IM - Law On Obligation and Contracts PDF

LAW 20013: LAW ON
OBLIGATIONS AND
CONTRACTS
INSTRUCTIONAL MATERIALS
ATTY. GARY CAMITAN AURE, MPA

Associate Professor
College of Accountancy and Finance
Table of Contents
Lesson 1 – Obligations: General Provisions .................................................................................... 3
Objectives: ............................................................................................................................................... 3
Course Discussions: .............................................................................................................................. 3
Exercises/Assessments: ....................................................................................................................... 4
Lesson 2 - Nature and Effect................................................................................................................. 5
Objectives: ............................................................................................................................................... 5
Exercises/Assessments: ....................................................................................................................... 7
Lesson 3 – Kinds of Civil Obligation .................................................................................................. 9
Objectives: ............................................................................................................................................... 9
Exercises/Assessments: ..................................................................................................................... 12
Lesson 4 – Modes of Extinguishment .............................................................................................. 14
Objectives: ............................................................................................................................................. 14
Course Discussions: ............................................................................................................................ 14
Lesson 5 – Contracts: General Provisions ..................................................................................... 23
Objectives: ............................................................................................................................................. 23
Lesson 6 – Essential Requisites ........................................................................................................ 27
Objectives: ............................................................................................................................................. 27
Lesson 7 – Formalities, Interpretation and Reformation of Contracts .................................... 31
Objectives: ............................................................................................................................................. 31
Lesson 8 – Defective Contracts ......................................................................................................... 35
Objectives: ............................................................................................................................................. 35
Page 1 of 44
Lesson 9 – Contract of Sale: General Concepts............................................................................ 42
Objectives: ............................................................................................................................................. 42
Page 2 of 44
LAW ON OBLIGATIONS
Overview:
The word obligation derives from Latin term obligationem which literally means “binding”.
Manresa defines obligation as a legal relation established between one person and
another, whereby the latter is bound to the fulfilment of a prestation which the former may demand
of him. While Sanchez Roman defines obligation as the juridical necessity to comply with a
prestation.
Lesson 1 – Obligations: General Provisions
Objectives:
After completion of this module, the learner must be able to:
1. Know the basic concepts of obligations.
2. Describe essential requisites of obligations.
3. Discuss the sources of obligations and its concept.
Course Discussions:
An obligation is a juridical necessity to give, to do or not to do.1
Obligations may be civil or natural.2 Civil obligation as defined under Article 1156 of the
Civil Code has a binding force wherein the creditor or obligee is given the right to enforce the
obligation against the debtor or obligor in a court of justice. Meanwhile, a natural obligation cannot
be enforced by action in a court of justice but is binding on the person who makes it in conscience
according to natural law.
An obligation has four (4) essential requisites, to wit:

1. Juridical or legal tie;
2. Active subject;
3. Passive subject; and
4. Fact, prestation or service.
A juridical or legal tie binds the parties to the obligation, and which may arise either from
bilateral or unilateral acts of persons. On the other hand, an active subject is the obligee or creditor
who can demand the fulfillment of obligation, while a passive subject is the obligor or debtor from
whom the obligation is juridically demandable. Lastly, the fact, prestation or service constitutes
the object of the obligation.
Obligations arise from:

1. Law;
2. Contracts;
1
Art. 1156, Civil Code of the Philippines (“Civil Code”)
2
Art. 1423, Civil Code
Page 3 of 44
3. Quasi-contracts;
4. Acts or omissions punished by law; and
5. Quasi-delicts.3
Law is a rule of conduct, just and obligatory, promulgated by legitimate authority, for the
common observance and benefit of all.
A contract is a meeting of minds between to persons whereby one binds himself, with
respect to the other, to give something or to render some service.4
Quasi-contracts are juridical relations arising from lawful, voluntary and unilateral acts, by
virtue of which the parties become bound to each other based on the principle that no one shall
unjustly enriched or benefited at the expense of another.5
Acts or omissions punished by law pertain to felonies or criminal offenses provided under
the Revised Penal Code of the Philippines (“Revised Penal Code”) or other special laws. As a
general rule, every person liable for a felony is also civilly liable. 6 Generally, crimes or felonies
has dual aspect – criminal and civil aspect.
A quasi-delict is the fault or negligence of a person, who by his act or omission, connected
or unconnected with but independent from any contractual relation, causes damage to another.7
References:
 Civil Code of the Philippines (Republic Act No. 386 as amended)
 Comments and Jurisprudence on Obligations and Contracts by Jurado
Exercises/Assessments:
1. Enumerate the differences between civil obligations and natural obligations.
2. Provide at least three (3) examples of natural obligations.
3. Give an illustration discussing the essential requisites of obligation.
4. How can we determine whether an obligation arises from law or from some other
source, such as contract, quasi-contract, acts or omissions punished by law, or a quasi-
delict?
5. Provide an example of obligation arising from the five (5) sources and explain each.
3
4
5
6
Art. 100, Revised Penal Code
7
Page 4 of 44
Lesson 2 - Nature and Effect
Objectives:
1. Identify if the thing which is the object of the obligation is determinate or indeterminate
(generic).
2. Discuss the nature of the rights of obligee or creditor.
3. Determine the rights of obligee or creditor and obligations of obligor or debtor.
4. Be knowledgeable on specific circumstances that affect obligations.
Course Discussions:
In obligations to give, the thing may be determinate or indeterminate (generic).
A thing is determinate when it is particularly designated or physically segregated from all

others of the same class.8 On the other hand, it is indeterminate or generic when the thing is
designated merely by its class without any particular designation or physical segregation from all
others of the same class.
The obligee or creditor has a right to the thing which is the object of the obligation as well
as the fruits thereof from the time the obligation to deliver it arises.9 In obligations arising from the
law, quasi-contracts, criminal offenses, and quasi-delicts, the obligation to deliver arises from the
time designated by the provisions of the Civil Code or of special laws creating or regulating them.
In obligations arising from contracts, the obligation to deliver arises from the moment of the
perfection of the contract, unless there is a stipulation to the contrary.
Consequently, the obligee or creditor has merely a personal right against the obligor or
debtor, which is the right to ask for the delivery of the thing and the fruits. Once the thing and fruits
are delivered, then the former acquires a real right over them, which right is enforceable against
the whole world.
If the obligation is determinate in the sense that the object thereof is particularly
designated or physically segregated from all others of the same class, the rights of the obligee or
creditor are:
1. To compel specific performance.10
2. To recover damages in case of breach of the obligation.11
However, if the obligation is indeterminate or generic, the rights of the creditor are:
1. To ask for performance of the obligation.12
2. To ask that the obligation be complied with at the expense of the debtor.13
8
9
10
Art. 1165, par. 1, Civil Code
11
12
13
Page 5 of 44
3. To recover damages in case of breach of the obligation.14
In obligations to give, the following are the different duties or obligations which are
imposed upon the obligor or debtor if the obligation is determinate:
1. To deliver the thing which he has obligated himself to give.
2. To take care of the thing with the proper diligence of a good father of a family. 15
3. To deliver all accessions and accessories.16
4. To pay damages in case of breach of the obligation.17
If the obligation is indeterminate or generic, the duties which are imposed upon the obligor
or debtor are:
1. To deliver a thing which must be neither of superior nor inferior quality.18
2. To pay damages in case of breach of the obligation.19
The following specific circumstances affect obligations:

1. Fortuitous events
2. Fraud
3. Negligence
4. Default
5. Breach or contravention of the tenor of obligations
A fortuitous event is an event which cannot be foreseen, or which though foreseen, is

inevitable.20 Fortuitous event may either be fortuitous event proper (Act of God) or force majeure
(fuerza mayor). It may also be ordinary or extra-ordinary.
Fortuitous event proper (Act of God) is absolutely independent of human intervention,

while force majeure (fuerza mayor) is dependent upon human intervention other than that of the
obligor.
Ordinary fortuitous event refers to an event which usually happens or which could have
been reasonably foreseen, on the other hand, extra-ordinary fortuitous event refers to an event
which does not usually happen or which are uncommon and which could not have been
reasonably foreseen.21 (Art. 1680, NCC.)
General Rule: No person shall be responsible for those events which could not be
foreseen, or which though foreseen, were inevitable.
Exceptions:
1. In cases expressly specified by the law, or
2. When it is otherwise declared by stipulation, or
3. When the nature of the obligation requires the assumption of risk.22
14
15
16
17
18
19
20
21
22
Page 6 of 44
If the object of the obligation to give is determinate and is lost or destroyed through a
fortuitous event, as a general rule, the obligor or debtor cannot be held liable for damages. 23
However, if it is indeterminate or generic, the obligor or debtor can still be held liable for
damages.24 Only a determinate thing or object can be destroyed by a fortuitous event while an
indeterminate or generic thing can never perish (genus numquam peruit).
Fraud, negligence, default and breach of obligations are acts or omissions that may be
committed by obligor or debtor.
Fraud (dolo) is the conscious and intentional proposition to evade the normal fulfillment of
an obligation.
Negligence (culpa) or fault of the obligor is the omission of that diligence which is required
by the nature of the obligation and corresponds with the circumstances of the persons, of the
time, and the place. If the law or contract does not state the diligence which is to be observed in
the performance of an obligation, that which is expected of a good father of a family shall be
required.25
Default (mora) signifies the idea of delay in the fulfillment of an obligation. It is the non-
fulfillment of an obligation with the respect to time.
In obligations to give or to do, the obligor or debtor incurs in delay from the time the obligee
or creditor judicially or extrajudicially demands from him the fulfillment of his obligation and in spite
of such demand, he is unable to comply with the obligation.26 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.27
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.28
References:
1. In obligations to give, when does the obligee or creditor acquire a right to the thing
which constitutes the object of the obligation as well as to the fruits thereof?
2. In obligations to give, what are the different rights which are available to the obligee
or creditor and what are the different duties or obligations which are imposed upon the
obligor or debtor?
3. X obliges himself to deliver to Y a 42-inch 2020 model television set, and the 13 cubic
feet White Carrier refrigerator, with Motor No. WW-12345, and to repair Y’s piano. X did
23
Ibid
24
25
26
27
28
Page 7 of 44
none of these things. May the court compel X to deliver the television set and refrigerator,
and to repair the piano? Why or why not?
4. If the object of the obligation to give is lost or destroyed through a fortuitous event,
can the obligor or debtor be held liable for damages?
5. Under the Civil Code, what are the different acts or omissions of the obligor or debtor
which will result in the breach of the obligation for which he can be held liable for
damages?
Page 8 of 44
Lesson 3 – Kinds of Civil Obligation
Objectives:
1. Identify the primary and secondary classifications of obligations.
2. Discuss the rules and concepts pertaining to the classifications of obligations.
Course Discussions:
Primary Classification of Obligations:
1. Pure and Conditional;
2. With a Term or Period;
3. Alternative and Facultative;
4. Joint and Solidary;
5. Divisible and Invisible; and
6. With and Without a Penal Clause.
A pure obligation is one whose effectively or extinguishment does not depend upon the
fulfillment or non-fulfillment of a condition or upon the expiration of a term period or period, and
which, as a consequence, is characterized by the quality of immediate demandability.29
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.30
An obligation is conditional when its effectivity is subordinate to the fulfillment or non-

fulfillment of a future and uncertain fact or event. A condition is as a future and uncertain event
upon which an obligation is subordinated or made to depend. Clearly, it has two requisites: 1)
futurity; and 2) uncertainty.
Obligations with a term or period are those whose demandability or extinguishment are
subject to the expiration of a term or period. A term or period is an interval of time, which either
suspends its demandability or produces its extinguishments. Hence, its requirements are: 1)
futurity, and 2) certainty.
If the event will necessarily come, although the date or time when it will come, the event
constitutes a day certain.31 Consequently, the obligation is with a term or period. However, if the
uncertainty consists in whether the day will come or not, that event constitutes a condition. Hence,
the obligation is conditional.32
Difference between condition and a term or period:
Condition Term or Period

In general Event Interval of time
29
30
31
32
Page 9 of 44
Requisites Futurity and uncertainty Futurity and certainty
Fulfillment May or may not happen Will surely happen, although
the time of happening is
unknown
Alternative obligations are juridical relations which comprehend several objects or

prestations which are due but the payment or performance of one of them would be sufficient.
Facultative obligations are juridical relations where only one object or presentation has
been agreed upon by the parties to the obligation, but the obligor or debtor may deliver or render
another in substitution.
Difference between alternative and facultative obligations:
Alternative Facultative
Object due Several objects are due Only one object is due
Compliance May be complied with by the May be complied with by the
delivery of one of the objects delivery of another object or the
or by the performance of one performance of another
of the prestations which are prestation in substitution of
alternatively due which is due
Right of May pertain even to the Pertains only to obligor or
choice creditor or to a third person debtor
Effect of Loss or impossibility of all of Loss or impossibility of the
fortuitous the objects which are object or presentation which is
event alternatively due before the due without any fault of the
choice is made may give rise debtor is sufficient to extinguish
to a liability on the part of the the obligation
debtor
An obligation may be either joint or solidary when there is concurrence of 2 or more obligee
(creditors), or of 2 or more obligor (debtors), in one and the same obligation.
A joint obligation is a concurrence of several obligee (creditors), or of several obligor

(debtors), or of several obligee (creditors) and obligor (debtors), by virtue of which each of the
creditors has a right to demand, while each of the debtors is bound to render, compliance with his
proportionate part of the prestation which constitutes the object of the obligation.
Therefore, each of the obligee (creditors) is entitled to demand the payment of only a
proportionate part of the credit, while each of the obligor (debtors) is liable for the payment of only
a proportionate part of the debt.
Meanwhile, there is a solidary obligation when there is a concurrence of several obligee

(creditors), or of several obligor (debtors), or of several obligee (creditors) and obligor (debtors),
by virtue of which each of the creditors has a right to demand, while each of the debtors is bound
to render entire compliance with the prestation which constitutes the object of the obligation.
In solidary obligations, each of the obligee (creditors) is entitled to demand the payment
for the entire credit, while each of the obligor (debtors) is liable for the payment of the entire debt.
Page 10 of 44
General Rule: When there is a concurrence of several obligee (creditors) and obligor
(debtors) in one and same obligation, the obligation is joint.33
Exceptions:
1. Obligation expressly states solidary obligation;
2. Law requires solidary obligation; or
3. Nature of the obligation requires solidarity.34
Under the law, there is a presumption that in case of concurrence of 2 or more obligee
(creditors), or of 2 or more obligor (debtors), in one and the same obligation, the obligation is joint.
In such case, each creditor is entitled only to demand for the payment of his proportionate share
of the credit, while each debtor can be compelled only to pay for his proportionate share of the
debt. However, that is a disputable presumption. The obligation is solidary when the obligation
expressly so states, or when the law or the nature of the obligation requires solidarity.
Divisible obligations are those which have as their object a prestation which is susceptible
of partial performance without the essence of the obligation being changed. On the other hand,
indivisible obligations are those which have as their object prestation which is not susceptible of
partial performance, because otherwise the essence of the obligation will be change.
A thing is divisible when, if separated into parts, its essence is not changed or its value is
not decreased disproportionately, because each of the parts into which it is divided are
homogenous and analogous to each other as well as to the thing itself. On the other hand, a thing
is indivisible when, if separated into parts, its essence is changed, or its value is decreased
disproportionately.
General Rule: If the thing which constitutes the object of an obligation to give is by its very
nature divisible, the obligation is also divisible since it is evidently susceptible of partial
compliance.
Exceptions:
1. the obligation is indivisible by express provision of law; or
2. the obligation is indivisible by intention of the parties.35
Absolute Rule: If the thing which constitutes the object of the obligation to give is by its
very nature indivisible, the obligation is also indivisible since it is evident that it is not susceptible
of partial compliance.36
An obligation with a penal clause is one with an accessory undertaking by virtue of which
the obligor assumes a greater liability in case of breach of the obligation. A penal clause is an
accessory obligation attached to a principal obligation by virtue of which the obligor is bound to
pay a stipulated indemnity or to perform an agreed prestation for the purpose of insuring the
performance of the principal obligation.
33
34
Ibid.
35
36
Page 11 of 44
The penalty shall substitute the indemnity for damages and the payment of interests in
case of non-compliance, 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.37
A penal clause has three (3) purposes as follows:

1. to insure the performance of the obligation (general);
2. to liquidate the amount of damages to be awarded to the injured party in case of
breach of the principal obligation (compensatory); and
3. in certain exceptional cases, to punish the obligor in case of breach of the principal
(punitive).
General Rule: In obligation with a penal clause, the penalty shall substitute the indemnity
for damages and the payment of interests in case of non-compliance.38 (Art. 1226, par. 1, NCC.)
Exceptions:
1. when there is a stipulation to the contrary;
2. when the obligor is sued for refusal to pay the agreed penalty; and
3. when the obligor is guilty of fraud.39
In all of the exceptions above stated, the purpose of the penalty is to punish the obligor
(debtor) Hence, the obligee (creditor) can recover from him not only the penalty, but also the
damages resulting from the breach of the principal obligation.
Secondary Classification of Obligations:

1. legal, conventional and penal40
2. real and personal41
3. determinate and generic42
4. positive and negative43
5. accessory and principal44
6. unilateral and bilatera45
7. single and multiple46
8. individual and collective.47
References:
1. What are the primary classifications of obligations? Explain each.
37
38
Ibid
39
Ibid
40
Arts. 1158-1162, Civil Code
41
Arts. 1156, 1163-1168, Civil Code
42
43
44
Arts. 1166, 1230, Civil Code
45
46
47
Page 12 of 44
2. Differentiate a condition from a term/period?
3. Distinguish facultative from alternative obligations.
4. X, Y and Z owe A and B Php 12,000 in a joint obligation. How many obligations exist
in this case? Who are the parties in each obligation and for how much? Explain your
answer.
5. Distinguish between divisibility of an obligation and the divisibility of the thing which
constitutes the object of the obligation.
6. What is meant by penal clause or penalty and what are its purposes?
Page 13 of 44
Lesson 4 – Modes of Extinguishment
Objectives:
1. Identify the modes of extinguishing obligations.
2. Describe and discuss each mode of extinguishing obligations.
Course Discussions:
Modes of Extinguishment of Obligations:
1. Payment or Performance
2. Loss of the Thing Due
3. Remission
4. Confusion or Merger
5. Compensation
6. Novation
Payment or Performance
Payment means not only the delivery of money but also the performance, in any other
manner, of an obligation.48
General Rule: A third person cannot compel the creditor to accept payment or
performance of an obligation.
Exceptions:
1. When it is made by a third person who has interest in the fulfillment of the obligation.
2. When there is stipulation to the contrary.49
Hence, a guarantor or a co-debtor can compel the creditor to accept payment or

performance since the payor is not strictly speaking, a stranger to the obligation. Also, in case the
creditor waives his right to refuse to deal witch stranger to the obligation, a third person can now
compel the creditor to accept payment or performance of an obligation.
If a third person pays the obligation with the knowledge and consent of the debtor, the
following are the rights available to him:
1. The third person can recover from the debtor the entire amount which he has paid;50
2. He is subrogated to all rights of the creditor.51
However, if the payment is made without the knowledge or against the will of the debtor,
the third person can recover only insofar as the payment has been beneficial to the said debtor.52
General Rule: Payment shall be made to the following:
48
49
50
51
Art. 1302. No. 2, Civil Code
52
Page 14 of 44
1. Person in whose favor the obligation has been constituted;
2. His successor in interest; or
3. Any person authorized to receive it.53
Exceptions:
1. Payment made to a third person, provided that it has rebounded to the benefit of the
creditor;54 and
2. Payment made to the possessor of the credit, provided that it was made in good faith.55
Payment made to a third person shall be valid insofar as it has redounded to the benefit
of the creditor. Such benefit to the creditor is presumed 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.56
Special Forms/Modes of Payment:

1. Application of Payment
2. Dation in Payment (Dacion en Pago)
3. Payment by Cession
4. Tender of Payment and Consignation
Application of Payment
Application of payment is the designation of the debt to which the payment must be applied
when the debtors has several obligations of the same kind in favor of the same creditor.
Essential requisites of application of payment are as follows:

1. There must be only one debtor and only one creditor;
2. There must be 2 or more debts of the same kind;
3. All of the debts must be due; and
4. The amount paid by the debtor must not be sufficient to cover the total amount of all
the debts.
General rule: In application of payment, there must be only one debtor and only one
creditor.
Exception:
If a debtor is indebted to a partnership and also to the managing partner at the same time
and both debts are already demandable, such debtor if he pays, may apply the payment to his
debt to the managing partner, provided that such debt is more onerous to him.57
In this exception, there are two creditors since the personality of the partnership is
separate and distinct from that of the partners.
The right to make an application of payment belongs to the debtors. However, if he does
not avail himself of this right, the creditor may rest in the initiative from him by giving to him a
53
54
55
56
57
Page 15 of 44
receipt designating the debt to which the payment shall be applied. But even this does not really
constitute an exception, because the debtor may either accept or reject the application.58
Dation in Payment (Dacion en Pago)
Dation in payment (dacion en pago), whereby property is alienated to the creditor in

satisfaction of a debt in money, shall be govern by the law on sales. 59 Te contract of sale is
perfected at the moment there is a meeting of minds upon the thing which is the subject of the
contract and upon the price.60
In dacion en pago, as a special mode of payment, the debtor offers another thing to the
creditor who accepts it as equivalent of payment of an outstanding obligation. The undertaking
really partakes in one sense of the nature of sale, that is, the creditor is really buying the thing or
property of the debtor, payment for which is to be charged against the debtor’s debt. As such, the
essential elements of a contract of sale, namely, consent, object certain, and cause or
consideration must be present.61
Simply, dation in payment is a special form of payment whereby property is alienated by

the debtor to the creditor in satisfaction of a debt in money. According to Manresa, dation in
payment is the transmission of the ownership of a thing by the debtor to the creditor as an
accepted equivalent of the performance of an obligation.
Payment by Cession
Cession or assignment is a special form of payment whereby the debtor abandons all of
his property for the benefit of his creditors in order that from the proceeds thereof the latter may
obtain payment of their credits.
Essential requisites:
1. plurality of debts;
2. partial or relative insolvency of the debtor; and
3. Acceptance by the creditors.
In case the creditors do not accept cession or assignment, a similar result may be obtained
by proceeding in accordance with the Insolvency Law (Act No. 1956, as amended).
Kinds of payment by cession:

1. Contractual – referred to in Art 1255 of the Civil Code.
2. Judicial – regulated by Insolvency Law which may be voluntary or involuntary.
Difference between dation in payment and payment by cession:
Dation in payment Payment by Cession

Number of May be one creditor Plurality of creditors is essential
parties
58
59
60
61
Filinvest Credit Corp vs Phil. Acetylene Co., 197 Phil. 394
Page 16 of 44
Financial Debtor not necessarily in Debtor in partial or relative
condition of financial difficulty insolvency
parties
Object Debtor delivers a thing as Debtor cedes universality of all his
equivalent of performance of property
obligation
Effect Generally, payment extinguishes Generally, payment merely
the obligation releases the debtor for the net
proceeds of things ceded or
assigned
Tender of Payment and Consignation
Tender of payment consists in the manifestation made by the debtor to the creditor of his
decision to comply immediately with his obligation. While consignation refers to the deposit of the
object of the obligation in a competent court in accordance with the rules prescribed by law after
refusal or inability of the creditor to accept the tender of payment.
Tender of payment Consignation

Preparatory act since it is the Principal act which produce the
antecedent of consignation. effects of payment.
Extra-judicial in nature. Judicial in nature.
Special requisites of consignation:
In order that consignation shall produce the effects of payment, it is not only essential that
it must conform with all of the requisites of payment, but is also essential that certain special
requirements prescribed by law must be complied with. The debtor must show that:
1. there is a debt due;
2. the consignation has been made either because the creditor to whom tender of
payment was made refused to accept the payment without just cause, or because any of
the cause stated by law for effective consignation without previous tender of payment
exists;62
3. previous notice of the consignation had been given to the persons interested in the
fulfillment of the obligation;63
4. the thing or amount due had been placed at the disposal of judicial authority;64 and
5. after the consignation had been made, the persons interested in the fulfillment of the
obligation had been notified thereof.65
Where the creditor accepts the debtor’s payment, there is no need for consignation. Where
the creditor, however, refuses to accept the debtor’s payment without just cause, consignation is
necessary.
The reason for consignation is to avoid the performance of an obligation from becoming
more onerous to the debtor by reason of causes not imputable to him.66
62
63
64
65
66
Jespajo Realty Corp. vs. CA, GR No. 113626, 27 September 2002
Page 17 of 44
General rule: Before consignation shall produce the effects of payment, it is essential that
there must be a previous tender of payment.
Exceptions:
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 right to collect; and
5. When the title of the obligation has been lost.67
Loss of the Thing Due
Loss of the thing due means that the thing which constitutes the object of the obligation
perishes, or goes out of the commerce of man, or disappears in such a way that its existence is
unknown or it cannot be recovered.68
According to Sanchez Roman, it is impossibility of compliance with the obligation through

any cause. Meaning, it is the “impossibility of performance.”
General Rule: In order that an obligation shall be extinguished by the loss or destruction
of the thing, the following requisites must concur:
1. The thing which is lost is determinate;
2. The thing is lost without any fault of the debtor. If the thing is lost through the fault of
the debtor, the obligation is transformed into an obligation to indemnify the obligee or
creditor for damages; and
3. The thing is lost before the debtor has incurred in delay.
Exceptions:
1. When by law, the obligor is liable for fortuitous events;69
2. When by stipulation the obligor is liable even for fortuitous events;70
3. When the nature of the obligation requires the assumption of risk;71
4. When the loss of the thing is due partly to the fault of the debtor;72
5. When the loss of the thing occurs after the debtor has incurred in delay;73
6. When the debtor promised to deliver the same thing to two or more persons who do
not have the same interest;74
7. When the obligation is generic;75
8. When the debt of a certain and determinate thing proceeds from a criminal offense.76
Condonation or Remission
67
68
69
Arts. 1174 and 1262, par. 2, Civil Code
70
Arts. 1174 and 1262, par. 2, Civil Code
71
Ibid
72
73
Arts. 1262, par. 1, and 1135, par. 2, Civil Code
74
75
76
Page 18 of 44
Manresa defines remission as an act of liberality by virtue of which the obligee, without
receiving any price or equivalent, renounces the enforcement of the obligation, as a result of which
is extinguished in its entirely or in that part or aspect of the same to which the remission refer. For
Sanchez Roman, it is the gratuitous abandonment by the creditor of his right.
Requisites in order that there will be a remission or condonation which results in the total
or partial extinguishment of the obligation:
1. it must be gratuitous;
2. it must be accepted by the obligor; and
3. the obligation must be demandable.
Remission or condonation may be classified as follows:

1. As to form
a. Express – made in accordance with the formalities prescribed by law for donation;
b. Implied – although not made in accordance with the formalities prescribed by law
for donation, it can be deduced from the acts of the obligee or creditors.
2. As to extent
a. Total - entire obligation is extinguished;
b. Partial - refers only to the principal or to the accessory obligation or to an aspect
thereof which affects the debtor.
3. As to constitution
a. Inter vivos - constituted by agreement of the obligee and the obligor;77
b. Mortis causa - constituted by last will and testament.78
Confusion or Merger
Confusion is the merger of the characters of creditor and debtor in the same person by
virtue of which the obligation is extinguished.79 Sanchez Roman defines it as the meeting in the
same person of the qualities of creditor and debtor with respect to one ant the same obligation.
Requisites in order that there will be a confusion of rights which will result in the
extinguishment of the obligation:
1. the merger of the characters of creditor and debtor must be in the same person;80
2. it must be place in the person of either the principal creditor or the principal debtor;81
3. the merger of rights of creditor and debtor must be complete and definite.
The requirement that the merger of rights of creditor and debtor must be complete and
definite does not mean that the extinguishment of the obligation should be complete or total in
character. It merely means that whether the merger refers to the entire obligation or only a part
thereof, it must be of such a character that there will be a complete and definite meeting of all
qualities of creditor and debtor in the obligation or in the part or aspect thereof which is affected
by the merger.82
Compensation
77
78
Arts. 935, 936 and 937, Civil Code
79
80
Ibid
81
Testate of Estate of Mota vs Serra, 40 Phil. 464
82
Sochayseng vs. Trujillo, 31 Phil. 153; Yek Tong Lin Fire & Marine Insurance Co. vs. Yusingco, 46 Phil. 473.
Page 19 of 44
According to Castan, compensation is a mode of extinguishing in their concurrent amount
those obligations of persons who in their own right are creditors of each other. Manresa defined
it as a figurative operation of weighing two obligation simultaneously in order to extinguish them
to the extent in which the amount of one is covered by the amount of the other.
Essential requisites:
1. There must be 2 parties, who in their own right are principal creditors and principal
debtors of each other;83
2. Both debt must consist in money or if the things due are fungibles (consumables), and
must be of the same kind and quality;84
3. Both debts must be due;85
4. Both must be liquidated and demandable;86
5. There must be no retention or controversy commenced by third person over either of
the debts and communicated in due time to the debtor;87and
6. The compensation must not be prohibited by law.88
Classifications of Compensation:
1. As to cause
a. Legal – when it takes affect by operation of law from the moment all of the
requisites prescribed by law are present. This is the fixed type which is regulated by
Arts. 1278 and 1279 of the Civil Code;
b. Voluntary – when the parties who are mutually creditors and debtors agree to
compensate their respective obligations, even though all the requisites for
compensation may not then be present. This would include the so-called facultative
compensation which is effected by a party who is entitled to oppose the compensation
because he would be prejudiced thereby; 89
c. Judicial – when it takes affect by judicial decree. This occurs, for instance, where
one of the parties to a suit over an obligation has a claim for damages against the
other and the former sets it off by proving his right to said damages and the amount
thereof.90
2. As to effect
a. Total – when the debts to be compensated are equal in amount;91
b. Partial – when the debts to be compensated are not equal in amount.92
Novation
Novation is the substitution or change of an obligation by another, resulting in its

extinguishment or modification, either by:
1. changing its object or principal conditions; or
83
Arts. 1278, 1279 No. 1, Civil Code
84
Art. 1279 No. 2, Civil Code
85
Art. 1279 No. 3, Civil Code
86
Art. 1279 No. 4, Civil COde
87
Art. 1279, No. 5, Civil Code
88
89
90
91
92
Ibid.
Page 20 of 44
2. substituting another in place of the debtor; or
3. subrogating a third person in the rights of the creditor.
It is one of the modes of extinguishing obligations through the creation of a new one
effected by the change or substitution of an obligatory relation by another with the intention of
substantially extinguishing or modifying the same.93
Kinds of Novation:
1. As to its essence
a. objective or real - refers to the change either in the cause object or principal
conditions of the obligation;94
b. subjective or personal - refers to the substitution of another in the person of the
debtor or to the subrogation of a third person in the rights of the creditor;95
c. mixed – combination of objective and subjective.
2. As to its form or constitution
a. express;
b. tacit or implied.96
3. As to its extent or effect
a. total;
b. partial.
If the substitution was effected without the knowledge or against the will of the original
debtor, the new debtor’s insolvency or nonfulfillment of the obligation shall not revive the original
debtor’s liability to the creditor.97 From this it can be inferred that if the substitution was effected
with the knowledge and consent of the original debtor, the new debtor’s insolvency or
nonfulfillment of the obligation shall revive the original debtor’s liability to the creditor.
If the new debts is unable to pay the obligation by reason of insolvency, the right of action
of the creditor can no longer be revived except in the following cases:
1. when the insolvency of the new debtor (delegado) was already existing and of public
knowledge at the time when the original debtor (delegante) delegated his debt; and
2. when such insolvency was already existing and known to the original debtor
(delegante) when he delegated his debt.98
References:
1. May a third person compel creditor to accept payment of performance of an
obligation? If a third person pays an obligation, what are the rights available to
him/her?
93
Court of Appeals in Government vs. Bautista, CA, 37 Off. Gas. 1880.
94
95
Art. 1291, Nos. 2 and 3, Civil Code
96
97
98
Art. 1295, Civil Code,
Page 21 of 44
2. To whom payment shall be made?
3. Explain the concept of dation in payment (dacion en pago).
4. When is a thing considered lost? What are the requisites in order that an obligation
be extinguished by the loss or destruction of the thing due?
5. Differentiate remission, confusion, compensation and novation.
 MIDTERM EXAMINATION COVERAGE

Exercises/Assessments for LESSONS 1-4
Page 22 of 44
LAW ON CONTRACTS
Overview:
In its derivative sense, contract means an agreement or convention. However, contract is
not synonymous with an agreement or convention.
An agreement or convention is broad enough to include any kind of agreement which may
create, modify or extinguish patrimonial and family relations while a contract is limited only to
agreements which create patrimonial obligations. Therefore, convention/agreement is genus, on
the other hand, contract is specie.
Simply put, by definition under the Civil Code, all contracts are agreements, but not all
agreements are considered contracts.
Lesson 5 – Contracts: General Provisions
Objectives:
1. Discuss the basic concepts of contracts;
2. Define contracts and determine its elements;
3. Identify the classifications, stages and characteristics of contracts.
Course Discussions:
A contract is a meeting of minds between two (2) persons whereby one binds himself, with
respect to the other, to give something or to render some service.99
Ordinary Contract vs Contract of Marriage
1. In an ordinary contract, the parties may be 2 or more persons of the same or of different
sexes, whereas in a marriage contract, it is necessary that the parties must be one man
or one woman;
2. In the first, the nature, consequences and incidents are governed primarily by the
agreement of the parties, whereas in the second, the nature, consequences and incidents
are governed by law;
3. In the first, once the contract is executed, the result is a contract, whereas in the second,
once the marriage is celebrated the result is a status;
4. The first can be terminated or dissolved by the mere agreement of the parties, whereas
the second cannot;
5. In the first, in case of breach, the usual remedy is for the injured party to institute an action
for damages, whereas in the second, in case of breach the usual remedy is for the injured
party to institute a civil action for legal separation or a criminal action for adultery or
concubinage.
99
Page 23 of 44
Contract vs Obligation
Contract is the cause, whereas the other is the effect. There are, however, 5 sources of
obligations and the most important among them is contracts. Consequently, we can very well say
that there can be an obligation without a contract, but there can be no contract without a resultant
obligation.
Elements of Contract:
1. Essential – are those without which there can be no contract.
a. Common - present in all contracts, such as consent, object certain and cause;
b. Special - are present only in a certain contracts, such as delivery in real contracts or
form in solemn ones
c. Extraordinary or Peculiar - peculiar to a specific contract such as the price in a contract
of sale.
2. Natural – derived from the nature of the contract and ordinarily accompany the same. They
are presumed by the law, although they can be excluded by the contracting parties if they
so desire. Thus, warranty against eviction is implied in a contract of sale, although the
contracting parties may increase, diminish or even suppress it.100
3. Accidental – exist only when the parties expressly provide for them for the purpose of
limiting or modifying the normal effects of the contract. Examples of these are conditions,
terms and modes.
Different Classes of Contracts:

1. According to their relation to other contracts:
a. Preparatory – those which have for their object the establishment of a condition in law
which is necessary as preliminary steps towards the celebration of another subsequent
contract. Example – partnership, agency.
b. Principal – those which can subsist independently from other contracts and whose
purpose can be fulfilled by themselves. Examples – sale, lease.
c. Accessory – those which can exist only as a consequence of, or in relation with, another
prior contract. Examples – pledge, mortgage.
2. According to their perfection:

a. Consensual –those which are perfected by the mere agreement to the parties. Examples
– sale, lease.
b. Real – those which require not only the consent of the parties for their perfection, but also
the delivery of the object by the party to the other. Examples – commodatum, deposit,
pledge.
3. According to their form:

a. Common or informal – those which do not require some particular form. Example – laon,
lease.
b. Special or formal – those which require some particular form. Examples – donation, chattel
mortgage.
4. According to their purpose:

a. Transfer of ownership. Example – sale.
b. Conveyance of use. Example – commodatum.
c. Rendition of services. Example – agency.
100
Page 24 of 44
5. According to their subject matter:
a. Things. Example – sale, deposit, pledge.
b. Service. Example – agency, lease of services.
6. According to the nature of the vinculum which they produce:

a. Unilateral - those which give rise to reciprocal obligation for only one of the parties.
Example – Commodatum, gratuitous deposit.
b. Bilateral – those which give rise to reciprocal obligations for both parties. Examples – sale,
lease.
7. According to their cause:

a. Onerous – those in which each of the parties aspires to procure for himself a benefit
through the giving of the equivalent or compensation. Example – sale.
b. Gratuitous – those in which one of the parties proses to give to the other a benefit without
any equivalent or compensation. Example – commodatum.
8. According to the risks involve:

a. Commutative – those where each of the parties acquires an equivalent of his prestation
and such equivalent is pecuniarily appreciable and already determined form the moment
of the celebration of the contract. Example - lease.
b. Aleatory – those where each of the parties has to his account the acquisition of an
equivalent of his prestation, but such equivalent, although pecuniarly appreciable, is not
yet determined, at the moment of the celebration of the contract, since it depend upon the
happening of an uncertain event, thus charging the parties with the risk of loss or gaoin.
Example – insurance.
9. According to their names or norms regulating them:

a. Nominate – those which have their own individuality and are regulated by special
provisions of law. Examples – sale, lease.
b. Innominate – those which lack of individuality and are not regulated by special provisions
of law.
Phases or stages in the life of a contract

1. Generation - preliminary or preparatory process for the formation of the contract;
2. Perfection - birth of the contract; and
3. Consummation - fulfillment of the purpose for which the contract was constituted.
Essential characteristic of contracts
1. obligatory force or character of contract - the principle that once a contract is perfected, it
shall be of obligatory force upon both of the contracting parties;101
2. autonomy of contracts - the principle that the contracting parties may stipulate, clauses,
terms and conditions as they may deem convenient subject to limitations;102
3. mutuality of the contract must bind both contracting parties;103
101
Arts. 1159, 1315, 1356, Civil Code
102
103
Page 25 of 44
4. relativity of contract - the principle that the contract takes the effect only between the
parties, their assigns and heirs.104
References:
1. Are all agreements considered contracts and vice versa? Explain and give at least 3
illustrations.
2. What are the limitations upon the right of contracting parties to establish such
stipulations, clauses, terms and conditions as they may deem convenient? Explain each
limitations and give examples.
3. What is meant by mutuality of contracts?
4. Discuss the rule on relativity of contracts and its exceptions.
104
Page 26 of 44
Lesson 6 – Essential Requisites
Objectives:
1. Discuss the concept of consent and its requisites;
2. Identify persons incapacitated to give consent as well as persons who are prohibited
to enter into a contract;
3. Know the effects of vices of consent;
4. To explain the concepts on the object certain and cause/consideration of contracts.
Course Discussions:
There is no contract unless the following requisites concur:
1. Consent of the contraction parties;
2. Object certain which is the subject matter of the contract; and
3. Cause of the obligation which is established.105
Consent
As applied to contracts, consent signifies the concurrence of the wills of the contracting
parties with respect to the object and the cause which shall constitute the contract. It signifies the
meeting of the offer and the acceptance upon the thing and the cause which are to constitute the
contract.106
Elements of consent:
1. must be manifested by the concurrence of the offer and the acceptance;107
2. contracting parties must possess the necessary legal capacity;108 and
3. consent must be intelligent, free, spontaneous, and real.109
In general, contracts are perfected from the moment that there is a manifestation of the
concurrence between the offer and the acceptance with respect to the object and the cause which
shall constitute the contract.110
However, if the acceptance is made by letter or telegram, the contract is perfected from
the moment that the offeror has knowledge of such acceptance.111
The following are incapacitated to give their consent to a contract:

1. unemancipated minors;
2. insane or demented persons;
3. deaf-mutes who do not know how to write;
105
106
107
108
109
110
111
Page 27 of 44
4. married women of age in case specified by law;
5. persons suffering from civil interdiction; and
6. incompetents under guardianship.112
The following persons are prohibited from entering into certain contracts:
1. Insolvents before they are discharged by the Insolvency Court, cannot encumber, alienate
or otherwise dispose of their properties;113
2. Non-Christians of Mindanao, Sulu, Mountain Province, and Nueva Vizcaya, cannot sell
real property without the written approval of the provincial governor or his
representative.114 This rule is still intact under Rep. Act. No. 3872, although the sale is
now subject to the approval of the Chairman of the Commission on National Integration;
3. Husband and wife, as a general rule, are prohibited from donating or selling property to
each other during the marriage;115
4. Persons who are prohibited from giving each other any donation or advantage, are
prohibited from entering into a contract of universal partnership;116
5. Persons holding a fiduciary relation with respect to certain properties. Thus, the following
cannot acquire by purchase, even at a public or judicial auction, in person or through the
mediation of another:
a. The guardian, the property of the persons or persons who may be under his
guardianship;
b. Agents, the property whose administration or sale may have been intrusted to them,
unless the consent of the principal has been given;
c. Executors and administrators, the property of the estate under administration;
d. 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;
e. 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 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;
f. Any others specially disqualified by law.117
Vices of consent:
1. vices of the will - mistake, violence, intimidation, undue influence, and fraud; and
2. vices of declaration - comprehends all forms of simulated contracts.118
Object Certain
112
Art. 1327, Civil Code; Art. 34, Revised Penal Code; Rules 93-94, Rules of Court
113
Act No. 1956 (Insolvency Law)
114
Secs 145-146, Revised Administrative Code
115
116
117
118
Page 28 of 44
The object of a contract is defined as the thing, right or service which is the subject matter
of the obligation which is created or established.
As a general rule, all things, rights or services may be the object of contracts. However, it
is essential that the following requisites concur:
1. The object should be within the commerce of men, meaning, it should be susceptible
of appropriation and transmissible from one person to another;
2. The object should be real or possible. It should exist at the moment of the celebration
of the contract, or, at least, it can exist subsequently or in the future;
3. The object should be licit. In other words, it should not be contrary to law, morals, good
customs, public order or public policy; and
4. The object should be determinate, or at least possible of determination, as to its kind.
The following cannot be the object of contracts:
1. Thing which are outside the commerce of men;

2. Intransmissible rights;
3. Future inheritance except in case expressly authorized by law;
4. Impossible things or service;
5. Service which are contrary to law, morals, good customs, public order or public
policy; and
6. Objects which are not determinable as to their kind.119
If the parties enter into a contract with respect to the above objects, the contract is void or
inexistent.
Cause of Contract
In general, cause is the why of the contract or the essential reason which moves the
contraction parties to enter into the contract. In other words, it is the immediate, direct or most
proximate reason which explains and justifies the creation of an obligation through the will of the
contracting parties.
In particular, 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 contracts, it is
the service or benefit which is remunerated; and in contracts of pure beneficence, it is the liberality
of the benefactor.120 (Art. 1350, NCC.)
Cause vs Consideration
In this jurisdiction, cause and consideration are used interchangeably. After all, causa is
merely the civil law term, while consideration is the common law term. It is, however, undisputed
that causa in civil law jurisdictions is broader in scope that consideration in Anglo-American
jurisdiction. Many agreements which cannot be supported in Anglo-American law for want of
consideration can enforced under the broader doctrine of causa.121
119
120
121
Tolentino, Civil Code, 1956 Edition
Page 29 of 44
Cause vs Object of Contract
The cause must not be confused with the object of the contract. Of course, there can be
no question about the difference between the two in cases of remuneratory and gratuitous
contracts: thus, in the first, the cause is the service or benefit which is remunerated, while the
object is the thing which is given in remuneration, and in the second, the cause is the liberality of
the benefactor, while the object is the thing that is dinated.
In onerous contracts, the cause for each contracting party is the prestation or promise of
a thing or service by the other, while the object is the thing or service itself. Thus, in a contract of
sale, the cause for the vendor is the acquisition of the purchase price, while the cause for the
vendee is the acquisition of the purchase price, while the cause for the vendee is the acquisition
of the thing sold. The objects, on the other hand, are the thing which is sold and the price which
is paid.
Dr. Tolentino, however, while concurring with this view with respect to the cause,
maintains that the object is the thing that is sold because it is the starting point of agreement
without which the negotiations would never have begun. Dr. Padilla, on the other hand, contends,
that in bilateral contracts likes sale, the thing sold is the object, while the price paid is the cause.
It is submitted that the view of Dr. Tolentino is the most logical.
Cause of a Contract vs Motives of the Contracting Parties
1. The cause is the direct or proximate reason of a contract, whereas the motives are the
indirect or remote reasons;
2. The cause is the objective or juridical reason of a contract, whereas the motives are
the psychological or personal reasons;
3. The cause for a certain contract is always the same, whereas the motives will differ or
vary depending upon who are the parties;
4. The cause can affect the validity of a contract, whereas the motives cannot.
References:
1. When are contracts perfected? Explain fully.
2. How is a contract perfected? Comprehensively explain and provide legal basis.
3. Differentiate the persons who are incapacitated to give consent from persons who are
prohibited to enter into a contract. Make sure to discuss the effect or consequences of
each.
4. Define and differentiate the following: violence, intimidation, mistake, fraud and undue
influence. What are its effects?
5. What do you mean by simulation of contracts and what are its effects?
6. Can a person enter into a contract with regard to future inheritance? Are there exceptions?
Page 30 of 44
Lesson 7 – Formalities, Interpretation and Reformation of Contracts
Objectives:
1. Explain the formalities required by law for contracts;
2. Identify the rules in the interpretation of contracts;
3. Discuss reformation of contracts as a remedy.
Course Discussions:
Form of Contracts
General Rule: Contracts shall be obligatory in whatever form in which the same may have
been entered into, provided all of the essential requisites for its validity are present.122
Exceptions:
1. When the law requires that the contract must be in a certain form in order to be valid;
and
2. When the law requires that the contract must be in a certain form in order to be
enforceable.
Different kinds of formalities which are prescribed by law for certain contracts
1. for convenience of for the purpose of binding third persons;123
The following must appear in a public document:

a. 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;124
b. The cession, repudiation or renunciation of hereditary rights or of those of the
conjugal partnership of gains;
c. The power to administer property, or any other power which has for its object an
act appearing or which should appear in public document, or should prejudice a
third person;
d. The cession of actions or rights proceeding from an act appearing in a public
document.
e. All other contracts where the amount involved exceeds P500.00 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. (Art. 1358, NCC.)
2. necessary for the validity of contract
Contracts with must appear in writing are as follows:
122
123
Art. 1356 to 1358, Civil Code
124
Arts. 1403, No. 2, and 1405, Civil Code
Page 31 of 44
a. Donation and acceptance of personal property whose value exceeds Php 5,000.00
shall be made in writing; otherwise, it shall be void;125
b. Sale a piece of land or any interest therein by an agent. If the authority of the agent
is not in writing, the sale is void;126
c. In contracts of antichresis, the amount of the principal and of the interest shall be
specified in writing; otherwise, the contract shall be void;127
d. Agreements regarding payment of interest in contracts of loan. No interest shall be
due unless it has been expressly stipulated in writing.128 The validity of the contract
of loan, however, is not affected.
Contract which must appear in a public document are as follows:

a. Donations of immovable property must be made in a public document. The
acceptance, on the other hand, may be made in the same deed of donation or in
a separate public document. If the acceptance is made in a separate public
document, the donor shall be notified thereof in an authentic form, and this step
shall be noted in both instruments. Non-compliance with any of these formalities
shall rendered the donation void;129
b. Partnership where immovable property or real rights are contributed to the
common fund, it is necessary that the contract must appear in a public instrument
and that there must be an inventory of the immovable property or real rights, signed
by the partners, and attached to the public instrument; otherwise, the contract is
void.130
Contract which must be registered are as follows:

a. In chattel mortgages, personal property is recorded in the Chattel Mortages
Register as a security for the performance of an obligation. If the movable, instead
of being recorded, is delivered to the creditor of a third person, the contract is a
pledge and not a chattel mortages;131
b. No sales or transfers of large cattle shall be valid unless it is duly registered and a
certificate of transfer is secured.132
3. necessary for the enforcement of the contract.133 (covered by Statute of Frauds)
Interpretation of Contracts
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.134
125
126
127
128
129
130
Art. 1771 and 1773, Civil Code
131
132
Art. 1581, Civil Code; Sec. 22, Act. No 1147 (Cattle Registration Act)
133
134
Page 32 of 44
The interpretation of obscure words or stipulations in a contract shall not favor the party
who caused the obscurity.135
Reformation of Instruments
When the true intention of the parties to a perfected and valid contract are not expressed
in the instrument purporting to embody their agreement, by reason of mistake, fraud, inequitable
conduct or accident, one of the parties may ask for the reformation of the instrument so that such
true intention may be expressed.136
Requisites:
1. There must be a meeting of the minds of the parties;
2. Their true intention is not expressed in the instrument; and
3. Such failure to express their true intention is due to mistake, fraud, inequitable conduct
or accident.137
If the first requisites is lacking, the proper remedy is not the reformation of the instrument
but the annulment of the contract. Hence, the most fundamental distinction between an action for
the reformation of an instrument and an action for the annulment of a contract consist of the fact
that the first presupposes a perfectly valid contract in which there has already been a meeting of
the minds of the contracting parties, while the second based on a defective contract in which there
has been no meeting of the minds because the consent of one of the contracting parties has been
vitiated.
Basis and Nature of Reformation of Instrument
The remedy of reformation of an instrument is based on the principle of equity where, to

express the true intention of the contracting parties, an instrument already executed is allowed by
law to be reformed. The right of reformation is necessarily an invasion or limitation of the parol
evidence rule since, when writing is reformed; the result is that an oral agreement is by court
decree made legally effective. Consequently, the courts, as the agencies authorize by law to
exercise the power to reform an instrument, must necessarily exercise that power sparingly and
with great caution and zealous care. The remedy, being an extraordinary one, must be subject to
limitations as may be provided by the law. A suit for reformation of an instrument must be brought
within the period prescribed by law, otherwise, it will be barred by the mere lapse of time.138
Reformation is that remedy in equity by means of which the instrument is amended to

conform to the real intention of the parties.139
Instruments that cannot be reformed:

1. Simple donations inter vivos wherein no condition is imposed;
2. Wills; and
3. Those where the real agreement is void.140
135
136
137
Huibonhoa vs. COA, 320 SCRA 625; Rita Starming, et al. vs. Dy, et al., G.R. No. 133646, 06 June 2002
138
Bentir and Formida vs. Judge Leonda and Leyte Gulf Traders, Inc., G.R. No. 128991, 12 April 2000
139
NIA vs. Gamit, et al., 215 SCRA 436; Conde vs. Cuenva, 99 Phil. 1056; Rita Sarming, et al. vs. Dy, et al.,
G.R. No. 133643, 06 June 2002
140
Page 33 of 44
References:
1. What is the form required of a contract for it to have obligatory force character? Are
there any exceptions? Explain fully.
2. Provide at least 5 formalities required by law for a contract to be valid.
3. When shall the literal meaning of the stipulations in a contract control? Is that an
absolute rule? Explain.
4. When can there be reformation of an instrument?
5. Illustrate at least 5 instruments which can be reformed and who are the parties who
can bring action for reformation of each instruments. Explain your answer.
Page 34 of 44
Lesson 8 – Defective Contracts
Objectives:
1. Identify and explain the classes of defective contracts;
2. Differentiate all defective contracts and discuss the effects of each.
Course Discussions:
Classes of Defective Contracts:
1. Rescissible contracts;
2. Voidable contracts;
3. Unenforceable contracts;
4. Void contracts; and
5. Inexistent contracts.
Rescissible contracts possess the following features or characteristics:

1. Their defect consists in injury or damage either to one of the contracting parties or to
third persons;
2. Before rescission, they are valid and therefore legally effective;
3. They are susceptible of convalidation only by prescription, and not by ratification;
4. They can be attacked directly only, and not collaterally;
5. They can be attacked either by a contracting party who suffers injury or by a third
person who is defrauded.
Voidable contracts possess the following features or characteristics:

1. Their defect consists in the vitiation of consent or in the legal incapacity of one of the
contracting parties;
2. They are binding until they are annulled by a competent court;
3. They are susceptible of convalidation either by ratification or prescription;
4. They cannot be attacked or assailed by third persons.
Unenforceable contracts possess the following features or characteristics:

1. Their defect consists either in the fact that they were entered into excess or without
any authority, or they do not comply with the Statue of Frauds, or both contracting
parties are legally incapacitated;
2. They cannot be enforced by a proper action in court;
3. They are susceptible of convalidation by ratification;
4. They cannot be attacked or assailed by third persons.
Void and inexistent contracts possess the following features or characteristics:

1. Their defect consists in the fact that they lack absolutely either in fact or in law one or
some of the elements of a valid contract;
2. As a general rule, they produce no legal effects in accordance with the principle “quod
nullum est nullum producil effectum”;
3. They are not susceptible of convalidation either by ratification or by prescription;
4. The right to set up the defense of absolute nullity or inexistence cannot be renounced;
Page 35 of 44
5. They can be attacked or assailed either by a contracting party or by a third person
whose interest is directly affected.
Rescissible Contracts
A rescissible contract is a contract which is valid because it contains all the essential
requisites prescribed by law, but which is defective because of injury or damage to either of the
contracting parties or to third persons, as a consequence of which it may be rescinded by means
of a proper action for rescission.
Rescission is a remedy granted by law to the contracting parties, and even to third
persons, to secure the reparation of damages caused to them by a contract, even if the same
should be valid, by means of the restoration of things to their condition prior to the celebration of
the contract.
The following contracs are rescissible:

1. Those which are entered into by guardians whenever the wards whom they represent
suffer lesion by more than one-fourth (1/4) of the value of the things which ate 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 if 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;141
6. 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.142
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.143 Hence, it must
be availed of as the last resort, availed only after all legal remedies have been exhausted and
proven futile.144
The action for rescission must be commenced within 4 years. For persons under
guardianship and for absentees, the period of 4 years shall not begin until the termination of the
performer’s incapacity, or until the domicile of the latter is known.145 It is the legal possibility of
bringing the action which determines the starting point for the computation of the 4 year
prescriptive period as provided in the law.146
As a general rule, the action to claim rescission must be commenced within 4 years. If the
action is based on lesion147, the period must be counted from the time of termination of the
141
142
143
144
Khe Hong Cheng vs. CA, G.R. No. 144169, 28 March 2001
145
146
Khe Hong Cheng vs. CA, G.R. No. 144169, 28 March 2001
147
Art. 1381, Nos. 1 and 2, Civil Code
Page 36 of 44
incapacity of the ward or from the time the domicile of the absentee is known. If it is based on the
fraud148, the period must be counted from the time of the discovery of the fraud.
However, in certain contracts of sale which are specially declared by law to be rescissible,
the period is 6 months or even 40 days, counted from the day of delivery. 149
Voidable Contracts
Voidable contracts are those in which all of the essential elements for validity are present,
but the element of consent is vitiated either by lack of legal capacity of one of the contracting
parties, or by mistakes, violence, intimidation, undue influence or fraud.
Voidable Contracts vs Rescissible Contracts

1. In a voidable contract, the defect is intrinsic because it consist of a vice which vitiates
consent, whereas in a rescissible contract the defect is external because it consist of
damage or prejudice either to one of the contracting parties or to a third person;150
2. In the former, the contract is voidable even if there is no damage or prejudice, whereas
in the latter the contract is not rescissible if there is no damage or prejudice;151
3. In the former, the annulability of the contract is based on the law, whereas in the
latter, the rescissibility of the contract is based on equity. Hence, annulment is not only
a remedy but a sanction, whereas rescission is a mere remedy. Public interest,
therefore, predominates in the first, whereas private interest predominates in the
second;
4. The cause of annulment are different from the causes for rescission;
5. The former is susceptible of ratification, whereas the latter is not;
6. Annulment may be invoked only by a contracting party, whereas rescission maybe
invoked either by a contracting party or by a third person prejudiced.
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 his consent to contract; and
2. Those where the consent is vitiated by mistake, violence, intimidation, undue influence
or fraud.152
Ways or Modes of Convalidating a Voidable Contract:

1. by prescription of the action for annulment;153
2. by ratification or confirmation;154 and
3. by the loss of the thing which is the object of the contract through the fraud or fault of
the person who is entitled to institute the action for the annulment of the contract.155
The action for annulment of a voidable contract must be commenced within a period of
four (4) years. If the action refers to contracts entered into by incapacitated persons, the period
148
Arts. 1381, Nos. 3 and 4, 1382, Civil Code
149
150
Arts. 1381 and 1930, Civil Code
151
Ibid.
152
153
154
155
Page 37 of 44
shall be counted from the time the guardianship ceases; if it refers to those where consent is
vitiated by violence, intimidation or undue influence, the period shall be counted from the time
such violence, intimidation or undue influence ceases or disappears; and if it refers to those where
consent is vitiated through mistake or fraud, the period shall be counted from the time of the
discovery of such mistake or fraud.156
Unenforceable Contracts
Unenforceable contracts are those which cannot be enforced by a proper action in court,
unless they are ratified, because either they are entered into without or in excess of authority or
they do not comply with the Statute of Frauds or both of the contracting parties do not possess
the required legal capacity.
Unenforceable Contracts vs Other Defective Contracts

1. From rescissible contracs
a. unenforceable contracts cannot be enforced by a proper action in court, whereas
rescissible cantracts are valid and enforceable unless they are rescinded;
b. the former are susceptible of ratification, whereas the latter are not;
c. the former cannot be assailed by third persons, whereas the latter may be assailed
by third persons who are prejudiced.
2. From voidable contracts – Unenforceable contracts cannot be enforced by a proper
action in court, whereas voidable contracts are binding and enforceable unless they
are annulled by a proper action in court.
3. From void contracts – There are some unenforceable contracts which are valid and,
therefore, may produce effects, although they cannot be enforced by a proper action
in court; void or inexistent contracts, on the other hand, do not produce, as a general
rule, any effect whatsoever. Hence, unenforceable contracts are susceptible of
ratification, whereas void contracts are not.
The following contracts are unenforceable, unless they are ratified:

1. Those entered into in the name of another person by one who has been given no
authority or legal representation, or who has acted beyond his powers;
2. Those that do not comply with the Statute of Frauds as set forth in this number. In the
following cases an agreement thereafter 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 evidence, or some or 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, price, names of the purchasers and
person whose account the sale is made, it is a sufficient memorandum;
156
Page 38 of 44
e. An agreement for the leasing for a longer period than one year, or for the sale of
real property or 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.157
The “Statute of Frauds” is descriptive of statutes which require certain classes of contracts
to be in writing. The contract shall be unenforceable by action unless the same or some not or
memorandum thereof be in writing and subscribed by the party charged or by his agent. Evidence
of the contract, therefore, cannot be received without the writing or a secondary evidence of its
content.158
The purpose of the Statute of Frauds is to prevent fraud and perjury in the enforcement of
obligation depending for their evidence on the unassisted memory of witnesses by requiring
certain enumerated contracts and transactions to be evidence by a writing a signed by the party
to be charged.159
Void and Inexistent Contracts
In general, void and inexistent contracts may be defined as those which lack absolutely
either in facto or in law one or some or all of those elements which are essential for its validity.
In particular, void contracts are the contracts where all of the requisites prescribed by law
for contracts are present, but the cause, object or purpose is contrary to law, morals, good
customs, public order or public policy, or they are prohibited by law, or they are declared by law
to be void.
Inexistent contracts, on the other hand, are those contract which lack absolutely one or
some or all of those requisites which are essential for validity.
Void vs Inexistent Contracts

1. Void contracts refer to those where all of the requisites of a contract are present, but
the cause, object or purpose is contrary to law, morals, good customs, public order or
public policy, or the contract itself is prohibited or declared by law to be void; inexistent
contracts, on the other hand, refer to those where one or some or all of those requisites
which are essential for validity are absolutely lacking;160
2. The principle of in pari delico is applicable in the first, but not in the second.
Consequently, the first may produce effects161, but the second does not produce may
effect whatsoever.
Void and Inexistent vs Other Defective Contracts

1. Void or inexistent contract vs rescissible contract
a. A void or inexistent contract produces as a rule no effect even if it is not set aside
by a direct action, whereas a rescissible contract is valid unless it is rescinded;162
157
158
159
Rosencor Development Corp. vs. Inquing, 354 SCRA 119, 08 March 2001
160
Liguez vs. Court of Appeals, 102 Phil. 577
161
162
Page 39 of 44
b. The defect of the former consists in absolute lack in fact or on law of one or some
ora ll of the essential elements of a contract, whereas the defect of the latter
consists in lesion or damage to one of the contracting parties or to third person;163
c. In the former the nullity or inexistence of the contract is based on the law, whereas
in the latter its rescissibke carácter is based on equity. Hence, an action for
declaration of absolute nullity or inexistence is not only a remedy but a sanction,
whereas an action for rescission is a mere remedy. Public interest, therefore,
predominates in the first, whereas private interest predomínate in the second;
d. The action for the declaration of the nullity or inexistence of a contract in
imprescriptible, whereas the action for the rescission of a contract is
prescriptible;164
e. The nullity or inexistence of a contract cannot as rule be assailed by third persons,
whereas the rescissible character of a contract may be assailed by third
persons.165
2. Void or inexistent contract vs voidable contract

a. A void or inexistent contract produces, as a rule, no effect even if it is not set aside
by a direct action, whereas a voidable contract is bindinng unless it is annulled;166
b. The causes for the inexistence of absolute nullity of the former are different rom
the causes for the annulability or relative nullity of the latter;167
c. The former is not susceptible of ratification, whereas the latter is susceptible of
ratification;168
d. The action for the declaration of the nullity or inexistence of a contract is
imprescriptible, whereas the action for the annulment of a contract is
prescriptible;169
e. The defense of enxistence or absolute nullity it available to third persons whose
interests are directly affected, whereas the defense of annulability is not available
to third persons.170 (Arts. 1397, 1421, NCC.)
3. Void or inexistent contract vs unenforceable contract

a. In a void or inexistent contract, there is in law or in reality no contract at all, whereas
in an unenforceable contract there is actually a contract which cannot be enforced
by a court action unless it is ratified;171
b. The causes for the inexistence or absolute nullity of the former are different from
the causes for the unenforceability of the latter;172
c. The former is not susceptible of ratification, while the latter is susceptible of
ratification;173
163
Ibid.
164
165
166
167
Ibid.
168
Ibid.
169
170
171
172
Ibid.
173
Arts. 1404, 1405, 1407 and 1409, Civil Code
Page 40 of 44
d. The former can be assailed by third person whos interests are directly affected,
whereas the latter cannot be assailed by third persons.174
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 tiem of transaction;
4. Those whose object is outside the commerce of men;
5. Those which contemplate an imposible 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;175
8. Those direct results of previous ilegal contracts;176
9. Those where there is no concurrence between offer and acceptance with regard to the
object and the cause of the contract;
10. Those which do not comply with the required form where such form is essential for
validity.
References:
1. Define each defective contracts and distinguish one from another.
2. Provide 5 illustrations for each defective contracts.
3. Are void contracts the same as inexistent contracts? Why or why not?
174
175
176
Page 41 of 44
LAW ON CONTRACT OF SALE
Lesson 9 – Contract of Sale: General Concepts
Objectives:
1. Discuss basic concepts on contract of sales;
2. Explain warranties, obligations of parties as well as installment payments in sale of
properties.
Course Discussions:
Contract of Sale
By the contract of sale, one of the contracting parties obligates himself to transfer the
ownership of and to deliver determinate thing, and the other to pay therefor a price certain in
money or its equivalent.177
Requisites:
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.
Characteristics of contract of sale:

1. Consensual;
2. Bilateral and Reciprocal;
3. Principal;
4. Onerous;
5. Commutative; and
6. Nominate.
Since a contract of sale is consensual, it is perfected at the moment there is meeting of

minds upon the thing which is the object of the contract and upon the price.178
The ownership of the thing sold shall be transferred to the vendee upon the actual or
constructive delivery thereof. 179 However, the parties may stipulate that the ownership shall not
pass to the vendee until the latter shall have fully paid the purchase price.180
Option Contract
177
178
179
180
Page 42 of 44
An agreement granting a privilege to buy or sell within an agreed time and at a determined
price. It is a separate and distinct contract from that which the parties may enter into upon the
consummation of the option. It must be supported by consideration.181
An accepted unilateral promise to buy or to sell a determinate thing for a price certain is
binding upon the promissor if the promise is supported by a consideration distinct from the price.182
Earnest Money
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.183
Earnest money is a part of the purchase price advanced by the vendee to the vendor as
a token of the perfection of the contract.
Unlike an option, where the grantee of the option is still undecided whether or not to buy
or sell the property, the buyer in giving an earnest money, manifested his earnest desire to buy
the property in question.
Remedies of Unpaid Seller
A seller of goods is considered to be an unpaid seller if the whole price has not been paid
or tendered, or when the check received as conditional payment was dishonoured by non-
payment or insolvency of the buyer.
If the ownership over the goods had not yet passed to the buyer, the seller as owner, could
retain the goods or resell them to another without prejudice to his liability for damages for any
breach of contract committed by him.
If the ownership had passed to the buyer but the goods are still in the possession of the
seller or are in transit to the buyer, the unpaid seller could withhold delivery or stop the goods in
transit should the buyer become insolvent.
Implied Warranties
A person who transfers or negotiates document of title for value, including one who
assigns for value a credit secured by a document of title, warrants not only the genuineness and
validity of the document and his right to negotiate or transfer it but also assumed all the warranties
of a vendor of goods.
Recto Law (Personal Property)
In a contract of sale of personal property the price of which is payable in instalments, the
vendor may exercise any of the following remedies:
1. Exact fulfilment of the obligation, should the vendee fail to pay;

2. Cancel the sale, should the vendee’s failure to pay cover two or more instalment;
181
Equatorial Realty Dev. Corp. vs Mayfair Theaters, Inc. 262 SCRA 283
182
183
Page 43 of 44
3. Foreclose the chattel mortgage on the thing sold, if one has been constituted, should
the vendee’s failure to pay cover two or more instalments. In the last case, he shall
have further action against the purchaser to recover any unpaid balance of the price.
Any agreement to the contrary shall be void.184
Maceda Law (Real Property)
R.A. 6552 recognizes in conditional sales of all kinds of real estate (industrial, commercial,
residential) the right of the seller to cancel the contract upon non-payment of an instalment by the
buyer, which is simply an event that prevents the obligation of the seller to convey title from
acquiring binding force.185
Extinguishment of Contract of Sale
Sales are extinguished by the same causes as all other obligations, and also by
conventional or legal redemption.186
References:
1. Define contract of sale and comprehensively explain each elements.
2. Can husband and wife enter into a contract of sale during marriage? Is that an absolute
or general rule? Explain fully. Are there any exceptions?
3. Differentiate option money from earnest money. Provide an illustration.
4. Are the remedies which are available to the vendor in case of breach provided under
the Recto Law cumulative? Why or why not?
5. What are the rights of both seller and buyer under Maceda Law?
 FINAL EXAMINATION COVERAGE

Exercises/Assessments for LESSONS 5-9
184
185
Carmelita Leaño vs CA, G.R. No. 129318, 15 November 2001
186
Page 44 of 44

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LAW 20013: LAW ON

ATTY. GARY CAMITAN AURE, MPA

Lesson 1 – Obligations: General Provisions

An obligation has four (4) essential requisites, to wit:

Obligations arise from:

A thing is determinate when it is particularly designated or physically segregated from all

The following specific circumstances affect obligations:

A fortuitous event is an event which cannot be foreseen, or which though foreseen, is

Fortuitous event proper (Act of God) is absolutely independent of human intervention,

In conditional obligations, the acquisition of rights, as well as the extinguishment or loss

An obligation is conditional when its effectivity is subordinate to the fulfillment or non-

Condition Term or Period

Alternative obligations are juridical relations which comprehend several objects or

Difference between alternative and facultative obligations:

A joint obligation is a concurrence of several obligee (creditors), or of several obligor

Meanwhile, there is a solidary obligation when there is a concurrence of several obligee

A penal clause has three (3) purposes as follows:

Secondary Classification of Obligations:

Hence, a guarantor or a co-debtor can compel the creditor to accept payment or

General Rule: Payment shall be made to the following:

Special Forms/Modes of Payment:

Essential requisites of application of payment are as follows:

Dation in Payment (Dacion en Pago)

Dation in payment (dacion en pago), whereby property is alienated to the creditor in

Simply, dation in payment is a special form of payment whereby property is alienated by

Kinds of payment by cession:

Difference between dation in payment and payment by cession:

Dation in payment Payment by Cession

Tender of Payment and Consignation

Tender of payment Consignation

Special requisites of consignation:

Loss of the Thing Due

According to Sanchez Roman, it is impossibility of compliance with the obligation through

Remission or condonation may be classified as follows:

Novation is the substitution or change of an obligation by another, resulting in its

 MIDTERM EXAMINATION COVERAGE

Lesson 5 – Contracts: General Provisions

Ordinary Contract vs Contract of Marriage

Different Classes of Contracts:

2. According to their perfection:

3. According to their form:

4. According to their purpose:

6. According to the nature of the vinculum which they produce:

7. According to their cause:

8. According to the risks involve:

9. According to their names or norms regulating them:

Phases or stages in the life of a contract

Essential characteristic of contracts

The following are incapacitated to give their consent to a contract:

The following cannot be the object of contracts:

1. Thing which are outside the commerce of men;

In particular, in onerous contracts, the cause is understood to be for each contracting

Cause of a Contract vs Motives of the Contracting Parties

The following must appear in a public document:

2. necessary for the validity of contract

Contracts with must appear in writing are as follows:

Contract which must appear in a public document are as follows:

Contract which must be registered are as follows:

3. necessary for the enforcement of the contract.133 (covered by Statute of Frauds)

Basis and Nature of Reformation of Instrument

The remedy of reformation of an instrument is based on the principle of equity where, to

Reformation is that remedy in equity by means of which the instrument is amended to

Instruments that cannot be reformed: