.

Requisites: As to the 1. Total or Extinctive – It is total when the original obligation is

extent of their completely extinguished. The new contract must extinguish the old
1. There must be a previous valid obligation. effects contract. There is no novation when the new contract is not between
○ It cannot be void, as in the eyes of the law, it does not exist. the same parties as in the old contract. Extinctive Novation has four
○ If there is no previous obligation, there is nothing to modify. requisites:
2. There must be an agreement by the parties to extinguish or modify the old a. Existence of a previous valid obligation
obligation, and to create a new one or a modified version. b. Agreement of all the parties to the new contract
3. The validity of the new obligation. c. Extinguishment of the old obligation or contract
d. Validity of the new one
2. Partial or Modificatory – It is partial when the original obligation
Effects of a Valid Novation:
is not totally extinguished but merely modified. Hence, the
● In novation consisting of the substitution of a new debtor, it is not enough to extend
unmodified portion of the obligation remains effective. Novation is
the juridical relation to a third person; It is necessary that the old debtor be released
merely modificatory when the old obligation subsists to the extent it
from the obligation, and the third person or new debtor take his place in the relation.
remains compatible with the amendatory agreement.
● If not, then there is no novation and the third person merely becomes a co-debtor or
a surety.
As to their 1. Legal Novation – Takes place by operation of law such as the
● A novation is not made by showing that the substituted debtor agreed to pay the
origin novations in Arts 1300 & 1302.
debt, it must also appear that he agreed with the creditor to do so.
2. Conventional Novation – This novation takes place by agreement
of the parties. Arts 1300 & 1301.
Defective Obligations and Mere Drafts:
● A void obligation cannot be novated, but a voidable obligation may be novated
before it is annulled. As to the 1. Pure – When the creation of a new obligation is not subject to any
● If the new obligation created is void, there is no novation. The original obligation presence or condition.
will subsist, unless the parties intended that the former relation is extinguished in absence of 2. Conditional – When the creation of the new obligation is subject to
any event.. condition a condition.
● A mere draft of the new contract is not a perfected contract. It cannot supplant the
original contract. Effect of Non-Fulfillment of Condition:
● Neither will a contract not signed by all have any effect. ● If the condition is not fulfilled, there is no novation.
● Failure to comply with a suspensive condition of the novation restores the original
Kinds of Novation agreement.

NOVATION IS NEVER PRESUMED:

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 ● Novation can never be presumed. The intention to novate should be expressly,
clearly and unequivocally declared, or that the terms of the new agreements be
incompatible with the old contract on every point.
● Novation must be clearly proved as a fact either by express stipulation or by
implication derived from an irreconcilable incompatibility between old and new
obligations or contracts on every point.
● Changes that breed incompatibility must be essential in nature and not merely
accidental.
● An agreement subsequently executed between a seller and a buyer that provides for
a different schedule and manner of payment, to restructure the modes of payment by
the buyer so that it could settle its outstanding obligation in spite of its delinquency
in payment, is not tantamount to novation.
● Novation may be a means to avoid criminal liability as long as novation occurs prior
to the filing of the criminal action.
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.
Formalities Required When Novation is Express:
● If done in writing, it is imperative that it be declared in unequivocal terms to avoid
any doubt.
● It is also imperative that the new obligation should expressly declare that the old
obligation is extinguished or that the new obligation is on every point incompatible
with the old one.
● In the absences thereof, absolute incompatibility of the two agreements must be
shown.
Implied Novation:
● It is essential that the old obligation and the new obligation are incompatible in all
material points.
● If there is no incompatibility, there is no novation created.
Test of Incompatibility:
● The test is “Whether the two obligations can stand together.”
● If they cannot, incompatibility arises, in which case the latter obligation novates the
first one.
● Absolute incompatibility must exist, in order to establish novation in the absence of
an express declaration.
● If there is no incompatibility, there is no novation. i.e., a party executed three
successive overdraft obligations which increased the debt, it could not be said that
the third novated the first two.
● If the parties expressly negate the lapsing of the old obligation, there can be no
novation.
Effect of Increasing or Reducing the Term or Period:
● Increasing the term of the obligation will not give rise to novation because of the
absence of incompatibility between the two obligations.
○ Thus, the postponement of the date of payment and the grant of an
extension did not result in novation because the obligations are not
incompatible and there is no change in the obligatory relation of the
parties which altered the essence of the obligation.
● The rule is different if the term is decreased. If the term is reduced, novation arises
because there is now an incompatibility between the old and the new obligations.
● When there is a change not only on the persons of the parties involved but also on
the amount due as well as on the date of maturity of the obligation, it is clear that
there is a novation.
● If there is a novation, the parties shall be governed by their subsequent agreement
which alone can be the basis of any action between them.
● An obligation is not novated by an instrument that expressly recognizes the old one,
changes only the terms of payment, and adds other obligations not incompatible
with the old provisions or where the new contract merely supplements the previous
one.
Examples:
● If a debt subject to a condition is made an absolute one without a condition.
● Reduction of the term or period originally stipulated
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.
Passive Subjective or Personal Novation:
● Consists in the substitution of a new debtor in place of the original debtor with the
consent of the creditor.
● Active subjective novation, on the other hand, consists in substituting a new creditor
in place of the old.
Two forms of Passive Subjective:
1. Delegacion – When the substitution is initiated by the old debtor himself by
convincing another person to take his place and to pay his obligation to the creditor.
Requisites:
a. The substitution is upon the initiative or proposal of the old debtor himself by
proposing to the creditor the entry of another person as the new debtor who will
replace him in the payment of the obligation.
b. The creditor accepts, and the new debtor agrees to the proposal of the old debtor.
c. The old debtor is released from the obligation with the consent of the creditor.
○ If the new debtor in turned out to be insolvent, the creditor is estopped
from going after the old debtor because the old debtor’s obligation has
already been extinguished.
○ Exceptions: If the insolvency of the new debtor was already existing
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 and of public knowledge, or if the old debtor knew that the new debtor
is insolvent when he delegated his debt, the old debtor may still be held
liable.
2. Expromission – When the substitution of the old debtor by a new debtor is upon the
initiative or proposal of a third person. Here, there is an agreement by and among
the old debtor, the new debtor, and the creditor to extinguish the old obligation.
There must be an express and clear agreement that with the entry of the new debtor,
the old debtor is released from the obligation.
Requisites:
1. The substitution is upon the initiative of a third person who will step into the
shoes of the old debtor.
2. The creditor gave his consent to the proposal of the third person.
3. The old debtor must be released from the obligation with the consent of the
creditor.
○ The substitution of the old debtor by a new debtor may be made
without the consent of the old debtor or even against his will. The
consent of the creditor, however, is mandatory.
Rights of the New Debtor:
● If the new debtor has paid the obligation of the old debtor, the former is given the
right to beneficial reimbursement, if payment was made without the old debtor’s
consent or against his will.
● The new debtor is given the right to reimbursement and subrogation if payment as
made with the old debtor’s consent.
Creditor’s Consent:
● Creditor’s consent or acceptance of the substitution of a new debtor may be given at
anytime and in any form whatever while the agreement of the debtors subsists.
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 obligation shall not give rise
to any liability on the part of the original debtor.
Applicability:
● Applies only to expromision where the substitution of the old debtor is upon the
proposal of a third person whose proposal was accepted by the creditor.
● Expromision may be made without the knowledge of the old debtor, or even against
his will.
● If made without consent of the old debtor, he will not be liable in case the new
debtor becomes insolvent.
● But if made with his consent, the old debtor will be made liable to avoid unjust
enrichment.
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 he delegated his debt.
Applicability:
● Applies only to delegacion where the substitution of the old debtor is upon the
proposal of the old debtor himself and the proposal was accepted by the new debtor
and the creditor.
Effect of Insolvency of New Debtor:
● If the new debtor is insolvent, old debtor will not be liable anymore because the
obligation is already extinguished. However, if the insolvency was already existing
and is of public knowledge when the debt was delegated to the new debtor, or if the
insolvency of the new debtor was already existing and known to the original debtor
at the time of the obligation of the debt to the new debtor, the old debtor is liable.
● Thus, if the insolvency was not existing at the time of the delegation of the debt, or
even if it was but it was not of public knowledge, or the same is not known to the
original debtor, the latter has no more liability to the creditor. The obligation of the
original debtor had already been extinguished by the novation.
When Delegacion does not give rise to Novation:
1. When the third person acted merely as a surety or guarantor for the original
debtor
2. When the third person is merely an agent of the debtor
3. When the new debtor merely agreed to assume a joint responsibility for the
obligation.
● The delegacion is only with reference to the proportionate share.
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.
Extinction of the Principal, Effect on Accessories:
● General Rule: Extinguishment of principal carries with the extinction of the
accessory.
● Exception: Accessories may subsist only insofar as they benefit third persons who
did not consent.
● If the contract contained a stipulation in favor of the third party, the beneficiary who
did not consent may demand the accessory obligation. If he consented, he cannot
make a demand anymore.
● Article does not apply to novations by the subrogation of a third person in the rights
of the creditor.
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Example: A owes B P2,000.00 with interest at 14%. B owes C P280.00. It was agreed
among the parties that A would pay the interest of P280.00 to C. In this case, besides the
principal obligation of A, there is a stipulation in favor of C, a third person. (Art. 1311, par.
2) Later on, A and B executed another contract whereby they agreed that A would deliver to
B a television set in payment of the loan.
In spite of the novation, the accessory obligation to pay the interest of P280.00 to C still
subsists unless C gives 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.
Effect of Invalidity of New Obligation:
● If the new one turns out to be void, it follows that there is no new obligation to
supersede the old obligation. Corrolarily, the original obligation shall continue to
subsist.
● Exception: If the parties have agreed that the old obligation shall nevertheless be
extinguished even if it turns out that the new one is invalid, then this is tantamount
to waiver or remission of the obligation.
● Example: Pio, a well known movie director owes Regal films a sum of money.
Because Pio could not pay the amount, he proposed to direct a particular film for
Regal films in settlement of his obligation. The film involves rebellion, and before
the film could be directed, a law was passed prohibiting the production of such
movies. The new obligation having become legally impossible is now void and the
old obligation subsists.
Effect of New Obligation which is merely Voidable:
● When the obligation is merely voidable, that is, it is valid and binding until annulled,
the obligation is novated.
● However, once it is annulled, the old obligation will subsist and the novation will be
set aside.
● If the parties agree otherwise, that the old obligation would still be extinguished in
any event, then the old obligation shall not subsist.
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.
Effect of Invalidity of the Old Obligation:
● If it is the old obligation which is void, there is nothing to novate. So the new will
also be void.
● The action to set aside a void contract is an action for declaration of nullity, while an
action to set aside a voidable contract is referred to as an action for annulment.
● There is a contradiction in the words used in the article because a void contract is
not susceptible of annulment or ratification. The solution is that the first portion
should apply only to void obligations, and the second portion to voidable
obligations.
Effect of a Voidable New Obligation:
● If the new obligation is voidable, it is valid and binding upon the parties until
annulled.
● Once annulled, whatever has been novated shall be set aside.
Effect of a Voidable Old Obligation:
● If the old obligation, being the voidable one, was ratified before it could be annulled,
then it can be the subject of novation.
● However, if it was already annulled, it ceases to exist and there is nothing to novate.
Rule in Prescribed Debts:
● An obligation which had not been enforced within the prescribed statute of
limitations is considered to have prescribed. That is, it cannot be enforced anymore
in court.
● Nonetheless, it has been reduced to a natural obligation such that when one pays, the
payment will be valid. As a prescribed debt constitutes a moral or natural obligation,
it can be the cause or consideration for a new obligation in novation.
Examples:
a. S agreed to deliver prohibited drugs to B. Later on, it was agreed that S would pay B
P100,000.00 instead of delivering the drugs. The novation is void because the original
obligation is void.
b. Suppose S was induced through fraud committed by B to sign a contract whereby S
obliged himself to deliver a specific car to B. Subsequently, it was agreed between S
and B that S would give B P100,000.00 instead of the car. The original obligation of S
is voidable. As it has not yet been annulled at the instance of S (see Art. 1397), the
second contract is valid.
c. In the same example, if S subsequently confirmed his obligation to deliver the car and
the right of B thereto, his ratification cleanses the contract from all its defects (Art.
1396) and makes it valid and, therefore, the novation is also valid.
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.
Applicability:
● Applies only to cases of original obligations subject to conditions, whether
suspensive or resolutory.
Effect of the existence of Conditions in the Original Obligation on the New one:
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 ● In the absence of any contrary stipulation, the conditions attached to the original ● Voluntary subrogation must be clearly established with sufficient evidence.
shall also be considered as attached to the new obligations.
● Example: Naomi promised Alexandra with a building which could be converted into
a hospital, provided that Alexandra shall become a licensed doctor of medicine. ARTICLE 1301. Conventional subrogation of a third person requires the consent of the
Shortly thereafter, the parties agreed that instead of a building, Naomi will just give original parties and of the third person.
Alexa his resthouse in Baguio City. The second agreement did not make any
stipulation on the nature of the condition. The giving of the rest house is Conventional Subrogation - In conventional subrogation, the consent of all the parties is an
nevertheless subject to the same condition, that Alexa shall become a licensed essential requirement.
doctor of medicine. 1. The debtor – because he becomes liable under the new obligation to a new creditor.
2. The old or original creditor – because his right against the debtor is extinguished.
ARTICLE 1300. Subrogation of a third person in the rights of the creditor is either legal or 3. The new creditor – because he may dislike or distrust the debtor.
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. Notes:
● In the absence of consent of all the parties, no subrogation will result.
● Assignment of rights is not subrogation.
● Active subjective novation is stricter than passive subjective novation because in the
latter, the consent of the old debtor is not even required in expromission.
Concept
● Subrogation is the active subjective novation characterized by the transfer to a third
person of all the rights appertaining to the creditor in the transaction concerned Basis Conventional Subrogation Assignment of Credits/Rights
including the right to proceed against the guarantors or possessors of mortgages, and
similar others subject to any applicable legal provision or any stipulation agreed Effect Extinguishes the original The transfer of the credit/right does not
upon by the parties in conventional subrogation. obligation and creates a new extinguish or modify the obligation. The
● It is the transfer of the credit of the creditor arising in a transaction, to a third person one. transferee becomes the new creditor for
with all the rights appertaining thereto, either against the debtor or against the third the same obligation.
persons.
● Rationale: Equity. It is designed to promote and to accomplish justice and is the Need for The consent of the debtor is The consent of the debtor is not
mode which equity adopts to compel the ultimate payment of a debt by one who in consent of necessary including the other necessary, notification is enough for the
justice and good conscience ought to pay. Debtor original parties. validity of the assignment.
● Limitation: A subrogee cannot succeed to a right not possessed by the subrogor.
Effectivity Effectivity begins from the Effectivity begins from the notification
moment of subrogation. of the debtor.

Kinds of Subrogation (Active Subjective Novation): Curability of The defect in the old The defect in the credit or rights is not
defect or vice obligation may be cured such cured by its mere assignment to a third
As to creation 1. Legal Subrogation – This is the subrogation that takes place by that the new obligation person.
virtue and operation of law (Art. 1302) becomes valid.
2. Voluntary or Conventional Subrogation – This is the
subrogation created by the agreement of the parties.
ARTICLE 1302. It is presumed that there is legal subrogation:
As to their 1. Total Subrogation – This is the subrogation where the credit or 1. When a creditor pays another creditor who is preferred, even without the debtor’s
extent rights of the creditor in the transaction are totally transferred to the knowledge;
third person. 2. When a third person, not interested in the obligation, pays with the express or
2. Partial Subrogation – This is the subrogation where only a part of tacit approval of the debtor;
the credit or rights of the creditor in the transaction are transferred 3. When, even without the knowledge of the debtor, a person interested in the
to the person. fulfillment of the obligation pays, without prejudice to the effects of confusion as
to the latter’s share.
Proving the Existence of Subrogation:
● Legal subrogation is not presumed except in the cases mentioned in article 1302.
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Legal Subrogation Not Presumed:
● Legal subrogation is subrogation by operation of law.
● Generally, it is not presumed, unless there is a specific law providing for it.
Three Exceptions:
First Presumption:
● The payment is made by a creditor to another who is preferred, meaning,
one who enjoys priority of payment under the rules on preference of credits.
● The rule in Articles 1236 and 1237 referring to payments made by a third person
in behalf of the debtor does not apply in the first exception.
Example: Isabel borrowed money from Lea and Bianca in the sum of 100 and 50 pesos,
respectively. Isabel’s loan from Lea is secured by a real estate mortgage, while Isabel’s loan
from Bianca is unsecured. Without the knowledge of Isabel, Bianca paid Lea all the
obligations of Isabel. By this development, Bianca becomes a mortgage creditor of Isabel at
the same time an ordinary creditor insofar as the 50 pesos is concerned. There is now a
presumption that there is legal subrogation. Wherewith, Bianca can collect from Isabel and
if the latter failed to pay the mortgage obligations, Bianca can foreclose the mortgage. From
the proceeds of the foreclosure sale, Bianca’s credits shall be paid.
Second Presumption:
● A person not interested in the fulfillment of the obligation is someone who is
not a party to the obligation or contract. A person interested in the
fulfillment is someone connected to the obligation like a guarantor,
co-debtor, or somebody who has a right on the property under consideration.
● When a third person without interest in the obligation pays the obligation of the
debtor, with the consent of the latter, he is entitled not only to be reimbursed for
what he had paid but is also subrogated in all the rights of the creditor.
● If the third person made the payment without the consent of the debtor, the
former has no right to be subrogated in all the rights of the creditor. He can only
demand reimbursement for what he had paid and only to the extent of the benefit
enjoyed by the debtor (Art. 1236-37)
Example: Camila borrowed money from Meg. The loan is secured by a real estate
mortgage. Sofy paid all the obligations of Camila with the consent of the latter. The result
of the consented payment is the subrogation of Sofy into all the rights of Meg. Sofy may
foreclose the mortgage if the mortgage obligations are not paid when they become due.
Continuing from the above, if the payment was made by Sofy without the consent of
Camila, Sofy cannot be subrogated into the rights of Meg. This time, Art. 1236 applies.
Third Presumption:
● In the third exception, the one who pays the obligation is someone interested
in the fulfillment of the obligation like a surety or guarantor.
● Payment may be done without the knowledge of the debtor. Legal subrogation
operates.
● The co-debtor or guarantor is placed in the position of the old creditor.
● Subrogation contemplates full substitution such that it places the party subrogated
in the shoes of the creditor, and he may use all means which the creditor could
employ to enforce payment.
● Rule In Case A Solidary Debtor Pays: If the payor is a solidary debtor, once the
full payment is made the entire obligation is extinguished. Hence, there is nothing
more to subrogate. The payor cannot step into the position of the creditor because
he cannot enforce against his co-debtor’s the payment of the original obligation.
Example: Suppose in the same example, C is the guarantor of A. C is a person interested in
the fulfillment of the obligation of A as he would be benefited by its extinguishment. If C
pays B, even without the knowledge of A, C is subrogated in the rights of B. Confusion
takes place in the person of C. Hence, the guaranty is extinguished but the principal
obligation still subsists. (Art. 1276)
A and B are joint debtors of C for the amount of P1,000.00. Without the knowledge of A, B
pays the debt of P1,000.00. In this case, B becomes a creditor of A for P500.00, the latter’s
share of the debt but not for the remaining P500.00, the portion of the debt which
corresponds to B, which is extinguished by confusion or merger of rights.
ARTICLE 1303. Subrogation transfers to the person subrogated the credit with all the
rights thereto appertaining, either against the debtor or against third persons, be they
guarantors or possessors of mortgages, subject to stipulation in a conventional subrogation.
Effect:
● Article applies to both legal and voluntary subrogations. Once subrogation takes
effect, the credit of the creditor as well as all the rights appurtenant thereto like
guaranty are transferred. However in conventional subrogation, parties may stipulate
on the extinguishment of the accessories.
● Example: Bea borrowed money from Nica. Monique stood as guarantor for the
obligation of Bea. Nicole, a stranger to the contract, paid the obligations of Bea with
the latter’s consent and that of Monique, the guarantor. If Bea could not pay the
obligation to Nicole, who has been subrogated in the place of Nica, Nicole could
proceed against Monique, the guarantor. The reason is that the guaranty subsists in
the absence of a contrary agreement.
● If the credit transferred to the new creditor is subject to a suspensive condition, the
credit cannot be collected until after the fulfillment of the said condition.
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.
Rule of Preference In Case Of Partial Subrogation:
● There is partial subrogation when the credit had not been entirely subrogated.
● It arises when a third person makes partial payment only to the creditor leaving the
remainder of the credit as subsisting.
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 ● There being two creditors, there may arise in conflict of interests when the payment
made is not enough to cover the two credits, in which case, the law states, the 1. Principal creditor and debtor of each other.
original creditor shall be preferred to the new creditor. 2. Both are sums of money or consumable things of the same kind and same quality
● The preference granted to the original debtor applies only to assets in the possession if stated.
of the debtor. It cannot be exercised against assets already transferred to other 3. The two debts are due.
persons. 4. Liquidated and demandable.
● Example: Joyce borrowed money from Hazel in the sum of 10 pesos. Kim, a 5. No retention or controversy commenced by 3rd parties.
stranger, paid Hazel the sum of 5 pesos leaving a balance of 5 pesos in the original
obligation. The payment made by Kim is with the consent of Joyce and Hazel. When ● If all the 5 requisites are present, legal compensation takes place such that there is
the obligation matured, due to a bad choices, Joyce has only 7 pesos. By the rule of no more obligation to speak of.
preference, Hazel will be paid 5 pesos in full, and Kim will be paid only 2 pesos. ● When the amounts of the two obligations are not the same, there is partial
compensation for the concurrent amounts between the principal creditor and
principal debtor. (Ex. Debts due and demandable are 100 and 50 - compensation
Class Notes will only be up to the amount of 50)

Condonation, Confusion, Compensation Compensation v. Offset

Condonation - essentially gratuitous and requires acceptance of the obligor. It takes the
form of donation, hence, there has to be a form of acceptance. Compensation (Total Or Partial Legal Offset
● Gratuitous Or Voluntary)
● Acceptance required
● Express or implied Art. 1281. Compensation may be total or If one of the parties to a suit over an
● Not inofficious - the creditor must reserve sufficient means for his own support partial. When the two debts are of the obligation has a claim for damages against
and of all relatives who are entitled to be supported by him at the time of the same amount, there is a total the other, the former may set it off by
acceptance of the condonation or remission (Art. 750 and 752). compensation. proving his right to said damages and the
amount thereof. (Art. 1283)
Implied Condonation Art. 1282. The parties may agree upon the
compensation of debts which are not yet
Implied Presumptions due.

Delivery of a private document Accessory obligations deemed condoned You don't have to do anything, by There has to be active defense whereby
evincing a credit whenever principal obligations are condoned operation of law (when 5 elements are one party to a suit over an obligation will
(Art. 1273) present), such extinguishment is triggered have to assert and say, quits na tayo dito.
Presumption of voluntariness by when 5 elements are present That’s why an offset requires that
the creditor (1271-72) Pledge of a thing deemed remitted when the thing participation of one of the parties unlike in
pledged is found in the possession of debtor or legal compensation, there is no need.
the owner of the thing (1274)
Is writing-off a loan equal to a condonation or release of a debt by the creditors?
● Writing off the loan, not necessarily condonation.
Note: If the debtor already has the private document that indicates that debtor is indebted to ● Writing off is more of an accounting procedure to help accountants. There is no
the creditor, that is considered as an implied condonation. condonation if there is no acceptance. In writing off, just putting in the books,
a. Express - need instrument. there is no notice to the debtor. more on accounting entry. So neither offset nor
b. Implied - need conduct and presumption in your favor. condonation.
● Writing-off a loan - not necessarily condodation. This only an accounting
One thing to remember: ART. 1270! procedure. There is no notice on the debtor. It is only an accounting entry.
● No condonation when there is no acceptance by the debtor.
Confusion - 1 credit that goes around and merges into 1 person.
● In general, total extinguishment of obligation. When can there be no compensation?
● Depositary, bailee, and support
Legal Compensation; Requisites: (SBM: Memorize this)

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 ● A contract cannot be confined to a meeting of the minds between two persons,
Novation otherwise if the number of persons exceed two then the article would no longer
Expromission Delegacion cover them.
● A party in a contract may refer to one or more persons. There may be more than two
1. The initiative must come from a 1. The initiative comes from the parties in a contract, and each party has a separate individuality which may
third person who will be the new old debtor constitute two or more persons.
debtor 2. All the parties concerned must ● The definition covers only the performance side of the obligation by one party, it
2. The new debtor and the creditor consent or agree failed to include cases of mutual or reciprocal prestation where both parties have to
must have consent 3. The older must be released from perform for each other.
3. The old debtor must be excused the obligation. ● It also failed to include obligations not to do
or related from his obligation
Suggested Definition:
● It is a meeting of the minds between two or more parties, whereby one party binds
Class Recit: Suppose that under an obligation imposed by a final judgment, the liability of himself with respect to the other, or where both parties bind themselves reciprocally,
the judgment debtor is to pay the amount of P6,000 but both the judgment debtor and the in favor of one another, to fulfill a prestation to give, to do, or not to do.
judgment creditor subsequently entered into a contract reducing the liability of the former
to only P4,000. Is there an implied novation which will have the effect of extinguishing the
judgment obligation and creating a modified obligatory relation? Reasons. Three Stages in the Making of a Contract:

Is there an implied novation which will have the effect of extinguishing OR (NOT
AND) creating a modified obligatory relation.
Words and phrases that will give rise to your answer: subsequently entered into a contract
(capacity and consent)
New agreement extinguished the old agreement. New one is incompatible and
irreconcilable. Price of P6k yo P4k.
Sir: I can just modify the object, object benign the payment of sum of money.
Not about express or implied more on did it extinguish or did it modify? This is
implied novation. But the question now, did it extinguish or did it modify?
Extinguish - because the first one is by judgment and the latter one was by agreement or
contract. Obviously there is a modification as to the amount but the phrase “subsequently
entered into contract” show second obligation arises from the contract. The agreement by
parties extinguished the obligation imposed by the court by final judgment.
Implied novation that extinguishes the obligation. Key words are “obligation imposed by
final judgment” “subsequently entered into contract” – different na.
CONTRACTS
Definition (Arts. 1305, 1491, 1646, 1890)
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.
1. Conception or Generation – The first stage, where parties begin their initial
negotiation and bargaining for the formation of the contract ending at the moment
of agreement of the parties. Also called preparatory stage.
2. Perfection or Birth – The second stage where the contract is said to have been
born. Here, the parties had a meeting of minds as to the object, cause, or
consideration and other terms and conditions of the contract. It has passed the
preparatory stage.
3. Consummation or Fulfillment – This is the last stage which consists in the
performance or fulfillment by the parties of their obligations under the terms of
the perfected contract. Consummation is accomplishment, death or termination of
the contract. The parties ceased to be contractually related to one another.
Basic Legal Principles Governing Contracts:
1. Freedom to Stipulate (Autonomy) – the parties are free to create or establish
stipulations, clauses, terms and conditions as they may deem convenient provided
these are not contrary to law, morals, good customs, public order, or public policy.
2. Obligatory force of contracts – obligations arising from contracts have the force of
law between the contracting parties and should be complied with in good faith.
3. Mutuality of contracts – a contract binds both contracting parties and its validity or
the compliance cannot be left to the will of only one party.
4. Relativity of contracts – contracts take effect only between the parties, their assigns
and heirs except where the rights and obligations arising from the contract are not
transmissible by their nature, by stipulation, or by law.
5. Perfection by mere consent of consensual contracts (Consensual)– consensual
contracts are perfected by mere consent.

Definition Given is Inaccurate:

ARTICLE 1491. The following persons cannot acquire by purchase, even at a public or
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 judicial auction, either in person or through the mediation of another:
(1) The guardian, the property of the person or persons who may be under his guardianship;
(2) Agents, the property whose administration or sale may have been intrusted to them,
unless the consent of the principal has been given;
(3) Executors and administrators, the property of the estate under administration;
(4) Public officers and employees, the property of the State or of any subdivision thereof, or
of any government-owned or controlled corporation, or institution, the administration of
which has been intrusted to them; this provision shall apply to judges and government
experts who, in any manner whatsoever, take part in the sale;
(5) Justices, judges, prosecuting attorneys, clerks of superior and inferior courts, and other
officers and employees connected with the administration of justice, the property and rights
in litigation or levied upon an execution before the court within whose jurisdiction or
territory they exercise their respective functions; this prohibition includes the act of
acquiring by assignment and shall apply to lawyers, with respect to the property and rights
which may be the object of any litigation in which they may take part by virtue of their
profession;
(6) Any others specially disqualified by law.
ARTICLE 1646. The persons disqualified to buy referred to in articles 1490 and 1491, are
also disqualified to become lessees of the things mentioned therein.
ARTICLE 1890. If the agent has been empowered to borrow money, he may himself be
the lender at the current rate of interest. If he has been authorized to lend money at interest,
he cannot borrow it without the consent of the principal.
FUNDAMENTAL CHARACTERISTICS/PRINCIPLES
Fundamental Characteristics/Principles:
1) Consensuality (Arts. 1305, 1317 Contract of Adhesion)
2) Obligatory Force (Arts. 1159, 1315-1316, 749)
3) Autonomy (Arts. 1306, 1799, 2088, 2130)
4) Relativity of Contracts — Arts. 1311-1314, 1177-1178, 1381(3) Privity of
Contracts
5) Mutuality (Arts. 1308-1310, 1182)
Consensuality (Arts. 1305, 1317 Contract of Adhesion)
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.
supra, Contracts intro
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.
Contracting in the Name of Another Person; Requirements:
● A person who contracts in the name of another person must comply with any of the
following:
1) He must have the authority to contract in the name of the other person
2) He has a right to represent the latter under the law such as a duly
appointed guardian with respect to his ward.
● In case of non-compliance with any of the above conditions, the contract is rendered
an unenforceable contract, one which cannot be enforced in court.
Unenforceable Contracts Are New in the Civil Code:
● A new class of defective contract is to a certain extent created by various decisions
of the Supreme Court.
● The term unenforceable is used as distinguished from voidable. The latter are
binding, unless annulled while the former cannot be sued upon or be enforced,
unless they are ratified.
● Voidable contracts are farther away from absolute nullity than unenforceable
contracts.
● In other words, an unenforceable contract occupies an intermediate ground between
a voidable and a void contract.
Ratification of the Unenforceable Contracts Under the Article is Allowed:
● The contracts referred to in the article are susceptible of ratification expressly or
impliedly.
● It is express when the confirmation of the act is done for instance in a sworn
statement where the party explicitly states that he gave his consent to the contract.
● It is implied when the confirmation can be deduced from the acts of the party in
whose behalf the contract was entered into. i.e., receiving benefits from the
unauthorized contracts.
Effect of Ratification:
● Ratification validates the act. It purges the contract of its defect from the moment it
was constituted and not from the time of ratification.
● Example: A contract entered into without authority in the name of a minor may be
ratified by him hen he reaches the age of majority.
Liability of the Person who contracted without Authority:
● The person who contract in the name of another without authority shall be liable for
damages to the party with whom he dealt with.
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Availability of Ratification:
● Ratification may be effected only before the contract had been revoked by the other
contracting party. Once it has been revoked, there is nothing more to ratify.
Cases
Rallos v. Go Under Art. 1931, an act done by the agent after the death of his principal is
Chan valid and effective only under two conditions, viz: (1) that the agent acted
without knowledge of the death of the principal and (2) that the third
person who contracted with the agent himself acted in good faith. These
two requisites must concur the absence of one will render the act of the
agent invalid and unenforceable. In this case, the agent, Ramon, executed
the sale notwithstanding notice of the death of his principal Accordingly,
the agent's act is unenforceable against the estate of his principal for having
acted without authority.
United Through Liboro’s endorsement, NAMARCO’s former Board of Directors,
Namarco v. in its Resolution No. 14, was able to clarify and give proper authority on
NAMARCO the Contract of Sale in favor of the Federation.
Aside from that, NAMARCO’s acceptance of the benefits (e.g. 5%
mark-up) under the Contract of Sale constitutes an implied ratification by
its Board of Directors of the contract in question.
The ratification cleanses the contract of any defect; in this case, through
ratification, the necessary consent and authority was subsequently given.
(The acceptance of benefits and Resolution No. 14 are the ratification in
this case.)
Obligatory Force (Arts. 1159, 1315-1316, 749)
ARTICLE 1159. Obligations arising from contracts have the force of law between the
contracting parties and should be complied with in good faith.
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.
Applicability of the Article, and Responsibilities of the Parties:
● Refers to consensual contracts which are perfected by mere consent.
● From the moment of perfection of the contract, the parties are bound to fulfill what
has been expressly stipulated in the contract.
● Their responsibility extends to all consequences which are the natural effects of the
contract taking into consideration its real objects, purposes, or aims, and other
related things in keeping with the law, good faith, and usage.
● Impliedly, at any time prior to the perfection, unaccepted offers and proposals
remain as such and cannot be considered as binding commitments; hence not
demandable.
● In the absence of agreement or mutual assent of the parties, there can be no contract.
Once Perfected, a Consensual Contract cannot be Disregarded:
● In one case, AFP occupied a lot and agreed to pay the owner. The owner accepted
the offer. However, there was a change in the Chief-of-Staff and the new Chief
refused to sign the papers for payment on the ground that the owner is entitled to a
lower amount. The contract has already been perfected previously, and the amount
cannot now be changed.
Case:
Luxuria Can the petitioners be compelled to execute a contract on the basis of a
Homes v. written authorization by Posadas? - NO. Since there was no perfected
CA management contract and also considering that the parties are no longer in a
harmonious relationship, the Court finds no cogent reason for the execution
of a contract to develop a subdivision. The authorization letter is nothing
more than a “to-whom-it-may-concern” authorization letter to negotiate with
the squatters. Although it appears that there was an agreement for the
development of the area, there is no showing that same was ever perfected
and finalized.
ARTICLE 1316. Real contracts, such as deposit, pledge and commodatum, are not
perfected until the delivery of the object of the obligation
Perfection of Real Contracts:
● Article refers to real contracts which require delivery of the object for their validity,
in addition to the presence of the other essential elements of a contract: consent,
subject matter, and cause or consideration.
● Real contracts are perfected from the moment of delivery of the object of the
obligation. A contract of carriage is also a real contract. A loan contract is also a real
contract perfected upon delivery of the object.
Reason why Delivery is Required:
● Delivery is necessary because without the object, the other party cannot exercise his
duties under the contract. To illustrate: in a contract of deposit, the depositary cannot
comply with his obligation to keep the property safely without the thing having been
placed first in his possession. Delivery is therefore an essential requisite for the
perfection of real contract of deposit. The same applies to pledge or commodatum.
Agreement to Enter into Real Contract Distinguished from the Real Contract Itself:
● There can be a contract to make a deposit, pledge, etc. This is consensual. It is
perfected upon the meeting of the minds of the parties. However, once the object has
been delivered, the contract is converted into a real contract.
Solemn Contract
ARTICLE 749. In order that the donation of an immovable may be valid, it must be made
in a public document, specifying therein the property donated and the value of the charges
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 which the donee must satisfy.
The acceptance may be made in the same deed of donation or in a separate public
document, but it shall not take effect unless it is done during the lifetime of the donor.
If the acceptance is made in a separate instrument, the donor shall be notified thereof in an
authentic form, and this step shall be noted in both instruments.
Autonomy (Arts. 1306, 1799, 2088, 2130)
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.
Principle of Free Stipulation:
● By this principle, parties have the right to negotiate and agree on any stipulation.
● The right is guaranteed under the constitution, so the right of stipulation is both a
statutory and a constitutional right.
LIMITATIONS OF CONTRACT:
● Freedom to stipulate is not an absolute right.
● The stipulations must not be contrary to law, morals, good customs, public order,
or public policy.
a. Limitations by Law – Existing law enters into and forms part of a valid contract
without the need for the parties expressly making reference to it. Acts contrary to
mandatory and prohibitory law are void except when the law itself authorizes
their validity. Violation of directory and suppletory laws do not make the act
void. i.e., a stipulation which deprives a court of jurisdiction is void.
b. Limitations by Morals – Morals referred to are those moral principles which are
incontrovertible and accepted universally. They must have social and practical
recognition. A full understanding of the Ten Commandments of God provides the
perfect and immutable standard for determining what is good and what is evil.
i.e., a contract where a man and a woman would get married but the woman
would be paid for entering into the relationship is void.
c. Limitations by Good Customs – Good customs refer to the generally accepted
principles of morality which have received some social and practical recognition
in the community for a long period of time. Thus, all contracts which have their
aims for immoral purposes are against good customs. Good morals and good
customs overlap each other, though sometimes they do not. i.e., a contract of
marriage with someone only for the purpose of economic gains since the other
spouse is very rich is contrary to good customs. Providing a penalty if one of the
parties would back out from his/her promise to marry is against good customs.
d. Limitations by Public Order – Public order refers only to public safety of the
people which includes the maintenance of peace and order both in the entire
country and in a particular community. i.e., a contract for importation of piranhas
is void for being contrary to public safety.
e. Limitations by Public Policy – Public policy is the public, social, and legal
interest in private law. It is a principle which restricts freedom of contract for the
good of the public. In the constitution, there is a declaration on the public policies
of the state, and a stipulation against these would be a stipulation against public
policy. A contract is contrary to public policy if it has a tendency to injure the
public, is against the public good, or contravene some established interest of
society, or is inconsistent with sound policy and good morals, or tends clearly to
undermine the security of individual rights. i.e., a stipulation exempting a carrier
from liability for its gross negligence, a stipulation in a contract surrendering
one’s right to vote and to run for public office.
Validity of Contracts, to be Sustained:
● When the stipulations are not against any of those mentioned above, the validity of
the contract must be sustained. Some examples of valid stipulations are as follows: a
stipulation that the mortgage debt shall not be paid during the war, a stipulation that
if the debtors could not pay, they would mortgage their land to the creditor, etc.
These are valid stipulations.
Cases:
Azcuna Jr. The freedom of the contracting parties to make stipulations in their contract
v. CA provided they are not contrary to law, morals, good customs, public order or
public policy is so settled, and the Court finds nothing immoral or illegal
with the indemnity/ penalty clause of the lease contract.
Manila Bay The Court held that it is within the right of the Sabenianos to rescind the
Club v. CA contract in view of the principle that contracts are considered as the law
between the parties and also the “Freedom to Contract” doctrine providing
for the power of the parties to establish such stipulations, clauses, terms and
conditions as they may want to include subject to the condition that they
should not be contrary to law, morals, good customs, public policy or public
order.
De Leon v. The court held that “relations” pertain to all kinds of relations, both marital
CA and property. Since the Letter- Agreement is premised on the termination of
either or both the marital or property relationship, it is void. Marriage is not
a mere contract but a sacred social institution.
Batarra v. A promise of marriage based upon carnal knowledge is an unlawful and
Marcos immoral consideration and no action can be maintained against Marcos by
Batarra who was already over 23y/o and deemed to have voluntarily
participated in the act. Both parties were at fault.
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 Cui v. To be able to take the bar examinations, receipt of scholarship grants,
Arellano Plaintiff Cui tried to secure his TOR from his previous school. School
Univ refused to issue his TOR unless he paid them back the fees corresponding to
his previous scholarships to ensure payment, Cui was made to sign a
contract of waiver which states he waives his right to transfer to another
school until he refunded his scholarship fees to Arellano.
Contract is not valid since scholarships are grande in recognition of merit
not to keep outstanding students in school to bolster its prestige. The
contract of waiver was contrary to public policy, and hence, null and void.
Awarding scholarships to attract students and to keep them in school is not
good customs.
Ferrazzini A provision in their contract states that once his employment is terminated,
v. GSell he cannot work anywhere in the Philippines for the next 5 years after his
termination. SC ruled that such stipulation is an undue and unreasonable
restraint of trade and therefore against public policy. It would force
Ferrazzini to leave the Philippines in order to seek employment if ever Gsell
decides not to allow him to work here. It was stated that Public Policy is the
principle under which freedom of contract or private dealing is restricted by
law for the good of the public.
Omico The contract of professional services entered into between private
Mining v. respondent and the petitioners, while the former was still a judge of the
Vallejos Court of First Instance, constituted private practice of law and in
contravention of the express provision of Section 35 of Rule 138 of the
Revised Rules of Court.
The aforesaid contract is void because a contract, whose cause, object or
purpose is contrary to law, morals, good customs, public order or public
policy, is considered inexistent and void from the beginning.
ARTICLE 1799. A stipulation which excludes one or more partners from any share in the
profits or losses is void.
ARTICLE 2088. The creditor cannot appropriate the things given by way of pledge or
mortgage, or dispose of them. Any stipulation to the contrary is null and void.
Pactum Commisorium - void.
ARTICLE 2130. A stipulation forbidding the owner from alienating the immovable
mortgaged shall be void.
Relativity of Contracts — Arts. 1311-1314, 1177-1178, 1381(3) Privity of Contracts
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.
Principle of Relativity of Contracts or Principle of Limited Effectivity:
● One of the characteristics of contracts is that they are binding or effective only
between the contracting parties, their assigns, and heirs. This is the principle of
relativity.
● It is understood that the rights are transmissible because if they are not, then they
only bind the actual parties in the contract.
● Assigns and heirs are thus excluded when the right or obligation is personal to the
party, such as the right to receive support. This is the principle of limited effectivity.
If the recipient dies, his heirs cannot continue with it as recipients.
Test to Determine Transmissibility of Rights:
● Rights which are intransmissible are purely personal rights, either by provisions of
law or by its nature.
● A good measure for determining whether a contract terminates upon the death of
one of the parties is whether it is of such a character that it may be performed by the
promissor’s personal representative.
● Contracts which cannot be performed by anyone else are discharged by the death of
the promissory.
● Conversely, when the service or act may be performed by another, death does not
terminate the contract.
Exceptions to the Principle of Relativity:
1. If the obligation is by their nature, not transmissible such as personal obligations.
i.e., obligation to give support.
2. If by stipulation of the parties, the obligation shall be performed only by the party
himself.
3. If under the provision of law, the obligation is intransmissible. i.e., obligations
arising from a contract of partnership.
Third Persons are not Bound in Contracts Where they did not Participate:
● Those who did not participate in the contract are not bound thereby.
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 ● In compromise agreements, a judgment based on a compromise agreement is
binding only on the parties to the compromise the court approved, and not upon the
parties who did not take part in the compromise agreement.
Exceptions to Third Persons not being Bound:
1. When there is a stipulation in favor of a third person who accepted the benefit
before the contract had been revoked. This is also known as “stipulation pour
autrui.”
2. A lessor is not bound by the terms of the sublease entered into by the lessee and
the sublessee as he is not a party thereto, but an action by the lessor against the
lessee will affect the sublessee
3. Even if the consignee is not a signatory to the contract of carriage, the consignee
can still be bound by the contract.
4. When third persons are adversely affected by a contract where they have no
participation.
5. When a third person induces a party to violate his contract.
6. Where a creditor by provision of law is authorized to assail the contract entered
into by his debtor.
Stipulation Pour Autrui:
● It is a stipulation in favor of a third person conferring a CLEAR and DELIBERATE
favor upon him and which stipulation is merely a part of the contract entered into by
the parties, neither of whom acted as agent of the third person, and which favor can
be demanded by the third person if dully accepted by him before it could be
revoked.
● A stipulation pour autrui cannot be revoked unilaterally by the obligor alone. The
conformity of the other contracting party is needed.
Requisites of Stipulation Pour Autrui:
1. There is a stipulation in favor of a third person
2. The stipulation is just a part of and not the whole obligation in the contract
3. The favor or benefit must have been clearly and deliberately conferred by the
parties upon a third person
4. The favor or benefit conferred is not just an incidental benefit or interest
5. Neither of the parties bears the legal representation or authorization of the third
party
Forms of Acceptance:
● Acceptance by the third person may be done expressly or impliedly.
● The acceptance must be absolute, unconditional, and identical with the terms of the
offer.
● Thus, when a beneficiary entered into the possession of the property, there is
acceptance already.
Test to Determine the Nature of the Interest of the Third Person:
● The question to answer is this: Did the parties deliberately insert terms in their
contract with the avowed purpose of conferring a benefit or favor upon such third
person? If yes, then there is a stipulation pour autrui.
● A stipulation in the insurance policy providing that the insurer shall indemnify the
insured taxi company in the event of an accident which causes bodily injury to its
driver is a stipulation pour autrui. It is a justification of the suit of the heirs of the
deceased driver filed against the insurer seeking indemnity.
Cases:
Integrated Transaction between the parties is a CONTRACT OF SALE whereby
Packing vs. Fil-Anchor (seller) obligates itself to deliver printing paper to Integrated
CA (buyer) which, in turn, binds itself to pay therefor a sum of money or its
equivalent (price). Both parties concede that the order agreement gives rise
to reciprocal obligations such that the obligation of one is dependent upon
the obligation of the other.
The private respondent’s suspension of its deliveries to petitioner whenever
the latter failed to pay on time, as in this case, is legally justified. Fil-Anchor
is not a party to said agreements. It is also not a contract pour autrui.
DKC A good measure for determining whether a contract terminates upon the
Holdings death of one of the parties is whether it is of such a character that it may be
vs. CA performed by the promissor's personal representative.
In the case at bar, there is no personal act required from the late Encarnacion
Bartolome. Rather, the obligation of Encarnacion in the contract to deliver
possession of the subject property to petitioner upon the exercise by the
latter of its option to lease the same may very well be performed by her heir
Victor.
Marmot The sole purpose of Maris Trading in acquiring possessory rights over that
Hotel vs. specific portion of the land where well and pump and piping had been
CA installed, was to supply the water requirements of petitioner’s hotel. That
said purpose was known by respondent spouses, is made explicit by the
second Memorandum of Agreement. Maris Trading itself had no need for a
water supply facility; neither did the respondent spouses. The water facility
was intended solely for Marmont Resort Hotel. The interest of Marmont
cannot therefore be regarded as merely "incidental."
Coquia vs. Pursuant to the stipulations in the insurance policy, the Insurance Company
Fieldmen’s "will indemnify any authorized Driver who is driving the Motor Vehicle" of
Insurance the Taxi Company and, in the event of death of said driver, the Company
shall, likewise, "indemnify his personal representatives."
In fact, the Company "may, at its option, make indemnity payable directly to
the claimants or heirs of claimants” - in other words, third parties.
Mandarin While private respondent may not be a party to the said agreement, the
Villa vs. Agreement conferred a favor upon the private respondent, a holder of credit
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CA card validly issued by BANKARD. This stipulation is a stipulation pour
autri and under Article 1311 of the Civil Code private respondent may
demand its fulfillment provided he communicated his acceptance to the
petitioner before its revocation.
Everett When private respondent formally claimed reimbursement for the missing
Steamship goods from petitioner and subsequently filed a case against the latter based
vs. CA on the very same bill of lading, it (private respondent) accepted the
provisions of the contract and thereby made itself a party thereto, or at least
has come to court to enforce it. Thus, private respondent cannot now reject
or disregard the carrier’s limited liability stipulation in the bill of lading. In
other words, private respondent is bound by the whole stipulations in the bill
of lading and must respect the same.
Kauffman The Court ruled in favor of Kauffman. Relying upon the intentions of the
vs. PNB parties, it can be said that Kauffman was a third party whose interests were
incidental to the contract.
The bank’s promise to cause a definite sum of money to be paid to him in
New York was a stipulation in his favor within the meaning of the Civil
Code, and as such, he had the right to maintain an action to recover it.
He also signified his acceptance to the transfer by demanding the money
from PNB New York, therefore the provision on pour autrui was met.
Associated The fact that the promissory note was executed after the effectivity date of
Bank vs. the merger does not militate against petitioner. The agreement itself clearly
CA provides that all contracts -- irrespective of the date of execution -- entered
into in the name of CBTC shall be understood as pertaining to the surviving
bank, herein petitioner.
SC found no stipulation at all that would even resemble a provision in
consideration of a third person. The instrument itself does not disclose the
purpose of the loan contract. It merely lays down the terms of payment and
the penalties incurred for failure to pay upon maturity.
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.
Concept of Real Right:
● A real right is one which binds the property over which it is created or exercised.
● Examples: A mortgage constituted on a titled property and duly registered, A
contract of lease of a parcel of land for more than one year which is duly registered.
● These real rights if recorded are binding upon third persons even if they did not
participate in the said contracts.
● However, if they are not registered, and the buyers of the properties have acted in
good faith, they are not bound to respect the mortgage or lease.
Article 1312 is an Exception to the General Rule of Relativity
● Even though third persons are not parties to the contracts under the article, they are
thus bound.
● A real estate mortgage which is duly recorded is a right in rem and is binding against
third persons. It is a lien on the property which is inseparable therefrom and remains
subsisting until discharged. Subsequent purchasers of said property are bound by the
said liens.
ARTICLE 1313. Creditors are protected in cases of contracts intended to defraud them.
Accion Pauliana:
● This article is also an exception to the rule of the principle of relativity of contracts.
● When a debtor alienates a property without leaving enough for his creditors and his
intention is to defraud them, his creditors may file an action for rescission of the said
contracts, accion pauliana.
ARTICLE 1314. Any third person who induces another to violate his contract shall be
liable for damages to the other contracting party.
Effect of Interference with Contractual Relations:
● A third person who induces another to violate his contract without a valid excuse is
liable for damages to the other contracting party who is prejudiced by the said
interference.
● This intermeddling is known in the law on torts as interference with contractual
relations.
● Extent of the liability for damages of the intermeddler cannot be more than the
liability that will be incurred by the party in whose behalf he intermeddled.
Elements of Tortious Interference with Contractual Relations:
1. Existence of a valid contract
2. Knowledge on the part of the third person of the existence of the contract
3. Interference of the third person without legal justification or excuse
Notes:
● Knowledge of the existence of the contract is an essential element to state a cause
of action.
● Liability of the intermeddler is solidary with the person whom he intermeddled
because the former has committed a tortious act or quasi-delict where liability is
solidary.
Generally, Malice is Essential to Make Intermeddler Liable:
● There must be bad faith in inducing a contracting party to break his contractual
relations with the other.
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 ● It is immaterial whether he benefited from the act or he did it simply to gratify his
thirst for spite or revenge against the other party. The malice required is legal
malice.
● However, if the intention is honest and laudable, such as when it is done to protect
the contracting party from danger to his life or property, he should not be made
liable for damages for the breach of contract.
Cases
Gilchrist vs. The liability of the appellants arises from unlawful acts and not from
Cuddy contractual obligations, as they were under no such obligations to induce
Cuddy to violate his contract with Gilchrist. So that if the action of
Gilchrist had been one for damages, it would be governed by chapter 2,
title 16, book 4 of the Civil Code. Article 1902 of that code provides that
a person who, by act or omission, causes damages to another when there
is fault or negligence, shall be obliged to repair the damage do done.
So Ping Bun In the instant case, it is clear that petitioner So Ping Bun prevailed upon
vs. CA DCCSI to lease the warehouse to his enterprise at the expense of
respondent corporation. Lack of malice, however, precludes damages.
But it does not relieve petitioner of the legal liability for entering into
contracts and causing breach of existing ones.
The respondent appellate court correctly confirmed the permanent
injunction and nullification of the lease contracts between DCCSI and
Trendsetter Marketing, without awarding damages.
Lagon vs. CA The records show that the decision of the heirs of the late Bai Tonina
Sepi to sell the property was completely of their own volition and that
petitioner did absolutely nothing to influence their judgment. In short,
even assuming that private respondent was able to prove the renewal of
his lease contract with Bai Tonina Sepi, the fact was that he was unable
to prove malice or bad faith on the part of petitioner in purchasing the
property. Therefore, the claim of tortuous interference was never
established.
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.
Supra. Remedies for Breach.
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.
Rights of obligations or those rights which are acquired by virtue of an obligation are
transmissible in character.
Exceptions:
1. Where they are not transmissible in their very nature (i.e. purely personal rights);
2. Where there are stipulations by the parties that they are not transmissible;
3. Where they are not transmissible by operation of law.
ARTICLE 1381. The following contracts are rescissible:
(3) Those undertaken in fraud of creditors when the latter cannot in any other manner
collect the claims due them;
Nature of Action for Rescission, Only Subsidiary:
● In action to rescind a rescissible contract is not a principal action. It is just a
subsidiary action, which means it cannot be instituted except when the party
suffering damages has no other legal means to obtain reparation for the damages
suffered.
What to Alleged and Prove; Consequences of Failure To Do So:
● The creditor seeking rescission of a contract as fraudulent must prove first that
he is really a creditor, and secondly that he could not collect his credit in any
other way.
● Exception: If it can be proven that the property alienated was the only property of
the debtor at the time of the transaction, the action for rescission is certainly
maintainable because it is clear that the creditor has no other remedy under the
circumstances.
Persons Allowed to Institute the Action:
● The persons allowed to file the rescissory action are the
a. Parties who suffered the economic lesion
b. The affected creditor
c. Other persons authorized by law.
● In case of their death or incapacity, their heirs may institute the action or may
continue the same if already commenced.
● However, the heirs of the debtor who alienated the properties in fraud of creditors
cannot represent the debtor to institute the action. The heirs are not allowed because
that will give them benefit arising from the wrongs committed by their own
predecessor. A wrongdoer is not allowed to benefit from his own wrong whether
directly or indirectly.
Can Apparent Heirs Rescind Contracts entered into by Their Predecessors In
Succession?
● If a deceased person alienated his properties during his lifetime for the purpose of
depriving or diminishing the legitimes of his compulsory heirs, the latter may
rescind the contracts made for that illegal purpose. The heirs are placed in a position
similar to that of creditors. Their legitimes will be the equivalent of the credit of
creditors.
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 ● Legitime is that part of the testator’s property which he cannot dispose of because
the law has reserved it for certain heirs who are, therefore, called compulsory heirs.
Prescription:
● The 4 year period to rescind a fraudulent contract must be counted from the time the
action accrues and not from the date of registration of the conveyance for that would
run counter to Art. 1383 as well as settled jurisprudence.
Cases
Suria vs. The contract in question is a DOS with Mortgage. Respondent alleged that
IAC petitioners violated the terms and conditions of the contract by failing to
pay the stipulated installments. Petitioners, on the other hand, posed the
rescission is ineffective because a remedy of foreclosure was stipulated in
the contract.
The remedy of rescission was NOT the correct remedy since the breach of
obligations was not with respect to the perfected contract of sale but in the
obligations created by the mortgage contract. Since foreclosure was a
specific provision found in the contract as the principal remedy, the action
of respondents must first be closure.
Regalado The action to set aside the contract on the ground that it is fraudulent as to
vs. creditors is subsidiary, and cannot be maintained if the debtor has other
Luchsinger property with which to pay the debt; but in this case we agree with the court
below that the evidence shows that the father had no such other property,
either at the time the sale was made or at the time this action was tried out
of which the defendants could have collected this debt. The only property
which it is said he had consisted of various debts owing to him, as he
claimed, from third persons. All of these debts were created prior to the
year 1888. One of them, the most important, for 10,000 pesos, was in
litigation.
Goquiolay The action for rescission is subsidiary; it cannot be instituted except when
vs. Sycip the party suffering damage has no other legal means to obtain reparation for
the same". Since there is no allegation, or evidence, that Goquiolay cannot
obtain reparation from the widow and heirs of Tan Sin An, the present suit
to rescind the sale in question is not maintainable, even if the fraud charged
actually did exist.
Mutuality (Arts. 1308-1310, 1182) Acceleration Clause and Escalation Clause
ARTICLE 1308. The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them.
Mutuality of Contract:
● It is natural and logical that the contract shall bind both contracting parties. This is
based on the essential equality of the parties.
● The binding effect of a contract on both parties is based on the principle that the
obligations arising from contracts have the force of law between the contracting
parties.
Rule on Validity or Compliance:
● Validity or compliance with the contract cannot be left to the will of one of the
contracting parties.
● What is meant here is that the contract cannot have any stipulation authorizing one
of the parties to:
○ Determine whether or not the contract shall be valid
○ Determine whether or not the contract shall be fulfilled
● However, a third person may be authorized to determine fulfillment but not the
validity, as provided for in the next article. But he must not make the determination
of the fulfillment evidently inequitable.
Stipulations Allowing a Party to Cancel or Rescind do not Militate Against Mutuality:
● When the contract provides that the contracting parties is authorized to cancel the
same and the party given this right subsequently cancelled the contract, the
agreement is just being fulfilled. Mutuality of the contract is not violated.
● The general rule is that a party cannot revoke or renounce a contract without the
consent of the other. They may however mutually cancel their contract under such
terms and conditions as they may deem wise.
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.
Determination of Performance:
● Performance refers to the fulfillment of the obligation. It is different from the
execution of the contract where only the contracting parties have any direct
participation.
● Illustration: Hazel purchased from Joyce goods in the possession of Kim. Hazel and
Joyce may agree that the delivery of the goods to Hazel will be at the convenient day
and time of Kim. Here, the delivery is left at the discretion of a third person, Kim.
However, Kim must notify Hazel and Joyce when she would deliver the goods to
bind the parties. Notice is required to allow the parties to prepare themselves for the
acceptance of the goods.
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.
If Determination is Evidently Inequitable, it is Not Obligatory upon the Parties:
● Once determination of the performance is left to a third person and that person made
a determination which is evidently or apparently inequitable, the court will resolve
what is equitable under the circumstances.
Concept of Equity; Distinguished from Justice:
● Equity is a system or code of law compiled as corrective to a too technical system.
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 ● Remedies in courts are so limited and precise in their application and so rigid as to
procedure that they are in many instances inadequate to mete out justice.
● When a person seeks justice, he is seeking the full impact of the law. When he seeks
equity, in effect, he is seeking mercy or relaxation of the sanctions of the law due to
certain humanitarian circumstances.
● The general rule is that where an adequate remedy can be had at law, one cannot
resort to a court of equity.
Cases
UCPB vs. The interest rates are dependent solely on the will of UCPB: it is
Beluso determined by Branch Head who may chose any rate he desires.
In order that obligations arising from contracts may have the force of law
between the parties, there must be mutuality between them based on their
essential equality. A contract containing a condition which makes its
fulfillment dependent exclusively upon the uncontrolled will of one of the
parties, is void.
Joaquin vs. Atty. Joaquin, for himself and in his own name, contracted with Mitsumine
Mitsumine for the acquisition and purchase of the said machine and received from him
the machine so purchased.
He therefore cannot use as a defense that the vendor should collect the
balance of its price from a third person with whom the vendor did not
contract and who did not receive the purchased machine, and in asserting
such a claim on the pretext that he made a mistake in contracting for
himself and not in the name of his client Macario Vito.
Garcia vs. The stipulation merely gave the vendor the “right to declare the contract
Legarda canceled and of no effect upon fulfillment of the conditions set forth in the
contracts. It does not leave the validity or compliance of the contract
entirely to the will of one of the contracting parties. A contract expressly
giving to one party the right to cancel is valid; the reason being that when
the contract was thus cancelled, the agreement of the parties was in reality
being fulfilled. It could be exercised, but only upon the other contracting
party committing the breach of contract of non-payment of the installments
agreed to it.
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.
Supra, Kinds of Obligation.
Class Notes
Contract Definition
● Meeting of the Minds
● Mental exercise
● Multiple persons (two persons only?) → Two or more persons can enter into
contract either to give or to do
● Binding (just himself?) → It is binding not just by himself because there can be
reciprocal obligations.
● Prestation — to give or to do (not to do)
● Names
1st: Contract is CONSENSUAL:
● Stages of Contract: Negotiation, Perfection, Consummation
● The moment there is consent, there is already a contract.
● XPN: Real contracts and formal contracts (when certain provisions of law require
solemnities for their validity)
● Offer must be certain, acceptance must be absolute.
Jardine Davies v. CA: Was there a perfect contract between Purefoods and Femsco?
● Yes. There was already a perfect contract since the conditions in the letter were
not conditions where the perfection of the contract was dependent, rather they
were conditions in performing the obligation. Even if we assume that the letter
was conditional counteroffer, subsequent acts such as the return of the bidding
bond and the payment of the all risk insurance policy confirmed that there was
already a perfected contract.
● Although there were conditions, it did not affect the acceptance given by the
winning bidder. Court considered that there were subsequent acts that confirmed
that there was already meeting of the minds even if there was conditional
acceptance, there were other circumstances whereby acceptance can be implied.
2nd: Obligatory force:
● Force of Law - juridical tie between parties that can be used to compel the parties
to perform the contract.
3rd. Autonomy: not contract to law, morals, good customs, public order, public policy.
● Cui - awarding scholarships to attract students and keep them in school is not a
good custom.
● Ferazzini - Cannot work in the PH for 5 years upon termination. It is
unreasonable.
4th. Relativity: Between parties whose minds have met and to their heirs. XPN:
obligations and rights that are intransmissible
5th Mutuality: Arts. 1347 and 1349 are important provisions.
● Both case refers to Contracts prior to death of one party
● Blas: Properties were not share on inheritance but conjugal
● Uson: there was document executed prior to death of one party it was clear that
she renounced right to inherit in exchange for parcel of land
CLASSIFICATION OF CONTRACTS
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 Different classification of contracts:
1. According to degree of dependence: (preparatory, principal, accessory)
2. According to perfection: (consensual, real, formal)
3. According to solemnity or form
4. According to purpose
5. According to cause
6. According to risk: commutative or aleatory
7. According to name: nominate or innominate
According to degree of dependence: (preparatory, principal, accessory)
a. Principal – can exist alone such as sale, lease, deposit commodatum.
b. Accessory – cannot exist alone such as mortgage which depends upon the
existence of a contract of loan.
c. Preparatory – those entered into for the creation of another contract such as an
agency. In agency, the principal gives authority to the agent to do a particular act.
Equipped with a SPA to sell, the agent, for instance, sells a property belonging to
the principal. Here, the agency was established in preparation for the contract of
sale. A partnership is also a preparatory contract.
a. preparatory — Arts. 1479, 1767, 1868,
Article 1479. A promise to buy and sell a determinate thing for a price certain is
reciprocally demandable.
An accepted unilateral promise to buy or to sell a determinate thing for a price certain is
binding upon the promisor if the promise is supported by a consideration distinct from the
price. (1451a)
Article 1767. By the contract of partnership two or more persons bind themselves to
contribute money, property, or industry to a common fund, with the intention of dividing
the profits among themselves.
Two or more persons may also form a partnership for the exercise of a profession.
Article 1868. By the contract of agency a person binds himself to render some service or to
do something in representation or on behalf of another, with the consent or authority of the
latter
b. principal — Arts. 1458, 1638, 1642, 1933, 1962,
Article 1458. By the contract of sale one of the contracting parties obligates himself to
transfer the ownership and to deliver a determinate thing, and the other to pay therefor a
price certain in money or its equivalent.
According to formation or perfection: (consensual, real, formal)
A contract of sale may be absolute or conditional.
Article 1638. By the contract of barter or exchange one of the parties binds himself to give
one thing in consideration of the other's promise to give another thing.
ARTICLE 1642. The contract of lease may be of things, or of work and service.
ARTICLE 1933. By the contract of loan, one of the parties delivers to another, either
something not consumable so that the latter may use the same for a certain time and return
it, in which case the contract is called a commodatum; or money or other consumable thing,
upon the condition that the same amount of the same kind and quality shall be paid, in
which case the contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum the bailor retains the ownership of the thing loaned, while in simple loan,
ownership passes to the borrower. (1740a)
ARTICLE 1962. A deposit is constituted from the moment a person receives a thing
belonging to another, with the obligation of safely keeping it and of returning the same. If
the safekeeping of the thing delivered is not the principal purpose of the contract, there is
no deposit but some other contract.
c. accessory — Arts. 2047, 2085
Article 2047. By guaranty a person, called the guarantor, binds himself to the creditor to
fulfill the obligation of the principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section 4,
Chapter 3, Title I of this Book shall be observed. In such case the contract is called a
suretyship
Article 2085. The following requisites are essential to the contracts of pledge and
mortgage:
1. That they be constituted to secure the fulfillment of a principal obligation;
2. That the pledgor or mortgagor be the absolute owner of the thing pledged or
mortgaged;
3. That the persons constituting the pledge or mortgage have the free disposal of
their property, and in the absence thereof, that they be legally authorized for the
purpose.
Third persons who are not parties to the principal obligation may secure the latter by
pledging or mortgaging their own property. (1857)
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a. Consensual – perfected by mere consent such as sale
a. Real – cannot be perfected without delivery, such as commodatum, depositum,
pledge, and loan
b. Formal – cannot be perfected without compliance with the special formalities
required by law such as donations and mortgages of real property. Also called
solemn contracts
a. consensual - Arts.1315, 1475,
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.
Article 1475. The contract of sale is perfected at the moment there is a meeting of minds
upon the thing which is the object of the contract and upon the price.
From that moment, the parties may reciprocally demand performance, subject to the
provisions of the law governing the form of contracts. (1450a)
b. real - Arts. 1316, 1934,
Article 1316. Real contracts, such as deposit, pledge and commodatum, are not perfected
until the delivery of the object of the obligation. (n)
Article 1934. An accepted promise to deliver something by way of commodatum or simple
loan is binding upon parties, but the commodatum or simple loan itself shall not be
perfected until the delivery of the object of the contract
c. formal — Arts. 1356
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.
General Rule: Form is not Required in Consensual Contracts,:
● As long as the essential requisites of the contracts are present, they are binding upon
the contracting parties regardless of whatever form they may have been entered into.
Exceptions
1. When the law requires that a contract be in certain form for its validity -
solemn/formal contracts
2. When the law requires that a contract be in certain form for its enforceability -
statute of frauds
Statute of Frauds
● The statute of frauds refers to the requirement that certain kinds of contracts be
memorialized in a writing, signed by the party to be charged, with sufficient content
to evidence the contract.
● A contract falling under the statute of frauds cannot be proved or established without
the note, writing, or memorandum thereof, unless there has been a waiver such as
when the party who can invoke the benefits of the statute does not object to the
presentation of oral evidence, or has received any benefits therefrom.
● It is understood that the statute is applicable only to executory contracts and not to
executed contracts, whether completely or partially executed, which execution
however must be proved either by documentary or oral evidence.
SBM: Memorize
Art. 1403 (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.
Examples of Formal Contracts: Donation of real property which requires a public
instrument for its validity. Donation of personal property the value of which is more than
five thousand pesos. Sale or transfer of large cattle requires registration and a certificate of
transfer. Negotiable instruments must be made in the form required by the Negotiable
Instruments Law. Sale of a piece of land through an agent requires the authority of the
agent to be in writing.
Examples of Agreements which must be in Writing to be enforced: An agreement that
by its terms is not to be performed within a year from the making thereof. A special
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 promise to answer for the debt, default, or miscarriage of another. An agreement made in
consideration of marriage, other than a mutual promise to marry.
According to solemnity or form — Arts. 1356 (supra)
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.
Contract of Partition not Covered By Statue of Fraud:
● A note or memorandum is not necessary for the contract of partition. A writing of
the contract of partition is not constitutive of its validity but merely evidential.
Cases:
Tan vs. Was the oral partition of the lands valid and binding? – YES. The Court held
Lum that contracts are obligatory in whatever form they may have been entered into
provided that all essential requirements are present. The fact that both lease
contract and deed of sale provides a definite portion of the land (1/18th share,
southeastern portion), indicates that there was a partition or else they could not
have specified such. Moreover, there was a judicial admission by Flora et al
that there was indeed a partition.
San An analysis of the facts and evidences leads to the conclusion that the
Lorenzo agreement between Babasanta and the Spouses Lu is a contract to sell and not
Dev’t a contract of sale. After SLDC had paid more than one half of the agreed
Corp. vs. purchase price, the Spouses Lu subsequently executed a Deed of Absolute Sale
CA in favor or SLDC. At the time both deeds were executed, SLDC had no
knowledge of the prior transaction of the Spouses Lu with Babasanta. SLDC
qualifies as a buyer in good faith since there is no evidence extant in the
records that it had knowledge of the prior transaction in favor of Babasanta.
According to purpose:
a. transfer of ownership — Arts. 725, 1458, 1638,
Article 725. Donation is an act of liberality whereby a person disposes gratuitously of a
thing or right in favor of another, who accepts it. (618a)
Article 1458. By the contract of sale one of the contracting parties obligates himself to
transfer the ownership and to deliver a determinate thing, and the other to pay therefor a
price certain in money or its equivalent.
A contract of sale may be absolute or conditional
Article 1638. By the contract of barter or exchange one of the parties binds himself to give
one thing in consideration of the other's promise to give another thing.
b. conveyance of use — Arts. 562, 1642, 1933,
Article 562. Usufruct gives a right to enjoy the property of another with the obligation of
preserving its form and substance, unless the title constituting it or the law otherwise
provides. (467)
Article 1642. The contract of lease may be of things, or of work and service.
Article 1933. By the contract of loan, one of the parties delivers to another, either
something not consumable so that the latter may use the same for a certain time and return
it, in which case the contract is called a commodatum; or money or other consumable thing,
upon the condition that the same amount of the same kind and quality shall be paid, in
which case the contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum the bailor retains the ownership of the thing loaned, while in simple loan,
ownership passes to the borrower. (1740a)
c. rendition of service — Arts. 1642, 1868
Article 1642. The contract of lease may be of things, or of work and service.
Article 1868. By the contract of agency a person binds himself to render some service or to
do something in representation or on behalf of another, with the consent or authority of the
latter.
According to cause (Arts. 1350):
a. Onerous – contracts providing for exchange of valuable considerations such as
sale
a. Gratuitous – those where one party gives/does something to/for the other
without receiving any equivalent or compensation such as donation and
commodatum. Also called a lucrative contract.
b. Remunerative – those where one party gives something to another in
consideration of a previous or past deeds of the other.
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.
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Cause of Contract, Concept:
● This is the reason why a party entered into the contract.
● Cause is the essential reason which moves the parties to enter into the contract.
● It is the immediate, direct, and proximate reason which justifies the creation of and
obligation through the will of the contracting parties. Thus, in a contract to export
logs abroad, the consideration for the logger is the distribution of the logs in the
areas agreed upon, whereas on the part of the distributor, the consideration is the
commission on the sale.
● In this jurisdiction, cause and consideration are the same. The terms are used
interchangeably.
Cause in Accessory Contracts:
● In accessory contracts like mortgage or pledge, the cause is identical with the cause
of the principal contract, that is, the loan from which it derives its life and existence.
● A mortgagor who mortgaged his own property to secure the loan of the principal
debtor, is not directly benefited by the mortgage executed. But there is a cause. It is
the loan given to the principal debtor. It is not necessary that the mortgagee be
benefited. It is enough that the principal debtor was favored with the a loan.
Remedy of Vendor, If Buyer does not Pay Balance of Purchase Price:
● The failure of the vendee to pay the full price, does not convert the sale into a void
contract for lack of consideration.
● The proper remedy of the seller is for specific performance or rescission.
● But if the sale is fictitious or without consideration, it is void. The remedy is
declaration of nullity.
● The consideration need not pass from one party to the other at the time the sale is
made. The reason is that the promise of one is the consideration for the other.
Distinctions Between Cause and Object:
Cause Object
The cause, for each contracting party is the Whereas, the object of the contract is the
prestation or promise of a thing or service very thing or service itself.
by the other.
Example: In a sale of a particular car, as to the vendor, the cause is the obligation of the
vendee to pay the price, and as to the vendee, the cause is the obligation of the vendor to
deliver the car. The object is the car being the root of the agreement of sale. If there is no
car, the sale would not have arisen at all.
Cause Need Not Be The Exact Equivalent of the Other’s Prestation:
● In onerous contracts, it is not necessary that the value paid or thing delivered is the
exact equivalent of the value of the prestation or promise of the other.
● Thus, a nominal consideration of one peso for a contract is an effectual
consideration as long as the parties had stipulated on it in good faith. It is as valid as
a bigger sum.
a. onerous (Arts. 1458, 1638, 1642)
Article 1458. By the contract of sale one of the contracting parties obligates himself to
transfer the ownership and to deliver a determinate thing, and the other to pay therefor a
price certain in money or its equivalent.
A contract of sale may be absolute or conditional.
Article 1638. By the contract of barter or exchange one of the parties binds himself to give
one thing in consideration of the other's promise to give another thing.
Article 1642. The contract of lease may be of things, or of work and service.
Onerous Contracts
● Contracts where the cause for each contracting party is the prestation or promise of
a thing or service by the other. Example: In a deed of sale, the cause for the seller is
the price and the cause for the buyer is the delivery of the thing sold.
Can A Moral Obligation Be a Valid Cause for an Onerous Contract:
● If the moral obligation is based on previous civil obligation but rendered ineffective
due to the prescription of the action, it constitutes a sufficient cause or consideration
to support an onerous contract. This is in effect a performance of a natural
obligation. If the moral obligation arises entirely from ethical considerations, it
cannot constitute as a sufficient cause.
b. gratuitous (Arts. 725, 1933)
Article 725. Donation is an act of liberality whereby a person disposes gratuitously of a
thing or right in favor of another, who accepts it.
Article 1933. By the contract of loan, one of the parties delivers to another, either
something not consumable so that the latter may use the same for a certain time and return
it, in which case the contract is called a commodatum; or money or other consumable thing,
upon the condition that the same amount of the same kind and quality shall be paid, in
which case the contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum the bailor retains the ownership of the thing loaned, while in simple loan,
ownership passes to the borrower.
Contracts for Pure Beneficence (or gratuitous contracts)
● Contracts where the cause is the mere liberality of the donor or benefactor. In simple
donations, pure liberality is the consideration of the contract.
● Example: Mary donated to Ramos a certain property in accordance with the
formalities required by law. The cause is the mere liberality of the donor or
benefactor.
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 c. remuneratory
Remuneratory Contracts
● Contracts where the cause is the service or benefit remunerated. Such service or
benefit may or may not have the character of recoverable debt.
● Example: Isabel rendered her services to Mitch for free. Sometime in the future,
Mitch gave Isabel a car in remuneration for the said past services which do not
constitute a demandable debt. The same applies if the services of Isabel were not for
free, and Mitch was just unable to pay due to lack of money. The giving of the car
would still be remuneratory.
According to risk: commutative or aleatory (Art. 2010)
a. Commutative – those contracts where the contracting parties contemplate the
assured fulfillment of the terms and conditions of their agreement such as
contracts of mortgage and pledge. Generally, there is no risk to anticipate here.
b. Aleatory – those contracts where the fulfillment is dependent upon chance or
event which may not happen within the period stipulated such as an insurance
contract.
Article 2010. By an aleatory contract, one of the parties or both reciprocally bind
themselves to give or to do something in consideration of what the other shall give or do
upon the happening of an event which is uncertain, or which is to occur at an indeterminate
time.
According to name: nominate or innominate (Art. 1307)
a. Nominate – those which have been given particular names or denominations by
law. Ex. Sale, mortgage, lease, carriage, deposit, insurance, agency, partnership,
barter
b. Innominate – those which have not been given any particular name and not
regulated by special provisions of law. Roman law has classified them as follows:
- Do ut des (I give that you may give)
- Do ut facias (I give that you may do)
- Facio ut facias (I do that you may do)
- Facio ut des (I do that you may give)
Applicability:
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.
Time when Acceptance Should be Made:
Innominate contracts shall be governed by the following:
● Stipulations of the parties
● Provisions of Obligations and Contracts in the Civil Code
● Rules governing the most analogues nominate contracts
● Customs of the Place
Cases:
Perez vs. Is Perez entitled to compensation for acting as interpreter? – YES.
Pomar Whether the service was solicited or offered, the fact remains that Perez
rendered to Pomar services as interpreter. As it does not appear that he did
this gratuitously, the duty is imposed upon the defendant, having accepted
the benefit of the service, to pay a just compensation therefor, by virtue of
the innominate contract of facio ut des implicitly established.
It is but just that he should pay a reasonable remuneration therefor,
because it is a well-known principle of law that no one should be
permitted to enrich himself to the damage of another.
Asian Should the stipulated interest rate on the sales invoice be followed? –
Construction YES. The sales invoices expressly stipulated the payment of interest and
vs. Cathay attorney’s fees in case of overdue accounts and collection of suits. The
Pacific Steel sales invoices are in the nature of contracts of adhesion. The court has
repeatedly held that contracts of adhesion are as binding as ordinary
contracts. Those who adhere to the contract are in reality free to reject it
entirely and if they adhere, they give their consent. By contracting with the
respondent and not objecting to the stipulations in the sales invoice,
ACDC bound itself to what is stipulated therein.
Stage of Contracts: Option Contract (Arts. 1324, 1479, 1482)
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)
Article 1479. A promise to buy and sell a determinate thing for a price certain is
reciprocally demandable.
An accepted unilateral promise to buy or to sell a determinate thing for a price certain is
binding upon the promisor if the promise is supported by a consideration distinct from the
price.
Article 1482. Whenever earnest money is given in a contract of sale, it shall be considered
as part of the price and as proof of the perfection of the contract. (1454a)
● Applies only to a situation where the offeror has allowed the offeree a certain period
of time to accept.
1. If a period is fixed – Acceptance should be made within the period fixed. If after
the lapse of the period, there is no more offer to accept. A delayed acceptance will
not result in the meeting of the minds.
2. If no period is fixed – Acceptance must be made immediately. This is similar to a
pure obligation. However, if the offer is made to a person who is not present,
acceptance should be made within such a time the acceptance could be received
from the offeree under normal circumstances.
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Option Contract, Concept:
● An option contract is a contract where the offeror grants the offeree, for a valuable
consideration, the privilege to buy or not buy certain objects at anytime within a
specified period and for a fixed price.
● An option contract is separate and distinct from the principal contract which the
parties may enter into later if they finally conclude their main agreement. It is
therefor a preparatory contract to the principal contract should the parties finally
consummate their transaction which is under negotiation. The matter is said to be
still under negotiation because the offeror may or may not take advantage of the
privilege granted him.
Kinds of Options Under the Article:
1. Option without any consideration given by the offeree.
2. Option with a consideration given by the offeree which consideration is different
and distinct from the purchase price.
Status of an Option without a Consideration; Effect:
● If the privilege granted to the offeree is not supported by a consideration, then the
option is just considered as an offer to sell.
● In other words, if the option is given without a consideration, it is a mere offer to
sell, which is not binding until accepted. Hence, it may be withdrawn by
communicating the withdrawal to the offeree.
● The offeror incurs no liability for the withdrawal of the offer. The reason is because
there is no contract perfected yet and the offeror is free to withdraw his offer.
● If, however, acceptance is made before a withdrawal, it constitutes a binding
contract of sale.
Consequences of Withdrawal of Offer with Consideration:
● If the offeror withdraw his offer after the offeree had given a consideration for the
option granted, which consideration is distinct from the purchase price or cause of
the principal contract, the offeror is liable for damages which may be suffered by the
offeror.
● The reason for this is that there is already a contract – called an Option Contract.
● Within the period granted to the offeree, the offeror must not deal with any other
party involving the same subject matter of the option contract. The offer is an
exclusive deal with the offeree, until the lapse of the option period and the latter
failing to exercise the privilege granted him.
● If the offeree exercises his right to accept the offer within the period fixed, the
offeror cannot just back out from his commitment.
● If the offeror unjustifiably backs out, he may be required to execute the necessary
document of sale, and in addition, damages may be imposed upon him.
Distinctions Between Option Money and Earnest Money:
Option Money Earnest Money
Option money is the Earnest money is the payment made to the seller by the
consideration paid in an option buyer to show his good faith. It will constitute as part of
contract. If the principal the purchase price, if the sale is finally consummated. It
contract is not consummated, is also a proof of the perfection of the contract (Art.
the option money is not 1482) If the sale is not concluded, the earnest money
refunded. shall be returned to the would-be- buyer unless there is
a contrary agreement.
Rule in Case the Offer is Subsequently Revoked but the Offer is Already Accepted:
● If the acceptance arrives first and came to the knowledge of the offeror, the contract
is perfected.
● If it is the revocation which arrives first and came to the knowledge of the offeree,
no contract is perfected.
● Whichever of the two arrives first shall be the one considered effective. If they
arrived exactly at the same time, the perfection of the contract shall be sustained.
Sanchez In order that said unilateral promise may be binding upon the promisor,
vs. Rigos Article 1479 requires the concurrence of a condition, namely, that the promise
be supported by a consideration distinct from the price. Accordingly, the
promisee cannot compel the promisor to comply with the promise, unless the
former establishes the existence of said distinct consideration. In other words,
the promisee has the burden of proving such consideration.
In accepted unilateral promise to sell, since there may be no valid contract
without a cause or consideration, the promisor is not bound by his promise
and may, accordingly, withdraw it. Pending notice of its withdrawal, his
accepted promise partakes, however, of the nature of an offer to sell which, if
accepted, results in a perfected contract of sale.
Class Notes
Option contract
● When the person is given a certain period to decide until when such person can
decide whether or not to accept the offer.
● Preparatory contract before the principal contract.
● Contract by itself. If violated, there can be consequences such as damages.
Different kinds:
● With consideration - cannot be taken away unilaterally by the offeror (a contract
of “option” is perfected; option is binding)
○ Offeror cannot withdraw offer. If he does, he is in breach of the option
contract.
● Without consideration - can be withdrawn before acceptance of the offeree.
○ IT IS A MERE OFFER TO SELL. Not binding until it is accepted. The
offeror can withdraw anytime.
○ But the moment there is an acceptance, there is already a perfected
PRINCIPAL Contract.
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 ESSENTIAL ELEMENTS OF CONTRACTS
Essential Elements of a Contract
1. Consent
2. Object
3. Cause
CONSENT
Consent of the contracting parties Arts. 1319-1329,
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.
Consent, Concept:
● Consent is giving of one’s conformity to the terms of the contract FREELY and
VOLUNTARILY.
● The concurrence of the minds of the parties on the cause and subject matter which
will constitute the contract, as well as on the other conditions and terms thereof to
which they voluntarily bind themselves to abide.
● Consent is the most important requisite of a contract.
Elements of Consent:
1. Legal Capacity – parties must possess both juridical capacity and capacity to act,
in other words, parties must have full civil capacity. If incapacitated, a party may
be represented by a legal representative such as by his parents or guardians.
2. Manifestation of Conformity – there must be overt acts showing the
concurrence of the offer and the acceptance with respect to the object and cause
of the contract. This is known as the meeting of the minds. The manifestation
may be in writing (express) or implied from the conduct (implied) like the
acceptance of payment.
3. Conformity must be intelligent, spontaneous, and free from all vices of consent.
4. Conformity must be real and not simulated or fictitious.
Forms of Consent:
● May be given expressly or impliedly.
● It is express when it is explicitly made like the affixing of one’s signature on the
written contract.
● It is implied, when it is manifested by the conduct of the parties like performing
one’s obligations under the contract such as by paying the amount due or by
accepting the payment.
● Consent may also be presumed by law as in the cases of quasi-contracts.
Character of the Offer and Acceptance:
● For a contract to be perfected,
- The Offer must be CERTAIN, DEFINITE, and COMPLETE
- The Acceptance must be ABSOLUTE and UNCONDITIONAL
● Any modification or variation from the terms of the offer annuls the offer.
● A conditional acceptance is a counter-offer which extinguishes the offer. If not
accepted by the offeror, there is no contract.
● Once there is concurrence of the offer and the acceptance on the object and cause,
the stage of negotiation is finished. The contract is now deemed perfected if it is a
consensual one.
Effect of Non-Acceptance of the Offer:
● If the offer is not accepted, no consent arises. Thus, no contract is established.
Acceptance by Letter or Telegram:
● Acceptance made by a party to an offer, which is coursed through letter or telegram,
binds the offeror only from the time the offeror came to know of the acceptance, and
the law presumes that the contract was perfected at the place where the offer is
made, which is the place of origin of the conception of the contract.
Withdrawal of the Offer:
● The offeror may withdraw the offer before any interested party had made an
acceptance.
● Pending the acceptance of the offer, the offerer is free to enter into a contract with
another person involving the same subject matter.
● However, if there was an acceptance already, the offeror cannot just withdraw his
offer unilaterally. He will be liable for damages specially to an offeree who had
incurred expenses in relation thereto.
Effect of Silence:
● Silence can constitute a manifestation of conformity to a contract will depend upon
the circumstances, as silence is by itself ambiguous.
● When there is a duty to speak up on the part of the person to whom an obligation is
being proposed for acceptance, his silence can be considered as consent.
● The silence, however, must be such that it cannot be interpreted in any other way
except to mean conformity.
Revocation of Acceptance:
● Acceptance may be revoked by the offeree before the acceptance reaches the offeror.
Thus if the acceptance was done through mails but before it could reach the offeror a
faster communication like a “fax message” is sent to him, no contract is perfected
for lack of consent.
Cases:
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 Korean Air Was there a perfected contract between Yuson and Korean Air? – NO
vs. Yuson For an offer to be certain, a contract must come into existence by the
mere acceptance of the offeree without any further act on the offeror’s
part. The offer must be definite, complete and intentional. In the present
case, the offer is not certain. The memorandum clearly states that,
"MNLSM Management, on its discretion, is hereby offering the said
early retirement program to its staff. Also, applications for the ERP were
forwarded to the head office for approval, and further acts on the
offeror’s part were necessary before the contract could come into
existence
Rosenstock Seller Burke and potential buyer Elsar began negotiations for the
vs. Burke purchase of yacht. Elser had been using the yacht even before they
(definite produced a finalized sale agreement. Elser even paid for the repairs of the
offer) yacht. Elser wrote a letter to Burke saying “I am in position and willing
to entertain the purchase of yacht” followed by several terms.
After 2 days, Elser wrote another letter to Burke saying it is impossible
for him to take charge of the boat and he returned the yacht to Burke.
Burke is now demanding from him the performance of the offer to
purchase the yacht based on their agreement.
Was there a definite offer and a binding sale in this case? - NO. The
Court ruled that it is not a definite offer. The word "entertain" applied to
an act does not mean the resolution to perform said act, but simply a
position to deliberate for deciding to perform or not to perform said act.
Taking into account only the literal and technical meaning of the word
"entertain," it seems to us clear that the letter of the Elser cannot be
interpreted as a definite offer to purchase the yacht, but simply a position
to deliberate whether or not he would purchase the yacht.
Acceptance - Absolute v. Qualified; Express or Implied
Article 1320. An acceptance may be express or implied. (n)
Acceptance, Forms:
● May either be express or implied. Expressly in writing or verbally, Impliedly by the
conduct.
Special Forms Of Acceptance:
1. Silence – In certain specific cases, silence puts the silent party in estoppel (Arts.
1670 – 1873)
2. Presumption – The law presumes acceptance of an inheritance, if within 30 days
from the approved partition, the heir has not repudiated the inheritance. (Art. 1057)
Article 1321. The person making the offer may fix the time, place, and manner of
acceptance, all of which must be complied with. (n)
Right of the Offeror to Control the Offer:
1. To fix the time when acceptance should be made;
2. To fix the place where acceptance should be effected; and,
3. To fix the manner and procedure of acceptance.
● Although not mentioned, it is understood that the offeror may fix the price,
conditions, and other terms of the offer. If accepted by the offeree, the latter is bound
thereby.
Consequence of Acceptance After the Lapse of the Period Fixed by the Offeror:
● If the acceptance was made after the period fixed by the offeror had lapsed, the
acceptance is not a legal acceptance anymore but constitutes instead as an offer by
the original offeree and this offer may or may not be accepted by the original offeror.
● The acceptance must be made known to the offeror before the lapse of the period
fixed.
Manner of Acceptance Fixed by the Offeror:
● Offerer may require for instance that the acceptance by done by letter or personal
communication or through a representative.
● Acceptance not made in the manner as directed by the offeror constitutes as
counter-proposal which extinguishes the offer and this may or may not be accepted
by the original offeror.
Cases:
Batañgan v. Was Cojuangco’s acceptance duly accepted by Batañgan? – NO.
Cojuangco Acceptance was late. An offer of compromise settlement must be
accepted within a reasonable time. And acceptance or rejection of an
offer of compromise may be inferred from circumstances. The
Batañgan’s failure to act on the offer before the judgment was entered
was an implied rejection of said offer. A compromise has for its purpose
the avoidance or termination of a law suit. Acceptance in order to
conclude the agreement must in every respect meet and correspond with
the terms and conditions of the offer.
Granting that the appellant acted on time, payment of P800 fell short of
the appellee's requirement. The appellee wanted P1, 508.28 in cash. This
was the least she was entitled to, being the amount which the court below
had found to be due her.
Zayco vs. Zayco and Serra entered into an option contract to buy Palma Central for
Serra P1M and that in case the part cannot pay the whole, then he will be given
(counteroffer) a period not exceeding 3 years to pay the balance. Zayco wrote a letter to
Zerra accepting the contract and placing at his disposal a cash order of
Acceptance BPI of P100k, in part payment. Serra argued that since the contract does
should be not specify the amount of initial payment and the part to be paid within 3
unqualified years in the contract, Zayco’s acceptance is not sufficient to perfect the
and at the contract.
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same time,
absolute. There was NO perfected contract between them since Zayco’s acceptance
did not imply conformity with the offer of Serra, but only when the latter
shall, in turn, have accepted his proposal that the amount to be paid in the
first paumen was P100k. When Zayco accepted the offer, tendering the
sum of oP100k as first payment, his acceptance involved a proposal, not
contained in the offer, that this precisely, and not any other, should be the
amount of 1st payment. This proposal, in turn, required, the acceptance
on the part of Serra.
*Compare with Jardine Case
In contrast to Jardine, there were conditions there, but they only
pertained to the performance, or conditions after the perfection of the
contract.
In person; via agent; by letter or telegram:
Article 1322. An offer made through an agent is accepted from the time acceptance is
communicated to him. (n)
Applicability:
● Applies when the offer is made through an agent.
● If authorized through a power of attorney, the agent is an attorney-in-fact.
● If the offeree has accepted the offer, the offer is deemed accepted not from the
knowledge of the acceptance by the offerer but from the moment the attorney-in-fact
has received the communication of acceptance.
● An intermediary for the offeror who is not an authorized agent cannot bind the
former. The offeree may also act through an authorized agent who will be
representing the offeree with binding effect.
Laudico vs. The Court held that an acceptance by letter does not have any effect until
Arias it comes to the knowledge of the offerer. Therefore, before he learns of
the acceptance, the latter is not yet bound by it and can still withdraw the
offer. There was no meeting of the minds, through offer and acceptance,
which is the essence of the contract.
While there was an offer, there was no acceptance, and when the latter
was made and could have a binding effect, the offer was then lacking.
Though both the offer and the acceptance existed, they did not meet to
give birth to a contract.
Effects of death, civil interdiction, insanity, or insolvency of either party before
acceptance:
Article 1323. An offer becomes ineffective upon the death, civil interdiction, insanity, or
insolvency of either party before acceptance is conveyed. (n)
Loss or Modification of Legal Capacity:
● It is essential that the parties must possess full legal capacity to enter into contracts.
● Before the acceptance of the offer had been made known to the offeror, no contract
is yet perfected.
● If during this interregnum, either party or both parties had lost their legal capacity to
contract, the offer becomes ineffective.
● Death terminates the personality of a person – except for purposes of succession,
where the deceased through his estate is considered an artificial person.
● Civil interdiction, insanity, or insolvency render the offer ineffective. While the law
speaks of an offer, it can also apply to a counter-offer.
Definitions of Civil Interdiction, Insanity, and Insolvency:
● Civil Interdiction – A mandatory accessory penalty deemed imposed whenever the
sentence rendered is within the range of reclusion temporal to death, if the latter is
not executed by reason of commutation or pardon.
● Insanity – The legal term from mental disorder. It is a manifestation of disease or
defect of the brain, or a more or less permanently diseased or disordered condition
of the mentality, characterized by the disordered function of the sensory or
intellective faculties, or by impaired or disordered volition.
● Insolvency – A condition where a man’s assets, if all made immediately available,
would not be sufficient to discharge his obligations or liabilities. His obligations are
more than his assets. It is the inability or the lack of means to pay one’s debt, or the
condition of a person who is unable to pay his debts as they fall due.
Option Contract (supra - Day 9)
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)
Business advertisements:
(1) Mere invitations to make an offer:
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:
● Business Advertisement may or may not constitute a definite offer, depending on
each case.
● If the advertisement contains all the necessary data needed in a contract, it is a
definite offer for the sake of the thing advertised.
For example, “For sale: House and Lot located at No. 999 Taft Avenue, Manila. Lot Area:
50 square meters, house floor area: 10 square meters. Price: 3 million pesos. Payment in
cash. Contact owner Anton Mercado at said address by letter or telegram.” This kind of an
advertisement is a definite offer. The advertiser cannot withdraw the offer once somebody
had accepted it.
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 ● If the advertisement does not contain all the important data for a future contract, it is
not a definite offer. It is a mere invitation to make an offer.
For example, “For sale House and Lot located at 999 Taft Avenue, Manila. Price: 50
million. Negotiable. Contact Anton at the address.” Clearly, this is just an invitation to
make offers. If offers are made, the same may not be accepted by the advertiser.
(2) Advertisements for bidders:
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.
Applicability:
● Refers to advertisement for bidding, where bidders are invited to make proposals.
Unless the contrary appears, the advertiser is not bound to accept the highest or
lowest bid.
● The advertiser seeks the highest bidder when the bidding is for alienation of
property like in execution sales, and for the lowest bidder, when some services are to
be done like the construction of a building or structure.
● The advertiser has the right to prescribe the manner, conditions, and terms of the
bidding. He may even provide that the full purchase price be paid at the time of sale,
or that time will be given for payment.
● The bidder who offers a bid is bound by the terms and conditions announce in the
notice. The terms and conditions are binding upon the bidder as long as he made a
bid regardless if he is aware of them.
Incapacitated persons to give consent to a contract:
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.
Article 37. Juridical capacity, which is the fitness to be the subject of legal relations, is
inherent in every natural person and is lost only through death. Capacity to act, which is the
power to do acts with legal effect, is acquired and may be lost. (n)
Article 38. Minority, insanity or imbecility, the state of being a deaf-mute, prodigality and
civil interdiction are mere restrictions on capacity to act, and do not exempt the
incapacitated person from certain obligations, as when the latter arise from his acts or from
property relations, such as easements. (32a)
Article 39. The following circumstances, among others, modify or limit capacity to act:
age, insanity, imbecility, the state of being a deaf-mute, penalty, prodigality, family
relations, alienage, absence, insolvency and trusteeship. The consequences of these
circumstances are governed in this Code, other codes, the Rules of Court, and in special
laws. Capacity to act is not limited on account of religious belief or political opinion.
A married woman, twenty-one years of age or over, is qualified for all acts of civil life,
except in cases specified by law. (n)
Article 40. Birth determines personality; but the conceived child shall be considered born
for all purposes that are favorable to it, provided it be born later with the conditions
specified in the following article. (29a)
Article 41. For civil purposes, the foetus is considered born if it is alive at the time it is
completely delivered from the mother's womb. However, if the foetus had an intra-uterine
life of less than seven months, it is not deemed born if it dies within twenty-four hours after
its complete delivery from the maternal womb. (30a)
Article 42. Civil personality is extinguished by death.
Persons who Cannot Give Consent to a Contract:
● The article mentioned only three classes of incapacitated persons who cannot enter
into contracts.
● There are others enumerated in Article 37 and 38 who cannot enter into certain
contracts like the imbecile, civil interdictee, family relatives, aliens, absentees,
insolvents, trustees.
Effects of Contracts Entered By Incapacitated Persons:
● The contracts entered into by the incapacitated persons enumerated in the law are
not void. They are only voidable if only one party cannot give his consent.
● If both parties are incapacitated to give consent, the resulting contract is
unenforceable.
(1) Minors:
● Under the present law, the only unemancipated minors are those below 18 years of
age.
● Children below 18 cannot enter into contracts by themselves.
Exceptions:
1. When the minor actively misrepresented his age on the contract by stating that he
is of age, and the other party was misled, the contract shall be binding upon him
on the basis of estoppel. If there is merely silence in the contract as to the age of
the minor, the fraud is not actual but only constructive, the minor is not bound by
his signature. Yet, he must still make restitution up to the extent that the was
benefited. If the other party knew of the minority of the minor, he is bound
thereby.
2. When the contract involves the sale and delivery of necessaries (or those which
constitute support), he is bound thereby.
3. When the minor, upon reaching the age of majority, ratifies the contract, he
becomes bound thereby.
4. When the contract is in the form of savings account in the postal savings bank
provided the minor is at least 7 years of age, the same is valid.
5. When the contract is an insurance for life, health, and the accident on the minor’s
life.
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Cases:
Bambalan vs. There was an alleged contract between Isidto and Maramba regarding the
Maramba sale of land in questions wherein Isidro at the time of execution was a
(impt) minor.
● Contract was NOT valid since consent is vitiated to the extent
of being void as regards the said plaintiff at the time, he signed
it due to minority.
● It is clearly shown by the record, and it does not appear that it
was his real intention to sell the land in question.
● The plaintiff did not pretend to be of age; his minority was well
known to the purchaser, the defendant, who was the one who
purchased the plaintiff's first cedula used in the
acknowledgment of the document.
Mercado, et Can the deed of sale be validly declared annulled? - NO. No evidence
al. vs. appears in the record that the plaintiffs Josefa and Domingo Mercado
Espiritu were in fact minors, for no certified copies were presented of their
baptismal certificates, nor did the plaintiffs adduce any supplemental
evidence. Even assuming that there is sufficient evidence to warrant the
petitioners claims that they were minors, the sale of real estate made by
minors who pretend to be of legal age, when in fact they are not, is valid,
and they will not be permitted to excuse themselves from the fulfillment
of the obligations contracted by them.
Braganza vs. Rosario and her sons Rodolfo (18) and Guillermo (16) issued a
de Ville promissory note in favor of Abrille for the loan they received from him.
Abrille (impt) Because of failure to pay, Abrille sued Braganza.
● The defense of minority can be invoked even though there was
failure to disclose minority in the note.
● In order to hold the minor liable, the fraud must be in actual
and not constructive. There was no active misrepresentation on
the part of the minors and no explicit mention of majority was
made by the minors in executing the instrument.
(2) Insane persons:
● When a person is insane or demented, he is detached from reality. He does not know
what he is doing. He cannot act with legal effects. Thus, he cannot enter into valid
contracts.
● Old age and weakness of the mind do not amount to insanity.
● Exceptions: During lucid intervals, they may enter into contracts, as can be seen in
the following article. This is because they are sane and capable of knowing what
they are doing during these moments.
And deaf-mutes who do not know how to write:
● Not all deaf-mutes, but only those who do now know how to write are disqualified.
● If he knows how to write, it is not difficult to communicate with him. If he can read,
generally, he knows how to write. Such a deaf-mute may validly enter into contracts.
(3) Drunk or under hypnotic spell:
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)
Contracts During Lucid Interval:
● The contracts referred to in the article are those entered into by insane persons who
re-enter into the realm of sanity at certain times. This moment of normalcy is called
lucid interval, after which the person may be out of his mind again.
● As long as the contract was entered into during this lucid interval, even if the person
is then under judicial guardianship, the contract is valid.
● However, sanity must be proved since such a person under judicial guardianship is
presumed to be insane.
● A person may be insane on certain subjects and situations but nevertheless sane in
other respects.
Drunkenness:
● Contracts entered into by persons who were drunk at that moment may be valid or
voidable depending upon the degree of his intoxication.
● If the drunkenness has reached that point that the person has completely lost the use
of his faculties and level of consciousness, the contract is voidable for the lack of
capacity to contract.
● However, if he is still fully aware of what he is doing and knows the consequences
thereof, the contract is valid.
Hypnotic Spell:
● A person under a hypnotic spell is doing things without volition. He is placed under
the control of the hypnotizer and his will is subdued and overcome by the power or
will of another.
● While he may sign the contract, his consent is not free. The contract is therefore
voidable.
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)
Article 1490. The husband and the wife cannot sell property to each other, except:
1. When a separation of property was agreed upon in the marriage settlements; or
2. When there has been a judicial separation of property under article 191. (1458a)
Article 1491. The following persons cannot acquire by purchase, even at a public or
judicial auction, either in person or through the mediation of another:
1. The guardian, the property of the person or persons who may be under his
guardianship;
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 2. Agents, the property whose administration or sale may have been intrusted to
them, unless the consent of the principal has been given;
3. Executors and administrators, the property of the estate under administration;
4. Public officers and employees, the property of the State or of any subdivision
thereof, or of any government-owned or controlled corporation, or institution, the
administration of which has been intrusted to them; this provision shall apply to
judges and government experts who, in any manner whatsoever, take part in the
sale;
5. Justices, judges, prosecuting attorneys, clerks of superior and inferior courts, and
other officers and employees connected with the administration of justice, the
property and rights in litigation or levied upon an execution before the court
within whose jurisdiction or territory they exercise their respective functions; this
prohibition includes the act of acquiring by assignment and shall apply to lawyers,
with respect to the property and rights which may be the object of any litigation in
which they may take part by virtue of their profession;
6. Any others specially disqualified by law. (1459a)
Article 1646. The persons disqualified to buy referred to in articles 1490 and 1491, are also
disqualified to become lessees of the things mentioned therein.
Special Disqualification to Contract, Different from the Incapacity under Art. 1327:
● Persons in 1327 are incapacitated to give consent because they do not have the
mental capacity to do so.
● The special disqualifications referred to in the present article refer to those explicitly
disqualified by law from entering into certain contracts.
● For example, a generally, a husband and wife cannot donate, sell, or lease properties
to one another as provided for in the family code.
● Also, the persons enumerated in Article 1491 are disqualified to enter into contracts
because of fiduciary relationship or because of public policy.
● Insolvents cannot enter into contracts until discharged.
Other Causes of Incapacity to Enter into Contracts:
● The following are considered incompetents and may be placed under judicial
guardianship:
a. Those suffering the penalty of civil interdiction
b. Hospitalized lepers
c. Prodigals
d. Deaf and dumb who are unable to read and write
e. Those of unsound mind even though that have lucid intervals
f. Those who by reason of age, disease, weak mind, and other similar causes,
cannot without outside aid, take care of themselves and manage their
property.
● The above incompetents are not prohibited to enter into contracts, but they can only
do so through their guardians with the approval of the court. But those specially
disqualified are prohibited whether they are represented or not.
Distinctions Between Incapacity to Consent (Art. 1327) and Special Disqualifications:
Incapacity to Consent Special Disqualification
Mere restriction upon the exercise of the A restriction upon the right itself which
right to enter into a contract. The person can means that the person is absolutely
still enter into a contract through his disqualified from entering into the contract,
guardian, and violating this would only and violating this would make the contract
make the contract voidable. void.
Lifted from Vergara’s reviewer:
General Rule: The contracts entered into by the persons enumerated in Article 1327 are
voidable.
Exception: In certain cases, their incapacity may be modified by law, that is, they can also
give valid consent. Thus:
1. When necessaries such as food, are sold and delivered to a minor or other person
without capacity to act, he must pay a reasonable price therefor.
2. A minor, 18 years old or above may contract for life, health and accident
insurance, provided, the insurance is taken on his life and the beneficiary
appointed is the minor’s estate or the minor’s father, mother, spouse, brother, or
sister.
3. A contract is valid if entered into through a guardian or legal representative.
4. A contract is valid where the minor who was near majority age misrepresented his
actual age and convincingly led the other party to believe in his legal capacity.
5. A contract is valid where a minor between 18 and 21 years of age voluntarily pays
a sum of money or delivers a fungible thing in fulfillment of his obligation
thereunder and the obligee has spent or consumed it in good faith.
6. Emancipation of a minor for any cause such as by marriage or by recorded
agreement, shall terminate parental authority over his person and property and he
shall then be qualified and responsible for all acts of civil life. The parents may
entrust the management or administration of any of their properties to an
unemancipated child.
Other special disqualification:
Article 739. The following donations shall be void:
1. Those made between persons who were guilty of adultery or concubinage at the
time of the donation;
2. Those made between persons found guilty of the same criminal offense, in
consideration thereof;
3. Those made to a public officer or his wife, descendants and ascendants, by reason
of his office.
In the case referred to in No. 1, the action for declaration of nullity may be brought by the
spouse of the donor or donee; and the guilt of the donor and donee may be proved by
preponderance of evidence in the same action.
Article 1476. In the case of a sale by auction:
4. Where notice has not been given that a sale by auction is subject to a right to bid
on behalf of the seller, it shall not be lawful for the seller to bid himself or to
employ or induce any person to bid at such sale on his behalf or for the
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 auctioneer, to employ or induce any person to bid at such sale on behalf of the
seller or knowingly to take any bid from the seller or any person employed by
him. Any sale contravening this rule may be treated as fraudulent by the buyer.
Art. 1533(5) (Contributor’s note: I am not sure what’s (5) so i just pasted all):Where the
goods are of perishable nature, or where the seller expressly reserves the right of resale in
case the buyer should make default, or where the buyer has been in default in the payment
of the price for an unreasonable time, an unpaid seller having a right of lien or having
stopped the goods in transitu may resell the goods. He shall not thereafter be liable to the
original buyer upon the contract of sale or for any profit made by such resale, but may
recover from the buyer damages for any loss occasioned by the breach of the contract of
sale.
Where a resale is made, as authorized in this article, the buyer acquires a good title as
against the original buyer.
It is not essential to the validity of resale that notice of an intention to resell the goods be
given by the seller to the original buyer. But where the right to resell is not based on the
perishable nature of the goods or upon an express provision of the contract of sale, the
giving or failure to give such notice shall be relevant in any issue involving the question
whether the buyer had been in default for an unreasonable time before the resale was made.
It is not essential to the validity of a resale that notice of the time and place of such resale
should be given by the seller to the original buyer.
The seller is bound to exercise reasonable care and judgment in making a resale, and
subject to this requirement may make a resale either by public or private sale. He cannot,
however, directly or indirectly buy the goods.
Article 1782. Persons who are prohibited from giving each other any donation or advantage
cannot enter into universal partnership.
Article 1409. The following contracts are inexistent and void from the beginning:
7. Those expressly prohibited or declared void by law.
Art. 87, FC. Every donation or grant of gratuitous advantage, direct or indirect, between
the spouses during the marriage shall be void, except moderate gifts which the spouses may
give each other on the occasion of any family rejoicing. The prohibition shall also apply to
persons living together as husband and wife without a valid marriage.
Art. 234, FC. Emancipation takes place by the attainment of majority. Unless otherwise
provided, majority commences at the age of eighteen years.
Art. XII, Secs. 7 & 8 1987 Constitution
SECTION 7. Save in cases of hereditary succession, no private lands shall be transferred
or conveyed except to individuals, corporations, or associations qualified to acquire or hold
lands of the public domain.
SECTION 8. Notwithstanding the provisions of Section 7 of this Article, a natural-born
citizen of the Philippines who has lost his Philippine citizenship may be a transferee of
private lands, subject to limitations provided by law.
Class Notes
Telegram Acceptance - acceptance when there is knowledge
Requisites of a valid offer:
1. Certain or definite offer so that, upon acceptance, an agreement can be reached.
2. Complete offer to indicate with sufficient clearness the kind of contract intended
and stating the essential conditions of the proposed contract.
3. Intentional offer with seriousness made in such manner that the other part would
not fail to notice the juridical effects of his acceptance.
Acceptance must be unconditional and absolute.
Qualified Acceptance
● Variation from the proposal either by way of omission, addition, or alteration.
● Considered as counteroffer.
● NOT acceptance; neither party is bound.
● BUT an acceptance is not conditional if the acceptor expresses dissatisfaction
with the offer, yet gives his unqualified assent, of id he adds immaterial words.
When offer becomes ineffective
1. Death, civil interdiction, insanity, insolvency
2. When the offeree expressly or impliedly rejects the offer (no meeting of the minds
there is a rejection. The offer has to be made again to be properly accepted)
3. When the offer is accepted with qualification or condition
4. When before acceptance is communicated, the subject matter has become illegal
or impossible.
5. When the period of time given to the offeree within which he must signify his
acceptance has already lapsed.
6. When the offer is revoked due time (that is, before the offeror has learned of its
acceptance by the offeree)
VICES OF CONSENT (ARTS. 1330-1346)
Article 1330. A contract where consent is given through mistake, violence, intimidation,
undue influence, or fraud is voidable. (1265a)
Vices of Consent:
1. Vices of the Will – this includes mistake, violence, intimidation, undue influence,
and fraud.
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 2. Vices of Declaration – this class includes all kinds of simulated contracts (Arts.
1345-6)
These can affect all kinds of contracts including the unilateral ones like will, donations,
recognition of illegitimate children.
Consent:
● Consent is manifested by the meeting of the offer and the acceptance upon the thing
and the cause which are to constitute the contract.
● Consent must be intelligent, free and spontaneous. If these requisites are absent, the
consent is said to be defected or vitiated and the ensuing contract voidable.
● Intelligence is vitiated by mistake or error; Freedom by intimidation, violence, or
undue influence; Spontaneity by fraud.
Proof needed to Sustain Annulment:
● Full, clear, and convincing evidence is needed to annul a contract on the ground of
vitiated consent.
Hernandez Was the receipt, and the quitclaim, valid? – NO. What is on record is
vs. that Cornelia asked for an accounting of the just compensation from
Hernandez Cecilio several times, but the request remained unheeded. Right at that
point, it can be already said that Cecilio violated the fiduciary
relationship of an agent and a principal. Instead of an accounting, what
Cornelia received was a receipt and quitclaim document that was ready
for signing. As testified to by Cornelia, due to her frail condition and
urgent need of money in order to buy medicines, she nevertheless signed
the quitclaim in Cornelio’s favor. Quitclaims are also contracts and can
be voided if there was fraud or intimidation that leads to lack of consent.
Based on the attending circumstances, the receipt and quitclaim
document is an act of fraud perpetuated by Cecilio.
(1) Mistake:
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.
Applicability and Concept of Mistake:
● The article refers to mistakes of fact and not to mistakes of law.
● Mistake is an erroneous belief about something. It is a belief on the existence of a
thing, event, or circumstance, which in reality does not exist.
Mistake Distinguished from Ignorance:
Mistake Ignorance
Mistake is the false impression on While ignorance is absence of any notion or
something, impression about a particular thing.
● In both concepts, there is a lack of full and correct knowledge about a thing.
● Both are contemplated in the article and the NCC does not distinguish between
the two.
Kinds of Mistake or Error which Vitiates Consent:
● The only mistake or error which vitiates consent refers to the substance of the thing
– which is the object of the contract, or those conditions which have principally
moved one or both parties to enter into the contract.
Classification of Mistakes or Errors which Vitiate Consent:
1. Mistake of Fact – this is the mistake incurred by a party or both parties in the contract as
to the nature of the contract, the object, the substance of the thing, the quality of
conditions of the thing, the identity or qualification of the person, and the quantity of the
thing where quantity is the main reason for the contract.
a. Nature of the contract – if the mistake refers to the nature of the contract, the error
or mistake goes to the essence thereof. This may invalidate the contract.
● For example, a party who affixed his thumb mark on the document
presented to him which he believed to be a deed of mortgage and not a
deed of sale, his consent is vitiated.
b. Object of the contract – the mistake here refers to the substance of the thing itself,
that is, the very material of which the thing is made of.
● For example, a buyer purchased a ring for a valuable consideration
believing that it is pure gold, but actually is only gold-plated. His consent
is vitiated.
c. Quality or principal conditions of the thing – the condition must be the principal
reason why a party or the parties entered into the contract.
● For example, a vendee agreed to purchase a parcel of land on the belief
that the land is free from any encumbrance. Turns out, land is being
claimed by another person. The vendor honestly thought, his land is free
from any claim. This mistake vitiates the consent of the parties.
● On the other hand, accidental conditions or qualities, such as the particular
lot number of the land, or the boringness of a film that was rented, are
accessory matters which do not invalidate the contract. They do not attach
to the essence of the thing.
d. Identity of the person or his qualifications – refers to an error made on the
identity or qualification of one of the contracting parties. It is the identity of the
person, not the name. A mistake in the name but not as to the person will not vitiate
consent as long as the person is identifiable. Generally applies to obligations “to
do”.
● Requisites of Mistake as to the Person:
1. Mistake must be with respect to the identity of one of the
parties, or his qualifications
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 2. The identity or qualification is the principal reason why the
injured party entered into the contract
● Example of Mistake as to Identity: Kim agreed to grant a loan to Jade,
on her belief that Jades’s guarantor is Zantua, on whom Kim as full trust
and confidence. It turned out, however, that the guarantor is actually a
different person named John Chua, and not Zantua. Here, the consent is
vitiated due to his mistake on the person of the guarantor.
● Example of Mistake as to Qualification: Isabel engaged the services of
Hazel to pose as a model for the front cover of her magazine, believing
that Hazel is such an empowering role model for the youth. It evolved that
Hazel is different from the model that Isabel had in mind, it only happened
that Hazel has the same name as the other model. Isabel’s consent is
vitiated, even though the Hazel that she hired is as beautiful as the other
Hazel.
e. Quantity – mistake in quantity must be distinguished from a mistake or error in
accounting. In the first, there really exists an error as to the extent or dimension of
the object of the transaction or contract. In the second, there is no real mistake but
only a mistake on paper due to an erroneous mathematical computation. The
contract in the first is voidable, while the contract in the second is not.
● For example, a vendee is informed by the vendor that the subject matter of
the sale is a 30 hectare sugarland which would produce 2,000 piculs of
sugar. Vendee paid 30,000. Later, it turned out that the land was only 18
hectares and production was only around 800 piculs. There was mistake in
quantity and the contract was set aside. But if the error in the area of the
land is not considered as essential to the contract, the sale is valid.
● However, when Joyce purchased 10 boxes of Royce chocolate covered
potato chips as comfort food at the price of 500 pesos each but was quoted
in the contract as amounting to 3,600 pesos instead of 5,000, there is
merely an error in computation of the account which can be easily
corrected as it is just a matter of arithmetic. It will not invalidate the
contract.
2. Mistake of Law – This is the mistake incurred by a party or both parties as to the legal
effect of a certain transaction or act. Generally, mistake of law does not vitiate consent as
to render the contract voidable, because ignorance is not an excuse. However, if mutual
error of the contracting parties as to the legal effect of an agreement frustrates the
intention of the parties, such error or mistake may vitiate consent.
Error in the Making of Estimates:
● Error in the estimation or calculation of the benefits derivable from a contract as
well as the expected expenses attendant thereto, is not a ground for annulment of the
contract. These errors do not permeate to the essential elements of the contract itself.
● If the estimations were done in bad faith to induce the other party to enter into the
contract, there is fraud, which may now invalidate the contract.
Is the Party Who is the Source of the Mistake or Error Liable for Damages?:
● If a party has sustained damages by his reliance on the erroneous declaration of the
other party, the latter may be held liable for damages if he is guilty of negligence.
● If he could have discovered the error by observance of simple diligence, and by such
omission, he had misled the other party to enter into the contract resulting in
damages to the latter, the errant party will be responsible therefor. However, if the
party alleging the mistake knew the doubt, contingency or risk affecting the object
of the contract, there is no mistake. (Art. 1333)
● The party who claimed he had made a mistake and would want to annul the contract
by reason thereof, is estopped from doing so, if he was aware of the existence of the
real fact from which the mistake has allegedly arisen. For example, if the purchaser
knew that the growing crops in a hacienda belonged to the lessee and not the owner,
there is no error or mistake that vitiated the purchaser’s consent.
● Negligence for not reading the “fine prints” of the contract which a party signed
cannot be considered as a vitiating factor in the consent given by such party. Such
failure did not make the act of the signing party as involuntary.
● If the negligence is mutual, they do not have a cause of action against each other.
● If the mistake is being employed merely as an excuse to evade the contract, but
actually, there is fraud, the misleading party will be liable for damages under Article
1171.
Mistake or Error in the Motive/s of a Party Does Not Vitiate Consent:
● If a contracting party was motivated to enter into the contract by reason personal to
himself but which turned out to be wrong, the consent he gave to the contract is not
vitiated. For example, Ysa purchased a car believing that her original car which was
car napped could no longer be recovered. However, the car was recovered and
returned to her. The purchase of the new car could not be set aside by reason of the
mistake or error in her motive.
Cases:
Gomez vs. Was the consent given by the respondents void by reason of error and
Linton deceit? – YES. The facts show conclusively that the respondents were
misled and deceived by the petitioner as to the actual boundaries of he
land, and, as to the important fact, that petitioner could not make a good
title to all of the land within the boundaries. Respondents admit that before
the signing of the contract, plaintiff took them out over the land, which he
proposed to sell and showed them the corners and exterior boundaries.
After the contract was signed and upon making further examinations of the
record title, it was found that a large portion of the most valuable part of
the tract was not included in the land, which the petitioner proposed to
convey.
Atilano vs. Atilino1 executed a DOS covering Lot E in favor of his brother, Atilano2
Atilano while retaining for himself the only remaining portion of the land, lot A.
When Atilano2 become a widower, they had the land resurveyed so that it
could properly be subdivided, and it was then discovered that the land they
were actually occupying on the strength of the DOS executed in 1920 was
lot A and the land E while the land which remained in the possession of the
vendor, Atilano 1 was lot E and instead of A. The heirs of Atalino2 filed an
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action and demanded the return of possession of lot E, but the defendants
refuses to accept the exchange.
● Did the mistake vitiate the consent of the parties thereby
affecting the validity of the agreement? – NO. he Court finds
that the object thereof, as intended and understood by the parties,
was that specific portion where the vendee was then already
residing (lot A) ; and that its designation as lot E in the deed of
sale was simple mistake in the drafting of the document, and thus
such mistake did not vitiate the consent of the parties, or affect
the validity and binding effect of the contract between them.
Teran vs. Was the sale binding even though the actual land is smaller than what is
Villanueva written on the deed? – YES. The Court ruled against Teran. He obviously
had ample opportunity to investigate the conditions of the land, without
any hindrance from the defendants, because of this he had no right to
allege that the vendors made false representation. Besides, no evidence
shows that the area was an essential element of the contract. A mistake on
an element not essential to the contract could not vitiate the same.
Furthermore, parties did not consider the area as an essential element of the
contract. Teran could not now argue that a mistake on an element not
essential to the contract vitiated the whole obligation.
a. Illiterates:
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.
Rationale and Applicability:
● There is still a fairly large illiterates in the country, and documents are ordinarily
drawn up in English.
● For this article to apply, it must first be convincingly established that the illiterate or
disadvantaged party could not read or understand the language in which the contract
was written or that the contract was left unexplained to said party.
Presumption:
● In the law on evidence, it is presumed that a person intends the ordinary
consequences of his voluntary act. This principle that a party is presumed to know
the import of a document to which he affixes his signature is modified by article
1332. Burden rests upon the party who seeks to enforce the contract to show that the
other party fully understood the contents of the document.
When Presumption is Not Applicable:
1. When one of the contracting parties is unable to read;
2. When the contract is written in a language not understood by the said party.
Allegation of Fraud or Mistakes by an Illiterate, Effects:
● If a contracting party is an illiterate or even if literate, but he could not understand
the language used in a contract which he signed, and later, he alleged that there was
fraud and mistake in the execution thereof, there is a presumption created that there
was fraud or mistake when he signed or gave his conformity to the contract.
● The burden of proof is shifted now to the party who is enforcing the agreement. He
must prove that the document was fully explained to the party alleging fraud or
mistake.
● For example: Two people who are both blind affixed their thumb marks to a deed
which they thought was merely a deed of mortgage but turned out to be a deed of
sale. The document was set aside as the defendant failed to prove that the other party
fully understood the contents of the document.
Tan vs Before his death, seller, totally blind and was crippled for 10 years,
Mandap conveyed the subject properties to his common-law wife’s relatives. Such
sale was challenged by seller’s children stating that the the sale of subject
properties by their father was fictitious, and without any consideration.
The sale between Mandap and Vasquez spouses was NOT valid since the
purportedly seller, totally blind and paralyzed, could not possibly have
read the contents of the deeds. As the party should have presented
evidence showing that the terms of deeds of sale to the Vasquez spouses
were fully explained to Mandap.
Dela Cruz vs. The court held that for Art. 1332 to apply, it must 1st be convincingly
Dela Cruz established that the illiterate or disadvantaged party could not read or
understand the language in which the contract was written or that the
contract was left unexplained to said party.
● Sellers failed to discharged this burden. The sale was valid.
● Buyer declared the property in his name for taxation purposes
and paid the realty taxes, without any protest from the Seller.
Article 1333. There is no mistake if the party alleging it knew the doubt, contingency or
risk affecting the object of the contract. (n)
Applicability:
● Covers mistakes or errors which are not excusable.
● If the mistake could have been avoided by exercising ordinary prudence or by
observing diligence to know the facts, or when it is so obvious and apparent that an
ordinary person could have known it, a party cannot invoke mistake to seek the
annulment of the contract.
● The mistake contemplated in this article which could constitute as a basis for the
annulment of the contract is an excusable one. It must arise from facts unknown to
the person. If the facts are known to him, or which he should have known by the
exercise of ordinary diligence, he cannot allege mistake.
● Example: A bought B’s house along the edge of a hill. It collapsed after a strong
typhoon.
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 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)
Rationale:
● When even the highest courts are sometimes divided upon difficult legal questions,
and when one-half of the lawyers in all controversies on a legal question are wrong,
why should a layman be held accountable for his honest mistake on a doubtful legal
issue? (Report of the Code Commission)
Requisites of Mutual Error:
1. The error must be mutual, that is, both parties are mistake about something but not
about the object, condition, personality or qualifications of a person as understood in
Art. 1331.
2. The error must refer to the legal effects of the agreement. Legal effect refers to the
rights of the parties as stated in legal provisions and not as stipulated by the
contracting parties.
For example: A is an heir of B, his deceased father. A sold his share to C which share is
indicated as his inheritance in the last will of his father. Both A and C believed that the sale
is valid. So C paid the value of the property. However, the will was denied probate,
therefore A is not yet the owner of the property. There is mutual error and the sale is
voidable.
Mistake in 1334 is different from Mistake in Reformation Cases:
● Where by a mutual mistake, the instrument embodying the agreement did not reflect
the agreement of the parties, the instrument is not annullable because there was a
meeting of the minds between the parties. The remedy authorized by law is
reformation of the instrument.
Calilap- It is quite notable that the petitioner did not specify which of the stipulations of
Asmeron the deed of conditional sale she had difficulty or deficiency in understanding.
vs. DBP Her generalized averment of having been misled should, therefore, be brushed
aside as nothing but a last attempt to salvage a hopeless position. Our
impression is that the stipulations of the deed of conditional sale were simply
worded and plain enough for even one with a slight knowledge of English to
easily understand.
Nor was the petitioner’s ignorance of the true nature of the deed of conditional
sale probably true. By her own admission, she had asked the bank officer why
she had been made to sign a deed of conditional sale instead of an absolute
sale, which in itself reflected her full discernment of the matters subject of her
dealings with DBP.
(2) Violence:
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.
Violence, Concept:
● It is an external and physical force or compulsion exerted upon a person to prevent
him from doing something or compelling him to do an act. Serious or irresistible
force is employed overcoming the mind of a person for the purpose of wresting his
consent.
Elements of Violence:
1. There is a physical force employed which must be serious or irresistible such that
the victim is left without any choice but to submit.
2. The physical force employed is the determining cause in the giving of the
consent.
(3) Intimidation:
Intimidation, Concept:
● It is an internal moral force operating in the will and inducing the performance of an
act. The victim in intimidation is compelled to give his consent due to a reasonable
and well-grounded fear of an imminent and grave evil upon his person or property or
those of his spouse, descendants or ascendants.
Elements of Intimidation:
1. The threat is real, serious, and imminent endangering the person and the property
of the victim or those of his spouse, descendants, or ascendants, if he does not
give his consent.
2. The threatened act is unjust or unlawful, for if it is not, there is no intimidation.
3. The threatened act is aimed to secure the consent of the victim.
Violence v. Intimidation
Violence Intimidation
It consists of physical force which is It consists of moral force operating in the
serious or irresistible. will of a person.
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It is external because it is exerted upon the It is internal because it operates in the mind
body of the victim. It is physical of the person. It is a moral compulsion.
compulsion.
There is no space of time to choose There is a brief space of time between the
between the physical compulsion and the threat and the actual act giving the victim a
act. They are simultaneously done. chance to choose between two evils: to do
what is being pressed upon him, or to suffer
the threatened act.
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 by a Third Person:
● Even if duress is employed by a third person who did not take part in the contract,
the principle remains the same, the contract is voidable because the consent is still
vitiated.
(4) Undue influence:
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; Concept:
● Undue influence is ANY means employed upon a party which, under the
circumstances, he could not well resist, and which has the effect of controlling his
volition and inducing him to give his consent to the contract, which otherwise, he
would not have entered into.
● It is a means which compels a person to do that which is against his will because of
fear, the desire for peace, or other feeling which he is unable to resist.
● It must in some measure destroy the free agency of a party and interfere with the
exercise of that independent discretion which is necessary for determining the
advantages or disadvantages of a proposed contract.
● Undue influence is different from intimidation. In intimidation, the threatened act
must be unjust or unlawful, in the former, the act need not be unjust or unlawful.
● In undue influence, the victim is deprived of his reasonable freedom of choice by
someone who subdued his will. Thus, when during a serious famine, one party is
compelled to accept the terms of a contract imposed by someone who has the
monopoly of the food, there is undue influence.
Due Influence, Reluctance, and Reverential Fear Does Not Vitiate Consent:
● When influence consists in persuasive arguments or appeals to the affections, the
consent is not vitiated at all. This is rather an exertion of due influence which is
allowed by law.
● Solicitation, importunity, argument, and persuasion do not constitute undue
influence, and a contract is not to be set aside merely because one party used these
means to obtain the consent of another.
● Giving of reluctant consent cannot be considered as vitiated consent because it is
clear that the person acted voluntarily and freely though he is reluctant.
● Reverential fear is the fear of displeasing persons to whom respect and obedience
are due, and this does not vitiate consent.
Circumstances Necessary in Determining Undue Influence:
● The law mentions certain circumstances to be considered in resolving whether there
is undue influence, but these are not exclusive.
● Other circumstances may be considered if they lead to the determination of the
existence of any kind of ascendancy or power of one person over the will of another,
depriving the latter of his freedom of choice.
Cases:
Martinez vs. Was the consent of the wife obtained under duress thus rendering the
HSBC agreement void? – NO. In the case at bar, it is not sufficient nor
conclusive that the petitioner now regrets having entered into the contract
and that she disliked entering into such. Petitioner was given the
opportunity to take the advice of her attorneys and if ever there were
threats, it was not made directly to her because it was her attorneys who
negotiated.
Cases where duress is applicable or present:
1. in cases where there was no time within which to deliberate
the matter as it should have been deliberated
2. there was no time or opportunity to take the advice of friends or
of disinterested persons
3. there was no time or opportunity to take the advice of counsel
4. the threats made to secure the performance of the act
complained of were made directly to the complaining party
5. there was no consideration for the performance of the act
complained of except immunity from the prosecution
threatened
6. the property transferred or encumbered was the separate
property of the person performing the act in which the person
for whom the act was performed claimed no interest whatever
7. there was no dispute as to the title of the property transferred or
encumbered, no claim made by anybody and no pretension that
it could be taken for the debts of the husband or any other
person.
Bañez vs. CA Was the letter of Senator Fernandez constitutive of undue influence? –
NO. The evidence on which the finding of the Court of Appeals that the
(CA held that PHHC accommodated petitioners because of the intercession of whoever
the approval of wrote "Exhibit C, has no evidentiary basis, for Exhibit C was rejected by
the transfer of the trial court" for being immaterial, irrelevant, impertinent and not
CIVREV C2022 COMPILATION - DBN & MKG | SBM SYLLABUS | 117
 the rights to properly identified. But assuming that the letter was written by Senator
the lot was due Fernandez, it cannot be implied from the facts of the case that the transfer
to the of rights from Basilio to Bañez was approved solely on the strength of
intercession of such letter, for the approval of the transfer was recommended as
the then "extremely meritorious" by the Head Executive Assistant, and by the
Senator Homesite Sales Supervisor.
Fernandez)
This Court has already said that solicitation, importunity, argument and
persuasion are not undue influence , and a contract is not to be set aside
merely because one party used these means to obtain the consent of the
others. Influence obtained by persuasion or argument or by appeals to the
affections is not prohibited either in law or morals, and is not obnoxious
even in courts of equity. Such may be termed "due influence."
Vales vs. Villa Was there undue influence placed upon Vales? – NO. No deception
took place in this case. Although Vales was in a disadvantageous
position, he acted independently and voluntarily. The only fear he had
that time was the fear of losing his properties. He could have gone to
courts to recover his properties, instead he continued dealing with the
defendants, and even repurchased the properties from them years later.
The court took it as his way of accepting all that had happened to his
person, no matter how unfavorable.
(5) Fraud:
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)
Concept of Fraud; Reason for Lack of Definition:
● Fraud is every kind of deception or misrepresentation designed or schemed to lead a
party into substantial mistake or error, and relying thereon, he executes a particular
act leading to his damage or prejudice
● In fraud, the will of a person is maliciously misled by means of a false appearance of
reality resulting in his damage and prejudice. Fraud does not necessarily need to
amount to estafa or felony to be considered as a fraud.
● The article did not define fraud. This is because the circumstances evidencing fraud
are as varied as the men who schemed the fraud in each case. Fraud is manifested in
illimitable degrees or gradations. The causal fraud (efficient cause to the giving of
consent) or dolo causante is a ground for annulment of a contract while the
incidental fraud is a ground for damages.
● It is fraud to conceal fraud.
Requisites of Fraud (Dolo Causante):
1. Fraud is applied or utilized by one contracting party upon the other. (If both
committed fraud, contract is valid) (Art. 1344)
2. It must be serious deception or misrepresentation. (Art. 1344)
3. It must have induced the victim to enter into the contract. (Art. 1338)
4. It must have resulted in damage or injury to the victim.
Insidious Machinations:
● This refers to a deceitful scheme or plot with an evil design, or a fraudulent purpose.
Thus, the deceit which avoids a contract, need not be by misrepresentations in
words.
● The deceit exists where the party who obtains consent does so by concealing or
omitting to state material facts which, with intent to deceive, by reason of such
omission or concealment the other party was induced to give consent which he
would otherwise have not given.
Quantum of Evidence:
● Fraud and misrepresentation are never presumed – they must be proved by clear and
convincing evidence and not mere preponderance of evidence.
Bad Faith Partakes of the Nature of Fraud:
● Bad faith does not simply connote bad judgment or negligence. It imports a
dishonest purpose or some moral obliquity and conscious doing of wrong. It means
breach of a known duty through some motive or interest or ill will. It partakes the
nature of fraud.
Kinds of Fraud:
● The civil code speaks of two different kinds of fraud which have no similarities.
● The first kind is treated in Article 1170-71 centering on the performance of the
prestation.
● The second kind is treated in Article 1338 centering on the celebration or perfection
of the contract.
● Fraud that justifies a prayer for annulment of contracts is different from the fraud
that justifies a liability for damages
● Fraud under 1338 refers to all kinds of deception, whether through insidious
machination, manipulation, concealment or misrepresentation to lead another party
into error.
Distinction Between Fraud in Performance and Fraud in the Perfection
Supra.
Resulting from Fraud Error/Mistake
To be clear, error induced Whereas, the mistake or error in 1331 will only vitiate
by fraud will always vitiate consent if it refers to the substance of the thing which it is
consent if it is the the object of the contract or to those which have principally
influencing factor for the moved one or both parties to enter the contract or it refers to
party to enter into the the identity or qualification of one of the parties which have
contract. (Art. 1338) been the principal cause of the contract.
Article 1339. Failure to disclose facts, when there is a duty to reveal them, as when the
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 parties are bound by confidential relations, constitutes fraud. (n)
Failure to Disclose Facts, When Fraudulent:
● When by the reason of confidential relations, a party is bound to disclose facts, but
instead, concealed them with the intention to deceive such concealment constitutes
fraud. It is a basis for annulment of the contract.
● For example: A principal was persuaded and induced by his agent to sell to the latter
certain properties at 12 dollars per piece. The agent did not disclose the fact that the
government was interested in buying these properties at a higher price of 19 dollars
per piece. It was held that the sale is fraudulent.
Opponents in Litigation have no Confidential Relations:
● Between opponents in a case, there could be no duty to disclose facts because their
relationship is far from being confidential, it is rather antagonistic.
Innocent Non-disclosure of facts when there is No Duty to Reveal them:
● When there is mere innocent non-disclosure of a fact where between the parties
there is no duty to reveal it, no fraud was committed.
Strong v. The defendant violated no duty in not communicating to the plaintiff his
Gutierrez purpose in buying her shares and has been guilty of no fraud. The
machinations with which the defendant is charged consist in the
suppression of his identity while negotiating for the stock and were paying
for it and also of his intention as majority stockholder in the company to
close the negotiation then pending with the Government for the sale of the
friar lands owned by the company. The prospect of such a sale would have
materially affected the price of the stock.
Woodhouse This Court had held that in order that fraud may vitiate consent, it must be
vs. Halili the causal (dolo causante), not merely the incidental (dolo causante),
inducement to the making of the contract. The record abounds with
circumstances indicative that the fact that the principal consideration, the
main cause that induced defendant to enter into the partnership agreement
with plaintiff, was the ability of plaintiff to get the exclusive franchise to
bottle and distribute for the defendant or for the partnership. The principal
obligation that he assumed or undertook was to secure said franchise for the
partnership, as the bottler and distributor for the Mission Dry Corporation.
We declare, therefore, that if he was guilty of a false representation, this
was not the causal consideration, or the principal inducement, that led
plaintiff to enter into the partnership agreement.
We conclude from the above that while the representation that plaintiff had
the exclusive franchise did not vitiate defendant's consent to the contract, it
was used by plaintiff to get from defendant a share of 30 per cent of the net
profits; in other words, by pretending that he had the exclusive franchise
and promising to transfer it to defendant, he obtained the consent of the
latter to give him (plaintiff) a big slice in the net profits. This is the dolo
incidente defined in article 1270 of the Spanish Civil Code, because it was
used to get the other party's consent to a big share in the profits, an
incidental matter in the agreement.
Cacho vs. Is the petitioner entitled to damages due to the writ of execution being
Bonifacio obtained by fraud? – YES. The appellate court itself found that
respondents' act of reviving Civil Case No. 1800 without impleading
petitioner (who, as respondents were very much aware, was the one already
occupying and actively managing the restaurant) was "very revealing of
their dishonest intention and bad faith that resulted to [the] prejudice and
damage" of petitioner.
Araneta vs. It was alleged that Atty. Salvador and Antonio who Paz said had been her
De Paterno attys and had drawn Exhibit A, and informed or had misinformed her about
its contents; that being English, she had not read the DOS; that if she had
not trusted the said attys, she would have been so foolish as to affix her
signature to a contact so one-sided.
Was there fraud in obtaining the consent of Paz Tuason? – NO. t is
difficult to believe that the defendant was deceived into signing Exhibit A,
as she had been intelligent and well educated in managing her affairs, she
had an able attorney who was assisting her in the suit against Vidal, a case
which was instituted precisely to carry into effect Exhibit A or Exhibit 1,
and a son who is leading citizen and a business-man and knew the English
language very well if she did not.
If the defendant signed Exhibit A without being apprised of its import, it
can hardly be conceived that she did not have her attorney or her son read it
to her afterward. Only after she was confronted with the signed copy of the
document on the witness did she spring up the defense of fraud. It would
look as if she gambled on the chance that no signed copy of the deed had
been saved from the war.
Tuason vs. Is Marquez guilty of fraud? – NO. It must be emphasized that in making
Marquez mention of the property of the electric light company, merely renewed a
previous inventory of the property. The franchise, therefore, was not a
determining cause of the purchase. The franchise was then in force and
either party could have easily ascertained its status by applying at the office
of the Public Utility Commissioner. The innocent non-disclosure of a fact
does not affect the formation of the contract or operate to discharge the
parties from their agreement.
Songco vs. Sellner bought Songco’s cane as it stood in the fields for the sum of 12k.
Sellner The PN in question was obtained from the defendant by means of certain
false and fraudulent representations based on estimates (3k piculs). The
crop turned out to produce 2k piculs, gross, and after the foll for milling
was deducted the net left to Sellner was very much less.
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NO FRAUD. Songco knew at the time he made the representation in
question that he was greatly exaggerating the probable produce of his fields.
While Songco had better experience and better information on which to
form an opinion on this question than Sellner, the latter could judge his own
eyes as to the character of the case. He knew what these same fields had
been producing over a long period of years; he knew that by judging from
the customary yield, the harvest of this year should fall below the amount
stated.
A misinterpretation upon a mere matter of opinion is not an actionable
deceit, nor is it a sufficient ground for avoiding a contract as fraudulent. It
is not every false representation relating to the subject matter of a contract
which will render it void. It must be as to matters of fact substantially
affecting the buyer's interest, not as to matters of opinion, judgment,
probability, or expectation.
Azarraga Was there fraud in obtaining the consent of Gay? – NO. Before the
vs. Gay execution of the agreement, Gay went over to the lands in question to make
her own calculations, but despite this, she still was not able to ascertain the
difference in the land area. Another document was also delivered to Gay
before the execution of the contract, which contains that the second parcel
has 70 hectares, and yet, despite knowing this discrepancy, she still
proceeded with purchasing the land. If the land area is so important, the sale
could have been made at a price per unit measure.
Usual exaggerations in trade:
Article 1340. The usual exaggerations in trade, when the other party had an opportunity to
know the facts, are not in themselves fraudulent. (n)
Usual Exaggerations in Trade known as Tolerated Fraud, Not Fraudulent by
Themselves:
● These exaggerations are also known as “dealer’s talk” or “trader’s talk” or “dolus
bonus” which constitute tolerated fraud as long as the other party has the
opportunity to check and know the facts.
What Tolerated Fraud Covers:
● Tolerated fraud usually refers to misrepresentation of traders tending to minimize
the perceived defects of the thing or service advertised, or magnification of its
qualities.
● They generally do not affect the validity of the contract. They will constitute fraud
when misrepresentations are set to deceive such as faking the quality of the thing
purposely to mislead, and preventing attempts at verification by the other party.
● When there is a written contract, what does not appear on the face of the contract
should be regarded as “trader’s talk.”
Caveat Emptor:
● “Let the buyer beware.” The buyer has the duty to check the title of the seller over
the property plus other circumstances necessary for his own protection. Otherwise,
he would be buying the property at his own risk.
● There is a presumption that a person takes ordinary care of his concerns, followed
by another presumption that the ordinary course of business has been followed.
Accordingly, let the buyer beware for he will assume the burden and consequences
of his imprudence and credulousness
Mere expression of an opinion:
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)
Significance:
● A mere expression of opinion by an ordinary person does not signify fraud.
However, if it is made by an expert offered by one party and the other party relied on
the expertise of the said expert, there is fraud if the opinion contemplated in the
article is not an honest-to-goodness opinion but a false representation precisely
given to mislead the victim.
● An expert has a special knowledge on his field of discipline. He is a recognized
authority in his line of business or profession. As such, his opinion is like a
statement of fact and if it is false, may be considered fraudulent giving rise to an
action for annulment.
When Expert was Engaged by the Plaintiff:
● If it is the plaintiff himself who hired the expert and he relied on the supposed
special knowledge of the said expert, and by reason of which he entered into the
contract but unfortunately, the expert’s opinion turned out to be wrong, the
plaintiff’s action for annulment must fall.
● The expert is considered the plaintiff’s own employee.
● The plaintiff’s recourse is against the expert.
Misrepresentation:
(1) By a third person:
Article 1342. Misrepresentation by a third person does not vitiate consent, unless such
misrepresentation has created substantial mistake and the same is mutual. (n)
General Rule: Misrepresentation by Third persons Does not Vitiate Consent:
● Misrepresentation or fraud committed by a third person inducing a party to enter
into the contract does not vitiate consent and cause the nullity of the contract.
● It may, however, give occasion for an action for damages against the third person by
the injured party.
● Exception: if the third party acted in collusion with a party who benefited thereby,
the contract may be annulled by the injured party. The complicity of a party and the
third person make them solidarily liable to the innocent party.
Exception to the General Rule:
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 ● The fraud committed by the third person will make the contract voidable only if the
following requisites concur: The representation created substantial mistake, and the
mistake is mutual.
● The cause of the voidability of the contract is a complex one, that is, the
misrepresentation of the third person resulting in substantial mistake on the part of
both parties.
Rule in Case of Force and Intimidation Exerted by a Third Person:
● The rule is different where the violence or intimidation is exercised by a third person
who did not participate in the contract. The contract shall be annulled by such
violence or intimidation. Whereas, the fraud made by the third person does not
vitiate consent.
Hill vs. Veloso Can the defense of deceit be used in this case to nullify the promissory
note? – NO. The deceit, in order that it may annul the consent, must be
that which the law defines as a cause. Domingo Franco is not one
contracting party with regard to Maximina Ch. Veloso as the other
contracting party. They both are but one single contracting party in
contractual relation with, or as against, Michael & Co.
Domingo Franco, like any other person who might have been able to to
induce Maximina Ch. Veloso to act in the manner she is said to have
done, under the influence of deceit, would be, for this purpose, but a third
person . There would then not be deceit on the part of the one of the
contracting parties exercised upon the other contracting party, but deceit
practiced by a third person.
Deceit by a third person does not in general annul consent, and in support
of this opinion it is alleged that, in such a case, the two contracting
parties act in good faith.
(2) In good faith:
Article 1343. Misrepresentation made in good faith is not fraudulent but may constitute
error. (n)
Effect of Misrepresentation:
● If the misrepresentation is done in bad faith, which means, it is deliberate and
intended, and the other party was induced to agree to the contract by the act of
misrepresentation, there is fraud. The contract is voidable.
● If the misrepresentation is made in good faith, the contract just the same is voidable,
not because of the misrepresentation but because of substantial error. This error is
tantamount to vitiated consent.
● Example: Rico sold a fighting cock to Patch, an amateur in cock-fighting. Patch
needed a Texas fighting cock, a kind of cock which lasts long during engagements.
Rico honestly believed that the cock he gave to patch is a Texas cock. When the
cock was pitted to another, it didn’t last long as its nature was too soft. It turned out
that the cock is just an ordinary one. The sale of the cock is voidable, not because of
the honest misrepresentation of Rico, but because of the substantial error on the part
of the parties.
Asiain vs. Was the misrepresentation made in good faith, and does it constitute as
Jalandoni a ground for rescission? –YES. There was no fraud on Asiasin’s part
but rather a mutual mistake on both parties. Since the mistake is so
material as to go to the essence of the contract, it is a ground for relief
and rescission. Innocent and mutual mistake alone are sufficient grounds
for rescission.
It is well settled hat a purchaser of land, when it is sold in gross, or with
the description “more or less” does not thereby ipso facto take all the risk
of quantity in the tract If the difference between the real and represented
quantity is very great, both parties act obviously under a mistake which it
is the duty of the court of equity to correct. Mutual mistake of the
contracting parties which is so material as to go to the essence of the
contract is a ground for relief and rescission.
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)
Character of Fraud to Render a Contract Voidable:
● The fraud must be serious to vitiate consent. Moreover, it must not be mutual.
● When fraud is sufficient to induce an ordinary prudent person into error, the fraud is
said to be serious. If it cannot deceive an ordinary prudent man, it is not serious.
● Personal circumstances of the victim should be weighed and considered in
determining the influence of the fraudulent act upon a person.
● If both parties are in pari-delicto, the law will leave them where it finds them.
Neither of the parties could seek the annulment of the contract.
Incidental Fraud:
● Incidental fraud is not the reason why the party has entered into the contract; it does
not vitiate consent.
● Even without it, the party just the same, would still have agreed to the contract.
Simulation of a contract:
(1) Absolute vs. relative:
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
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 ● In the event that the contract was intended for an illegal purpose, the contract is void
agreement. (n) and the parties have no cause of action against each other. (Article 1411)

Concept of Simulation: Right of a Third Person Prejudiced by the Simulation:

● Simulation of a contract is the deliberate act of making a fictitious agreement by the ● A third person or creditor who is prejudiced by the simulated contract may attack the
parties for purposes of deception, when in fact the juridical act that appears on the nullity of the contract. If the third person is in bad faith, he can have no better right
contract does not really exist or is different from what is actually agreed upon. than the person from whom he had acquired title. However, if the third person acted
● It takes place when the parties do not really want the contract they have executed to in good faith in acquiring title over the property, the said third person will be
produce the legal effects expressed by its wordings. protected by law. The apparent contract will then be considered as a real contract.
● Simulation of contract involves a defect in the declaration of the will of the parties. ● Example: To frustrate an impending writ of execution, Aldrin fictitiously transferred
in a deed of sale some of his properties to Aimee. Without the knowledge of Aldrin,
Aimee sold these properties to Annarose who was acting in good faith. The apparent
contract between Aldrin and Aimee will be considered as a true contract. The sale in
Two Juridical Acts Involved in Simulation: favor of C will be sustained.
1. Ostensible act – this is the apparent but fictitious document or conduct executed by
the parties. It has the semblance or color of a contract. This act is always void. Absolute Simulation v. Fraudulent Alienation
2. Hidden act – this is the true or real agreement contemplated by the parties. The real Absolute Simulation Fraudulent Alienation
agreement which is disguised under another contract is valid and binding between
the parties, if it does not prejudice a third person, or is not contrary to the law,
There is no valid existing contract between There is a true and existing contract
morals, good customs, public order or public policy.
the parties between the parties
Kinds of Simulated Contracts and their Effects:
1. Absolute Simulation – is one where the parties do not intend to be bound by the Contract can be attacked by any creditor Only creditors before the alienation of the
contract. The parties do not really intend to produce any legal effects between the even by one who became such after the property can attack the contract
parties. If the contract is absolutely simulated, it is void. simulation
● Example: In a sale of a fishpond, it was made to appear that the price was
paid when actually it was not. The sale being without consideration is Insolvency of the simulating debtor is not Insolvency of the debtor is necessary. The
fictitious. necessary for the nullification of the creditor cannot recover in any manner what
2. Relative Simulation – is one where the parties conceal their real agreement by contract is due him
disguising it under another contract. If the contract is relatively simulated, it can be
void or valid depending upon the circumstances. If it prejudices a third person or is Action to declare nullity of contract does Action to rescind (Accion Pauliana) the
contrary to law, morals, good customs, public order or public policy, it is void. not prescribe contract prescribes in four years
Otherwise, the real agreement which was concealed shall be binding provided that
all essential elements of a contract are present. The apparent contract will not be Simulation Different from Inadequacy of Price:
recognized by law, it is only the concealed agreement which has a chance to be ● Simulation of contract and gross inadequacy of price are distinct legal concepts,
recognized as valid. with different effects – the concept of a simulated sale is incompatible with
● Example: A donor is donating a property to a donee. However, instead of inadequacy of price.
executing a deed of donation, the donor instead executed a deed of sale to ● When the parties to an alleged contract do not really intend to be bound by it, the
conceal the donation intended. contract is simulated and void. Gross inadequacy of price by itself will not result in a
void contract, and it does not even affect the validity of a contract of sale, unless it
Reason For Invalidity of Absolutely Simulated Contracts: signifies a defect in the consent or that the parties actually intended a donation or
● Absolutely simulated contracts are void because they lack the element of true some other contract.
consent. The parties do not intend to be bound at all. More, the act is executed to
prejudice a third person and is generally fraudulent. Cases:
May the Owner-Simulator Recover?: Rodriguez Were the contracts simulated and without consideration, thus void? –
● If the absolutely simulated contract does not have any illegal purpose, the interested vs. NO. The characteristic of simulation is the fact that the apparent contract is
party may prove the simulation to recover whatever he might have given under the Rodriguez not really desired or intended to produce legal effects or in way alter the
fictitious contracts. juridical situation of the parties. Concepcion and her daughter must have
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 intended the two conveyance to be real and effective; for appellant could
not intend to keep the ownership of the fishponds and at the same time vest
half of them in her husband.
Since in each conveyance the buyer became obligated to pay a definite
price in money, 2.5k in the first and 3k in the second, such undertaking
constituted in themselves actual causa or consideration for the conveyance
of the fishponds. The considerations need not pass from one party to
another at the time the contract is entered into.
Gonzales vs. Was the contract of sale null and void for being simulated? – YES. The
Trinidad contract of sale, being onerous has for its cause or consideration the price
of P10,000; and both this consideration as well as the subject matter of the
contract namely, the property, are lawful and not penalized by law.
However, as the contract was fictitious and simulated and the supposed
vendors did not receive the stipulated price, the consideration being thus
lacking, said contract is null and void per se or non-existent.
Borromero Was the sale during the lifetime of Johanna’s husband fictitious? – YES.
vs. In the case at bar the sale is alleged to be fictitious because no payment of
Borromeo the stated price was made. The sale, therefore, was non-existent, because
one of the elements, that of consideration, was absent.
In cases where no consideration exists, the contracts or agreements lack
one of the essential elements for their validity , namely, cause or
consideration, and, therefore, they are considered as non-existent. It is
under this category (of non-existent contracts) that the fictitious sale,
alleged in the case at bar to have been executed by the husband without
consideration or with false consideration, falls.
Bravo Mauricio carried out a DOS to his son Roland and grandchildren, Ofelia
Guerrero v. and Elizabeth as vendees. The sale was conditioned on the payment of 1k.
Bravo Mauricio and Simona died. Edward, one of the spouses’ grandchildren,
filed for the annulment of DOS on the ground that it was simulated to
prejudice the other heirs as shown by the gross inadequate consideration.
Was the deed of sale simulated? – NO. Simulation of contract and gross
inadequacy of price are distinct legal concepts. The former shows no real
agreement between the parties, hence, void. The latter may embody a true
agreement between the parties, especially as to the price negotiation in
contracts of sale. It does not affect the validity of the contract.
Class Notes: Vices of Consent
Mistake
● There can be mistakes of fact incurred by one or both parties.
● 1331 also mentions mistake as to identity of qualifications of one of the parties
● Mistake in identity – make sure here, as a vice of consent, such identity was the
moving cause for such person to enter into contract
● As to quantity and quality, see discussion on cause and consideration.
● For quantity - mistake in quantity vs mistake or error in accounting.
Illiterates - Does it mean contract is voidable?
● No, however, there is that additional obligation tot he part of the person enforcing
the contract that there must be subsequent explanation, if a person is an illiterate
and a language not understood and later on allege fraud or mistake there is
presumption thats is why law imposes duty on the part of the perion that duty of
subsequent explanation. There is a duty of subsequent explanation.
Violence and Intimidation
● Intimidation is more of moral mind game.
● Vice of consent regardless whether it was violence or intimidation it will annul
even though employed by 3rd person who did not take part in the contract.
Undue influence
● In all of the vices of consent, if it influences lang, okay lang. If there is UNDUE
influence then that is when it becomes a vice of consent.
● There has to be that deprivation of that reasonable freedom of choice.
Test:
● Certain circumstances establish moral ascendancy where one can exercise such
influence
● Influence must be undue.
● If there is no relationship, regardless of kind, it is not a case of undue influence.
Not undue influence
● What if there are persuasive arguments “sige na, pwede ba mag recit or drills
tapos sabi wag na wag na” - exertion of due influence ; but exercise through
appeal to the affection
● Solicitation
● Reluctant consent - it is not a case of undue influence
● Reverential fear - “let’s say, boys and girls, let's have a drill at the end.”
Nakakatakot baka magalit si sir pag ano eh, sige na lang”
Fraud
● Fraud in the performance: Occurs after executed contract
● Fraud in the perfection: before or simultaneous with the creation of the
obligation. Consent is vitiated and it is an action for annulment plus damages.
No fraud
● Failure to disclose facts - not necessarily fraud/no fraud, only when there is duty
to disclose.
● Usual exaggeration in trade - no fraud
- Dealer’s talk or extraordinary seller’s talk
- When other party had opportunity to know the facts
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● Mere expression of an opinion - no fraud unless by an expert and other party
relied on that expert.
● Misrepresentation - Unless substantial mistake and the same is mutual.
● valid.
Simulated contracts
● If there is no consent in the case of absolutely simulated contract
Relative simulation, no prejudice to third parties
● Parties will be bound to their real agreement.
● Agreement for as long as no prejudice to 3rd parties, will be considered as valid.
OBJECT
Object: (Arts. 1347-1349, 1311, 1178)
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.
What Can Be the Object of a Contract:
● It can be a thing, right, or service arising from a contract.
● If the object is a thing, it should be within the commerce of man, that is, its
alienation or free exchange is not restricted by law. In other words, it can be the
subject of lawful negotiation. Example: Public plazas cannot be alienated, thus they
are outside the commerce of man.
● A future thing which has a potentiality of existence at some future time may be the
object of a contract.
● Future right may also be an object of a contract. Example: A composer or author can
sell an intellectual work which he intends to compose or write even before the work
is actually composed or written.
Right As Object Of Contract:
● Not all rights may be the object of contracts but only transmissible rights. Rights
like the right to vote which is political in nature, marital rights, right to receive
future support, are intransmissible rights which cannot be the subjects of contracts.
Future Inheritance; Concept:
● This is any property or right not in existence or capable of determination at the time
of the execution of the contract which a person may acquire in the future by
succession.
● While future inheritance is a future thing, it cannot be the subject of a contract. The
reason is that a future inheritance is just an inchoate right which comes into
realization only after the death of the predecessor. Its amount cannot exactly be
determined until the final settlement of the estate of the deceased. It cannot be the
subject of compromise.
● Any partition agreement of the estate of a living person by the supposed heirs, is
void, but partition made by the decedent himself of his estate during his lifetime is
● Conversely, a contract of renunciation of the right to inherit from someone who is
still alive is equally void.
Exceptions to the Rule on Future Inheritance:
1. In case of marriage settlements, future inheritance may be the object of donation
2. In case of partition of property inter vivos made by the deceased himself as long
as no legitime is impaired.
Services as Object of Contract:
● Services may also be the subject of contract provided they are not contrary to law,
morals, good customs, public order, or public policy. Thus, requiring a person to
render perpetual services to another without salary, being tantamount to involuntary
servitude, is void for being contrary to the fundamental law.
Cases
Blas vs. The court ruled that the contract was valid because the object was existing at
Santos the time of the agreement and it did not concern future inheritance. The
properties subject of the contract Exhibit "A" are well defined properties,
existing at the time of the agreement, which Simeon Blas declares in his
statement as belonging to his wife as her share in the conjugal partnership.
Certainly his wife's actual share in the conjugal properties may not be
considered as future inheritance because they were actually in existence at the
time Exhibit "A" was executed.
Uson vs. The claim of the defendants that the common-law wife had relinquished her
Del right over the lands in question because she expressly renounced to inherit
Rosario any future property that her husband may acquire and leave upon his death in
the deed of separation they had entered into cannot be entertained for the
simple reason that future inheritance cannot be the subject of a contract nor
can it be renounced. Furthermore, her rights of inheritance over the lands in
question became vested at the moment that her husband died.
ARTICLE 1348. Impossible things or services cannot be the object of contracts.
Applicability of Article:
● Applies only to absolute or objective impossibility – that is, the impossibility of the
object.
Impossible Things or Services, Meaning:
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 ● Things which are not susceptible of existence are impossible things – like a square
circle, flying elephant, visible wind, or a love life.. kidding on the last one.
● Things outside the commerce of man are also impossible things such as public
plazas.
● Personal services are impossible when they are beyond the physical strength or
power of man to perform such as resurrecting a dead person, pushing the earth
closer to the moon, crossing the pacific ocean by foot.
Kinds of Impossibility and Its Effect
As to the a. Impossibility due to the nature of the thing or service such as things
cause or services which could not be performed.
b. Impossibility because of the law such as illegal things or those
beyond the commerce of man.
As to the a. Absolute/Objective Impossibility – the thing or service cannot be
extent of done by any man. When the impossibility of the object of the
fulfillment obligation is absolute, the contract is void.
b. Relative/Subjective Impossibility – the thing or service cannot be
done by a particular person but may be done or complied with by
another who is qualified or competent. If the impossibility is relative
or subjective but not permanent, the obligation is not nullified. Thus, a
partner who failed to contribute to the partnership as it is beyond his
means is merely a relative impossibility because sooner or later, he
can produce the amount or thing he has agreed to contribute. If the
relative impossibility is permanent like blindness, and the contract
requires the use of eyesight, like a contract to operate the ailing heart
of a patient, this will nullify the contract.
Partial Impossibility and Partial Possibility:
● If the thing or service is partly impossible and partly possible, the effect will be
dependent upon the divisibility of the thing or service.
● If it is divisible, the possible part will be valid and impossible part will be void.
● If it is indivisible by reason of law or by stipulation, the contract is entirely void
because partial performance in indivisible obligation is equivalent to
non-performance.
Difficulty of Performance is not identical with Impossibility of Performance:
● When there is a mere difficulty or great inconvenience, that is not an impossibility.
Equity will not excuse the debtor from the bad bargains which he had entered into.
He is liable for damages if he does not perform his prestation.
○ Exception: When the debtor has obligated himself to do something which
will prove dangerous to his life and property. To compel someone to fulfill
a contract which is undesirable and harmful is contrary to law and public
policy.
Damages Arising From Impossible Things or Services:
● If both parties are fully aware of the impossibility, there is no liability for damages.
● If the debtor knew of the impossibility or could have known it by exercising
ordinary diligence, he is liable for damages because he is in bad faith or is negligent.
Case:
Castro v. The administrator of Central Azucarera absented himself due to the war.
Larga Longa could not comply with said obligation either because of the order of
President Quezon suspending the milling of sugar cane or prohibiting its
planting during the Japanese occupation, or because he was prevented from
doing so in view of the uncertain condition of peace and order then prevailing
in the municipality due to the war.
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)
Object of A Contract; Concept:
● A contract cannot exist without an object. The object is the subject matter in the
contract – which is the thing to be delivered/given or the service to be performed by
the debtor.
● The object of the contract and the object of the obligation created are thereby
identical.
Requisites of Object of Contract:
1. It must be determinate as to its kind although not definite as to its quantity
provided the quantity can be determined without need of a new contract.
2. It must be existing or has the potentiality to exist subsequent to the contract or in
the future;
3. It must be licit, that is, not contrary to law, morals, good customs, public order, or
public policy.
4. It must be within the commerce of man which means, it is susceptible of
appropriation or capable of being owned privately and is at the same time
transmissible.
Determinate In Kind, Meaning:
● A thing is determinate in kind when the specie is indicated such as a horse, a cow, a
dog.
● Its particularization may be established by evidence. However, if the object is
merely described as an animal, the contract is void because there are millions of
animals, and even some people can be animals too if you know what I mean.
● Where the kind is undefined, there is no object and thus no contract is created by the
parties.
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 ● Where the subject matter of the contract is land, it must be sufficiently described to
allow its proper identification without need of entering into a new contract between
the parties.
Effect of Indeterminate Quantity:
● It can happen that the kind or specie of the object is determinate but not the quantity.
In such a case, the contract may be valid or not, depending upon the circumstances.
● If the quantity can ultimately be determined, the present character of the quantity
will not affect the validity of the contract as long as it is possible to determine the
quantity without need of a new contract.
● Thus, if there is a basis for determining the quantity of the object such as the needs
of a family, the provisions needed for a factory, the materials required for a
particular work and similar others, the contract is valid. However, if there is no
possibility of determining the quantity, the contract is void.
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.
Supra, Relativity of Contracts.
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.
Supra, Relativity of Contracts.
CAUSE
Cause: (Arts. 1350-1355)
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.
Cause of Contract, Concept:
● This is the reason why a party entered into the contract.
● Cause is the essential reason which moves the parties to enter into the contract.
● It is the immediate, direct, and proximate reason which justifies the creation of an
obligation through the will of the contracting parties. Thus, in a contract to export
logs abroad, the consideration for the logger is the distribution of the logs in the
areas agreed upon, whereas on the part of the distributor, the consideration is the
commission on the sale.
● In this jurisdiction, cause and consideration are the same. The terms are used
interchangeably.
Kinds of Contracts as to Cause:
1. Onerous Contracts – Contracts where the cause for each contracting party is the
prestation or promise of a thing or service by the other. Example: In a deed of
sale, the cause for the seller is the price and the cause for the buyer is the delivery
of the thing sold.
2. Remuneratory Contracts – Contracts where the cause is the service or benefit
remunerated. Such service or benefit may or may not have the character of
recoverable debt. Example: Isabel rendered her services to Mitch for free.
Sometime in the future, Mitch gave Isabel a car in remuneration for the said past
services which do not constitute a demandable debt. The same applies if the
services of Isabel were not for free, and Mitch was just unable to pay due to lack
of money. The giving of the car would still be remuneratory.
3. Contracts for Pure Beneficence (or gratuitous contracts) – Contracts where
the cause is the mere liberality of the donor or benefactor. In simple donations,
pure liberality is the consideration of the contract. Example: Mary donated to
Ramos a certain property in accordance with the formalities required by law. The
cause is the mere liberality of the donor or benefactor.
Cause in Accessory Contracts:
● In accessory contracts like mortgage or pledge, the cause is identical with the cause
of the principal contract, that is, the loan from which it derives its life and existence.
● A mortgagor who mortgaged his own property to secure the loan of the principal
debtor, is not directly benefited by the mortgage executed. But there is a cause. It is
the loan given to the principal debtor. It is not necessary that the mortgagee be
benefited. It is enough that the principal debtor was favored with the a loan.
Can A Moral Obligation Be a Valid Cause for an Onerous Contract:
● If the moral obligation is based on previous civil obligation but rendered ineffective
due to the prescription of the action, it constitutes a sufficient cause or consideration
to support an onerous contract.
○ This is in effect a performance of a natural obligation. If the moral
obligation arises entirely from ethical considerations, it cannot constitute a
sufficient cause.
Remedy of Vendor, If Buyer does not Pay Balance of Purchase Price:
● The failure of the vendee to pay the full price, does not convert the sale into a void
contract for lack of consideration.
● The proper remedy of the seller is for
○ specific performance or
○ rescission.
● But if the sale is fictitious or without consideration, it is void. The remedy is
declaration of nullity.
● The consideration need not pass from one party to the other at the time the sale is
made. The reason is that the promise of one is the consideration for the other.
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 ● Example: Sei purchased a long Samurai for 500 pesos from Pua. The motive of Sei
is to use the sword to kill somebody. While the motive is illegal, that will not
Cause Object invalidate the purchase of the sword from Pua.
Presence of Motives Does Not Cure Absence of Cause:
The cause, for each contracting party is the The object of the contract is the very thing ● A contract without cause or consideration is void and this inefficiency cannot be
prestation or promise of a thing or service or service itself. cured by the presence of motives.
by the other. ● Consequently, a simulated contract for lack of consideration cannot be sustained by
the simple reason that the vendor had some motives in entering into the contract like
Example: In a sale of a particular car: his desire to avoid the effects of an attachment or execution.
● As to the vendor, the cause is the obligation of the vendee to pay the price, and
● As to the vendee, the cause is the obligation of the vendor to deliver the car. Cases:
○ The object is the car being the root of the agreement of sale. If there is
no car, the sale would not have arisen at all. Liguez While maintaining the distinction and upholding the inoperativeness of the
vs. CA motives of the parties to determine the validity of the contract, expressly
excepts from the rule those contracts that are conditioned upon the attainment
Cause Need Not Be The Exact Equivalent of the Other’s Prestation: of the motives of either party.
● In onerous contracts, it is not necessary that the value paid or thing delivered is the
exact equivalent of the value of the prestation or promise of the other. In the present case, it is scarcely disputable that Lopez would not have
● Thus, a nominal consideration of one peso for a contract is an effectual conveyed the property in question had he known that appellant would refuse
consideration as long as the parties had stipulated on it in good faith. It is as valid as to cohabit with him; so that the cohabitation was an implied condition to the
a bigger sum. donation, and being unlawful, necessarily tainted the donation itself.

ARTICLE 1351. The particular motives of the parties in entering into a contract are
different from the cause thereof.
Cause
Cause is the direct reason
for the contract.
Cause is the objective and
juridical reason for the
establishment of a contract.
Cause is always the same in
each kind of contract.
A contract without a cause
is void.
In making the donation in question, the late Salvador P. Lopez was not moved
exclusively by the desire to benefit appellant Conchita Liguez, but also to
secure her cohabiting with him, so that he could gratify his sexual impulses.
Motive became the cause; motive is illegal, hence the donation is void
Motive
Gonzales The court ruled that there was a consideration (10,000) and the subject matter
vs. was lawful. However as the contract in itself was fictitious and simulated
Motive is the indirect reason for the contract
Trinidad price, the consideration being thus lacking, the contract was null and void per
se or nonexistent.
Motive is the psychological or personal purpose of a party
in getting the object.
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.
Motive differs with each person.
Effect of Absence of Cause, and When Unlawful + Others:
A contract without motive or even with illegal motives does ● A contract without cause is void. If it has a cause but the same is unlawful, the
not affect validity of the contract. contract is also void.
● A cause is unlawful if it is contrary to law, morals, good customs, public order or
Exception: If the motive predetermines the purpose of the public policy.
contract, motive may be regarded as cause. Thus, if a debtor ● Failure to pay consideration is different from lack of consideration, the former
has alienated his properties with the motive to defraud his results in a right to demand the fulfillment or cancellation, the latter prevents the
creditors, the alienation is rescissible. execution of a valid contract.
● Where the consideration in a deed of sale constituted nothing more than the
accumulated usurious interests, the said consideration is null and void because the
cause is illegal.

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 Requisites for a Good Cause:
1. The cause must be existing at the time of the perfection of the contract. It need
not exist later.
2. It must be a lawful cause, not contrary to law, morals, good customs, public order
or public policy.
3. It must be a true cause (Art. 1353, the next article)
Cases
Velez vs. The Court held that an action cannot be maintained upon the contract because
the consideration is clearly illicit, which fact is apparent on the face of the
Ramas contract. It has been considered contrary to public policy to allow parties to
make agreements designed to prevent or stifle prosecutions for crime and a
contract based upon an unlawful consideration or designed to promote an
unlawful object is an always has been void ad initio by the common law, by
the civil law, moral law, and all laws whatsoever.
Liam In regards to the agreement of the parties relative to the P6,000 obligation, "it
Law vs. is presumed that the cause
Olympic exists and is lawful, unless the debtor proves the contrary".
Sawmill
Olympic Sawmill had not proven that the P6,000 obligation was illegal.
Confirming the Trial Court's finding, we view the P6,000 obligation as
liquidated damages suffered by plaintiff, as of March 17, 1960, representing
loss of interest income, attorney's fees and incidentals.
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.
Effect of Statement of False Cause:
● If a false cause is stated in the contract, the general rule is that the contract is void.
○ Exception: If the interested part can prove that the contract is founded
upon another cause which is true and lawful, the contract will be saved
from invalidity.
Applicability to Simulated Contracts; Void Contracts Not Subject to Ratification:
● The article can apply to absolutely simulated contracts which are void contracts. If it
can be established that there is another cause for it which is valid, the contract will
be considered valid.
● If the contract is relatively simulated, only the real agreement remains binding
between the parties, unless it prejudices the rights of third persons, or is contrary to
law, morals, good customs, public order or public policy.
● Void contracts cannot be ratified.
○ However, even if the cause is void, the contract can still be valid if another
cause which is true and lawful could be shown to support it.
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.
Is it Necessary to State the Cause of A Contract? Presumption:
● In the event that the contract does not state its cause, the presumption of the law
operates, that the cause exists and is lawful. The presumption is however rebuttable.
● The principle applies to contracts which must be evidenced by writing under the
statute of frauds.
● The presumption cannot be overcome by a bare assertion that there was no
consideration for the contract.
● The alleged lack of consideration must be established in an appropriate action, and
the burden of proof lies with the debtor.
Cases:
Raet vs. There were no meeting of the minds as to terms of the contract of sale. At
CA best, only a proposed contract
to sell was obtained. Without perfected contracts, there can be no specific
performance of a contractual
obligation as yet non-existent.
There were no written contracts to evidence the sale. The records also do not
show the total cost of the units and the payment schemes, and figures given
were just estimates of Gatus, who is not even an agent of PVDHC. PVDHC
had no knowledge of the figures given by Gatus, thus it could not have
ratified the same.
PBC vs. Although Atty. Alonzo (lawyer who prepared the contracts) declared that he
Lui She saw no money paid at the time of the execution of the documents, his
negative testimony does not rule out the possibility that the considerations
were paid at some other time as the contracts in fact recite.
What is more, the consideration need not pass from one party to the other at
the time a contract is executed because the promise of one is the
consideration for the other. The illicit purpose, which was to transfer
ownership to an alien, becomes the illegal causa" rendering the contracts
void.
Saquid vs. The third element (cause) is lacking because there was no transaction
Security between the parties for the proceeds of the loan which were used in
Finance purchasing the subject motor vehicle.
Inc.
Under Article 1354 of the NCC, it is presumed that consideration exists and
is lawful unless the debtor proves the contrary. The presumption cannot be
overthrown by mere assertion that it has no consideration; alleged lack of
consideration must be shown by preponderance of evidence.
The following evidence were presented to show that they bought the car in
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 cash, and not in installment basis: vehicle sales invoice, vehicle delivery
note, certificate of registration, official receipts.
General Rule: Form is not Required in Consensual Contracts:
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.
Effect of Lesion or Inadequacy of Cause:
● Generally, a contract is not subject to annulment simply because of lesion or
inadequacy of cause or consideration.
● However, in cases provided by law such as those mentioned in Art. 1381 and Art.
1098 lesion is a good ground for rescission of the contract.
● Lesion or inadequacy of cause will also be a basis for rescission of the contract if the
lesion or inadequacy is the result of fraud, mistake or undue influence.
● When the inadequacy of the cause is gross, that fact will naturally suggest fraud and
is evidence thereof, so that it may be sufficient to prove the fraud when taken in
connection with other circumstances.
Effect of Bad Bargain:
● The fact that the bargain was a hard one, coupled with mere inadequacy of price,
when both parties are in a position to form an independent judgment concerning the
sale, is not a sufficient ground for cancellation of the contract.
Class Notes:
Cause
● Arts. 1354 and 1350
Lesion or inadequacy of cause
● Lesion - basically kulang, bad bargain
● Instead of getting 10m for a 10m car, you only get 5m or 1m. But it does not
necessarily mean that if there is inadequacy of the cause, it does not mean that the
cause is illegal or that it will invalidate the contract.
● Lesion can be a ground for rescission of contract. Inadequacy of a cause can be
basis for invalidating contract if by virtue of fraud, mistake, undue influence etc.
● If it is gross inadequacy - suggests fraud or even undue influence which may be
sufficient to prove vice in consent when taken in connection with other
circumstances which can still invalidate the contract.
● GR: contract cannot be subject to annulment simply because of lesion.
FORM (Arts. 1356-1358)
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,
Contract of Partition not Covered By Statue of Fraud:
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.
● As long as the essential requisites of the contracts are present, they are binding upon
the contracting parties regardless of whatever form they may have been entered into.
Exceptions:
1. When the law requires that a contract be in certain form for its validity
● The first refers to solemn or formal contracts
● Examples of Formal Contracts:
○ Donation of real property which requires a public instrument
for its validity.
○ Donation of personal property the value of which is more
than five thousand pesos.
○ Sale or transfer of large cattle requires registration and a
certificate of transfer.
○ Negotiable instruments must be made in the form required by
the Negotiable Instruments Law.
○ Sale of a piece of land through an agent requires the authority
of the agent to be in writing.
2. When the law requires that a contract be in certain form for its
enforceability
● The second refers to the agreements covered by the statute of frauds.
● A contract falling under the statute of frauds cannot be proved or
established without the note, writing, or memorandum thereof, unless
there has been a waiver such as when the party who can invoke the
benefits of the statute does not object to the presentation of oral
evidence, or has received any benefits therefrom. It is understood that
the statue is applicable only to executory contracts and not to executed
contracts, whether completely or partially executed, which execution
however must be proved either by documentary or oral evidence.
● Examples of Agreements which must be in Writing to be enforced:
○ An agreement that by its terms is not to be performed within
a year from the making thereof.
○ A special promise to answer for the debt, default, or
miscarriage of another.
○ An agreement made in consideration of marriage, other than a
mutual promise to marry.
● A note or memorandum is not necessary for the contract of partition. A writing of
the contract of partition is not constitutive of its validity but merely evidential.
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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.
Applicability:
● Applicable only when the form is needed for convenience and not for validity or
enforceability.
● The contracting parties may compel each other to observe the required form once
the contract has been perfected and is enforceable under the Statute of Frauds.
Otherwise, the action for specific performance will not prosper.
● Example: Ghelyn leased a parcel of land belonging to Ysa for five years which lease
contract was done in a private instrument. Desiring to register the lease with the
registry of Deeds, Ghelyn filed a case for specific performance against Ysa to
compel Ysa to execute the necessary document. Here, the action will prosper
because the contract of lease is both valid and enforceable.
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
conjugal 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.
Form Required under the Article merely for Convenience, Not for Validity or
Enforceability:
● The article is couched in mandatory terms, however, even if the contract is not in
writing, it does not necessarily mean that the contract is void.
● The form (public document) is only for convenience, not validity or enforceability.
● Registration of the instrument only adversely affects third parties. Formal
requirements, therefor, are for the benefit of third persons.
● Example: The sale of land must appear in a public instrument in order to be
enforceable against third persons, the registration of the document is essential to
affect third persons.
Cases:
Shaffer vs. Shaffer filed a complaint against the defendant sps. Palma to recover sums
Palma of money and shares of stock. Lower court ruled that the action is based on
an agreement which involves the amount of P118k and that unless the
agreement is in writing it is unenforceable.
● The contract is valid even if it is not in writing because contracts
are binding upon the parties in whatever form they may have been
entered into unless the law requires otherwise.
● It is true that Article 1358 of the Civil Code provides that
contracts involving more than P500.00 must appear in writing but
nothing is said therein that such requirement is necessary for their
validity or enforceability.
Dauden vs. Actress filed a complaint to recover payment for the balance of her service.
delos The lower court judge dismissed due to lack of written agreement.
Angeles
The Court held that the contract (compensation for services) is valid and
enforceable. It is true that it appears included in Article 1358, last clause,
providing that "all other contracts where the amount involved exceeds five
hundred pesos must appear in writing, even a private one."
However, Article 1357 clearly indicates that contracts covered by Article
1358 are binding and enforceable by action or suit despite the absence of
writing. It is not enough that the law should require that the contract be in
writing, as it does in Article 1358. The law must further prescribe that
without the writing the contract is not valid or not enforceable by action.
Special Forms of Contracts:
1. For validity (Arts. 748, 749, 1744, 1773, 1874, 1956, 2134, Act 1147, Sec. 22),
2. For enforceability (Arts. 1403, 1878),
3. For greater efficacy or convenience (Arts. 1358)
Special Forms of Contracts:
For Validity (Arts. 748, 749, 1744, 1773, 1874, 1956, 2134, Act 1147, Sec. 22),
ARTICLE 748. The donation of a movable may be made orally or in writing.
An oral donation requires the simultaneous delivery of the thing or of the document
representing the right donated.
If the value of the personal property donated exceeds five thousand pesos, the donation and
the acceptance shall be made in writing. Otherwise, the donation shall be void.
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 ARTICLE 749. In order that the donation of an immovable may be valid, it must be made making thereof;
in a public document, specifying therein the property donated and the value of the charges
which the donee must satisfy. (b) A special promise to answer for the debt, default, or miscarriage of another;

The acceptance may be made in the same deed of donation or in a separate public (c) An agreement made in consideration of marriage, other than a mutual promise
document, but it shall not take effect unless it is done during the lifetime of the donor. to marry;

If the acceptance is made in a separate instrument, the donor shall be notified thereof in an
authentic form, and this step shall be noted in both instruments.
ARTICLE 1744. A stipulation between the common carrier and the shipper or owner
limiting the liability of the former for the loss, destruction, or deterioration of the goods to a
degree less than extraordinary diligence shall be valid, provided it be:
1. In writing, signed by the shipper or owner;
2. Supported by a valuable consideration other than the service rendered by the
common carrier; and
3. Reasonable, just and not contrary to public policy.
ARTICLE 1773. A contract of partnership is void, whenever immovable property is
contributed thereto, if an inventory of said property is not made, signed by the parties, and
attached to the public instrument.
ARTICLE 1874. When a sale of a piece of land or any interest therein is through an agent,
the authority of the latter shall be in writing; otherwise, the sale shall be void.
ARTICLE 1956. No interest shall be due unless it has been expressly stipulated in writing.
ARTICLE 2134. The amount of the principal and of the interest shall be specified in
writing; otherwise, the contract of antichresis shall be void.
(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.
Unenforceable Contracts, Concept:
● Unenforceable contracts are those which cannot be enforced by action or complaint
in court, unless that have been ratified by the parry or parties who did not give their
consent thereto.
● They are midway between void and voidable contracts.

SECTION 22 OF ACT NO. 1147. "No transfer of large cattle shall be valid unless Kinds of Unenforceable Contracts:
registered, and a certificate of transfer secured as herein provided."
1. Those entered into in the name of another person by one who has no
authority/who acted beyond his powers.
For Enforceability (Arts. 1403, 1878) 2. Those that do not comply with the Statute of Frauds.
ARTICLE 1403. The following contracts are unenforceable, unless they are ratified: 3. Those where both parties are incapable of giving consent to a contract.

(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; Distinctions/Differences of the Similarities of the Three Kinds of Unenforceable
Three Kinds of Unenforceable Contracts:
(2) Those that do not comply with the Statute of Frauds as set forth in this number. In the Contracts:
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 1. In the first kind, there is 1. They cannot be enforced or pursued in
charged, or by his agent; evidence, therefore, of the agreement cannot be received without a lack of consent on the court
the writing, or a secondary evidence of its contents: part of the person whose 2. They can be ratified, which means, they can
name the contract was be convalidated and become enforceable in
(a) An agreement that by its terms is not to be performed within a year from the entered into. court.
2. In the second kind, there 3. They cannot be attacked or assailed by third
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is no written proof persons. The remedy of the third person is
whatever by which the against the agent ho acted without authority
contract may be proved. or acted beyond his authority.
3. In the third kind, while
there is consent, the According to Pineda, the grouping of the three
same is absolutely unenforceable contracts is not logical because the
vitiated because both second group which suffers from mere defects of
parties are incapable of formalities are placed in the category of contracts
giving their consent to which suffer from lack of consent which affects not
the contract. only their enforceability but also their validity.
Unauthorized Contracts:
● The first kind refers to unauthorized contracts.
● Examples: A lawyer signed a compromise agreement for and in behalf of the client
without the authority of the latter. An agent enters into a contract of sale in behalf of
the principal after the death of the principal and with the knowledge of such death.
Check the cases for further explanation.
Statute of Frauds:
● The term statute of frauds is descriptive of those laws, statutes, or provisions which
require certain agreements to be in writing before they can be proved and enforced
in a judicial action.
● The term is the name given to the well-celebrated statute passed in 1676 by the
English Parliament requiring certain agreements to be reduced in writing before they
could be proved and enforced in court.
● The statute does not deprive the parties of the right to contract with respect to the
matters therein involved, but merely regulates the formalities of the contract
necessary to render it enforceable.
Purpose of the Statute:
● The purpose of the statute is to prevent fraud and perjury in the enforcement of
obligations, depending for their existence on the unassisted memory of witnesses, by
requiring certain enumerated contracts and transactions to be evidenced by a writing
signed by the party to be charged.
● It is obviously intended to close the door to the numerous frauds and perjuries to be
perpetrated when alleged obligations could be enforced based merely on the
recollection of witnesses whose memories as the years go by, may no longer be
defendable and reliable to serve them with perfection.
Applicability of Statute of Frauds and Reason for Such Applicability:
● The statue only applies to executory (not executed) contracts. It cannot be invoked
in contracts which had been already executed whether partially or completely.
● When there has been performance by one party in an oral contract, equity dictates
that all evidence be admitted to prove the existence of the alleged contract.
● The reason why the Statute is made applicably only to executory contracts is the
greater possibility of fraud in such contracts than in other contracts. If the rule were
otherwise not applicable, many would perjure themselves on the witness stand.
● The reason for excluding partially executed contracts from the rule is that fraud
would otherwise be promoted, instead of prevented if one party would be able to
keep the benefit.
Enumeration of Contracts/Agreements Under the Statute is Exclusive:
● The statute of frauds refers to specific kinds of transactions and cannot apply to any
other transaction that is not enumerated therein. The enumeration is exclusive. Thus,
an agreement creating an easement of right-of- way is not covered because it is not a
sale of real property or of an interest therein.
Consequence of Non-Compliance with the Statute of Frauds:
● If a contract is among those covered by the Statute but not done in writing, such
deficiency does not make the oral contract invalid or void. It merely renders the
action for specific performance ineffective.
● The effect therefore of non-compliance with the Statute is that no action for the
enforcement of the contract can be proved. Thus, any oral evidence being presented
may be objected for being inadmissible evidence. But the objection must be timely
made.
● The absence of an objection at the proper time will result in an implied waiver of the
right to invoke this defense. In which case, the oral contract shall become binding
upon the parties as if it were done in writing.
Specific Actions Where the Statute of Frauds May be Invoked:
● The Statute of Frauds is a matter of personal defense and is also a ground for a
motion to dismiss. It can be invoked before an answer is filed as a ground for a
motion to dismiss, or it can be interposed as an affirmative defense provided it is not
waived during the trial.
● It can only be invoked in two kinds of cases, namely:
1. In complaints for specific performance where the defendants may frustrate
the actions by showing that the contracts in issue are among those covered
by Article 1403, par. 2 and are not evidenced by any written document, not
or memorandum.
2. In complaints for damages for violation of the contract. If there is no
enforceable contract, naturally, there can be no basis for damages
grounded on violation thereof.
Waiver:
● The right to invoke the Statue of Frauds is deemed waived by failure to object to the
presentation of oral evidence, or by cross-examining the witness on the issue.
Cases On The Inapplicability of the Statute Because The Action is not one for Specific
Performance or Damages:
● First of all, check the cases under the heading “Statute of Frauds.”
Can Oral Evidence Be Admitted To Prove Performance:
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 ● In proving total or partial payment or performance of the contract itself, the plaintiff
is allowed to present oral evidence to prove the total or partial payment or
performance.
● If documentary evidence would still be required to prove the payment or
performance, the precise evil which the statute of frauds seeks to prevent, would be
present, that is, one who has received some benefits out of the oral contract would
be allowed to defraud the other party.
● Example: A loan of money of whatever amount, although not in writing may be
proved by oral evidence because loan is not included among the contracts covered
by the statute. But a mortgage covering land must be in writing because it
constitutes an interest on a real property. In another case, an implied contract for the
rendition of service as an interpreter is not covered by the Statute of Frauds. It can
be proved by oral testimony. And in another, a breach of a mutual promise to marry
is not covered by the statute of frauds. Hence, it can be proved by oral evidence.
Meaning of “Note”, “Memorandum” or “Writing”:
● The six enumerated contracts or agreements in Article 1403, paragraph 2, require
that the same be evidenced by some note, memorandum or writing, subscribed by
the party charged, or by his agent, otherwise, the said contracts shall be
unenforceable.
● The note, memorandum, or writing may consist of any kind of writing showing the
intention of the parties. The law does not require any particular form of instrument
or any language unlike the formal requisites of a notarial will. It may be executed on
any paper and done in ink, pencil and similar other writing instruments.
Requisites of the Note/Memorandum/Writing Must be Sufficient To Prove Agreement:
1. Names of the Parties
2. Terms and Conditions of the Agreement
3. Description of the Subject Matter for the Proper Identification Thereof
4. Place and Date of the Making of the Agreement
5. Signature/s of the parties who are assuming the obligation
● Cause or consideration need not be stated because it is presumed to be both present
and legal.
● The contents of the note/memorandum/writing shall be considered the contract itself
except as to form. It can be made in two or more documents.
● In the absence of any of the requisites, the proponent of the contract cannot prove its
existence by oral evidence. The oral testimony will be excluded. The Statute of
Frauds is a rule of exclusion. It is not concerned with the weight of the evidence but
only with its admissibility.
● Example: Where a telegram was sent to the prospective buyer advising him to come
to a certain place to complete the purchase of the land which was orally promised to
said buyer, it was held that the telegram, as a note or memorandum is clearly
insufficient, because it did not state the purchase price, and neither did it describe
the property. Moreover, the telegram was not signed by any person authorized by the
seller.
Discussion of the Six Contracts Mentioned in Number 2 of Article 1403:
1. An Agreement Not To Be Performed Within One Year.
● The one year period is counted from the perfection of the contract and not from
the day the performance of the contract is to begin.
● By force of the Statute of Frauds, an agreement that by its terms is not to be
performed within a year from the making thereof shall be unenforceable by
action, unless the same, or some note or memorandum thereof, be in writing and
subscribed by the party charged.
● If the contract is silent as to its period of performance, the same is not covered by
the statute. It can be proven by oral evidence.
● When by the terms of the contract, the same will not be performed within one
year, but one of the parties has complied with his obligation within the year, the
other party cannot avoid the contract by using the Statute of Frauds as defense.
The statute is intended to prevent and not to protect fraud.
● An agreement which by its terms will be performed within one year is
enforceable even if not reduced to writing. This is the clear implication of the
law.
2. A Special Promise To Answer For The Debt, Default, Or Miscarriage Of
“Another.”
● Special promise does not refer to the original or independent promise of the
debtor to his own creditor. It refers rather to a collateral promise such as a
contract of guaranty where the guarantor answers for the liability of the principal
debtor if the latter fails to comply with his obligation. A guaranty therefore must
be in writing to be enforceable. So also a surety bond.
● At least three parties are involved – the debtor, the creditor, and the promisor.
● The true test is whether the promise is an original or a collateral one. If the
promise is an original or an independent one, that is, if the promisor becomes
thereby primarily liable for the payment of the debt, the promise is not within the
statute. But, on the other hand, if the promise is collateral to the agreement of
another and the promisor becomes thereby merely a surety, the promise must be
in writing.
● While a promise, absolute in form, to pay or to be responsible or to be the
paymaster, is an original promise, and while on the other hand, if the promisor
says, “I will see you paid/I will pay if he does not”, or uses equivalent words, the
promise standing alone is collateral, yet under all circumstances of the case, an
absolute promise to pay, or a promise to be responsible may be found to be
collateral, or promises deemed prima facie collateral may be adjudged collateral.
This is because the general rule is that the parties making a promise of this nature
rarely understands the legal and technical difference between an original and
collateral promise, thus the precise form of words used is not always conclusive,
even when established by undisputed testimony.
3. An Agreement Made In Consideration of Marriage Other Than A Mutual
Promise To Marry:
● The agreement may be one entered into by reason of marriage such as a marriage
settlement and donations propter nuptias. They are entered into by reason of an
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 impending marriage.
● The term in consideration of marriage should read by reason of marriage because
the cause of a donation propter nuptias is not the marriage but the liberality of the
giver.
● As long as the agreement is in consideration of a marriage to be celebrated yet, it
must be in writing to make it enforceable.
● However, a mutual promise to marry is not covered by the Statute of Frauds.
Testimonial evidence is therefore admissible to prove the promise in an action for
actual damages for breach of promise.
4. An Agreement For The Sale of Goods, Chattels, or Things In Action, At a Price
Not Less Than ₱500
● The sale of goods, thing, and other as indicated in the law must be in writing if
the price is at least ₱500. Otherwise, the sale is unenforceable and cannot be
proved by oral evidence. The writing, note or memorandum must be signed by
the person charged or by his representative.
● However, the signature of the seller is dispensed with, if the sale was effected at
an auction sale. The law did not say “public” auction. Hence, private auctions are
included as the law made no distinction.
● The entries made in the sales book of the auctioneer at the time of the sale of the
kind of property sold, its amount, terms of the sale, price, names of purchasers
and persons on whose account the sale is made, is considered a sufficient
memorandum to make the sale enforceable.
● Pineda observes that the amount of 500 is now very impractical, and that
Congress must amend it.
5. An Agreement For Leasing For A Longer For A Longer Period Of More Than
One Year, Or For The Sale of Real Property Or Of An Interest Therein.
● Paragraph (e) of the law applies to the following kinds of contracts:
a. Lease, for more than one year of a real property like lands, buildings, and
the like. If the lease is exactly for one year, it is enforceable even if not in
writing. It must be for more than one year to require its reduction to writing.
i. An alleged promise of the representative of the lessor to the effect
that the lessee should be given priority or a renewal of the lease is
unenforceable. The reason is, the promise was not done in writing,
note, or memorandum subscribed by the party charged, or by his
agent.
b. Sale of real property or an interest therein regardless of the amount of the
purchase price. An oral agreement to sell a parcel of land is unenforceable.
However, if there has been already payment made, it is take out of the
coverage of the Statute of Frauds.
i. Also, when there has been delivery the Statute is not applicable.
ii. Also, a promise to give the land is not a sale of real property or any
interest therein.
iii. All executory contracts of realty unless made in writing are
unenforceable.
iv. A deed of extrajudicial partition and sale of conjugal property
executed by the widow, who represented her minor children, is
unenforceable as to the minors.
6. A Representation As To The Credit Of A Third Person
● This is an assurance given by a person as to the good credit of a third person.
There is an assurance that somebody has a certain amount of credit, that is,
capacity to pay his obligation, with the intention of enabling the person in whose
favor it is made to obtain credit by virtue of such assurance or representation. In
effect, a contractual relation is established between two persons because of the
representation.
Partition Among Heirs, Not Deemed A Conveyance of Property, Not Covered By SoF:
● The partition of inherited property need not be embodied in a public document so as
to be effective as regards the heirs that participated therein. Neither does the Statute
of Frauds under Article 1403 of the New Civil Code apply because partition among
heirs is not legally deemed a conveyance of real property.
Interest in Real Property:
● Interest in real property refers to any claim or right on a real property such as
voluntary easement, usufruct, right of a mortgage of real estate, right of a transferee
of a co-owner’s share over a real property.
Representation Distinguished From Guaranty:
● This is different from a guaranty. In a guaranty, there is a promise to answer for the
debt of another, whereas in representation, there is merely an assurance that
somebody has a certain amount of credit to influence the supposed creditor to give
or grant a favor to the supposed debtor.
● In guaranty, the guarantor participates directly in the contract, whereas in
representation the one making the representation does not take part in the contract
proper.
● However, the person’s assurance to the supposed creditor who is going to give credit
to a third person, creates some sort of an agreement. This must be put in writing to
make it valid and enforceable. If it is not in writing, it is unenforceable.
● Example: Ghelyn filed an application with a bank for a loan. She mentioned the
name of Anton, a man of repute as her reference. When inquired about the capacity
of Ghelyn, Anton assured the bank that Ghelyn is very reliable and a trustworthy
person as she owns several real properties although short of cash money at the
moment. This representation is not enforceable against Anton because it was not
made in writing. Thusly, if the representation is false, the bank cannot pursue a
complaint for damages against Anton because the representation not being in writing
is unenforceable.
● Note from Pineda: According to J.B.L. Reyes, this paragraph on representation is
improperly included among the unenforceable contracts. It is not a liability
ex-contractu but a matter of tort. It is not even included in the original Statute of
Frauds.
Nature of The Representation:
● The representation must be done in good faith. It must not be intended to deceive or
defraud.
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 ● A false representation that a person is a partner in a company, done for the purpose
of inducing the other party to sell goods to the company, is not within the coverage
of the Statute of Frauds.
● The act may be proved by parol evidence in an action for damages against the
deceiving parties.
Requirement in Article 1724 Is Not Covered By the Statute of Frauds:
ARTICLE 1724. The contractor who undertakes to build a structure or any other work for
a stipulated price, in conformity with plans and specifications agreed upon with the
land-owner, can neither withdraw from the contract nor demand an increase in the price on
account of the higher cost of labor or materials, save when there has been a change in the
plans and specifications, provided:
(1) Such change has been authorized by the proprietor in writing; and
(2) The additional price to be paid to the contractor has been determined in writing
by both parties. (1593a)
Requisites of Action for Reformation:
1. There is a contract agreed upon where there is a meeting of the minds.
2. The real intention of the parties was not expressed in the instrument.
3. The reason for the failure of the instrument to express the real intention of the
parties is mistake, fraud, inequitable conduct, or accident.
4. The said intervening mistake, fraud, inequitable conduct, or accident did not
prevent the meeting of the minds of the parties.
● Illustrations: In a contract for the construction of a building, the parties agreed that
payment be in dollars. The dollar sign was used in the original draft. However, what
was typewritten in the contract, occasioned by mistake, was the peso sign.
Reformation was ordered by the court.

Quantum of Evidence Needed:

● The requirement that the change in the plans and specifications must be in writing is ● The evidence must be strong, clear, and convincing. Mere preponderance will not
not part of the Statute of Frauds. This requirement is a substantive provision or is a suffice.
condition precedent to allow recovery on the part of the contractor. The requirement
that the change be in writing is not a mere prohibition against the admission of oral When Does Annulment and not Reformation Become the Appropriate Remedy?:
testimony but a condition precedent. ● An action for annulment of the contract becomes the appropriate remedy when the
mistake, fraud, inequitable conduct or accident has prevented a meeting of the minds
For greater efficacy or convenience (Arts. 1358) between the parties. Example: Where a party is leasing is property to another, the
Supra, Forms of Contracts. latter through fraud was able to make him sign an absolute deed of sale, the action is
not for reformation but for annulment.
REFORMATION OF INSTRUMENTS (ARTS. 1359-1369) ● If it did not and there was merely a failure to express the true intention of the parties,
reformation is the proper remedy. Expediency and convenience are not grounds for
the reformation of an instrument.
ARTICLE 1359. When, there having been a meeting of the minds of the parties to a
contract, their true intention is not expressed in the instrument purporting to embody the
In SBM’s ppt:
agreement, by reason of mistake, fraud, inequitable conduct or accident, one of the parties
may ask for the reformation of the instrument to the end that such true intention may be Reformation Annulment
expressed.
There is a meeting of the minds between the There is no meeting of the minds. Consent
If mistake, fraud, inequitable conduct, or accident has prevented a meeting of the minds of parties as to the object, cause of the is Vitiated.
the parties, the proper remedy is not reformation of the instrument but annulment of the contract.
contract.
The instrument failed to express the true The meeting of the minds was prevented by
intention of the parties due to mistake, reason of mistake, fraud, inequitable
Definition and Rationale: fraud, inequitable conduct, or accident. conduct, or accident perpetrated by one
● Reformation is a remedy in equity by means of which a written instrument is made party against the other.
or construed so as to express or confirm the real intention of the parties when some
error or mistake is committed. The purpose of reformation is to establish The purpose of annulment is to render
A New Contract is Not Created: the true agreement of the parties and not to inefficacious the contract in question.
● The court which orders the reformation of an instrument does not make a new create a new one.
contract for the participating parties in the document but merely orders that the
instrument express their true agreement. The court is therefor following a rule of Cases:
equity.
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Sarming vs. All of the requisites for an action for reformation to prosper are present in
Dy this case. There was a meeting of the minds of the parties but the deed did
not express the true intention of the parties due to the mistake in the
designation of the lot subject of the deed.
ARTICLE 1360. The principles of the general law on the reformation of instruments are
hereby adopted insofar as they are not in conflict with the provisions of this Code.
General Law on Reformation:
● The governing law is Article 17 of the Civil Code: Article 17: The forms and
solemnities of contracts, wills, and other public instruments shall be governed by the
laws of the country in which they are executed. When the acts referred to are
executed before the diplomatic or consular officials of the Republic of the
Philippines in a foreign country, the solemnities established by Philippine laws shall
be observed in their execution.
● Since the Chapter on Reformation is of an American Extract, American
jurisprudence will be persuasive, though not necessarily binding, as long as it does
not contradict the Civil Code.
ARTICLE 1361. When a mutual mistake of the parties causes the failure of the instrument
to disclose their real agreement, said instrument may be reformed.
Applicability of the Article:
● The article applies when the mistake is mutual, that is, both parties committed the
same mistake which caused the failure of the instrument to express their true
agreement.
● Proof necessary to establish the mutual mistake must be clear and convincing.
Effect of Unilateral Mistake:
● Where only one party is guilty of negligence in not informing himself as to the
contents of a written contract and signs it or accepts it with the full opportunity to
advise himself as to its contents, he cannot later on escape liability on the pretext of
mistake, unless there is fraud or misrepresentation.
● However, a unilateral mistake under the succeeding articles may justify reformation.
ARTICLE 1362. If one party was mistaken and the other acted fraudulently or inequitably
in such a way that the instrument does not show their true intention, the former may ask for
the reformation of the instrument.
Unilateral Mistake of One part and Fraud/Inequitable Conduct on the Part of the Other:
● The article covers a situation where one party has committed a mistake, while the
other party is guilty of fraud or inequitable act causing the failure of the instrument
to express the true intention of the parties.
● Ordinarily, if there is no fraud on the part of the other, the unilateral mistake of the
first party will not exempt the latter from the effects of the contract. The presence of
fraud or inequitable conduct justifies the reformation of the contract.
ARTICLE 1363. When one party was mistaken and the other knew or believed that the
instrument did not state their real agreement, but concealed that fact from the former, the
instrument may be reformed.
Unilateral Mistake of One Party and Concealment on the Part of the Other:
● Just like in the preceding article, the mistake of one party is unilateral with the
difference however that the other party is guilty of concealment rather than fraud or
inequitable conduct.
● The party guilty of concealment knew or believed that the instrument failed to state
their real agreement. Hence, the concealment is necessarily attended with bad faith.
Reformation is authorized to avoid injustice and inequity.
● If the second party is not aware of the imperfection in the contract and he is in good
faith as the first party, then mistake becomes a mutual one and under the obtaining
circumstances, reformation is authorized.
ARTICLE 1364. When through the ignorance, lack of skill, negligence or bad faith on the
part of the person drafting the instrument or of the clerk or typist, the instrument does not
express the true intention of the parties, the courts may order that the instrument be
reformed.
Mistake of the Drafter, Clerk or Typist:
● The mistake of the drafter, clerk or typist who did the mechanical act of preparing
the instrument, must be due to his ignorance, lack of skill, or bad faith. If due to any
of these, the instrument may be reformed.
● Example: The writing of the figure 15% as the share of a lessee-co-owner was a
clear clerical mistake because there are four co-owners. The figure 15% should be
reformed to read 25%.
ARTICLE 1365. If two parties agree upon the mortgage or pledge of real or personal
property, but the instrument states that the property is sold absolutely or with a right of
repurchase, reformation of the instrument is proper.
Applicability:
● Article refers to a mortgage of real property or pledge of personal property but the
instrument signed is an absolute sale or sale with pacto de retro. The reformation of
the instrument is authorized to express the real intention of the parties.
Factors in Determining the Intention of Parties:
● Intention may be inferred from their simultaneous or subsequent acts, as well as
from their stipulations in the contract. For example, the use of the word debt would
imply the existence of a creditor-debtor relationship, which is not in accord with a
CIVREV C2022 COMPILATION - DBN & MKG | SBM SYLLABUS | 136
 purchase and sale transaction wherein the relationship of the parties is vendor and
vendee.
Parol Evidence is Admissible:
● Parol evidence is admissible to prove that the agreement of the parties is not one of
sale but only a mortgage, although the instrument signed is a deed of sale or with a
right of repurchase or that the deed of sale was merely used as security for the
payment of the loan.
ARTICLE 1366. There shall be no reformation in the following cases:
1. Simple donations inter vivos wherein no condition is imposed;
2. Wills;
3. When the real agreement is void.
In SBM’s ppt:
Reasons Why Reformation is Not Allowed:
1. Unconditional Simple Donations Cannot be Reformed – the reason for this is
that such unconditional donations are essentially gratuitous. Being acts of
liberality, courts should not interfere in such kind of donation. The donee has not
paid anything and consequently, it is inappropriate for him to sue the donor to
reform the deed of donation which the latter has executed unilaterally.
Exception: If the donation is subject to a condition, it partakes of the nature of a
contract. If the contract failed to express the intention of the parties on the agreed
condition, the deed of donation can be reformed.
2. Wills – are not allowed to be reformed. The reason for this is that the execution
of a will is a personal act which can be revoked anytime by the testator. If the
testator has changed his mind and desires to cancel his testamentary dispositions,
all he has to do is to revoke the will by another will or codicil or execute overt
acts of revocation like tearing, burning, cancelling, or obliterating the will with
the intention of revoking it.
Exception: When there are imperfect or erroneous descriptions of persons or
property, the mistakes and omissions must be corrected, if the error or errors
appear from the context of the will or from extrinsic evidence but excluding oral
declarations of the testator as to his intention.
● It must be noted it is only on these specific matters of misdescriptions
that a will may be corrected by the court, that is, in the course of the
probate proceedings.
● The testamentary dispositions themselves cannot be corrected by the
court. The only person allowed to amend or add something to
testamentary dispositions is the testator himself.
● When the exception to correct is allowed, it is because the testator is
already dead and the court simply reads the intention of the testator on
the correct person/property imperfectly described.
3. Void Agreements – are not reformable because courts of justice should not be
wasting their time reforming instruments which will not in any way produce legal
effects; waste of time.
ARTICLE 1367. When one of the parties has brought an action to enforce the instrument,
he cannot subsequently ask for its reformation.
An Action Filed to Enforce the Instrument Bars Subsequent Action of Reformation:
● When a party has previously filed an action for the enforcement of the instrument,
he is no longer allowed to bring a subsequent action for the reformation thereof. He
is placed under estoppel because in seeking the enforcement of the instrument, he is
considered to have ratified it.
● A party is not allowed to pursue two inconsistent positions regarding an instrument,
one for its affirmance and the other for its disaffirmance.
ARTICLE 1368. Reformation may be ordered at the instance of either party or his
successors in interest, if the mistake was mutual; otherwise, upon petition of the injured
party, or his heirs and assigns.
Who can Initiate an Action for Reformation?:
1. If the mistake is mutual, either party or his successor in interest may file the case for
reformation.
2. If the mistake is only on one side, the injured party or his heirs or assigns may file
the action.
Indispensable Allegations in an Action for Reformation:
1. The meeting of the minds on the real intention or agreement of the parties.
2. The instrument did not express the real intention or agreement of the parties.
3. The reason for the failure of the instrument to express the real intention or
agreement of the parties.
Prescriptive Period:
● An action for reformation of a contract prescribes after ten years.
ARTICLE 1369. The procedure for the reformation of instrument shall be governed by
rules of court to be promulgated by the Supreme Court.
Rule on Reformation of Instrument:
● An action for reformation of an instrument, to quiet title to real property or remove
clouds therefrom, or to consolidate ownership under Article 1607, may be brought
under Rule 63, declaratory relief and similar remedies.
Jurisdiction:
● An action for reformation of instrument necessarily falls under the jurisdiction of the
Regional Trial Court. Any disagreement as to the nature of the parties’ relationship
CIVREV C2022 COMPILATION - DBN & MKG | SBM SYLLABUS | 137
 which would require first an amendment or reformation of their contract is an issue
which the courts may and can resolve without the need of the expertise and
specialized knowledge of the Housing and Land Use Regulatory Board.
INTERPRETATION OF CONTRACTS (ARTS. 1370-1379)
ARTICLE 1370. If the terms of a contract are clear and leave no doubt upon the intention
of the contracting parties, the literal meaning of its stipulations shall control.
If the words appear to be contrary to the evident intention of the parties, the latter shall
prevail over the former.
SBM: Memorize!
ARTICLE 1371. In order to judge the intention of the contracting parties, their
contemporaneous and subsequent acts shall be principally considered.
Applicability:
● Applies only when the terms of the contract are not clear and leave some doubts on
the intention of the contracting parties. If there are no doubts, the literal meaning of
the terms used shall control.
Determination of Intention:
● The judge should give special consideration to the circumstances surrounding the
execution of the contract and the conduct of the parties as it appears on record and
by a review of the circumstances under which the agreement was executed.
● The reasons which induced the parties to enter into the contract and the
circumstances surrounding the execution of the contract are of paramount
importance in interpreting it. The rule favors the conservation of a right, not its
impairment, loss, abandonment, or forfeiture.
● The intent of the contracting parties may be deduced from the stipulation of facts
they made in court.
● A supplemental agreement made by the contracting parties will be given weight in
the interpretation of the original contract executed by them.
● When the parties themselves placed an interpretation to the terms used in their
contract, such interpretation, in general, be followed by the court.
● Acts done in the course of the performance of the contract are admissible in
evidence upon the question of the meaning of the terms used.
Rules if contract is NOT clear
Specific over general - ARTICLE 1372. However general the terms of a contract may be,
they shall not be understood to comprehend things that are distinct and cases that are
different from those upon which the parties intended to agree.
Effectual over ineffectual - ARTICLE 1373. If some stipulation of any contract should
admit of several meanings, it shall be understood as bearing that import which is most
adequate to render it effectual.
As a whole instead of in part - ARTICLE 1374. The various stipulations of a contract
shall be interpreted together, attributing to the doubtful ones that sense which may result
from all of them taken jointly.
In keeping with nature - ARTICLE 1375. Words which may have different significations
shall be understood in that which is most in keeping with the nature and object of the
contract.
Usage and custom - ARTICLE 1376. The usage or custom of the place shall be borne in
mind in the interpretation of the ambiguities of a contract, and shall fill the omission of
stipulations which are ordinarily established.
Construed against the one who caused obscurity - ARTICLE 1377. The interpretation of
obscure words or stipulations in a contract shall not favor the party who caused the
obscurity.
Rule if intention cannot be resolved
ARTICLE 1378. When it is absolutely impossible to settle doubts by the rules established
in the preceding articles, and the doubts refer to incidental circumstances of a gratuitous
contract, the least transmission of rights and interests shall prevail. If the contract is
onerous, the doubt shall be settled in favor of the greatest reciprocity of interests.
If the doubts are cast upon the principal object of the contract in such a way that it cannot
be known what may have been the intention or will of the parties, the contract shall be null
and void.
Applicability:
● Applies only when the doubts or obscurities in a contract could not possibly be
determined by the application of the rules provided in the preceding articles. ! Thus,
this article is invoked only as a last resort.
Two Kinds of Doubts:
1. Doubs on the incidental circumstances of the contract covered by the first paragraph.
Thus, as to whether a contract is a sale or mortgage, this is considered an incidental
circumstance.
2. Doubts on the principal object of the contract covered by the second paragraph.
Thus, if the intention of the parties cannot be determined, the contract shall be void.
Rules on Doubts on Incidental Circumstances:
● If the contract is gratuitous, the least transmission of rights and interests shall
prevail.
○ Example: If there is doubt whether the gratuitous delivery of a personal
thing to someone constitutes a commodatum or donation, it shall be
construed as commodatum because this will involve lesser transmission of
CIVREV C2022 COMPILATION - DBN & MKG | SBM SYLLABUS | 138
 rights. In a case whether a mortgage is onerous or gratuitous, it is
interpreted as gratuitous. performance case
● If the contract is onerous, the doubt shall be construed in favor of the greatest or complain for
reciprocity of interests. damages based on
○ Example: If there is doubt as to the nature of a mortgage contract, it is breach of contract.
presumed that the debtor assumed liability which permits the greatest
reciprocity of rights and interests. The document should not be considered Nature of Direct action. Direct action, Indirect attract is Attacked
as a pacto de retro sale. action Collateral attack either in the allowed in the directly or
is not allowed. complaint or as form of a defense. indirectly.
a counterclaim.
ARTICLE 1379. The principles of interpretation stated in Rule 123 of the Rules of Court
shall likewise be observed in the construction of contracts. Who can Contracting party. Only Contracting party. 3rd persons
file? XPN: creditors contracting Third person cannot assail
who are party cannot assail. the contract
defrauded. principally or unless his
DEFECTIVE CONTRACTS subsidiarily interests are
obliged under directly
the contract. affected.
Defective Contracts: XPN: A 3rd
person who is
1) Rescissible Contracts — Arts. 1380-1389, 1191 prejudice.
2) Voidable Contracts — Arts. 1390-1402, 1327-1328, 1330
3) Unenforceable Contracts — Arts. 1403-1408, 1317, 1878 Can it be Susceptible to Yes Yes No
4) Void or Inexistent — Arts. 1409-1422, 1318, 1353, 1378, 1491, 1898 ratified? convalidation but
not on ratification
proper.
Basis Rescissible Voidable Unenforceable Void
Prescrip- 4 years 4 years 10 years if written; No prescription
Damage There must be Not necessary. Not necessary. Not necessary. tion 6 years if unwritten
or damage/lesion or
Prejudice prejudice to one Rescissible Contracts — Arts. 1380-1389, 1191
of the contracting
parties or 3rd ARTICLE 1380. Contracts validly agreed upon may be rescinded in the cases established
person. by law.

Legal Valid and legally Valid, binding, Inoperative until Generally, they
Concept of Rescissible Contract:
effect enforceable until and ratified. Not do not produce
● A rescissible contract is one which contains all the essential requisites of a contract
judicially enforceable enforceable in legal effects
which make it valid, but by reasons of injury or damage to either of the contracting
rescinded. until judicially court without with a few
parties or to third persons, such as creditors, may be rescinded.
annulled. proper ratification. exceptions
● An action to rescind under this article or an accion pauliana must be of last resort,
(void married
availed of only after all other legal remedies have been exhausted and have been
prode legitimate
proved futile.
children)

Remedy Rescission or Annulment of This is just a Declaration of Characteristics of a Rescissible Contract:

or action rescissory action. contract. personal defense nullity of
when the plaintiff contract. 1. It has all the elements of valid contract:
pursues a specific 2. It has a defect consisting in an injury to one of the contracting parties or third,

CIVREV C2022 COMPILATION - DBN & MKG | SBM SYLLABUS | 139

 generally in the form of economic damage or lesion, fraud, and alienation of
property subject of case in court without the consent of the litigants or of the
court;
3. It is valid and effective until rescinded;
4. It can be attacked only directly, either by one of the contracting parties or by an
affected third person, who is injured or defrauded by the contract;
5. It is susceptible of convalidation only by prescription. Ratification does not apply.
Can a Voidable Contract be Rescinded:
● The article speaks of contracts validly agreed upon. It does not however confine the
action for rescission to valid contracts only.
● The article does not require the validity of contracts as a sine qua non (essential
condition) for rescission. Voidable contracts which are also defective contracts, may
be the subject of rescission.
● In other words, voidable contracts may either be annulled or rescinded. (Art. 1380
and 1391)
Rescission By Mutual Consent is Not Rescission Proper Under Art. 1381:
● When the parties mutually agree to rescind their contract, it is not a rescission proper
because it is not based on any of the grounds of rescission stated in Articles 1381
and 1382, but based on the will of the parties who are withdrawing from their
contract.
Requisites For An Action For Rescission (1381 Rescission):
1. The contract subject of the action must be a rescissible one, that is, it must be one
of those mentioned in Articles 1381 and 1382.
2. The plaintiff must have no other recourse to obtain reparation for the damages he
suffered except the rescission of the contract. (Art. 1383) It must be noted that the
action is only subsidiary.
3. The plaintiff must be able to return whatever he is obliged to restore, if the action
would be sustained (Art. 1385).
4. The object/s of the contract must not have already passed unto the ownership or
possession of a third person who is acting in good faith (Art. 1385).
5. The action must be brought within the prescriptive period, that is, within four
years from the accrual of the cause of action. (Art. 1389)
Right to Rescind May be Noted in the Certificate of Title:
● Direct action is needed to attack a rescissible contract. Indirect attack is not allowed.
● If a real property is involved and covered by title, the right to rescind, which is an
interest on real property may be preserved by the court, and registered.
Can There be a Valid Extrajudicial Rescission of a Contract?:
● Yes. A judicial rescission of a contract is not necessary where the contract itself
provides that it may be revoked and cancelled for violation of any of its terms and
conditions.
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 manner
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.
Coverage of Article:
● The Article listed five cases of rescissible contract. The last paragraph (no. 5) is
all-embracing as it covers all other contracts specially declared by law as rescissible
like those stated in Articles 1189, 1382, 1098, 1526, 1534, 1539, 1542, 1556, 1560,
1567, and 1659.
Rescissible Contracts Due to Economic Lesion of More than 25% of the Value:
● Contracts entered into by guardians whenever the wards whom they represent suffer
lesion by more than 1⁄4 of the value of the things disposed of can be rescinded.
● It is understood that there is no judicial approval of the contracts entered into by the
guardians because if there is, whether the contracts involve acts of ownership or acts
of administration, the contracts will not be rescissible. (Art. 1386)
● If a guardian alienates properties of the ward without judicial approval, the contract
is unenforceable for lack of authority irrespective of the value of the economic
lesion or damage. (Art. 1403)
● Even if the act constitutes merely an act of administration such as causing the
painting of a building owned by the ward but under the management of the guardian
where the latter contracted the services of a painter for a price higher by more than
25% of the ordinary charge of the painter, the contract is rescissible. The reason is
that the ward suffered more than 1⁄4 of the actual value of the services of the painter.
● If the guardian is managing a hacienda belonging to the ward and the former sold
the corps harvested therefrom for a price lower than 25% of the value thereof, the
sale is rescissible because of the economic lesion of more than 1⁄4 the value of the
crops.
● The principles above are also applicable to acts of the representatives of absentees –
there being a parity of reasoning and identical law applicable.
Contracts Undertaken Deliberately In Fraud of Creditors:
● Not all fraudulent transactions entered into by a debtor can be the subject of
rescission by the creditor.
● The contract must be intended to defraud the creditor/s, and that the creditor/s
cannot in any manner collect the claim due him/them.
● Fraudulent intent must be proved. Without the needed proof establishing the
fraudulent intent, the contract cannot be rescinded.
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Nature of Action for Rescission: and/or is intended contrary to law,
● Rescission is a subsidiary action. It is popularly known as accion pauliana. It cannot morals, good customs, public order, or
be instituted if the plaintiff has other legal means to obtain reparation for the public policy.
perceived damage or injury he suffered.
● For example, Trisha extended a loan to Emmanuel which loan is secured by a real Possibility of Satisfaction of plaintiff’s Non-satisfaction of plaintiff’s claim is
estate mortgage that is duly registered. In order to escape his creditors, Emmanuel Satisfaction of claim is not possible except not required.
sold his properties to third persons. Trisha cannot rescind the contracts entered into Claim through the rescission.
by Emmanuel, because Trisha has other means of collecting what is due to her. She
can always foreclose the existing mortgage at maturity time. Creditors who Only creditors prior to the All creditors, whether before or after
can pursue the alienation may file the action. the simulation, may file the action.
Badges of Frauds: case
● It is not sufficient that it is founded on a good or valuable cause or consideration or
is made with bona fide intent: it must have both elements. If defective in either of
these particulars, although good between the parties, it is rescissible as far as the Alienation of Thing/s Under Litigation:
creditors are concerned. ● A property is said to be under litigation when the summons and complaint, seeking
● Examples: the rescission of the contract involving the property, had been received by the debtor
○ Consideration of the conveyance is fictitious or inadequate who alienated it.
○ The transfer is made by the debtor after suit has begun and while it is ● If during the pendency of the case, the debtor alienated the subject property without
pending against him the knowledge and approval of the litigants or of the proper court, the sale or
○ A sale upon credit by an insolvent debtor alienation is rescissible. It can be set aside.
○ Evidence of large indebtedness or complete insolvency ● For the protection of the rights of the complaining creditor, he should cause the
○ The transfer of all or nearly all of his property by a debtor, especially registration of a notice of lis pendens. This will place all persons under notice that
when he is insolvent or greatly embarrassed financially there is a claim over the property. If the property is personal, the creditor may apply
○ Transfer is made between father and son, when the other circumstances for the issuance of a writ of attachment.
above are present
○ The failure of the vendee to take exclusive possession of all the property Violation of Right of First Refusal:
● The prevailing doctrine is that a contract of sale entered into in violation of a right of
Accion Pauliana Requisites: first refusal of another person is rescissible. It is not covered by the statute of frauds.
● Right of first refusal (ROFR or RFR) is a contractual right that gives its holder the
1. Plaintiff asking for rescission has a credit prior to the alienation option to enter a business transaction with the owner of something, according to
2. The debtor has made a subsequent contract conveying a patrimonial benefit to a specified terms, before the owner is entitled to enter into that transaction with a third
third person party.
3. Creditor has no other legal remedy to satisfy his claim
4. The act being impugned is fraudulent Cases
5. Third person who received the property conveyed, if it is by onerous title, has Cannu vs. The rescission on account of breach of stipulations is not predicated on
been an accomplice in the fraud CA injury to economic interests of the party plaintiff but on the breach of faith
by the defendant, that violates the reciprocity between the parties.It is not
a subsidiary action. (Art. 1383) Article 1191 rescission applies. This
Basis Accion Pauliana Action to Declare Nullity of rescission is a principal action retaliatory in character, it being unjust that
Absolutely Simulated Contract a party be held bound to fulfill his promises when the other violates his.

Nature There is a true alienation of There is no alienation of property but CBC vs. CA Assignment of rights to redeem in favor of Paulino is to rescinded since it
property. only pretension of alienation. was done to defraud China Bank. Despite Alfon’s knowledge that it is the
only property he had which his other creditors could levy, he still assigned
Purpose To set aside a contract validly To declare the inexistence of the his right to redeem his ½ share of the conjugal property in question from
entered into. absolutely simulated contract which Metrobank in favor of his son, Paulino. Also, the presumption that the
prejudices the rights of a third person conveyance is fraudulent has not been overcome. This presumption is
CIVREV C2022 COMPILATION - DBN & MKG | SBM SYLLABUS | 141

strengthened by the fact that the conveyance has virtually left Alfonso’s
other creditors with no property to attach.
Oria vs. Hermanos received a favorable judgment against Oria Co. which was
McMicking under liquidation. When execution was placed in the hands of the sheriff,
Oria replied that there were no funds to pay the civil liability. A steamship
was then subjected to public auction where the highest bidder was
Gutierres Hermanos. Oria claims that he is the owner of the steamship due
to the earlier sale by the company to him.
The sale in the form in which it was made leaves the creditors
substantially without recourse. The property of the company is gone, its
income is gone, the business itself is likely to fail, the property is being
dissipated, and is depreciating in value.
Contreras vs. The deed of mortgage in question has for its object a property in litigation,
CBC and it was executed by spouses Molina without the knowledge and
approval of neither the petitioner nor the court having cognizance of the
litigation. Spouses Molina cannot allege that the 1⁄2 belonging to them
was free from litigation because the action involved the whole property.
Rosenroc v. This does not mean that respondents are left without any remedy for the
Inquing unjustified violation of their right of first refusal. Their remedy however is
an action for damages against the heirs of the spouses Tiangco for the
unjustified disregard of their right of first refusal.
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.
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.
Requisites of Action For Rescission Under Article 1382:
1. Payment or payments were made by the debtor to a creditor
2. Payment or payments were made while the debtor is in state of insolvency
3. Obligations paid were not yet due and demandable
● Example: An insolvent corporation owed a Kingsman 70k. Although, the debt is not
yet enforceable, the corporation delivered a deed of sale covering one of its
properties to the Kingsman as payment, to abide by the saying that ‘Manners maketh
man’. However, the value of the property is much greater than the amount of
indebtedness. The sale is rescissible because it was made by the debtor who is in a
state of insolvency, in payment of an obligations which is not yet due.
● An insolvent will not be permitted to alienate his property without a full and fair
consideration where the conveyance was not done in good faith.
Kinds of Premature Obligations Covered:
● The premature obligation which was paid by the insolvent debtor may include a
void, natural, condoned, or prescribed obligation.
Contracts Entered Into By Guardians and Representatives of Absentees:
● If the contracts entered into by guardians or representatives are approved by the
court having jurisdiction over the proceedings, the contracts could not be rescinded.
● Opposition to these contracts should have been timely made before the court. The
lack of opposition is deemed a waiver of the right to rescind.
● Unless this presumption is rebutted with strong, clear, and convincing evidence,
contracts entered into by guardians and representatives which have been approved
by the court, cannot be the subject of rescission.
● The court must, however, be a competent court and had observed due process.
Applicability; Payments:
● The article does not refer to a contract but to payments made, that is why the same
were not included among the enumeration in Art. 1381.
● What is rescissible are the payments for obligations which are not yet due. Payments
must have been made by a payer-debtor who is in a state of insolvency.
State of Insolvency, Meaning:
● The word insolvency is understood in its vulgar and not technical sense as defined
under the Insolvency Law. In its vulgar sense, a person is considered insolvent when
it is impossible for him to fulfill his obligations because of financial constraints. He
has more obligations than assets.
● The law does not require a judicial declaration of insolvency to make the payments
rescissible.
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.
Nature of Action for Rescission, Only Subsidiary:
● An action to rescind a rescissible contract is not a principal action. It is just a
subsidiary action, which means it cannot be instituted except when the party
suffering damages has no other legal means to obtain reparation for the damages
suffered.
What to Alleged and Prove; Consequences of Failure To Do So:
● The creditor seeking rescission of a contract as fraudulent must prove first that he is
really a creditor, and secondly that he could not collect his credit in any other way.
● Exception: If it can be proven that the property alienated was the only property of
the debtor at the time of the transaction, the action for rescission is certainly
maintainable because it is clear that the creditor has no other remedy under the
circumstances.
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Persons Allowed to Institute the Action:
● The persons allowed to file the rescissory action are the
a. Parties who suffered the economic lesion
b. The affected creditor
c. Other persons authorized by law.
● In case of their death or incapacity, their heirs may institute the action or may
continue the same if already commenced.
● However, the heirs of the debtor who alienated the properties in fraud of creditors
cannot represent the debtor to institute the action. The heirs are not allowed because
that will give them benefit arising from the wrongs committed by their own
predecessor. A wrongdoer is not allowed to benefit from his own wrong whether
directly or indirectly.
Can Apparent Heirs Rescind Contracts entered into by Their Predecessors In
Succession?
● If a deceased person alienated his properties during his lifetime for the purpose of
depriving or diminishing the legitimes of his compulsory heirs, the latter may
rescind the contracts made for that illegal purpose. The heirs are placed in a position
similar to that of creditors. Their legitimes will be the equivalent of the credit of
creditors.
● Legitime is that part of the testator’s property which he cannot dispose of because
the law has reserved it for certain heirs who are, therefore, called compulsory heirs.
Prescription:
● The 4 year period to rescind a fraudulent contract must be counted from the time the
action accrues and not from the date of registration of the conveyance for that would
run counter to Art. 1383 as well as settled jurisprudence.
Cases:
Suria v. IAC The petitioners’ breach of obligations was not with respect to the
perfected contract of sale but in the obligations created by the mortgage
contract. In this case, the remedy of rescission is not a principal action but
becomes a subsidiary one which by law is available only in the absence of
any other legal remedy. Since foreclosure was a specific provision found
in the contract as the principal remedy, the action of respondents must first
be foreclosure.
Regalado vs. The action to set aside the contract on the ground that it is fraudulent as to
Luchsinger creditors is subsidiary, and cannot be maintained if the debtor has other
property with which to pay the debt; but in this case we agree with the
court below that the evidence shows that the father had no such other
property, either at the time the sale was made or at the time this action was
tried out of which the defendants could have collected this debt. The only
property which it is said he had consisted of various debts owing to him,
as he claimed, from third persons. All of these debts were created prior to
the year 1888. One of them, the most important, for 10,000 pesos, was in
litigation.
Goquiolay The action for rescission is subsidiary; it cannot be instituted except when
vs. Sycip the party suffering damage has no other legal means to obtain reparation
for the same". Since there is no allegation, or evidence, that
Goquiolay cannot obtain reparation from the widow and heirs of Tan Sin
An, the present suit to rescind the sale in question is not maintainable,
even if the fraud charged actually did exist.
ARTICLE 1384. Rescission shall be only to the extent necessary to cover the damages
caused.
Extend of Rescission, Total or Partial as the case may be:
● The primary purpose of rescission is reparation for damage or injury suffered either
by a contracting party or by a third person. The injury or damage may not cover the
entirety of the thing sought to be recovered.
● Partial rescission is allowed. Thusly, the scope of the rescission shall only be to that
extent necessary to satisfy the damages caused.
Persons Who Can Benefit From The Rescission:
● If rescission is allowed by the court, only the particular creditor/s who instituted the
action shall be benefited.
● If the rescission is partial, and there is a remainder after the satisfaction of the claims
of the suing creditor/s, the same shall remain in the hands of the transferee because
the alienation of the property or thing is valid up to this limit or extent.
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.
Applicability of Mutual Restitution:
● Mutual restitution is applicable only when there is delivery on both sides. It is not
applicable when creditors are rescinding fraudulent contracts executed by their
debtors in favor of other persons. This is so because such creditors have not received
anything from their debtors and have nothing to restore.
Applies in Rescission of Reciprocal Obligations as well as in Mutual Dissent:
● The rule of mutual restitution was applied in reciprocal obligations governed by
Article 1191 which speaks of rescission in the sense of cancellation of contract
based only on non-performance of what is incumbent upon a party in reciprocal
obligations.
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 ● The same rule applies to cases of mutual dissent where the parties agreed to back out
from their contract.
● The complaining party who cannot return whatever he may be obliged to restore, is
not entitled to rescission. His case will be dismissed for lack of condition precedent.
No Rescission when Property had already been Legally Transferred to Third Person:
● If the property had already been alienated in favor of a third person, such as by way
of sale, and he is in good faith, the transfer of the property to him will be respected,
as he has a better and superior right than that of the complaining party whose claim
or right had not been preserved. If in bad faith, the property transferred to him could
still be recovered, aside from the imposition of damages for the injury suffered by
the complaining party.
● Although a transferee is in good faith, if he got the property gratuitously from the
debtor, he is obliged to return the thing under the principle that no person shall be
enriched at the expense and prejudice of other persons like the creditors. He will
restore the property in the condition it may be found without any liability to pay for
the fruits he had received, if there are any. More, he is entitled to reimbursement or
necessary and useful expenses which he incurred. Even more, he is not liable for the
deterioration or loss of the thing possessed except when he acted with fraudulent
intent or negligence, after judicial summons had been received by him.
Persons Liable for Indemnity for Damages:
● If creditors who desire to recover the property alienated to defraud them, failed in
their quest for rescission due to the lawful transfer of the possession or ownership of
property to a third person who acted in good faith, their recourse is to go after the
person who had caused the loss.
● Thus, if it is guardian who is involved, he will be liable to indemnify the ward for
the value of the economic damage or lesion suffered by the latter.
Article 1385 has a Parallel Rule in Article 1402:
● The present article has a parallel rule in the Chapter on Voidable Contracts: 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 incumbent upon him. (1308)
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.
Nature of Fraud:
● Fraud is deception. It consists of any means or ways, usually through insidious
words or machinations, perpetrated by one of the contracting parties, by reason of
which, the other party is persuaded to enter into contract which, without them, he
would not have agreed to.
Presumptions of Good Faith:
● Generally, when a person acts, he is presumed to be acting in good faith.
● Good faith is always presumed and upon him who alleges and imputes bad faith on
the part of the possessor of the property rests the burden of proof. Further, a person
is presumed to take ordinary care of his concerns and that the law has been obeyed.
● When the law presumes a transaction as fraudulent, that presumption is an exception
to the general rule of good faith stated in Art. 527.
Presumptions of Fraud are Rebuttable:
● The legal presumption in Article 1387 are rebuttable, which means, they may be
overcome by clear, strong, and convincing evidence.
● Unless sufficiently controverted, the presumptions will maintain the existence of
fraud with all the consequences attendant thereto.
● The presumption of fraudulent transaction is not overcome by the mere fact that the
deeds of sale in question were in the nature of public instruments. Their being
notarized does not render them immune and free from their fraudulent and deceptive
elements.
Requisites to Overcome Statutory Presumption of Fraud:
1. It must be proved affirmatively that the conveyance was done in good faith.
2. It must also be established that the conveyance was for a sufficient and valuable
consideration.
Effect if there is no judgment against alienating debtor nor writ of preliminary
attachment
● If there is no judgment rendered or any writ of preliminary attachment issued against
the debtor, the presumption of fraud under the article will not apply.
● These two circumstances are conditions precedent which must be established.
Otherwise, no fraud is presumed. However, if there is actually a fraud committed, it
may still be proven by available competent evidence.
Complaining creditor not confined to the Presumption to Prove Existence of Fraud:
● The creditor if he so desires may present other evidence to establish the existence of
the fraud more convincingly, although he already enjoys a favorable presumption.
● Thus, the last paragraph of the law says, “In addition to these presumptions, the
design to defraud creditors may be proved in any other manner recognized by the
law on evidence.
A Rescissible Contract is Valid Before its Rescission:
● Just like a voidable contract, a rescissible contract, until it is finally rescinded, is
considered a valid contract. It is legally effective and can transfer or convey title. It
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 cannot be attacked collaterally like in a land registration proceeding. There is a need
for direct attack, that is, a specific action for rescission.
Existence of Fraud Does not Necessarily Bring About Rescission:
● The presence of fraud in a transaction concluded by a debtor does not by itself make
the contract rescissible.
● Thus, if the transferee acted in good faith and the transaction was for a valuable
consideration, rescission will not be granted.
Cases
Cabaliw vs. The Court held that there is a presumption of fraud in this case. The
Sadorra circumstances involved shows that Benigno intended to defraud Isidora
by selling the parcels of land knowing that the same were subject to a
judgment for support.
Alpuerto vs. Court held that the transaction is fraudulent and wholly fictitious
Perez Pastor because of the circumstances surrounding the case: (1)Alpuerto is the
son-in-law of Llenos, (2)an action was pending at the time of
conveyance and this was known by Alpuerto, (3)consideration for
transfer is less than half of the value of the property and (4) it does not
appear that Alpuerto’s resources are sufficient to enable him to readily
command that sum.
Ayles vs. Reyes The court held that due to the fact, from the whole of the evidence,
independent of such presumptions, that the debtor went into a complete
state of insolvency, selling the property in question to his wife's parents,
and the sales were simulated, the purchasers being accomplices in the
fraud — all with the purpose of frustrating the legitimate rights
pertaining to the Garay estate, and the liabilities contracted — it is
obvious that there was no infringement of the said article and the
doctrine connected therewith.
Lee vs First, Bangkok Bank failed to establish the alleged fraud. Second, the
Bangkok Bank presumption of fraud on alienations by onerous title contemplated in the
article implies a complete transfer and conveyance of ownership of real
properties. In this case, the contract in question is a mortgage contract.
Mortgages do not contemplate absolute transfer of ownership; the
property is only subject to a lien. Therefore, the presumption of fraud in
Art. 1387 cannot apply in this case
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.
Rule When Transferee Is In Bad Faith; Sanctions:
● Any person who being aware of the intention of the debtor to defraud his creditors,
still insisted on acquiring or purchasing the debtor’s property, will be liable to return
the same to the particular creditor/s who had successfully instituted the complaint
for rescission.
● In case restitution is not possible, the transferee being in bad faith will be liable to
pay indemnity to the suing creditor for the damages the latter suffered by reason of
the alienation, even if the loss or destruction of the property is due to fortuitous
event. This is an imperative legal consequence because the law clearly states that the
reason for the impossibility of returning could be due to any cause.
Rule When There is A Second Transferee or More:
● If the property had been alienated by the first transferee, the subsequent transferee/s
will be liable only if an action lies against the first transferee. This means that
rescission will not take place when the property alienated by the debtor had been
legally placed in the possession (or ownership) of a third person who did not act in
bad faith. When the first transferee was in good faith, the property ceases to be part
of the patrimony of the debtor, and the latter’s creditors can not do anything to
recover it.
● If the first transferee is in bad faith, the liability of the second transferee will now
depend upon his good faith or bad faith. If he is in good faith, he is not liable. If he
is in bad faith, he is liable to restore the thing. If that is no longer possible, he will
pay indemnity for the damages suffered by the creditor/s occasioned by the act of
alienation of the property.
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.
Prescriptive Period For Rescissory Actions; Reckoning Time:
● Generally, the prescriptive period within which to file a rescissory action is four
years. The reckoning time however, may vary depending upon the circumstances:
a. If the complaining party is a third person who has no participation in the
contract, the prescriptive period is four years reckoned from the discovery
of the fraudulent contract, or from the registration thereof, if real property
is involved.
b. If the complaining party is a ward who intends to rescind the contracts
entered into by his guardians which prejudiced him, there being a
sufferance of economic lesion up to at least one- fourth of the value of the
thing disposed of, the action must be filed within four years from the time
of attainment of the age of majority.If the complaining party is an
absentee, he should file the action for rescission within four years from the
time his domicile has been known. An absentee is one who disappears
from his domicile and his whereabouts are unknown, without leaving an
agent to administer his properties. Consequently, when he appears in his
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 domicile, he ceases to be an absentee as long as he informs the court of his
presence.
● When the contract is one of those specially declared by law as rescissible, the
prescriptive period of four years shall commence to run from the execution of the
contract.
● To count the four-year period to rescind an allegedly fraudulent contract from the
date of registration of the conveyance with the register of deeds would run counter
to Article 1383 of the civil code as well as settled jurisprudence. The reckoning
should be from the time the action accrues.
Voidable Contracts — Arts. 1390-1402, 1327-1328, 1330
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.
Voidable Contract, Concept:
● A voidable contract is one which has all the essential elements of a valid contract,
except that the element of consent is vitiated or weakened either by the incapacity of
one of the contracting parties, or by mistake, violence, intimidation, undue
influence, or fraud.
Status of a Voidable Contract:
● A voidable contract is valid and obligatory between parties before its final
annulment. A voidable contract could be attacked only directly either by an action
for that purpose or by seeking its annulment in a counter-claim and not merely by
way of special or affirmative defense.
Ratification
● Ratification is an act by virtue of which efficacy is given to a contract or obligation
which suffers from a vice of curable nullity. Voidable contracts are susceptible of
ratification.
● If they are not assailed within four years from the time the cause of action for
annulment has accrued, the contract is said to have been convalidated by
prescription. Thereafter, it is no longer subject to attack.
Damage Not Essential to Render a Contract Voidable:
● The contracts enumerated in Article 1390 are voidable even if no damage is suffered
by any of the contracting parties. The same could be annulled just the same.
Annulment Distinguished from Other Remedies in Attacking Defective Contracts:
1. The remedy of annulment applies to voidable contracts. Rescission is applicable too.
2. The remedy of rescission applies to rescissible contracts.
3. The remedy of declaration of nullity applies to void or inexistent contracts.
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.
Applicability and Prescription:
● Article only applies to the parties in the contract. It does not apply to third persons
when the law allows them to question the validity of a contract.
● Actions prescribe by the mere lapse of time fixed by law. It is one of the grounds for
extinguishing obligations. Failure to pursue an action within the period prescribed
by law will have the effect of extinguishing the action. When the contract is
voidable, the four year prescription applies.
Time of Reckoning of the Four-Year Period:
1. If the vice consists in intimidation, violence, or undue influence, the reckoning
begins from the cessation of such vice.
2. If it consists in mistake or fraud, the reckoning begins from the discovery thereof.
3. If it consists in the incapacity of the contracting parties who is under
guardianship, the reckoning begins from the cessation of the guardianship.
Fraud Thru Public Instruments Involving Registered Lands, Special Reckoning Period:
● With regard to fraudulent conveyances registered with Registry of Property, the
prescriptive period is counted not from the actual knowledge of the fraud by the
plaintiff but from the registration of the public document with the said registry.
● The act of registration is a notice to the whole words. It is the operative act which
binds registered lands under the Torrens System. Hence, the period of prescription
begins not from the discovery of the fraud but from the registration of the fraudulent
instrument.
ARTICLE 1392. Ratification extinguishes the action to annul a voidable contract.
Notes:
● Confirmation tends to cure a vice of nullity, and ratification is for the purpose of
giving authority to a person who previously acted in the name of another without
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 authority,. Recognition, on the other hand, is merely to cure a defect of proof. In
recognition, there is no vice to be remedied such as fraud, violence, or mistake, so
that the case is distinguished from confirmation. In recognition, the person acting on
behalf of another is duly authorized to do so, so the situation is different from
ratification.
● When a person confirms a voidable contract, it is presupposed that he has
participated in the very act which is the object of the action for annulment. Whereas,
a person who ratifies has no participation in the act but only approves the act
executed by another.
● IMPORTANT: TODAY, THERE IS NO MORE DISTINCTION BETWEEN THE
THREE TERMS. THEY ARE NOW REFERRED TO AS RATIFICATION.
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 reason having ceased, the person who has a right to invoke it should
execute an act which necessarily implies an intention to waive his right.
Concept of Ratification:
● It is an act or means by virtue of which efficacy is given to a contract which suffers
from a vice of curable nullity. This concept covers voidable contracts.
● It is an act of curing the defect of lack of authority or defect due to excess of
authority of the party who entered into the contract in the name of another without
the latter’s authorization. This concept specifically refers to unenforceable contracts.
Coverage of the Term Ratification Made Broader:
● The New Civil Code did not consider technical differences of the terms ratification,
confirmation, and acknowledgment. Ratification as now used covers both the ideas
of confirmation and acknowledgment. It may be defined as the validation of a
transaction otherwise without validity or partly valid.
Requisites of Ratification:
1. The contract is a voidable one
2. The confirmation is made by the injured contracting party
3. The confirming party has full knowledge of the vice or defect of the contract
4. The cause of voidability should have already ceased or disappeared at the time of
the ratification. Otherwise, if the cause of voidability is still present, such as
subsisting intimidation, the act of confirmation would also suffer from the very
vice or defect it is attempting to cure.
Forms of Ratification:
1. Express – This takes place when the desire of the innocent party to convalidated
the contract, or his waiver or renunciation of his right to annul the contract is
clearly manifested verbally or formally in writing.
2. Tacit or Implied – This takes place when the innocent party with full knowledge
of the vice which renders the contract voidable, and the same having ceased
already, he executed act/s or displayed conduct which necessarily implies his
intention to waive his right to annul the contract.
● Example: A person who has the right to attack the validity of a voidable contract of
sale instead of demanding its annulment, collected the greater part of the purchase
price as set out in the promissory note, has made a tacit confirmation of the contract.
● A minor entered into a contract of sale and when he turned 18, did not repudiate
such sale. Instead he spent most of the purchase price having full knowledge of
facts. This constitutes tacit confirmation.
● A person after knowing the nullity, still performed the obligation. This is tacit
ratification.
Effect of Lapse of Time:
● An injured party in a contract who remained silent for a certain period of time is
deemed to have ratified such contract.
● A voidable contract if not questioned within the prescriptive period of the action for
annulment, remains valid and effective.
Effects of Ratification:
1. The contract is purged or cleansed of its defects from the moment of its
constitution or establishment. The validation is retroactive to the day of its
creation.
2. Corrolarily, there being a convalidated contract which is clean, any action for its
annulment is extinguished.
An annullable contract may be rendered perfectly valid by ratification, which can be
express or implied such as by accepting and retaining the benefits of a contract.
Right to Ratify is a Transmissible Right:
● The right to ratify, if not exercised by the proper party during his lifetime, may be
exercised by his heirs it being a transmissible right.
Effect of Lack of Ratification
● A defective contract like a voidable one, if not ratified, remains valid until annulled.
Within the prescriptive period for the filing of an action for annulment, the contract
is open to assailment. An unenforceable contract if not ratified remains ineffective.
It cannot be enforced.
● Void Contracts cannot be ratified because in the contemplation of the law, they do
not exist. Only existing contracts, though defective, may be ratified.
Cases:
Soo Lim SC ruled that the contract had been ratified by the petitioner. It stated that the
v. Tan assumption that Uy Soo Lim might have had a right to rescind this contract on
Unchuan the ground of minority, his action fails because with a full knowledge of his
rights in the premises, he failed to disaffirm his contract within a reasonable
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 time after reaching majority. Not only should plaintiff have refunded all
moneys in his possession upon filing his action to rescind, but, by insisting
upon receiving and spending such consideration after reaching majority,
knowing the rights conferred upon him by law, he must be held to have
forfeited any right to bring such action.
De Luna The letter is not a ratification of the sale, nor a confirmation of authorizing
v. Linatoc another who acted without authority. The letter is one of recognition wherein
the husband stated that his wife sold the said property with his knowledge and
consent, and such that the requirement that an agent’s authority be in writing
is fulfilled. Thus the wife is the husband’s agent. Mistake of law does not
make a contract voidable, because ignorance of the law does not excuse
anyone from its compliance. That the petitioners did not know the prohibition
against partition of the conjugal partnership property during marriage is no
valid reason why they should ask for the annulment of the sales.
Rosales v. The Court held that the contract of 1902 cannot be annulled because Rivera
Reyes ratified it by entering into the contract with Rosales in 1903, wherein he stated
he was 23 years of age, thus making applicable the provisions of article 1311
of the Civil Code, which provides: "It shall be understood that there is an
implied confirmation when, being aware of the cause of the nullity and such
cause having ceased to exist, the person who may have a right to invoke
should execute an act which necessarily implies his wish to renounce such a
right."
ARTICLE 1394. Ratification may be effected by the guardian of the incapacitated person.
● If the persons enumerated in 1327, or those who are incapacitated to give consent,
continue with their condition of not being able to give consent, their guardian may
affect the ratification of the defective contract.
ARTICLE 1395. Ratification does not require the conformity of the contracting party who
has no right to bring the action for annulment.
● It is the innocent party who has the prerogative to annul or not to annul a voidable
contract. The one who cause the vice of consent personally or through a third person
is not allowed to file a case of annulment because of the principle that he who comes
to court, must come with clean hands, and a guilty party is not allowed to benefit
from his own wrong.
● To require such conformity from the guilty party as a condition precedent, enables
the guilty party to scheme a way to back out of the contract by just refusing to give
his conformity. Absurdity is the result.
ARTICLE 1396. Ratification cleanses the contract from all its defects from the moment it
was constituted.
Consequences of Ratification
● One of the consequences of ratification of the contract is its legal purification and its
being made as a regular and untainted contract. The cleansing of the voidable
contract retroacts to the time of its constitution.
● Action for annulment of the contract based on its original curable defects, can no
longer prosper after its due ratification or confirmation.
Exceptions to the Effect of Retroactivity:
● The rule of retroactivity shall not prejudice the rights of innocent third persons for
that will result in injustice which is not the intention of the law. In case of doubt in
the interpretation of laws it is presumed that the lawmaking body intended right and
justice to prevail.
Example: Joyce who is a minor sold her property to Patch. The sale is voidable due to
Joyce’s minority. After reaching the age of majority, Joyce borrowed money from Ghelyn,
a money lender. Joyce could not pay Ghelyn. Since Ghelyn was charging high interest
rates, Joyce, now being of legal age, ratified the sale she made in favor of Patch. Joyce’s
intention was to avoid paying her obligation to Ghelyn. Joyce has no other property by
which she could satisfy the claim of Ghelyn. May Ghelyn rescind the sale made by
Joyce when she was still a minor but which she ratified when she became of age?
● Yes. Before the belated ratification, Ghelyn had already acquired a valid credit as
against Joyce. The retroactive effect of the ratification which cleanses the
voidable contract of its defect from its inception will not affect or prejudice the
right of Ghelyn, who is an innocent third person. Otherwise, injustice will result.
If Ghelyn was aware of the sale from the beginning, she is in bad faith and Patch
will get the property.
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.
Persons Who Can Institute Action for Annulment:
● Action for annulment may be instituted only by persons who are parties bound either
principally or subsidiarily by the contract and who are innocent of the act or acts
constituting the reason for the voidability or annullability of the contract. The
plaintiffs must be persons with interest in the contract.
● Example: A corporation acquired a lot and building which was being occupied by
several tenants. The tenants assailed the validity of the sale where they were not
privies. They being not parties to the contract, have no right to question the same.
● Exception to the Rule: A person who is not obliged principally or subsidiarily may
exercise an action for nullity of the contract if he is prejudiced in his rights with
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 respect to one of the contracting parties, and can show the detriment which could
positively result to him from the contract in which he had no intervention.
Meaning of Principal And Subsidiary Liability:
● The liability of the principal party is principal liability and that of a subsidiary party
is subsidiary liability.
● Illustration: The principal debtor is principally bound to the creditor while the
guarantor is only subsidiarily bound. The guarantor becomes liable only if the debtor
has no property to answer for his obligation and only after all proper remedies
against the debtor had been resorted to but failed.
Contract Between Capacitated and Incapacitated Persons:
● Where the contract is between a person who has full civil capacity and one who has
no capacity to give consent to a contract such as a minor or an insane person, the
former cannot invoke the incapacity of the latter to set aside the contract.
● In brief, the former cannot have his cake and eat it too. He cannot win by betting on
both sides of the coin. He who comes to court must come with clean hands.
● When it comes to minors, if there is active misrepresentation, the minors are
estopped from annulling their contract based on their minority.
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.
Applicability:
● Applies only if the contract had been consummated. If the contract has not been
performed yet, it is understood, there is no obligation to restore as nothing had been
received by the parties.
● Strangers to the contract cannot avail of themselves the benefit of mutual restitution
under the article.
● Innocent third parties, who are not privies to the contract, cannot be obliged to
restore.
● Damages may be imposed upon the guilty party, which is justified by Articles 19,
20, and 21 of the civil code.
Duty of Mutual Restitution:
● If the obligation has been annulled, the contracting parties shall restore to one
another what they have received by virtue of the contract. This duty of mutual
restitution covers:
1) The return of things received together with the fruits or value thereof.
2) The return of the subject matter with interest at the legal rate.
Article Speaks of Annulment of Obligation and Not of Contract:
● The Article uses the phrase annulment of obligation instead of annulment of contract
because of the possibility that a contract may cover several prestations which are
divisible. Some may be voided, but others may be retained.
Obligations to Render Service:
● If services had already been rendered, and the obligation was annulled, damages, if
suffered, may be recovered using as basis of estimation, the value of the services
rendered.
● The last paragraph of the article refers to obligations to do or not to do while the first
refers to obligations to give.
Rule of Mutual Restitution is not Absolute:
● Because of the recognized principle of unjust enrichment in our legal system, if and
when the application of mutual restitution will result in an unjust enrichment of one
party at the expense of another, the rule of mutual restitution must give way.
● Example: A land is leased for a year, with the land delivered and rent paid in
advanced for the full period. After four months, contract is annulled. The mutual
restitution cannot be total because the one who rented the land has already made use
of the land, thus the amount of rent paid for the period actually used shall not be
returned, because the benefit of the use of the land for said period cannot be returned
to the lessor.
Meaning of Except In Cases Provided by Law:
● With the annulment of the contract, there must be restoration of things received with
their fruits, and the price with interest – except in cases provided by law. Insofar as
fruits are concerned, the rules on possession must be applied, particularly, the
following:
Rule of Compensation:
● If the contracting parties have reciprocal prestations which consist of sum of money
or fungible thing of the same kind, compensation will take place by operation of law
to the concurrent amount.
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.
Incapacitated/Disadvantaged Person Is Generally Favored by Law:
● Article 24 of the code provides, “In all contractual, property or other relations, when
one of the parties is at a disadvantage on account of his moral dependence,
ignorance, indigence, mental weakness, tender age or other handicap, the courts
must be vigilant for his protection.”
● Exception: However, to balance things, where the minor had received something by
virtue of a contract, which is voidable solely and exclusively because of his
incapacity, he must make a restoration insofar as he has been benefited by the thing
or price received by him. If he did not benefit, he has no duty to make restoration.
Rule With Respect To The Capacitated Party:
● Whether or not the capacitated party has benefited from what he received from a
minor, he must return the same except when he received the thing from the minor in
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 the performance of the latter’s natural obligation, and what had been received had
been spent or consumed in good faith. The reason is that the minor cannot recover
what he had paid in fulfillment of a natural obligation.
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.
Effect When Thing was lost Without the Fault of Defendant Obligor:
● The article will not apply if the thing ordered to be returned which is determinate
was destroyed or got lost without the fault of the debtor.
● Example: A determinate thing supposed to be returned got lost due to a fortuitous
event. The debtor should not be made liable for the loss of the thing because it as
provided in Article 1174, a person shall not be responsible for those events which
are fortuitous.
● Consequences: If the thing is lost due to a fortuitous event, the debtor will not be
required to make restitution. Corollarily, the creditor cannot be compelled to make
restitution because the debtor could not fulfill what is incumbent upon him.
Ultimately, Article 1402 shall apply.
Effect When Thing was lost Through the Fault of Defendant Obligor
● The rule is different if the thing was lost through the fault of the obligor, in which
case, he is obliged to return the value of the thing at the time of loss and to pay 6%
interest per annum on the value of the thing.
● Example: A contract was entered into between Chelle and Ventura. The contract was
annulled. The subject matter or object of the contract is a plow carabao which died
while in the possession of the Ventura. The court held that the value of 120 should
be paid by the defendant with interest as an indemnity for the detriment cause to its
owner.
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.
Applicability:
● Applies when the object of the contract is lost due to the fraud or fault of the creditor
himself.
● Accordingly, his complaint must be dismissed. The creditor has no cause of action
because he himself caused the loss of the thing. It is absurd to require the debtor to
return a thing which got lost due to the fault of the creditor himself.
● Even without the article, this principle is understood and universally recognized
because he who comes to court must come with clean hands.
Annulment Can Prosper Despite the Loss of The thing If Plaintiff is not at Fault:
● The action for annulment can prosper even if the object of the contract had been lost
as long as the loss is not attributable to the plaintiff. After all, if the cause is won, the
thing will be substituted by its value in money with legal interest.
● However, the law says, the ground for annulment must be the incapacity of any one
of the contracting parties. There seems to be no difference, if the ground would be
any of the vices of consent committed by the defendant. The reasons and principle
involved are the same.
● Whether the loss of the thing happened during the incapacity of the plaintiff or after
he acquired capacity jut the same, the action for annulment will be extinguished
under the first paragraph of the article because he was at fault.
● The action may also be extinguished by prescription or by ratification.
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 incumbent upon him.
Duty of Restitution is Mutual:
● After the case had been decided, and the court has required the parties to restore
what they received from each other, no one can file motion for execution to
implement the decision unless he himself has first restored what he is bound to
return.
● In case neither party takes the initiative, the best solution is to make a simultaneous
delivery in court of what is incumbent upon them. The inability to make restitution
may apply to both parties.
● If one cannot restore what he is bound to return, he cannot compel the other to
comply what is incumbent upon the latter. To require so is obviously unfair.
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.
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.
ARTICLE 1330. A contract where consent is given through mistake, violence,
intimidation, undue influence, or fraud is voidable.
Supra, Consent.
Unenforceable Contracts — Arts. 1403-1408, 1317, 1878
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
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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.
Modes of Ratification of Contract Infringing The Statute of Frauds:
Supra, Relativity of Contracts.
ARTICLE 1404. Unauthorized contracts are governed by article 1317 and the principles of
agency in Title X of this Book.
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.
Effect of Cross-Examination of the Witness:
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)
● Articles 1868-1932 in the law on agency under Title X of the Code
Unauthorized Contracts Are Susceptible To Ratification:
● The ratification of an unauthorized contract has the effect of cleansing the contract
from all its defects from the moment it was constituted (Art. 1396). It has a
retroactive effect.
Cases:
Bumanlag However, The petitioners by their silence for 16 years and by their overt acts
vs. Alzate of exchanging or bartering some lots with the private respondents have
doubtless ratified the act of their lawyer; ergo, the requisites of res judicata
being all present, the principle applies to the instant case.
Rallos vs ● Rallos, an agent granted with SPA by Concepcion to sell a lot, sold
Felix Go the undivided share of Concepcion in the land after the death of
Chan Concepcion herself. The sale was unenforceable. Ramon,
executed the sale notwithstanding notice of the death of his
principal. Accordingly, the agent’s act is unenforceable against the
estate of his principal for having acted without authority.Under
Art. 1931, an act done by the agent after the death of his principal
is valid and effective only under two conditions, viz: (1) that the
agent acted without knowledge of the death of the principal and (2)
that the third person who contracted with the agent himself acted in
good faith. These two requisites must concur and the absence of
one will render the act of the agent invalid and unenforceable.
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 benefits under them.
● Unenforceable contracts are all susceptible of ratification. But unenforceable
contracts in paragraph 2 of Article 1403 may be ratified in two ways, namely:
a. Failure to object to the presentation of oral evidence. This is tantamount to
a waiver. Contracts which infringed the Statute of Frauds ratified by the
failure to object to the prestation of parol evidence are enforceable.
b. Acceptance of benefits under these contracts. This is equivalent to waiver
or estoppel. Hence, it only applies to executory contracts.
● If the oral contract was reduced into writing by the party charged, such exercise is
called recognition. It is in effect an express ratification of the contract.
● If the party in whose favor the statute may be invoked, cross-examined the witness
who is testifying on the oral contract, the former is deemed to have waived the right
to object to the admission of the testimonial evidence.
● The remedy of the party is to promptly object to the presentation of the witness
once it becomes apparent that no evidence in writing could be presented to prove the
contract. The objection must be invoked during the “offer of the testimony” of the
witness, that is, before he testifies. Or, a motion to dismiss may be filed before
answer to the complaint is filed.
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
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 themselves of the right under Article 1357.
Applicability and Availment of Article 1357:
● Applies only when the contract involved is both valid and enforceable. The other
party cannot be compelled to execute a public instrument to cover a contract which
is not valid and enforceable under the Statute of Frauds.
● If the contract is enforceable under the Statute of Frauds because it is duly evidenced
in by a writing, note, or memorandum, but it cannot be registered because it is not in
a public instrument, the party concerned may compel the opposite party to formalize
it in the proper form required by law.
● If the latter refuses, the court will issue the necessary order to that effect. If despite
the order, the concerned party continues to refuse to execute the contract, the Court
may authorize the Deputy Clerk of Court to execute the document in behalf of the
refusing party.
Cases:
Almirol Section 335 refers to executory rather than executed contracts. In this case,
vs. the contract was partially executed since a part of the price was paid by the
Monserrat applicants in 1912, and pursuant to said contract, spouses delivered the land
and documents pertaining thereto. “Otherwise, injustice or unfairness will
result as the other party had already benefited therefrom.”
Hernande When the essential requisites for the existence of a contract are present, the
z vs. contract is binding upon the parties, and, although required to be in writing
Andal by article 1280 of the Civil Code, the plaintiff can maintain an action under
article 1279 to compel the execution of a written instrument. It says that
"Article 1279 does not impose an obligation, but confers a privilege upon
both contracting parties, and the fact that the plaintiff has not made use of
same does not bar his action."
Robles vs. When a document, which is a statement of accounts, is offered in evidence
Lizarraga not to prove such accounts, but for the only purpose of showing the
possessor's good faith, section 335 of the Code of Civil Procedure is not
applicable, and such a document is admissible in evidence although it is not
signed. In this case, the court rule that even if Exhibit A was unenforceable it
could be used as evidence since it was not intended to prove what was there
but only to prove that Robles was a possessor in good faith.
Reiss vs. While it is true that one of the plaintiffs in his disposition, made in the
Memije United States, refers to the agreement as one whereby defendant
"guaranteed" payment for the lumber, we are satisfied from all the evidence
that the word was not used by this witness in its technical sense, and that he
did not mean thereby to say that defendant guaranteed payment by the
contractor, but rather that after satisfying plaintiffs as to his own financial
responsibility, he obligated himself to pay for the lumber delivered to his
contractor for use in his house.
Syquia vs. The Court ruled that the Statute of Frauds requires that a period of lease for
CA more than a year should be put into writing and the Parol Evidence Rule
provides that when an agreement is put into writing, it shall be considered
that all terms are contained therein that anything not expressed is deemed not
agreed upon.
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.
Effect When Both Contracting Parties Are Incapable of Giving Consent:
● When both parties to the purported contract are not capacitated to give consent, the
contract is unenforceable. It cannot be enforced in court. It may however, be ratified:
1. If ratification is only on the side of one of the contracting parties, that is,
by the parent or guardian, the contract is transformed into a voidable
contract on the part of the party who did not ratify. It means it is now valid
and binding unless annulled by the court. Of course, instead of ratifying
the contract, the party who did not ratify may opt to pursue the annulment
of the voidable contract.
2. If ratification is made by both sides that is, by the parents or guardians, the
contract is validated from its inception. The validation is retroactive.
Can the Incapacitated Persons Themselves Ratify the Contract? :
● If the parties’ ground for incapacity like minority had disappeared such as by
attainment of majority age, or if the incapacity is due to insanity and they regained
their sanity, there is no question that they can ratify their previous acts. There is no
need for the law to include this expressly because it is deemed understood.
Cases:
Averia Statute of Frauds applies only to executory contracts and not to contracts
vs. which are either partially or totally performed. In proving the fact of partial or
Averia total performance, oral evidence may be received. However, it is not enough
for a party to allege partial performance in order to render the Statute of
Frauds inapplicable; such partial performance must be duly proved by either
documentary or oral evidence.
Abrenica It is held in general that by failing to object to the proof of an oral contract a
vs. party waives the benefit of the statute and cannot afterward claim it. The court
Gonda held that as no timely objection or protest was made to the admission of the
testimony of the plaintiff with respect to the contract; and as the motion to
strike out said evidence came too late, such is a waiver of the right to have
such evidence stricken out.
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ARTICLE 1408. Unenforceable contracts cannot be assailed by third persons.
Third Persons Cannot Attack Unenforceable Contracts:
● As the defense of the Statute of Frauds is personal to the availing party in the
contract, it cannot set up as a defense by strangers to the transaction. Only the
contracting parties may attack unenforceable contracts.
● However, void contracts may be attacked even by strangers whose interests are
directly affected. Voidable contracts may also be attacked by third persons who are
prejudiced thereby. Rescissible contracts are subject to attack by creditors who are
being defrauded by their debtors.
ARTICLE 1878. Special powers of attorney are necessary in the following cases:
1. To make such payments as are not usually considered as acts of administration;
2. To effect novations which put an end to obligations already in existence at the
time the agency was constituted;
3. To compromise, to submit questions to arbitration, to renounce the right to appeal
from a judgment, to waive objections to the venue of an action or to abandon a
prescription already acquired;
4. To waive any obligation gratuitously;
5. To enter into any contract by which the ownership of an immovable is transmitted
or acquired either gratuitously or for a valuable consideration;
6. To make gifts, except customary ones for charity or those made to employees in
the business managed by the agent;
7. To loan or borrow money, unless the latter act be urgent and indispensable for the
preservation of the things which are under administration;
8. To lease any real property to another person for more than one year;
9. To bind the principal to render some service without compensation;
10. To bind the principal in a contract of partnership;
11. To obligate the principal as a guarantor or surety;
12. To create or convey real rights over immovable property;
13. To accept or repudiate an inheritance;
14. To ratify or recognize obligations contracted before the agency;
15. Any other act of strict dominion. (n)
Void or Inexistent — Arts. 1409-1422, 1318, 1353, 1378, 1491, 1898
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 illegality be
waived.
The Article Provides For the Second Type of Void Contracts:
● The first type of void contract refers to Article 1318, or those which are lacking an
essential element thus rendering the contract void. The present Article provides for
the second type of void contracts.
Void or Inexistent Contracts; Concept:
● The code uses the words “void contracts” interchangeably with “inexistent
contracts,” referring to contracts which have no force and effect from the beginning
and which cannot be ratified or validated by lapse of time.
● What does not exist cannot be ratified. However, there are void contracts which may
give rise to certain legal effects. Thus contracts of marriage tainted with
psychological incapacity are void, yet the children conceived prior to the
nullification of the marriage are legitimate children.
● Void contracts generally refer to agreements which are tainted with illegality or
immorality.
● Illustrations: A contract of service for killing a person is void for being contrary to
law. A bigamous marriage is a void contract. It is both illegal and immoral.
● An inexistent contract is one which lacks one or more of the essential elements of a
contract, that is, it lacks any, some, or all of the following elements: consent, object,
or cause. Illustrations: A deed of sale where the appearing purchase price had not
been paid by the buyer is an inexistent contract. It is a simulated contract and,
therefore, without effect between the parties. A donation of real property not done in
a public instrument is also an inexistent contract.
● Article 1409 provides that contracts which are expressly prohibited or declared void
by law are considered inexistent and void from the beginning.
Characteristics of Void or Inexistent Contracts:
1. Generally, they produce no civil effects either in favor of or against anyone.
2. They are not susceptible to ratification.
3. The right to set up the defense of their inexistence or absolute nullity cannot be
waived.
4. The action or defense for the declaration of the inexistence of the contracts does
not prescribe.
5. The defense of illegality of contracts cannot be invoked by third persons whose
interests are not directly affected.
6. No action is needed to set them aside because their nullity exists ipso jure.
However, if there has been performance already, the intervention of the court is
necessary to declare its nullity and decree the restitution of what has been given
by virtue thereof. No one should take the law into his own hands. The judgment
of nullity is merely declaratory. If the void contract is still completely executory,
no action is needed to declare its nullity. Anybody who tries to enforce it may be
resisted by the other party by putting up the defense of nullity of the contract.
7. Parties to a void agreement cannot expect the aid of the law – the courts leave
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 them as they are, because they are deemed in pari delicto or “in equal fault.” E. Those which Where the contract requires the performance of a service which is
8. They cannot give rise directly to another contract. contemplate an physically impossible to perform or which is a legal impossibility like
impossible the delivery of prohibited drugs, the same is void.
service:
Void Contract Cannot Be Ratified:
● The nullity of void or inexistent contract is permanent and fixed and the same cannot
F. Those where This paragraph is just a reiteration of the second paragraph of Article
be cured by ratification. Thus, if the cause of the nullity had ceased, or even if the
the intention of 1378 which provides – “If the doubts are cast upon the principal object
terms thereof had been complied with voluntarily by the parties, there is no
the parties of the contract in such a way that it cannot be known what may have
ratification. A contract which does not exist in the eyes of the law cannot be
relative to the been the intention or will of the parties, the contract shall be null and
confirmed or ratified.
principal object void.”
● However, if a new contract had been entered into, and at the time of its execution the
of the contract
cause of the nullity of the first contract had already ceased, the new and second
cannot be
contract is valid, although its effect will not retroact to the date of the first contract.
ascertained:
Defense of Illegality Cannot Be Waived:
● A void contract is inexistent from the beginning, and the right to set up the defense G. Those 1. A contract for professional services entered into between an
of its illegality cannot be waived. Persons who are not parties in the deed of expressly incumbent judge and a corporation is void. Judges cannot
donation can set up its nullity if they are directly affected by the same. prohibited or practice law.
declared void by 2. The sale of shares of stocks of a travel agency without prior
law: notice to the Department of Tourism is void being prohibited by
law.

Illustrations of Void or Inexistent Contracts:

Cases:
A. Those whose 1. Sale of the husband to his concubine of the conjugal house, Ariaga vda. Having been established that the subject property was still the object of
cause, object or without consent of legal wife. de Gurrea litigation at the time the subject deed of Transfer of Rights and Interest was
purpose is 2. Promissory note executed to be used in bribing NARIC officials. vs. Suplico executed, the assignment of rights and interest over the subject property in
contrary to law, 3. A contract involving “Kabit System” where a holder of a favor of respondent is null and void for being violative of the provisions of
morals, good certificate of public convenience permits another person to Article 1491 of the Civil Code which expressly prohibits lawyers from
customs, public operate for a consideration the latter’s motor vehicles under the acquiring property or rights which may be the object of any litigation in
order or public franchise of the former. which they may take part by virtue of their profession.
policy: 4. A contract which deprives a court of justice of its jurisdiction.
Tongoy vs. The deeds of transfer executed in favor of Luis Tongoy were from the very
B. Those which 1. Mother sold a property to her child for a very low price which CA beginning absolutely simulated or fictitious, since the same were made
are absolutely she bought just three months ago. merely for the purpose of restructuring the mortgage over the subject
simulated or 2. A sale simulated to avoid a judgment for damages is void properties and thus preventing the foreclosure by the PNB. There is no
fictitious: implied trust that was generated by the simulated transfers; because being
fictitious or simulated, the transfers were null and void ab initio—from the
C. Those whose 1. Sale without actual consideration paid is void, and produces no very beginning—and thus vested no rights whatsoever in favor of Luis
cause or object effect whatsoever. Tongoy or his heirs. That which is inexistent cannot give life to anything at
did not exist at 2. The phrase “the cause or object did not exist at the time of the all.
the time of the transaction” which renders the contract void, will not apply to
transaction: contracts involving future things which may legally be the Rongavilla As there is no indication that private respondents were in dire need of
object of a valid contract. vs. CA money, except for few [sic] amount necessary for the repair of the roof of
their house for which they obtained a loan of P2,000.00 from petitioners,
D. Those whose 1. A compromise agreement adjudicating a creek in favor of a there was no reason for private respondents to dispose of their property. The
object is outside private person is void because it is a property of public right of action against a simulated, void ab initio contract does not prescribe.
the commerce of dominion, and as such, is outside the commerce of men.
men: 2. A public plaza cannot be the subject of a lease contract.
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Calimlim – The contract of sale was null and void for being contrary to morals and
Canullas public policy. The sale was made by a husband in favor of a concubine after
vs. Fortun he had abandoned his family and left the conjugal home where his wife and
children lived and from whence they derived their support. That sale was
subversive of the stability of the family, a basic social institution which
public policy cherishes and protects.
Mapalo vs. It is null and void because there was no cause. The P500 consideration was
Mapalo totally absent. A contract of purchase and sale is null and void and produces
no effect where the same is without cause or consideration in that the
purchase price which appears on the document as paid has in fact never
been paid by the purchaser to the vendor.
Manzano There are two types of void contracts: (1) those where one of the essential
vs. Garcia requisites of a valid contract as provided for by Article 1318 of the Civil
Code is totally wanting (consent, object,cause); and (2) those declared to be
so under Article 1409 of the Civil Code.
Conveyances by virtue of a forged signature are void ab initio. The absence
of the essential requisites of consent and cause or consideration in these
cases rendered the contract inexistent.
ARTICLE 1410. The action or defense for the declaration of the inexistence of a contract
does not prescribe.
Action To Declare Inexistence Of A Contract, Imprescriptible:
● If a contract is null and void, the action to declare its inexistence does not prescribe.
● The action can be filed at any time. The defense that a contract is null and void and
therefore could not be enforced, can be put up despite the passage of time.
● The mere lapse of time does not invalidate a contract unlike voidable ones.
Is it Necessary to go to Court to Declare the Nullity of A Void Contract?
● A void contract remains void even if no court has declared its inexistence or
illegality.
● However, there are certain contracts the nullity of which is not apparent on their
faces. And considering that there is a presumption of regularity of contracts, it is the
better part of prudence that the interested party should go to court first to avoid
inconvenience or to avoid taking the law into his own hands when the other party
refuses to restore what he had received out of the void contract. Taking the law into
one’s hands may lead to coercion which is a criminal offense.
Effect of Laches on Imprescriptibility of Action to Attack A Void Contract:
● Laches has been defined as the failure or neglect, for an unreasonable length of time,
to do that which by exercising due diligence could or should have been done earlier;
it is negligence or omission to assert a right within a reasonable time, warranting a
presumption that the party entitled to assert it either has abandoned it or declined to
assert it.
● The prevailing doctrine is that the right to have a contract declared void ab initio
may be barred by laches although not barred by prescription
Elements of Laches:
1. Conduct on the part of the defendant or one under whom he claims, giving rise to
the situation complained of;
2. Delay in asserting complainant’s right after he had knowledge of the defendant’s
conduct and after he has an opportunity to sue;
3. Lack of knowledge or notice on the part of the defendant that the complainant
would assert the right on which he bases his suit;
4. Injury or prejudice to the defendant in the event relief is accorded to the
complainant. Unlike estoppel, laches as an equitable defense usually bars only the
equitable enforcement of a right but not the right itself. It is an affirmative
defense and the burden of proving it rests on the defendant.
Laches is Inapplicable if Action is Filed Within The Prescriptive Period:
● The doctrine of laches is inapplicable when the claim was filed within the
prescriptive period set forth under the law. An action to demand partition cannot be
barred by laches.
Cases
Ras vs. Sua The Court ruled in favor of Ras, saying that because the lease contract was
in violation of a law, thus void, the action to declare its inexistence does not
prescribe, and it may be initiated any time.
Angeles vs. SC ruled in favor of petitioners. SC stated that there is no question that the
CA sale in March 1937 having made within five years from 'the date of the
issuance of the patent' was 'unlawful and null and void from its execution',
by expressed provision of sections 116 and 122 of Act No. 2874.
Under the existing classification, such contract would be 'inexistent' and' the
action or defense for declaration' of such inexistence 'does not prescribe'.
However, the amount of 2500 (price of the sale) should be returned to the
defendants.
Terre vs. Respondent Jordan Terre, being a lawyer, knew or should have known that
Terre such an argument ran counter to the prevailing case law of this Court which
holds that for purposes of determining whether a person is legally free to
contract a second marriage, a judicial declaration that the first marriage was
null and void ab initio is essential.
Atienza vs. The Court held that Article 40 is applicable to remarriages entered into after
Brillantes the effectivity (remarriage with De Castro was on 1991, after the effectivity
of the code in 1988) of the Family Code on August 3, 1988 regardless of the
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date of the first marriage.
MWSS vs. The alleged vitiation of MWSS’ consent did not make the sale null and void
CA ab initio. Thus, “a contract where consent is given through mistake,
violence, intimidation, undue influence or fraud, is voidable.”
Hypothetically, the prescriptive period to annul the same would have begun
on February 26, 1986 which this Court takes judicial notice of as the date
President Marcos was deposed. Prescription would have set in by February
26, 1990 or more than three years before petitioner MWSS’ complaint was
filed.
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 claim what he has given, and shall not be bound to comply with his promise.
Nullity of Contract Due to Illegality of Cause or Object:
● If a contract is void because of the nullity of the cause or object and it happens that
the transaction constitutes a criminal offense, both parties are in pari delicto, they
shall have no cause of action against each other.
● This means, if the contract is still in the executory stage, they cannot compel one
another to fulfill their respective promises.
● If the contract was already executed, they cannot get back what they had already
paid or delivered to one another. The law will leave them where they are.
Furthermore, the parties will be prosecuted for the crime committed. The things or
price subject of the contract may be confiscated by the State.
Applicability of Article 1411:
1. The contract entered into by the contracting parties is null and void and nullity
arises from the illegality of the cause or object of the contract. Illegality of
motives is different.
2. The transaction agreed in the contract constitutes a crime.
3. The contracting parties are in pari delicto, that is, the fault of one party is more or
less equal or equivalent of the fault of the other party.
Consequences:
● The consequences of the above in pari delicto rule are:
a. The parties shall have no action against each other;
b. Both parties shall be prosecuted criminally for their crime;
c. The things or price of the contract may be confiscated by the State in
accordance with Art. 45 of the Revised Penal Code, which is made
applicable.
● Example: The contracting parties involved in importation of contrabands have no
remedy against each other if one has violated his undertaking. Where a man and a
woman had sex not amounting to seduction, and the man did not fulfill his promise
of marriage to the woman, the latter cannot recover damages from the former as
both parties are at fault.
Extended Applicability:
● The Article will apply even if there is no in pari delicto situation provided one of the
contracting parties is guilty of the act which made the contract unlawful. The
innocent party may claim what he has given to the party and is not bound to comply
with his promise.
● Example: A public official pilfered office supplies in a government office under his
control and sold them to a buyer who was acting in good faith. The buyer paid
partial payments leaving a sizable balance unpaid. The buyer can recover what he
had paid and he cannot be compelled to pay the balance. However, he must return
the supplies he got. The public official will be prosecuted criminally for the crime.
Cases:
Batarra A promise of marriage based upon carnal connection is founded upon an
vs. Marcos unlawful consideration and no action can be maintained by the woman (over
the age of 23) against the man because the act does not constitute the crime
of statutory rape, for the woman voluntarily participated in the act.
Santos vs. The principle of pari delicto has been applied by this Court in a number of
Roman cases wherein the parties to a transaction have proven to be guilty of having
Catholic effected the transaction with knowledge of the cause of its invalidity subject
Church to certain exceptions one of them being when its enforcement or application
runs counter to an avowed fundamental policy or to public interest.
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 with his promise.
When Unlawful or Forbidden Cause is Not Constitutive Of A Crime; Consequences:
● In the preceding Article, the nullity of the contract arises from the illegality of the
cause or object.
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 ● In the present Article, the act does not constitute a criminal offense. In which case,
the rule in Art. 1411 shall not apply specifically the criminal prosecution of the
parties and the possible confiscation of the thing or price of the contract.
Rules to Follow:
A. If both parties are in pari delicto, they cannot recover what they had given
under the contract; moreover, they cannot demand the performance of the
undertaking or promise of the other party.
● A party who voluntarily entered into an illegal compromise cannot
withdraw or render ineffective acts already performed in connection
with his part of the unlawful agreement.
Timely Repudiation of Unlawful Contract; Effects:
● Where the plaintiff alienated a fishpond to her daughter, who then
resold it to her mother and her stepfather for the purpose of
circumventing the prohibition against donations between husband and
wife, the sale was not simulated but illegal. Plaintiff could not recover
since they were in pari delicto
B. If only one of the contracting parties is at fault, the one at fault cannot
recover what he has given under the contract; further, he cannot demand the
fulfillment of the promise of the other. On the other hand, the one who is not
at fault, may demand the return of what he has given without any obligation
to comply with his promise or undertaking to the other.
● A married man living under the property regime of absolute separation
of property and without children and creditor donated a piece of land to
a woman. The donation was accepted by the latter following the
formalities required by law. The man cannot recover what he had
delivered and he cannot compel the woman to live with him, although,
the consideration for the donation is actually the promise of the woman
to live with him as his concubine.
Principle of In Pari Delicto is Not Absolute; Exceptions:
● The principle of in pari delicto non oritur acto is not absolute. Under this principle,
the law will not aid either party to an illegal contract but will leave them where they
are.
● The supposition is that both parties are more or less equal in their faults. If they are
not equally guilty, the principle will not apply. The law will give relief to the party
who is the more excusable than the other.
● Examples: Basically, Articles 1413-1419 are some of them. Also, one who lost in
gambling because of the fraudulent schemes practiced on him is allowed to recover
his losses even if the gambling is a prohibited one.
Exceptions: (Articles 1413 – 1419)
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.
Usury Law No Longer Operative:
● Usury law criminalizes the act of imposing an interest on a loan in excess of the
interests allowed by the law. Circular No. 905 of the Central Bank has rendered the
Usury law as legally inexistent because the parties can now agree on any amount of
interest on the principal loan extended to the former.
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.
● A party in an unlawful contract may repudiate the contract provided the purpose/s
for which the contract was constituted had not yet been accomplished, or before any
damage has been cause to a third person.
● At this stage, if the repudiating party had paid money or delivered property as
consideration for the contract, he may be allowed to recover the same if public
interest will be subserved as determined by the court using its sound discretion.
● After the accomplishment of the purpose/s of the illegal contract, the parties could
not longer repudiate the act already performed. It is just too late to invoke the
benefits accorded under the Article. The parties will face the consequences of their
act.
● If the act constitutes a crime, they will be prosecuted for the commission of the said
crime.
● The article constitutes an exception to the general rule of “in pari delicto.” Despite
the fact that the repudiating party is privy to the illegal transaction, nonetheless, the
law allows him to recover what he had paid or delivered by reason of his timely
repudiation of the transaction. This is one way of encouraging a would-be criminal
to desist from the projected crime or illegal conduct.
● Even if the contracting parties are not equally guilty, the article will apply if public
policy will be subserved. Relief is given to the less guilty of the two parties or to the
one more excusable.
Example: Two persons including a certain Bough, induced a wife to transfer her several
properties to them through fraudulent misrepresentation. The misrepresentation consists in
the declaration that the wife’s husband was in town and is bent on suing her to take and
deprive her of the properties which she received out of the martial separation of property
previously agreed upon. To prevent the husband from taking the properties she was
constrained to sign a deed of sale in favor of Bough. Although, the wife was part of the
fraudulent transaction, it was held that while she was in delicto she was not in pari delicto
with the other party. She was allowed to be placed at the position she was before the
transaction which she had entered into.
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.
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Incapacity To Give Consent; Effect:
● If a party who entered into an illegal contract is not capacitated to give his consent,
he may be allowed to recover the money or property he had delivered by reason
thereof.
● The recover, however, will be allowed only if the interest of justice so demands. The
matter is left to the sound discretion of the court. It will be on a case to case basis
there being no criteria provided by the law.
● In the preceding article, the party who repudiates has capacity to give consent unlike
in the present one where the party is incapacitated to give consent.
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.
Agreement Prohibited By Law, Effects:
● When a law is merely prohibitive, and designed to protect the plaintiff, the latter
may be allowed, if public policy is enhanced, to recover what he has paid or
delivered to the other party.
● Depending upon the circumstances, the court may opt to pursue a strict
interpretation of a penal provision under Article 1416.
● The clear implication is that if the agreement is illegal per se, the plaintiff will not be
allowed to make recovery.
Concept of “Illegal Per Se”:
● When by universally recognized standards, an act or contract is by its very nature
bad, improper, immoral, or contrary to conscience, said act or contract is set to be
illegal per se.
● Illegal per se contracts are forbidden because of public interest.
Illustration of a Prohibitive Law:
Article 750. The donation may comprehend all the present property of the donor, or part
thereof, provided he reserves, in full ownership or in usufruct, sufficient means for the
support of himself, and of all relatives who, at the time of the acceptance of the donation,
are by law entitled to be supported by the donor. Without such reservation, the donation
shall be reduced in petition of any person affected. (634a)
● Donation under this article is not illegal per se, it is intended merely for the
protection of the donor. If the donor violates this law, he is allowed to recover at
least that portion of the donation which is necessary for his own support and that of
his relatives who are entitled to be supported by him under Article 195 of the Family
Code.
Distinctions and Similarities Between Article 1414, 1415, and 1416:
Art. 1414 Art. 1415 Art. 1416
Speaks of public interest Speaks of interest of justice. Speaks of public policy.
In all the three, even if a party is in pari delicto, he will be given relief if the said interests
will be subserved.
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.
Applicability:
● Article applies only if there is a law or regulation issued by competent authority
fixing the maximum price for the sale of any article or commodity.
● The aim of the law is to prevent profiteering which is inimical to the interest of the
people. Any payment made in excess of the maximum limit is revocable.
● If there is a special law providing for the maximum price of an article or commodity
and provides for other sanctions not covered by the article, the special law shall
govern.
Example: A regulation was promulgated by the government fixing the maximum price of a
particular brand of rice at 700 pesos per cavan. If a buyer paid 1k per cavan, whether or not
he knew the regulation, he is allowed to recover the excess of 300 pesos which he paid for
the price of each cavan.
ARTICLE 1418. When the law fixes, or authorizes the fixing of the maximum number of
hours of labor, and 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.
Maximum Number of Hours of Labor:
● Employees are required to observe not more than eight-hour labor work each day of
employment under the eight-hour labor law. They are entitled to additional
compensation for services rendered beyond the time limit.
● Social legislations and labor laws will govern the rights and obligations of
employees and laborers.
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.
No Waiver of Minimum Wage:
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 ● If a laborer has agreed to receive a wage lower than the minimum wage fixed by
law, he is not barred from recovering the deficiency. Such contract or agreement is
void under the Minimum Wage Law which provides: “No worker or organization of
workers may voluntarily or otherwise, individually or collectively, waive any rights
established under this Act, and no agreement or contract, oral or written, to accept a
lower wage or less than any other benefit required under this Act shall be valid.
(R.A. No. 602)
ARTICLE 1420. In case of a divisible contract, if the illegal terms can be separated from
the legal ones, the latter may be enforced.
Applicability:
● The article applies only if there are several stipulation, terms or conditions in the
contract. if some of the stipulations are illegal and others are valid, the latter if
separable from the former shall be effective and enforceable.
The rule of divisibility or separability cannot apply in two situations:
a. When the contract by its nature requires indivisibility
b. When the parties intended the contract to be entire or indivisible
Examples: Ysa agreed to sell and deliver to Joel certain amount of illegally cut logs
including the towing vessel to be used. The sale of the illegal logs may be avoided by
leaving the transaction on the towing vessel enforceable. However, if they intended the
transaction to be entire, that is, without the logs the vessel would not be purchased, the
entire transaction is void. In another case where there is a contract of loan, the borrower as
security for the payment executed a real estate mortgage using a fake title. The mortgage is
void but the loan remains valid.
Presumption:
● In case of doubt on whether the terms of a contract are indivisible or divisible, the
same will be presumed as divisible.
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.
Supra, Contracts intro.
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.
Effect of Statement of False Cause:
● If a false cause is stated in the contract, the general rule is that the contract is void.
● Exception: If the interested part can prove that the contract is founded upon another
cause which is true and lawful, the contract will be saved from invalidity.
Applicability to Simulated Contracts; Void Contracts Not Subject to Ratification:
● The article can apply to absolutely simulated contracts which are void contracts. If it
can be established that there is another cause for it which is valid, the contract will
be considered valid. If the contract is relatively simulated, only the real agreement
remains binding between the parties, unless it prejudices rights of third persons, or is
contrary to law, morals, good customs, public order or public policy.
● Void contracts cannot be ratified. However, even if the cause is void, the contract
can still be valid if another cause which is true and lawful could be shown to support
it.
ARTICLE 1378. When it is absolutely impossible to settle doubts by the rules established
in the preceding articles, and the doubts refer to incidental circumstances of a gratuitous
contract, the least transmission of rights and interests shall prevail. If the contract is
onerous, the doubt shall be settled in favor of the greatest reciprocity of interests.
If the doubts are cast upon the principal object of the contract in such a way that it cannot
be known what may have been the intention or will of the parties, the contract shall be null
and void.
ARTICLE 1491. The following persons cannot acquire by purchase, even at a public or
judicial auction, either in person or through the mediation of another:
1. The guardian, the property of the person or persons who may be under his
guardianship;
2. Agents, the property whose administration or sale may have been intrusted to
them, unless the consent of the principal has been given;
3. Executors and administrators, the property of the estate under administration;
4. Public officers and employees, the property of the State or of any subdivision
thereof, or of any government-owned or controlled corporation, or institution, the
administration of which has been intrusted to them; this provision shall apply to
judges and government experts who, in any manner whatsoever, take part in the
sale;
5. Justices, judges, prosecuting attorneys, clerks of superior and inferior courts, and
other officers and employees connected with the administration of justice, the
property and rights in litigation or levied upon an execution before the court
within whose jurisdiction or territory they exercise their respective functions; this
prohibition includes the act of acquiring by assignment and shall apply to
lawyers, with respect to the property and rights which may be the object of any
litigation in which they may take part by virtue of their profession;
6. Any others specially disqualified by law.
ARTICLE 1898. If the agent contracts in the name of the principal, exceeding the scope of
his authority, and the principal does not ratify the contract, it shall be void if the party with
whom the agent contracted is aware of the limits of the powers granted by the principal. In
this case, however, the agent is liable if he undertook to secure the principal’s ratification.
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Class Notes: Defects of contract ● This is to prevent fraud in the enforcement of the obligations.
Rescissible contracts (damages)
● Enumeration is exclusive but #5 covers other contracts said by law to be Applicability:
rescissible - Executory NOT EXECUTED contracts. If partially executed or executed, you
● You have to distinguish 1381 with 1191. cannot avail of SOF.
● IF property was alienated in favor fo 3rd person but in good faith → transfer - There has been performance, equity dictates all evidence be admitted to prove
respected existence of alleged contract
● Remedy is go after some other person who caused the loss
● If with BF → property can still be recorded + damages Fraud will be propagated more if you allow exclusion of partially executed contracts.
● In 1191, damages basis will be 1170. The damage can extend beyond the actual
damages. For rescissible contracts, damages will be demanded form the person SoF is a personal defense that can be waived or lost depending on conduct of parties.
who caused the loss and only limited to the extent of that loss (another good
feature of 1381 contracts unlike 1191 where damages can extend beyond the Note//Memorandum
actual damages) ● If there is a note or memorandum pero walang contract, takes out the defense of
● Subsidiary action - Only up to the extent necessary to cover the damages. SoF.
● But the Note/memorandum must contain the following:
Voidable contracts (consent) 1. Names of parties
● Consent as an element of contracts there must be concurrence on the will of 2. Terms and conditions
offeror and consentor as to the thing and cause 3. Description of subject matter
● No consent = void → lacking one of the essential requisites so no contract 4. Place and date of making the agreement
● Consent defective = voidable → there is presence of all essential requisites but
one is defective 2 kinds of cases to invoke SoF:
● GR: minors cannot enter into contracts because of lack of legal capacity 1. Complaints for SP
- EXCN: 2. Complaints for damages
1. Active misrepresentation as to age of minor and the other was
misled. → binding upon the minor based on estoppel (Passive Failure to timely make defense of SoF, you will lose it.
misrepresentation) Silence → minor not bound. ● Say during trial, there was presentation of oral evidence to establish oral contract
2. When delivering necessaries (support) and do not object then it is considered as waived.
3. Minor ratifies contract upon reaching majority
● Prescription: When to count the 4 year period? From discovery of vice of Void contracts (Object or Cause)
consent or if vice is incapacity, reckoning point is cessation of guardianship. ● Art. 1409
- Registered lands, special reckoning period: Counted not form the actual
knowledge but form registration. Since registration is notice to the
whole world.
● Effects of Ratification: It cleanses the contract. The effect retroacts from the
moment it was constituted. Only the innocent party has the prerogative to annul
or not to annul a voidable contract.

Unenforceable contracts (authority/form)

1. Lack of consent: Entered into in the name of another person by one who has no
authority/who acted beyond his powers.
2. No written proof: Those that do not comply with SoF. (memorize)
3. Consent is vitiated: Those where both parties are incapable of giving consent to
a contract.

Purpose of SoF:
● Back then, there was this effort to reduce certain contracts into writing for its
enforceability because of the frail human memory.

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 COMPARISON TABLE - VOIDABLE CONTRACT V. VOID AND RESCISSIBLE CONTRACTS
Basis Voidable Contract Void Contract

Nature of Defect Consent of one of the parties is vitiated. Consent is absent or is lacking. Presence of other defects will also render a
contract void.

Effectivity Effective and binding until annulled. Ineffective because it does not exist in contemplation of the law.

Susceptibility to Consolidation Susceptible to consolidation by ratification or by prescription. Not susceptible to consolidation by ratification or by prescription.

Prescriptability of Actions Action for annulment prescribes. Action or defense based on its inexistence or absolute nullity does not prescribe.

Waiver of Defect Defect may be waived. Right to set up the defense of illegality cannot be waived.

Basis Voidable Contract Rescissible Contract

Nature of Defect Defect is intrinsic. There is a vice of consent which vitiates consent. Defect is External. It consists in damage or prejudice suffered by one of the
contracting parties or a third person like a creditor.

Effect of Damage or Prejudice Whether there is damage or not, contract is voidable. If there is no damage or prejudice, contract cannot be rescissible.

Basis of Defect Annulability of the contract is based on law. Rescissibility of the contract is based on equity.

Predominance of Public Interest Public interest predominates. Private interest predominates.

Susceptibility to Ratification It is susceptible to ratification. Not susceptible to ratification.

Sanction It is a sanction. It is not a sanction but a remedy.

Persons who can assail the Only parties to the contract can assail it. Third persons who are affected may assail it.
contract

Nature of Action Pursuable Action is a principal action. Action is subsidiary.

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 COMPARISON TABLE - VOID CONTRACT V. RESCISSIBLE, VOIDABLE, AND UNENFORCEABLE CONTRACTS

Basis Void Contract Rescissible Contract

Nature of Defect The defect is inherent in the contract itself. The defect is in its effects, which is either against one of the parties or a third person.

Interest Served Nullity is a matter of law and public interest. It is based on equity and is more a matter of private interest.

Consequences When No There are no legal effects even if no action is filed to set it aside. Contract remains valid if no action is filed. It produces legal effects.
Action is Filed

Prescription Action to declare its nullity does not prescribe. Action to rescind contract prescribes within four years.

Basis Void Contract Voidable Contract

Cause of Defect Absence of essential elements of a contract. Consent is vitiated or there is incapacity to give consent.

Effect It has no effect even if not set aside, because it is non-existent. It is a valid contract until it is set aside.

Ratification It cannot be ratified. It can be ratified.

Against whom can nullity Its nullity can be set up against any person asserting a right arising from Its nullity can be set up only against a party thereto.
be set up it, and his successors in interest not protected by law.

Prescription Action to declare nullity of contract does not prescribe. Action to annul contract prescribes within four years.

Basis Void Contract Unenforceable Contract

Status There is no contract at all. There is a contract but which cannot be enforced.

Ratification It is not subject to ratification. It is subject to ratification.

Attack by Third Person It can be assailed by third persons whose interests are directly affected. It cannot be assailed by third persons.

Causes Causes of nullity are those enumerated in Article 1409. Cause of unenforceability are enumerated in Article 1403.

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