CA5011: Law on Obligations and Contracts

Final Examination

LECTURE

MODULE 1: General Provisions on Obligations

Article 1156 of the Civil Code of the Philippines
➔ New Civil Code of the Philippines
➔ Encompasses the set of laws that dictate how one should act with another person.
➔ Took effect on August 30, 1950
An obligation is a juridical necessity to give, to do, or not to do.
➔ juridical necessity entails that one may file a legal case against someone’s failure to comply with
their promises to another person.
➔ A civil obligation is enforceable by court action unlike natural obligations.
Natural Obligations
➔ civil obligations that lead to the expiration of an individual’s rights regarding the subject matter
are prescribed (expired).
◆ Time period before an individual’s rights expire: 10 years
◆ As a civil obligation becomes a natural obligation, one cannot file a case against the
debtor as the obligation must now be voluntarily given.
◆ Example of prescriptive period: Obligations set through written contracts
Requisites/Elements of an Obligation
a. Active subject (creditor or obligee) - the party holding the right to demand performance of the
obligation.
b. Passive subject (debtor or obligor) - the party required to perform the obligation.
c. Prestation (object or subject matter) - may be caused by giving, doing, or not doing
something.
d. Efficient cause (vinculum juris or juridical tie) - that which binds the parties of an obligation.
Forms of Obligations
➔ Oral, In Writing, Partly Oral, and Partly in Writing
Kinds of Obligation According to Subject Matter
a. Real Obligations
➔ originated from the latin word res, meaning object or thing.
➔ a real obligation encompasses the provision of an object.
➔ represents “to give”
◆ Example: A tech business is obligated to provide a mobile phone to a customer
who paid for the said mobile phone.

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 b. Personal Obligations

1. Positive Personal Obligation

➔ represents “to do”
◆ Example: An artist has a personal obligation to sing at his/her concert that
the fans have paid for.

2. Negative Personal Obligation

➔ represents “not to do”
◆ Example: One must not block the path of the neighbor (right of way).

Sources of Obligation: Article 1157. Obligations arise from:

1. Law
➔ It is a rule of conduct, just and obligatory, laid down by legitimate authority for common
observance and benefit.

Article 1158. Obligations derived from law are not presumed. Only those expressly
determined in this Code or in special laws are demandable, and shall be regulated by
the precepts of the law which established them; and as to what has not been foreseen,
by the provisions of this Book.

◆ Example: The obligation that individuals have arising from the tax law.
2. Contracts
➔ It is the meeting of the minds between two or more persons or more persons whereby
one binds himself with respect to the other to give something or to render some service.

Article 1159. Obligations arising from contracts have the force of law between
the contracting parties and should be compiled with in good faith.

◆ Example: A rental and lease contract that is present between the landlord and
the tenant of a property.
3. Quasi-Contracts
➔ They refer to certain lawful, voluntary and unilateral acts giving rise to a juridical relation
to the end that no one shall be unjustly enriched at the expense of another.
Two Common Examples of Quasi-Contracts
a. Negotiorum gestio
➔ This refers to the voluntary administration of the property, business or
affairs of another without his consent or authority.
➔ There is now an obligation to reimburse the gestor for the necessary and
useful expenses.
◆ Example: If the lawn of a homeowner is overgrowing, and a
concerned individual decides to mow them, the homeowner is
then obligated to reimburse the concerned individual’s expenses.
The law assumes that this is what the homeowner on vacation will
do regardless, hence the presence of obligation to pay.

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 b. Solutio Indebiti
➔ This refers to the payment by mistake of an obligation, in excess of what
should have been paid or payment to a person not due to receive it.
◆ Example: A tenant’s mistake of paying an extra rent in advance
without being obligated in the contract requires the landlord to
return the money that has been paid by mistake. One should not
benefit something at the expense of another individual.
4. Delicts
➔ Acts or omissions punishable by law.
➔ This refers to crimes or felonies defined under the law to be punishable as such.
➔ A person that is criminally liable is also civilly liable.
◆ Example: A man guilty of murder must be jailed, and at the same time obligated
to pay for compensations to the damages caused.
5. Quasi-Delicts
➔ tort or culpa aquiliana
➔ There are acts or omissions that cause damage to another.
➔ There being fault or negligence but without any existing contractual relation between the
parties. There is now an obligation to pay for damages.

Article 1163. Every person obliged to give something is also obliged to take care of it
with the proper diligence of a good father of a family, unless the law or the stipulation
of the parties requires another standard of care.

◆ Example: A truck driver who accidentally ran over a man on the street. While
there was no intent to harm the man, the negligence of the truck driver that has
caused damage to the man obligates him to be criminally liable and pay for
damages at the same time.
Determinate/Specific Thing vs.Generic Thing
a. Determinate Thing
➔ If it is particularly designated and physically segregated from all other objects of
the same class.
◆ Example: I will give you a house located at 526 Legarda Street, Quiapo,
Manila.
b. Generic Thing
➔ Identified only by its species. The debtor can give anything of the same class as
long as it is of the same kind.
◆ Example: I will give you a house.
NOTE: Genus nungram perit: genus never perishes.
Obligations of a Debtor Obliged to Give a Determinate Thing
1. To take good care of the thing with the diligence of a good father of a family unless the law or
agreement of the parties requires another standard of care.
2. To deliver the thing.
3. To deliver the fruits of the thing.

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 a. Natural Fruits - Spontaneous products of the soul and the young and other
products of animals.
b. Industrial Fruits - Refer to those produced by land of any kind through
cultivation or labor.
c. Civil Fruits - Refer to fruits that are the result of a juridical relation.
➔ lease of land
➔ rent income
➔

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

➔ This situation entails that the creditor is identified as the buyer or the
active object.
Personal Rights vs. Real Rights
a. Personal Right
➔ the right to demand from another, the fulfillment of the latter’s obligation to give,
to do or not to do.
b. Real Right
➔ right or interest of a person over a specific thing without a definite passive subject
against whom the right may be personally enforced. It is binding against the
whole world.

Article 1166. The obligations to give a determinate thing includes that of delivering all
its accession and accessories, even though they may not have been mentioned.

Accessions vs. Accessories

a. Accessions
➔ everything that is incorporated or attached to a thing, either naturally or artificially
➔ its absence has no effect on function of the principal object
◆ Example: A land with coconut trees. Unless stated explicitly in the
contract that the coconut trees are not included, the aforesaid trees
should go along with the land.
b. Accessories
➔ those joined to or included with the principal thing for the latter’s better use,
perfection or enjoyment.
➔ its absence has a significant effect on the principal object
◆ Example: The purchase of a wristwatch. The strap is considered an
accessory as its absence will hinder the actual function of the watch.
Remedies of the Creditor
1. If the debtor fails to perform his obligations to deliver a determinate thing
➔ To compel the debtor to make the delivery.
➔ To demand damages from the debtor.

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 2. If the debtor fails to perform his obligation to deliver a generic thing
➔ To ask that the obligation be complied with at the expense of the debtor.
➔ To demand damages from the debtor.
3. If the debtor fails to perform his obligation in obligations to do:
➔ If the debtor fails to perform the obligation or performs it but contravenes the
tenor thereof, the creditor may have the obligation executed at the expense of the
debtor or he may also demand damages from the debtor.
➔ If the debtor performs the obligations but does it poorly, the creditor may have the
same be undone at the debtor’s expense or he may also demand damages from
the debtor.
4. If the debtor does what has been forbidden him:
➔ The creditor may demand that what has been done be undone but at his
expense.
➔ To demand damages from the debtor.

Grounds for liability to pay for damages

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

Damages vs. Injury

a. Damages
➔ refer to the harm done or the sum of money that may be recovered in reparation
for the harm done.
b. Injury
➔ refers to the wrongful, unlawful or tortious act which causes loss or harm to
another. It is the legal wrong to be redressed.
NOTE: Damnum Absque Injuria: Damage without injury
Kinds of Damages
1. Actual/Compensatory Damages
➔ refer to the pecuniary loss that was actually incurred by the plaintiff. It includes
the actual value of the loss suffered and profits not realized.
◆ Example: A person accidentally ran over someone while driving on the
street. Once hospitalized, the victim’s hospital bills become actual
damages. (Take note that the victim may only demand compensation if
receipts of the expenses related to the damages are present.)
2. Moral Damages
➔ include physical suffering, mental anguish, fright, serious anxiety, besmirched
reputation, wounded feelings, moral shock and social humiliation.
◆ Example: If abused, one has the right to demand for moral damages.
3. Nominal Damages
➔ damages awarded to a party whose right has been violated.
➔ the damages are not big enough to look for the actual damages.
◆ Example: If two cars bumped against each other. The minor scratches
may be internally agreed upon by both parties with certain estimated
compensation that does not require a receipt.

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 4. Temperate or Moderate Damages
➔ more than nominal but less than actual damages.
◆ Example: The court may award temperate damages if the court finds
some pecuniary loss has been suffered but its amount cannot, from the
nature of the case, be proved with certainty.
5. Liquidated Damages
➔ Damages agreed upon by the parties to a contract, to be paid in case of breach.
◆ Example:The tenant agreed to the contract that one the rent must be paid
according to the date agreed upon, otherwise, they are obliged to pay
Php500.00 per succeeding day of failure to pay. If the tenant failed to pay
as agreed upon, the landlord may impose the said liquidated damages.
6. Exemplary/Corrective Damages
➔ Imposed by way of example or correction for public good, in addition to the moral,
temperate, liquidated or compensatory damages.
➔ extra damages awarded beyond actual damages incurred by the plaintiff.
◆ Example: In cases like massacres, aside from payment of
moral/compensatory damages, the court includes exemplary damages as
a warning for the public to not follow the same act.
Fraud
➔ deliberate or intentional evasion by the debtor of the normal compliance of his obligation.

Article 1170. Refers to the fraud committed by the debtor at the time of the
performance of the obligation.

Article 1338-1344. Refers to fraud employed in obtaining consent.

Kinds of Fraud

a. Fraud in Obtaining Consent

1. Causal Fraud or Dolo Causante
➔ Fraud of a serious kind, without which, consent would not have been given. It
renders the contract voidable for it is a defect in one of the essential elements of
a contract, “consent”.
2. Incidental Fraud or Dolo Incidente
➔ Refers to fraud without which consent would have still been given but the person
giving such consent would have agreed on different terms.
➔ It would not render the contract void but the party committing the fraud shall be
liable for damages.

b. Fraud in the Performance of the Obligation

➔ the deliberate act of evading fulfillment of an obligation in a normal manner.
➔ the party committing fraud shall be liable for damages.

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Rules in Waiver of Fraud

a. Past Fraud
➔ fraud committed in the past.
➔ such an act is considered as liberality on the part of the creditor.
➔ can be waived.
b. Future Fraud
➔ fraud that is yet to be committed.
➔ such stipulation is void for being contrary to public policy.
➔ cannot be waived.
Negligence
➔ omission of that diligence which is required by the nature of the obligation and corresponds with
the circumstance of the person, of the time, and of the place.
➔ is the failure to observe the required degree of care, precaution and vigilance that the
circumstances justly demand.
Diligence to be Observed
➔ If the law or contract does not state the diligence which is to be observed in the performance of
that obligation, the debtor must observe the diligence of a good father of a family, as required by
the nature of the obligation and which corresponds with the circumstances of the person, of the
time or of the place.
Kinds of Negligence
a. Culpa Contractual
➔ negligence in the performance of a contract.
➔ it supposes a pre-existing contractual relationship between the parties.
➔ negligence in the performance of the obligation arising from a contract resulting in
damages.
b. Culpa Aquiliana
➔ civil negligence or tort/quasi-delict/culpa extra contractual
➔ quasi-delict where negligence itself is the independent source of the obligation.

c. Culpa Criminal
➔ criminal negligence
➔ negligence that results in commission of a crime.
Delay or Default or Mora
Delay
➔ non-fulfillment of an obligation with respect to time or delay in the fulfillment of an
obligation, contrary to what was agreed upon.
a. Mora Solvendi
➔ delay on part of the debtor.
b. Mora Accipiendi
➔ delay on the part of the creditor. It exists when the creditor unjustly
refuses to accept the thing.
c. Compensatio Morae
➔ delay in reciprocal obligations, both parties are in default. It is as if there is
no delay.
When is there a delay? (Legal Delay)
➔ As a rule, the debtor incurs delay from the time the creditor demands fulfillment of the
obligation (either juridically or extra-juridically) and the debtor fails to comply with such
demand. Hence, no demand, no delay.

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 Exceptions to the No Demand, No Delay Rule:

1. When the law or the obligation so provides

➔ When there is an express provision of the law or stipulation by the parties that
there is no need for a demand for the performance of the obligation
2. When the time is of the essence of the contract
➔ When the designation of the time for the performance of the obligation is the
controlling motive for the establishment of the obligation.
3. When demand would be useless as when the obligor has rendered it beyond his
power to perform
➔ in reciprocal obligations, from the moment one of the parties fulfills his obligation,
delay by the other begins notwithstanding the absence of a demand.

Effects of Delay

To the Debtor To the Creditor

He shall be liable for the payment of incurred He shall bear the risk of loss and shall
damages. shoulder the expenses for the preservation
of the thing.

If the obligation consists in the delivery The debtor may resort to the consignation of
of a determinate thing, he shall be liable even the thing due.
if the thing is lost due to a fortuitous event.

Fortuitous Event
➔ These are events that could not be foreseen or which, though foreseen, are inevitable. It is not
enough that the event should not be foreseen or anticipated, but it must be one impossible to
foresee or avoid.

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

Requisites of fortuitous event to be accepted as a justification for the non-performance

of an obligation to deliver a determinate thing:
1. The cause must be independent of the debtor’s will.
2. There must be an impossibility of foreseeing the event or if it can be foreseen, it must be
impossible to avoid.
3. The occurrence must be of such magnitude as to render it impossible for the debtor to perform
his obligation.
4. The debtor must be free from participation in the non-performance, damage or loss of the
property brought about by the fortuitous event.

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General Rule: If the foregoing requisites are present in a case, then the debtor shall not be liable for
non-performance of the obligation due to a fortuitous event. His obligation is extinguished.
Exceptions:
1. When the debtor is in delay.
2. When the debtor promised the same thing to two or more persons who don't have the
same interest.
3. When the parties stipulate or agree that the debtor will not be exempted from liability
even if non-performance of the obligation is due to a fortuitous event.
4. When the nature of the obligation requires the assumption of risk.
5. When the thing to be delivered is generic.

Article 1175. Usurious transactions shall be governed by special laws

➔ Usury is contracting for or receiving interest in excess of the amount allowed by law for the loan
or use of money, goods, chattels or credits.
➔ Usury is now legally non-existent. Parties are now free to stipulate any amount of interest.
(Refer to Central Bank Circular No. 905 effective since January 1, 1983.)
➔ It does not, however, give absolute right to the creditor to charge the debtor interest that is
“iniquitous or unconscionable.”
Presumptions on receipts of principal and installment payments (Art. 1176)
a. The receipt of the principal without reservation as to interest, shall give rise to the presumption
that the interest has been paid.
b. The receipt of a later installment without reservation as to prior installments, shall give rise to the
presumption that prior installments have been paid.
NOTE: The foregoing are mere disputable presumptions (not conclusive) and the creditor may
rebut such with clear and convincing evidence to the contrary
Different remedies of the creditor to enforce payment of his claims against the debtor (Art. 1177)
a. Specific Performance
➔ exact fulfillment of the obligation by specific or substitute performance with a right to
damages in either case.
b. Attachment
➔ pursue the property in the possession of the debtor, except those exempt by law.
➔ Exemption: Family Home
c. Accion Subrogatoria
➔ to be subrogated to all the rights and actions of the debtor save those which are inherent
in his person
d. Accion Pauliana
➔ asking the court to rescind or to impugn all the acts which the debtor may done to
defraud the creditors
➔ the three preceding remedies must be considered first, making accion pauliana the last
resort among all the aforementioned remedies.
Relativity of Contracts
➔ a contract can only bind the parties who have entered into it or their successors who have
assumed their personality or their juridical position and that, as a consequence, such contract
can neither favor nor prejudice a third person.

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 Exceptions: Intransmissible Rights and Obligations
1. By their nature as when the special or personal qualification of the obligor constitutes one of the
principal motives for the establishment of the contract
2. By stipulation of the parties, as when the contract expressly provides that the obligor shall
perform an act by himself and not through another
3. By provision of law, as in the case of those arising from a contract of partnership or of agency

MODULE 3: Different Kinds of Obligations

CLASSIFICATIONS OF OBLIGATIONS

1. Primary classification of obligations under the Civil Code:

a. Pure and Conditional obligations
b. Obligations with a period
c. Alternative and Facultative obligations
d. Joint and Solidary obligations
e. Divisible and Indivisible obligations
f. Obligations with a penal clause
2. Secondary classification of obligations under the Civil Code:
a. Unilateral and Bilateral obligations obligations
b. Real and Personal obligations
c. Determinate and Generic obligations
d. Civil and Natural obligations
e. Legal, Conventional, and Penal obligations

SECTION 1 - PURE AND CONDITIONAL OBLIGATIONS

Article 1179. Every obligation whose performance does not depend upon a future or uncertain
event, or upon a past event unknown to the parties, is demandable at once.

Every obligation which contains a resolutory condition shall also be demandable, without
prejudice to the effects of the happening of the event. (1113)

1. Pure Obligation - One which is not subject to any condition and no specific date is mentioned
for its fulfillment
◆ Demandable immediately
➔ Example:
◆ “I will give you P10,000.”
● The statement is not subjected to any conditions and for a period of time to pass.
● The 10,000 is immediately demandable.
◆ A binds himself to pay B P3,000 “upon demand of B”
● The obligation is immediately demandable because there is no condition and
date mentioned for its fulfillment.

2. Conditional Obligation - One whose consequences are subject in one way or another to the
fulfillment of a condition.
◆ Its demandability or creation depends on the fulfillment of a condition

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 ➔ Condition: A future and uncertain event, upon the happening of which, the acquisition or
extinguishment of an obligation (or right) subject to its depends.

➔ Characteristics of a condition:
1. Future and Uncertain - To constitute an event to be condition, it must be future and
uncertain
● First paragraph of the Art. 1179 uses the disjunctive “or” between “future" and
“uncertain” to distinguish pure obligation from both the condition obligation and
one with a period.
○ Obligation with a period - future and certain
2. Past and Unknown - Condition may also refer to a past event unknown to the parties
● If it refers to a future event, both its very occurrence and time of such occurrence
must be uncertain; otherwise, it’s not a condition.
➔ Condition must not be impossible (Art. 1183)

TWO PRINCIPAL KINDS (CLASSIFICATION) OF CONDITION

(AS TO EFFECT):

1. Suspensive condition - Also called as condition precedent or condition antecedent

➔ A condition where the happening of which will give rise to the obligation (or right).
◆ The demandability of the obligation is suspended until the uncertain event which
constitutes the condition.
◆ Its birth or effectivity takes place only if and when the event that constitutes the
conditions happens or fulfilled
➔ Example:
◆ “I will give you P4,000 if you pass your preliminary examinations.”
● Obligation is demandable only after the condition is fulfilled - passing the
preliminary examinations.
2. Resolutory condition - Also called as condition subsequent
➔ A condition where the happening of which will extinguish an obligation (or right) already
existing.
◆ The obligation is demandable immediately but shall be extinguished upon the happening
of the resolutory condition.
➔ Example:
◆ “I will pay for your rental fee until you turn 20.”
● The obligation may be demanded immediately by the creditor, but the obligation
will be extinguished once the debtor already turns 20 years old.

Distinction between Suspensive and Resolutory Condition

Suspensive Resolutory

Once the Obligation arises Obligation is extinguished

condition is
fulfilled:

If the first The tie of the law does The tie of the law is consolidated
doesnt take not appear

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 place:

Until the Existence is a mere Its effects flow, but over it hovers the possibility of
first takes hope termination
place:

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

➔ This article reiterates the distinction between a suspensive (antecedent) condition and a
resolutory (subsequent) condition.

➔ Obligation is demandable at once

1. When it is pure. (as stated in Art. 1179)

2. When it is subject to a resolutory condition.
3. When it is subject to a resolutory period.

➔ Past event unknown to the parties

◆ Condition: really refers to an uncertain and future event

◆ Past events can not be said to be a condition since the demandability of an obligation
depends upon whether the event will happen or not.
◆ What is really contemplated by law is the knowledge to be acquired in future of a past
event which at the moment is unknown to the interested parties for it is only in that sense
that event can be determined uncertain
● This knowledge determines whether the obligation will arise or not.
➔ Example:
◆ A is the owner of a parcel of land which is being claimed by B. Last week, the Supreme
Court rendered a final decision upholding the right of B. However, A has not yet received
the notice that he had won the case. Now, A is obliged himself to sell his land to C,
should he win the case against B.
● Under the facts, A would be bound to sell the land to C upon the receipt of notice
that he had won the case against B.

CLASSIFICATION OF CONDITIONS
AS TO CAUSE OR ORIGIN:

3. Potestative condition - Condition that depends upon the will of one of the contracting parties
(upon the will of the debtor or the creditor).

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

➔ Potestative on the will of the debtor

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 ● Purely Potestative Condition: Conditional obligation shall be void because its
validity and compliance is left to the will of the debtor, therefore, cannot be easily
demanded
○ Debtor may just not fulfill the condition if he doesn’t want to be liable
○ There is no burden on the debtor and consequently, no juridical tie is
created
● If Suspensive: Obligation is void even if the condition is not demandable.
○ Examples:
○ “I will give you P19,000 once I go to New Zealand.”
○ “I will pay you if I want.”
○ “I will pay you after I recover what A owes.”
○ “I will continue to lease your property for as long as I need the premises
and pay the rent.”
◆ Continuance, effectivity, and fulfillment of lease contracts depends
solely upon the uncontrolled will of the lessee
● If Resolutory: Obligation is valid.
○ Example: “I will allow you to use my car until I come home from New
Zealand.”
➔ Only the condition is void - If the obligation is a pre-existing one, and therefore, does
not depend for its existence upon the fulfillment by the debtor of the potestative
condition, only the condition is void, leaving unaffected the pre-existing obligation.
● Condition is imposed not on birth of the obligation but on its fulfillment
● Example: A borrowed P12,000 from B within five months. Subsequently, A
promised to pay B “after A sells his house” to which B agreed. In this case, only
the condition is void but not the pre-existing obligation of A to pay B.

➔ Potestative on the will of the creditor - Obligation is valid whether it is suspensive or

resolutionary.
○ Examples:
○ “I will pay you P4,000 upon your demand.”
○ “I will give you P20,000 if you go to Cebu.”

4. Casual condition - Condition that depends upon chance or will of a third person.
➔ Example: “I will give you P15,000 if UST will be the champion for UAAP Season 86.”
◆ The condition depends upon the chance of the UST to be the champion but
there’s no certainty that the UST will win or lose the game.
◆ Obligation will only arise once UST is held as the champion of the game.
➔ Example: “ I will give you P3,000 if X will go to the party.”
◆ Here, the condition depends on the third person, which is X
◆ Obligation of giving P3,000 will only arise once it is ensured that X went to the
party.

5. Mixed condition - Condition depends partly upon the will of one of the parties and partly upon
chance or the will of a third person.
➔ Example: “A will give B P14,000 if B will marry X.”
◆ The condition depends if B will offer X to marry him. (one of the parties)
◆ The condition also depends if X will accept B’s offer to marry him. (third person)

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 ◆

When the fulfillment of the Effect as to the

condition depends upon: obligation:

1. Sole will of the debtor Void

2. Sole will of the creditor Valid

3. Chance Valid

4. Will of the third person Valid

CLASSIFICATION OF CONDITIONS AS TO POSSIBILITY:

6. Possible condition - One that is capable of fulfillment, legally and physically,

➔ Example: “I will give you P1,000 once you finish reading the book of Atty. De Leon.”
◆ The condition is still possible. The obligation will arise if the creditor was able to
finish reading the book. The condition is a bit difficult, but the event is still
possible

7. Impossible condition - One that is not capable of fulfillment, legally or physically.

Article 1183. Impossible conditions, those contrary to good customs or public policy and
those prohibited by law shall annul the obligation which depends upon them. If the obligation is
divisible, that part thereof which is not affected by the impossible or unlawful condition shall be
valid.

The condition not to do an impossible thing shall be considered as not having been agreed
upon.

➔ Article 1183 refers to suspensive conditions. It applies only to cases where the
impossibility already existed at the time the obligation was constituted.
➔ Two Kinds of Impossible Conditions
a. Physically impossible conditions - When they, in nature of things, cannot exist
or cannot be done.
● Example: “I will give you P500 if it will not rain in the Philippines for one
year.”
b. Legally impossible conditions - When they are contrary to law, morals, good
customs, public order, or public policy.
● Example: A will give B P3,000 if B -
○ will kill C (against the law)
○ will be the common-law husband of D (against morals)
○ will slap his mother (against good customs)
○ will publicly advocate the overthrow of the government (against
public order)

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 ○ will not appear as a witness against E in a criminal case (against
public policy)
➔ Effects of Impossible Impossible Conditions
◆ Conditional obligation is void - Impossible conditions annul the obligation
which depends upon them.
● Both the obligation and condition are void.
● The obligor knows his obligation cannot be fulfilled. Hence, he has no
intention to comply with his obligation.
◆ Conditional obligation is valid - If the condition is negative, that is, not to do or
not to give an impossible thing, it is disregarded.
● The obligation is rendered pure and valid .
● The condition is always fulfilled when it is not to do an impossible thing so
that it is the same as if there were no conditions.
● Example: “I will sell you my car if you do not give me a cat that barks.”
◆ Only the affected obligation is void - If the obligation is divisible, the part
thereof not affected by the impossible condition shall be valid.
● Example: “I will give you P14,000, if you sell my phone, and a house, if
you kill X.”
○ The obligation to give P14,000 is valid but the obligation to give a
house is void because it is dependent upon an impossible
condition.
◆ Only the condition void - If obligation is a pre-existing condition, and, therefore,
doesn’t depend upon the fulfillment of a condition which is impossible, for its
existence, only the condition is void.
● Example: A borrowed P2,000 from B. If B later agreed to kill C before A
pays him, the condition to kill C is void but not the existing obligation of A
to pay B.
➔ According to the article, If the condition is not to do an impossible thing, it shall be
deemed as not having been agreed upon. Thus, obligation is immediately demandable
◆ Example: “A will give B P25,000 if B does not swim across the Atlantic Ocean.”

CLASSIFICATION OF CONDITIONS AS TO MODE:

8. Positive condition - The condition consists in the performance of an act.

➔ A condition that is supposed to happen or occur or something that must be done.

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

➔ The article above refers to a positive (suspensive condition) - the happening of the event
at a determinate time.
➔ Example: “I will give you P500 if you clean your room.”
➔ The obligation is extinguished:
◆ As soon as time expires without the event taking place.

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 ●Example: A obliged himself to give B P10,000 if B will marry C before B
reaches the age of 21.
◆ A is not liable anymore if B marries C at the age of 23 or
above.
◆ As soon as it has become indubitable that the event will not take place although
the time specified has not yet expired.
● Example: D obliged himself to give E P10,000 if E will marry F before E
reaches the age of 21.
◆ If E dies at the age of 20, without being married to F, the
obligation is extinguished because the condition is not
possible to take place anymore even if the specified time
has not yet expired.

9. Negative condition - The condition consists in the omission of an act.

➔ A condition characterized by an event not supposed to happen or something that must
not be done.

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

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

➔ Example: “A will give B P500 if B doesn't go out for a week.”

◆ Something should not be done for the obligation to arise.
➔ Obligation shall become effective and binding:
◆ From the moment the time indicated has elapsed without the event taking place
● Example: In the above example, if B didn’t go out after a week, the
obligation of A to give B P500 will arise.
◆ From the moment it has become evident that the event can not occur, although
the time indicated has not yet elapsed.
● Example: A is to give B P50,000 if B will not marry C on or before
October 1, 2023.
◆ If C dies on September 30, 2023 before B has married her,
then the obligation becomes effective on such date
because it is evident that the marriage will not take place
anymore.
➔ If no time is fixed, circumstances shall be considered to arrive at the intention of parties
◆ This rule may also be applied to a positive condition.

CONSTRUCTIVE FULFILLMENT

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

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 I. Constructive Fulfillment of Suspensive Condition
➔ Requisites:
◆ The condition is suspensive.
◆ The obligor actually prevents the fulfillment of conditions.
◆ He acts voluntarily.
➔ If the obligor has a purpose of preventing the fulfillment of the condition, he should not
be allowed to profit from his own fault or bad faith to the prejudice of obligee.
◆ Even if the obligor doesn’t act with malice or fraud, the condition shall be deemed
fulfilled if his purpose of preventing the obligation from happening has been
proven.
➔ Example: A promised to sell his land to B if B’s loan from a bank would be approved.
Later on, A decided not to sell his land, so he went to the bank and induced them not to
give B a loan.
◆ A is now liable to sell his land to B due to his voluntary act of preventing B to
have an approved loan.
II. Constructive Fulfillment of Resolutory Condition
➔ Art. 1186 applies to an obligation subject to a resolutory condition with respect to the
debtor who is bound to return what he has received upon the fulfillment of the obligation.
➔ Example: A obliges himself to allow B to occupy A’s house in Laguna as long as A is
assigned to work abroad. When B learned that A would be transferred to Laguna again,
he was able to induce the officer of the company to assign another person in place of A.
◆ The obligation of A is extinguished.
◆ Fulfillment of the resolutory condition was voluntarily prevented by B.
◆ Hence, B should vacate the house of A.

CLASSIFICATION OF CONDITIONS AS TO FORM:

10. Express condition - The condition is clearly stated.

11. Implied condition - The condition is merely inferred.

CLASSIFICATION OF CONDITIONS AS TO NUMBERS:

12. Conjunctive condition - There are several conditions and all must be fulfilled.
13. Disjunctive condition - There are several conditions and only one or some of them must be
fulfilled.

CLASSIFICATION OF CONDITIONS AS TO DIVISIBILITY:

14. Divisible condition - One that is capable of partial performance.

15. Indivisible condition - One that is not capable of partial performance based on the nature of
the obligations by law or by agreement of the parties.

RETROACTIVE EFFECTS

Article 1187. The effects of a conditional obligation to give, once the condition has been
fulfilled, shall retroact to the day of the constitution of the obligation. Nevertheless, when the
obligation imposes reciprocal prestations upon the parties, the fruits and interests during the
pendency of the condition shall be deemed to have been mutually compensated. If the

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

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

I. Retroactive effects of fulfillment of Suspensive condition

a. In obligation to give - Obligation to give subject to a suspensive condition becomes
demandable only upon the fulfillment of the condition.
● However, once the condition is fulfilled, its effects shall retroact the day when the
obligation was constituted because the condition is only an accidental element of
contract.
● An obligation can exist without being subject to a condition.
● Had the parties known beforehand that the condition would be fulfilled they would
have bound themselves under a pure obligation
➔ Obligation should be considered from the time it is constituted and not from the time the
condition is fulfilled.
b. In obligation to do or not to do - No fixed rule is provided.
● Courts are empowered by the use of sound discretion and bearing in mind the
intent of the parties, to determine, in each case, the retroactive effect of the
suspensive condition that has been complied with. ‘
● It includes the power to decide that the fulfillment of the condition shall have no
retroactive effect or from what date such retroactive effect shall take effect.

II. Retroactive effects as to fruits and interests in obligations to give

a. In reciprocal obligations - No retroactivity because the fruits and interests received
during the pendency of the condition are deemed to have been mutually compensated.
● The rule is necessary for purposes of convenience since the parties do not have
to render mutual accounting of what they have received.
○ Fruits here may refer to the natural, industrial, or civil fruits.
b. In unilateral obligations - There is also no retroactivity because they are gratuitous.
● The debtor receives nothing from the creditor. Thus, the fruits and interests
belong to the debtor.
○ Unless, from the nature and other circumstances of the obligation it
should be inferred that the intention of the person constituting the same
was different.

RIGHTS PENDING FULFILLMENT OF SUSPENSIVE CONDITION

Article 1188. The creditor may, before the fulfillment of the condition, bring the appropriate
actions for the preservation of his right.

The debtor may recover what during the same time he has paid by mistake in case of a
suspensive condition.

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 I. Rights of creditor - He may take or bring appropriate actions for the preservation of his right,
as the debtor may render nugatory (no importance) upon the happening of the condition.
➔ Creditors may go to the court to prevent the alienation or concealment of the property
the debtor has bound himself to deliver.
◆ Creditor may also have his right annotated on the title to the property in the
register of deeds.
II. Rights of debtor - He is entitled to recover what he has paid by mistake prior to the happening
of the suspensive condition.
➔ This right is granted to the debtor because the creditor may or may not be able to fulfill
the condition imposed and hence, it is not certain that the obligation will arise.
◆ Note that the payment before the fulfillment of obligation must be “by mistake”.
◆ Otherwise, the debtor is deemed to have impliedly waived the condition.
● In this case, he cannot recover what he has prematurely paid once the
suspensive condition is fulfilled.
➔ This is a case of Solutio indebiti, which is based on the idea that no one shall enrich
himself at the expense of another.

RULES IN CASE OF LOSS, DETERIORATION, OR IMPROVEMENT OF DETERMINATE THINGS

BEFORE THE FULFILLMENT OF SUSPENSIVE CONDITION

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

Example: “I will give you this car if you will pass the October CPA Licensure Examination.”

1. If the thing is lost without the fault of the debtor, the obligation shall be extinguished;
➔ If the car is lost or destroyed due to the lightning and thunderstorm, the obligation shall
be extinguished since the event happened without the fault of the debtor.

2. If the thing is lost through the fault of the debtor, he shall be obliged to pay damages; it
is understood that the thing is lost when it perishes, or goes out of commerce, or
disappears in such a way that its existence is unknown or it cannot be recovered;
➔ If the car was destroyed due to the reckless driving of the debtor, the creditor will be
entitled to demand damages
◆ Example: P600,000 value of the car.
➔ Kinds of Loss:
a. Physical Loss - When a thing perishes as when a house is burned and reduced
to ashes.
● Example: A car was destroyed due to the explosion
b. Legal Loss - [1] When a thing goes out of commerce (i.e., when it is
expropriated or [2] when a thing heretofore legal becomes illegal (e.g., selling of
marijuana in the Philippines).
c. Civil Loss - [1] When a thing disappears in such a way that its existence is
unknown (e.g. a particular cat has been missing for some time) or even if known,
it cannot be recovered, whether as a [2] matter of fact (e.g. earrings is dropped

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 from a ship at sea) or [3] of law (e.g. property is lost through prescription)

3. When the thing deteriorates without the fault of the debtor, the impairment is to be borne
by the creditor;
➔ The value of the car decreased from P600,000 to P500,000 as years passed by due to
the concept of depreciation.
◆ The creditor will have to suffer the deterioration or impairment in the amount of
P100,000.

4. If it deteriorates through the fault of the debtor, the creditor may choose between the
rescission of the obligation and its fulfillment, with indemnity for damages in either case;
➔ The value of the car decreased from P600,000 to P500,000 because of some broken
parts through the fault of the debtor.
◆ Creditor may choose between:
a. Rescission (or cancellation) of the obligation with damages - Debtor is
liable to pay P600,000, the value of the car before its deterioration plus
incidental damages, if any.
b. Fulfillment of obligation also with damages - Debtor is obliged to give the
car to creditor and pay P100,000 plus incidental damages, if any.

5. If the thing is improved by its nature, or by time, the improvement shall inure to the
benefit of the creditor;
➔ Due to the high demand of the model of the car, its market value increased from
P600,000 to P1,000,000.
◆ In this case, the creditor will be the one to get the benefit of the increase of the
market value.
◆ In as much as the creditor would suffer in case of deterioration of a car through a
fortuitous event.

6. If it is improved at the expense of the debtor, he shall have no other right than that
granted to the usufructuary.
➔ Usufruct - Right to enjoy the use and fruits of a thing belonging to another.
➔ Rights granted to the usufructuary:
◆ May make on the property held in usufruct.
● Example: Useful improvements or expenses for mere pleasure.
○ As long as he does not alter its form or substance.
○ He shall also have no right to be indemnified thereof.
○ He may, however, remove such improvements as long as it would
not damage the subject matter.
◆ The usufructuary may offset the improvements he may have made on the
property against any damages he have incurred to the property.
➔ Example: During the pendency of the condition, the debtor had the car painted and its
seat cover changed at his expense.
◆ The debtor would not be able to recover the car paint, for it will damage the car
once removed but he could use it to offset the damages he incurred.

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 ◆ However, the debtor may recover the seat covers, for it will not affect the car
once removed.

REQUISITES FOR APPLICATION OF ART. 1189:

➔ Art. 1189 only applies if:
a. The obligation is a real obligation;
b. The object is a specific or determinate thing;
c. The obligation is subject to a suspensive condition;
d. The condition is fulfilled; and
e. There is loss, deterioration, or improvement of the thing during the pendency of
the condition.

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

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

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

Effects of fulfillment of resolutory conditions

● In obligations to give - The parties are obliged to return to each other what they
have received under the obligation.
a. There is a return to the status quo. The effect of the fulfillment of the
condition is retroactive.
b. In case the thing to be returned is legally in the possession of a third
person who did not act in bad faith, the remedy of the party entitled to
restitution is against the other.
c. The obligation of mutual restitution is absolute. It applies to both things
received and to the fruits and interests as well.
■ The reason for the difference is because the fulfillment of the
resolutory condition extinguishes the obligation as though it had
never existed
■ The only possible exception is when the intention of the parties is
otherwise.
● In obligations to do or not to do - The court shall determine the retroactive
effect of fulfillment of resolutory condition as in the case where the condition is
suspensive
○ The courts in the exercise of discretion may even disallow retroactivity,
taking into account the circumstances of each case.

Applicability of Art. 1189 to party with obligations to return

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 ➔ The fulfillment of the resolutory condition converts the creditor into a debtor, and the
debtor into a creditor.
◆ Hence, the provisions of Art. 1189 in case of loss, deterioration, or improvement
of the thing is also applied.

RECIPROCAL OBLIGATIONS

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

The injured party may choose between the fulfillment and the rescission of the obligation, with
the payment of damages in either case. He may also seek rescission, even after he has
chosen fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing
of a period.

This is understood to be without prejudice to the rights of third persons who have acquired the
thing, in accordance with articles 1385 and 1388 and the Mortgage Law.

➔ Kinds of obligations according to the person obliged:

1. Unilateral - Only one party is obliged to comply.
2. Bilateral - Both parties are mutually bound to each other. They are debtors and
creditors of each other.
a. Reciprocal obligations - Arise from the same cause and in which each party is
the debtor and creditor of each other.
b. Non-reciprocal obligations - Those who do not impose simultaneous and
correlative performance on both parties.
● Performance of one party is not dependent upon the simultaneous
performance by the other.
➔ Remedies in Reciprocal Obligations
1. Choice of remedies - In case one of the obligors does not comply with what is
incumbent upon him.
a. Action for specific performance (fulfillment) of the obligation with damages; or
b. Action for rescission (cancellation) of obligation also with damages.
2. Remedy of rescission for non-compliance - Remedy granted is for breach by other
contracting party that violates the reciprocity between them.

Example: In contract of sale of a car between A and B, it was agreed that A, owner,
would deliver the car and other documents at the house of B on October 1, and B would
deliver the payment at the same place and date.
● If A does not comply:
○ B may choose between fulfillment and rescission of the obligation,
with the payment of damages in either case.
○ B may also seek rescission even after he has chosen fulfillment, if
the latter should become impossible.

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 ○ This is understood to be without prejudice to the rights of third
persons who have acquired the thing, in accordance with articles
1358 and 1388 and the Mortgage Law.

WHERE BOTH PARTIES ARE GUILTY OF BREACH

Article 1192. In case both parties have committed a breach of the obligation, the liability of
the first infractor shall be equitably tempered by the courts. If it cannot be determined which of
the parties first violated the contract, the same shall be deemed extinguished, and each shall
bear his own damages.

I. First infractor known - One party violated his obligation; followed by the other party.
➔ Liability of the first infractor should be equitably reduced since the other party also
violates his obligation.
II. First infractor cannot be determined - One party violated his obligation followed by the other,
but it cannot be determined which one of them was the first infractor.
➔ Contract shall be deemed extinguished and each shall bear his own damages.
➔ The court shall not provide remedy to either parties.

Example: In a contract of sale, the seller was delayed in delivering 10 sacks of rice. When it
was being delivered, the buyer was also delayed for the payment of the delivered items.
● Each party caused injuries to each other.
● Liability of the seller was equitably reduced because the buyer also incurred
some violation of his obligation.
● If ever that the first infractor cannot be determined, the court will not provide
remedy to either party.

SECTION 2 - OBLIGATIONS WITH A PERIOD

Article 1180. When the debtor binds himself to pay when his means permit him to do so, the
obligation shall be deemed to be one with a period, subject to the provisions of article 1197.

➔ Obligation with a period - One whose demandability or extinguishment depends on the arrival
of a period that is certain to come.
◆ If a condition is a future and uncertain event, period is a future and certain event.
◆ There is a day certain where the obligation will arise or terminate.
● It may also not be known when (e.g. death of a person).
➔ When duration of period depends upon the will of debtor:
a. The debtor promises to pay when his means permits him to do so - In this case,
what depends upon the debtor’s will is not whether he should pay or not for indeed he
binds himself to pay.
● What is left only to his will is the duration of the period
● If the parties cannot agree as to specific time for payment, court shall fix the
same on the application of either party.
b. Other cases - As when debtor finds himself to pay:
● “Little by little”, “ASAP”, “from time to time”

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 ● “At any time I have the money”
● “In partial payments.”
● “When I am in a position to pay.”

Period and condition distinguished

Condition Period

As to fulfillment: Events that may or may Event that must necessarily come,
not happen. at a date known beforehand, or at
a time that can’t be determined.

As to time: Future or to a past event Always refer to the future.

unknown to parties.

Ast o influence on the Causes an obligation to Merely fixes the time for
obligation: arise or cease. efficaciousness of an obligation.

As to will of the debtor: A suspensive condition A period that depends upon the
that solely depends upon will of the debtor authorizes the
the will of the debtor is court to fix its duration.
considered as void.

As to retroactive effects: The happening of a Unless there is an agreement to

condition has a retroactive the contrary, arrival of a period
effect. does not have retroactive effect.

Article 1193. Obligations for whose fulfillment a day certain has been fixed, shall be
demandable only when that day comes.

Obligations with a resolutory period take effect at once, but terminate upon arrival of the day
certain.

A day certain is understood to be that which must necessarily come, although it may not be
known when.

If the uncertainty consists in whether the day will come or not, the obligation is conditional, and
it shall be regulated by the rules of the preceding Section.

➔ Example: “I will pay you P14,000 on Dec. 31, 2023.

◆ Obligation will only be demandable when the date is already Dec. 31, 2023
➔ Example: “I will give you P400 when A dies.”
◆ The day must necessarily come since A is a mortal human, although it may not be
known when.
➔ Kinds of Period:
1. Suspensive Period or Ex Die - Period with suspensive effect or obligation becomes
demandable upon the arrival of the period
● Example: “I will give you P500 on Jan. 1, 2024.”
“I will pay you when my means permits me to do so”

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 2. Resolutory Period or In Diem - Period with a resolutory effect or obligation is
demandable upon perfection but extinguished upon lapse of the period.
● Example: “:I will give you a monthly allowance of P500 until you turn 18.”
➔ Other kinds of Period
(As to source)
3. Legal period - Period that is fixed by law.
4. Conventional or voluntary period - Period that is fixed by parties.
➔ (As to definiteness)
5. Definite period - When it is fixed or it is known when it will come.
6. Indefinite period - When it is not fixed or it is not known when it will come.
● When the period is not fixed but a period is intended, the courts are usually
empowered by law to fix the same.

RULES ON LOSS, DETERIORATION, OR IMPROVEMENT OF A PERIOD:

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

PAYMENT BEFORE ARRIVAL OF PERIOD.

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

➔ Art. above implies only obligations to give. It is similar to the provisions of Art. 1188, par.2, which
allows the recovery of what has been paid by mistake before the fulfillment of a suspensive
period. This is also where the concept of Solutio Indebiti can be seen.

➔ Under the former provision, the debtor could only recover the fruits or interests but not the thing
or sum given or paid in advance once the period has arrived.
◆ This rule was deemed unjust and contrary to the manifest intention of the parties
➔ Example: A owes B P5,000, which was supposed to be paid on December 31, 2024. By
mistake, A paid B in December this year.
◆ Assuming that today is June 30, A can still recover the P5,000 (thing) and the P500
(interest of 10% for ½ year), but once the debt has already matured, A can only recover
the P600 (interest).
➔ No Recovery in Personal Obligations - Art. 1195 does not apply in personal obligations
because it is physically impossible to recover what has been rendered or what has not been
done.

PRESUMPTION AS TO BENEFIT OF PERIOD

Article 1196. Whenever in an obligation a period is designated, it is presumed to have been

established for the benefit of both the creditor and the debtor, unless from the tenor of the

25
 same or other circumstances it should appear that the period has been established in favor of
one or of the other.

➔ It is presumed that the benefit of the both parties have been considered when establishing a
period.
◆ Unless, it should appear that the period has been established in favor of one or of the
other
➔ Example: The P5,000 debt is payable on December 31, 2023.
◆ Here, both of the parties benefited from the period. The debtor cannot be compelled to
perform, and the creditor cannot be compelled to accept the performance, before the
period expires.
◆ The P5,000 debt is payable on or before December 31, 2023.
● Period is on the benefit of the debtor. He cannot be compelled to perform his
obligation until the period expires (“on”), but he may choose to perform such
obligation before the expiration of the period. (“on or before”)
◆ The P5,000 debt is collectible on or before December 31, 2023.
● Period is for the benefit of the creditor. He cannot be compelled to accept the
performance until the period expires (“on”), but he may choose to accept or
demand such performance before the expiration of the period. (“on or before”)

INSTANCES WHEN THE COURT MAY FIX A PERIOD

Article 1197. If the obligation does not fix a period, but from its nature and the circumstances
it can be inferred that a period was intended, the courts may fix the duration thereof.

The courts shall also fix the duration of the period when it depends upon the will of the debtor.

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

➔ Juridical Period - When the court is the one who fixed the period.
➔ Contractual Period - When the provision of the contract of the parties is the one who fixed the
period.
➔ Two cases when a court is authorized to fixed a duration of a period
1. No period is fixed but a period was intended - Obligation does not fix a period but
from its nature and circumstances, it can be inferred that a period was intended.
● Example: A is obliged to construct the house of B. However, no period was
indicated in the agreement as to when A must finish the construction, but it is
clear that a period was intended.
○ B may go to the court and ask it to fix the duration of the agreement.
2. The duration of the period solely depends upon the will of the debtor - As stated on
the Art. 1180, when the debtor binds himself to pay when his means to do so, or other
cases, such as little by little and ASAP.

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WHEN THE OBLIGATION CAN BE DEMANDED BEFORE LAPSE OF A PERIOD

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

1. When after the obligation has been contracted, he becomes insolvent, unless he gives a
guaranty or security for the debt
➔ Since the debtor does not have any sufficient property, for the protection of the creditor,
the obligation will become due and demandable. Unless, the debtor provides a security
such as guarantee or by a pledge or mortgage by such a third person.
2. When he does not furnish to the creditor the guaranties or securities which he has
promised;
➔ Example: A borrowed P500 from B promising to pledge his necklace to B to secure the
debt within one month. A gave B one year to pay the loan. However, B failed to pledge
his necklace within the period agreed upon
◆ In this case, A can demand immediate payment even before the agreed due date
thereof.
3. When by his own acts he has impaired said guaranties or securities after their
establishment, and when through a fortuitous event they disappear, unless he
immediately gives new ones equally satisfactory;
4. When the debtor violates any undertaking, in consideration of which the creditor agreed
to the period;
5. When the debtor attempts to abscond.
➔ If the debtor has been disposing of all of his property with an attempt to leave his place
of business to escape his creditors, such creditors can demand immediate payment of
his debts even if the maturity is not yet due.

KINDS OF OBLIGATION ACCORDING TO THE NO. OF PRESTATIONS

1. Simple - There is only one prestation.

● A promised himself to deliver a sack of rice to B.
2. Compound - There are several prestations.
● This may be:
a. Conjunctive - Several obligations are due and all of them must be performed.
○ A is to give B a specific car, specific laptop, and specific dog.
b. Distributive or Disjunctive - Several obligations are due, but only one or some
may be performed.
○ Example: Alternative and Facultative Obligation

SECTION 3 - ALTERNATIVE OBLIGATIONS

Article 1199. A person alternatively bound by different prestations shall completely perform
one of them.

The creditor cannot be compelled to receive part of one and part of the other undertaking.

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 ➔ Alternative Obligation - One where several prestations are due but the complete performance
of one of them is sufficient to extinguish the obligation.
◆ Only one must be given to the creditor. Debtor can’t give any part of a thing, and another
part of another thing he promised.
➔ Example: I will give you a specific cat, or a specific dog, or a specific cow.

GENERAL RULE:

Article 1200. The right of choice belongs to the debtor, unless it has been expressly granted to
the creditor.

The debtor shall have no right to choose those prestations which are impossible, unlawful or
which could not have been the object of the obligation.

➔ The right to choose the presentation generally belongs to the debtor. Unless, it has been
expressly granted to the creditor.
➔ Example: A will give B a specific watch, or a specific phone, or a specific illegal drug.
◆ Here, B does not have any right to choose because the right of choice belongs to the
debtor. Unless, it has been expressly granted to him.
◆ A could not also choose to give a specific illegal drug since it is unlawful.

COMMUNICATION OF NOTICE THAT CHOICE HAS BEEN MADE

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

➔ Effect of notice - Until the choice is made and communicated, the obligation remains
alternative.
➔ When obligation ceases to be alternative and becomes a simple obligation:
1. When the debtor has communicated his choice to the creditor.
2. When among the prestations, where the right of choice is given to the debtor, only one is
practicable.
3. When the creditor has communicated his choice to the debtor, if the creditor has been
granted the right of choice.

EFFECT WHEN ONLY ONE IS PRACTICABLE

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

➔ When among the prestation, only one is practicable, the debtor has no right of choice anymore.
Thus, making the obligation into a simple one.

WHEN DEBTOR MAY RESCIND CONTRACT

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

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 ➔ Example: A borrowed P5,000 from B. It was agreed that instead of P5,000, A could deliver item
one, item two, or item three.
◆ If through fault of B, item one is destroyed, A may rescind the contract if he wants.
● In case of rescission, B must return the amount of the value of time one plus
damages.

EFFECT OF LOSS OF OBJECTS OF OBLIGATION

Article 1204. The creditor shall have a right to indemnity for damages when, through the fault
of the debtor, all the things which are alternatively the object of the obligation have been lost,
or the compliance of the obligation has become impossible.

The indemnity shall be fixed taking as a basis the value of the last thing which disappeared, or
that of the service which last became impossible.

Damages other than the value of the last thing or service may also be awarded.

➔ Articles 1203 and 1204 apply when the right of choice belongs to the debtor.
1. Some of the objects have been lost or become impossible - The debtor is not liable for any
damages, even if the thing has been lost through a fortuitous event or negligence, but he still
has an obligation to perform since he still has the right of choice among the remaining objects.
2. All of the objects have been lost or become impossible
Right of choice is given to the Right of choice is given to the
debtor: creditor:

Lost or become impossible The creditor has the right to
through the debtor’s fault indemnify for damages,
taking the value of the last
item lost or service that
became impossible as the
basis.
The creditor has the right to
indemnify for damages,
taking the value of any item
lost or service that became
impossible as the basis.

Lost or become impossible Obligation is extinguished Obligation is extinguished

through fortuitous event

◆ Note: The loss of the last item or impossibility of the last service may be looked upon to
check whether the debtor is liable or not.

Different Kinds of Obligations

When right of choice belongs to creditor

Article 1205. When the choice has been expressly given to the creditor, the obligation shall cease to
be alternative from the day when the selection has been communicated to the debtor.
Until then the responsibility of the debtor shall be governed by the following rules:
1. If one of the things is lost through a fortuitous event, he shall perform the obligation by
delivering that which the creditor should choose from among the remainder, or that which
remains if only one subsists;
2. If the loss of one of the things occurs through the fault of the debtor, the creditor may claim

29
 any of those subsisting, or the price of that which, through the fault of the former, has
disappeared, with a right to damages;
3. If all the things are lost through the fault of the debtor, the choice by the creditor shall fall upon
the price of any one of them, also with indemnity for damages.
The same rules shall be applied to obligations to do or not to do in case one, some or all of the
prestations should become impossible.
➔ Rules in case of loss before creditor has made choice
◆ When a thing is lost through a fortuitous event. Creditor can choose from what is
remaining.
◆ When a thing is lost through debtor’s fault. Creditor may choose what is remaining with a
right to damages or the price of what was lost with a right to damages.
◆ When all is lost through the debtor’s fault. Creditor can demand payment from any of
what is lost along with the right to indemnity for damages.
◆ When all is lost through a fortuitous event. The obligation is extinguished.

Facultative obligation

Article 1206. When only one prestation has been agreed upon, but the obligor may render another in
substitution, the obligation is called facultative.

The loss or deterioration of the thing intended as a substitute, through the negligence of the obligor,
does not render him liable. But once the substitution has been made, the obligor is liable for the loss
of the substitute on account of his delay, negligence or fraud.
➔ Facultative obligation is an obligation where only one prestation is due but the debtor may
render another as a substitute.
➔ Effect of loss before substitution
◆ If the principal thing is lost due to a fortuitous event, the obligation is extinguished. If it is
lost due to the debtor’s fault, the debtor is liable for damages.
◆ If the substitution is lost whether through a fortuitous event or the debtor’s fault, the
debtor is not liable for damages.
➔ Effect of loss after substitution
◆ If the principal thing is lost due to a fortuitous event or the debtor’s fault, the debtor is not
liable because it is no longer due.
◆ If the substitution is lost due to a fortuitous event, the obligation is extinguished. If it is
lost due to the debtor’s fault, the debtor is liable for damages.

Joint and solidary obligations

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

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

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 ➔ Collective obligation has two or more debtors and/or creditors. May be joint or solidary
obligation.
◆ Joint obligation is an obligation wherein debtors are only liable for their proportionate
portion of the debt and creditors are only entitled to their proportionate share of the
credit.
◆ Solidary obligation is an obligation wherein each debtor is bound to render the whole
obligation and each creditor has the right to demand payment from any of the debtors in
whole.
➔ Kinds of solidarity obligation
◆ Passive solidarity is solidarity on the side of the debtor, wherein any one of them can be
made liable for the fulfillment of the whole obligation.
◆ Active solidarity is solidarity on the side of the creditors wherein any one of the creditors
can demand the fulfillment of the whole obligation.
◆ Mixed solidarity is solidarity on both the debtor and creditor side.

Joint indivisible obligations

Article 1209. If the division is impossible, the right of the creditors may be prejudiced only by their
collective acts, and the debt can be enforced only by proceeding against all the debtors. If one of the
latter should be insolvent, the others shall not be liable for his share.
➔ Article 1209 refers to joint indivisible obligations.
➔ An obligation is indivisible when the object is not physically divisible into different parts or
portions. Its compliance must be in whole.
◆ For example, an indivisible obligation may be to deliver a car. The debtors cannot deliver
only portions of the car or only fulfill a portion of the obligation.

Difference of indivisible and solidary obligations

Article 1210. The indivisibility of an obligation does not necessarily give rise to solidarity. Nor does
solidarity of itself imply indivisibility.
➔ Indivisibility refers to prestation while solidarity refers to the juridical tie.
➔ In indivisible obligations, only the debtor is guilty of breach of obligation is liable for damages
while in solidarity obligations, all of the debtors are liable for the breach of the obligation
committed by a debtor.
➔ Indivisibility can exist although there is only one debtor and one creditor, while solidarity must
have at least two debtors or two creditors.
➔ In indivisible obligations, others are not liable in case of insolvency of one debtor while in
solidarity obligations, the other debtors are proportionately liable.

Solidarity does not mean having the same stipulations

Article 1211. Solidarity may exist although the creditors and the debtors may not be bound in the
same manner and by the same periods and conditions.
➔ Uniform- when the parties are bound by the same stipulations.
➔ Non- uniform or varied- when the parties are not bound by the same stipulations.

Mutual agency among solidary creditors

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 Article 1212. Each one of the solidary creditors may do whatever may be useful to the others, but
not anything which may be prejudicial to the latter.
➔ A solidary creditor may do any act beneficial or useful to the others but he cannot perform any
act prejudicial to them. If he performs such an act and as a result the obligation is extinguished,
he shall be responsible to the others for damages. As far as the debtor or debtors are
concerned, the act shall be valid and binding.
➔ The rule is based on the theory of mutual agency among the solidary creditors. A joint creditor
cannot act in representation of the others.

Assignment of rights

Article 1213. A solidary creditor cannot assign his rights without the consent of the others.
➔ A creditor cannot assign his rights to others without the consent of fellow creditors. The reason
is that the assignee may not have confidence or trust of the original solidary creditors. However,
is the assignment is given to a co-creditor, consent is not necessary

Payment to creditors

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

Extinguishment of obligation made by a solidary creditor.

Article 1215. Novation, compensation, confusion or remission of the debt, made by any of the
solidary creditors or with any of the solidary debtors, shall extinguish the obligation, without prejudice
to the provisions of Article 1219.

The creditor who may have executed any of these acts, as well as he who collects the debt, shall be
liable to the others for the share in the obligation corresponding to them.
➔ Novation, compensation, confusion, and remission are causes of extinguishment. The creditor
who performs any of these acts should be liable to the other creditors for their corresponding
shares considering that such acts are prejudicial to them.

Right of creditor to proceed against any solidary debtor

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

Payment of solidary debtor

Article 1217. Payment made by one of the solidary debtors extinguishes the obligation. If two or
more solidary debtors offer to pay, the creditor may choose which offer to accept.

He who made the payment may claim from his co-debtors only the share which corresponds to each,
with the interest for the payment already made. If the payment is made before the debt is due, no

32
 interest for the intervening period may be demanded.

When one of the solidary debtors cannot, because of his insolvency, reimburse his share to the
debtor paying the obligation, such share shall be borne by all his co-debtors, in proportion to the debt
of each.
➔ Effects of payment by a solidary debtor
◆ Between the solidary debtors and creditor(s). Payment made by one of the solidary
debtors extinguishes the obligation. However, the creditor for his protection is given the
right to choose which offer to accept if two or more solidary debtors offer to pay.
◆ Among the solidary debtors. After payment of the debt, the paying solidary debtor can
demand reimbursement from his co-debtors for their proportionate share with (legal)
interest only from the time of payment.
◆ Among the solidary creditors. The receiving creditor is jointly liable to the others for their
corresponding shares.

Effect of payment by a solidary debtor when obligation has been prescribed or became illegal.

Article 1218. Payment by a solidary debtor shall not entitle him to reimbursement from his
co-debtors if such payment is made after the obligation has been prescribed or become illegal.
➔ A solidary debtor is ordinarily entitled to reimbursement from his co-debtors except when the
obligation has been prescribed or becomes illegal because the obligation has essentially
extinguished.

Remission made by a creditor

Article 1219. The remission made by the creditor of the share which affects one of the solidary
debtors does not release the latter from his responsibility towards the co-debtors, in case the debt
had been totally paid by any of them before the remission was effected.
➔ If the waiver or remission is made before payment, solutio indebiti arises. Conversely, when
payment is made before waiver or remission, the waiver or remission has no effect since the
obligation has already been fulfilled prior to remission.

Remission of whole obligation

Article 1220. The remission of the whole obligation, obtained by one of the solidary debtors, does
not entitle him to reimbursement from his co-debtors.
➔ Remission is basically gratuitous, or a donation. There is no payment made to the creditor. The
above article only applies when the whole obligation is remitted.

Rules in case thing has been lost or prestation has become impossible

Article 1221. If the thing has been lost or if the prestation has become impossible without the fault of
the solidary debtors, the obligation shall be extinguished.

If there was fault on the part of any one of them, all shall be responsible to the creditor, for the price
and the payment of damages and interest, without prejudice to their action against the guilty or
negligent debtor.

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 If through a fortuitous event, the thing is lost or the performance has become impossible after one of
the solidary debtors has incurred in delay through the judicial or extrajudicial demand upon him by
the creditor, the provisions of the preceding paragraph shall apply.
➔ If the thing is lost through a fortuitous event before delay, the obligation is extinguished.
➔ If the is lost due to fault of a solidary debtor before or after delay, refer to paragraph two of
article.

Defenses of solidary debtor

Article 1222. A solidary debtor may, in actions filed by the creditor, avail himself of all defenses
which are derived from the nature of the obligation and of those which are personal to him, or pertain
to his own share. With respect to those which personally belong to the others, he may avail himself
thereof only as regards that part of the debt for which the latter are responsible.
➔ Example of defense derived from the nature of the obligation. Obligation has prescribed or
become illegal.
➔ Example of defense personal to him. The debtor is a minor or was insane and could not have
reasonably entered into the obligation.
➔ Example of defense personal to other solidary debtors. If from the previous example, the minor
has a co-debtor. The co-debtor may use the defense of the co-debtor being a minor to only be
liable for his portion.

Divisible and indivisible obligations

Article 1223. The divisibility or indivisibility of the things that are the object of obligations in which
there is only one debtor and only one creditor does not alter or modify the provisions of Chapter 2 of
this Title.
➔ Divisible obligations can be partially performed, while indivisible obligations cannot.

Article 1224. A joint indivisible obligation gives rise to indemnity for damages from the time anyone
of the debtors does not comply with his undertaking. The debtors who may have been ready to fulfill
their promises shall not contribute to the indemnity beyond the corresponding portion of the price of
the thing or of the value of the service in which the obligation consists.
➔ If any one of the debtors does not comply with what he is bound in a joint indivisible obligation,
the obligation is transformed into one for damages. The creditor has no right for specific
performance or rescission because he has no cause of action against the other debtors who are
willing to fulfill the obligation.

Article 1225. For the purposes of the preceding articles, obligations to give definite things and those
which are not susceptible of partial performance shall be deemed to be indivisible.

When the obligation has for its object the execution of a certain number of days of work, the
accomplishment of work by metrical units, or analogous things which by their nature are susceptible
of partial performance, it shall be divisible.

However, even though the object or service may be physically divisible, an obligation is indivisible if
so provided by law or intended by the parties.

In obligations not to do, divisibility or indivisibility shall be determined by the character of the

34
 prestation in each particular case.

Obligations with a penal clause

Article 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for
damages and the payment of interests in case of noncompliance, if there is no stipulation to the
contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of
fraud in the fulfillment of the obligation.

The penalty may be enforced only when it is demandable in accordance with the provisions of this
Code.
➔ Difference of principal and accessory obligations.
◆ Primary obligation can stand on itself and does not depend on another obligation to be
valid or exist.
◆ Accessory obligation cannot stand by itself and is attached to a principal obligation.
➔ Obligation with a penal clause contains an accessory obligation to pay an established indemnity
in case of breach of the principal prestation, in order to induce its fulfillment.
➔ Penal clause is an accessory undertaking that is attached to an obligation to assume greater
liability in case of breach. It is generally undertaken to insure their performance by making a
deterrent, to substitute a penalty for the indemnity for damages and the payment of interests, or
to punish the debtor.

Rules regarding penal clauses on the debtor and creditor side

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

Proof of damages under obligations with penal clauses

Article 1228. Proof of actual damages suffered by the creditor is not necessary in order that the
penalty may be demanded.
➔ The creditor only has to prove that there is a violation of the obligation by the debtor. One of the
reasons for the existence of penal clauses is to avoid such processes and difficulties involved in
litigations.

Reduction of the penalty

Article 1229. The judge shall equitably reduce the penalty when the principal obligation has been
partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty
may also be reduced by the courts if it is iniquitous or unconscionable.
➔ Iniquitous means being grossly unfair or morally wrong, while unconscionable means being not
right or reasonable.

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 Nullity of the penal clause

Article 1230. The nullity of the penal clause does not carry with it that of the principal obligation.
The nullity of the principal obligation carries with it that of the penal clause.
➔ The accessory generally follows the principal. Thus, if the principal is void, the penal clause is
also void. Furthermore, the injured party may recover indemnity for damages in case of violation
or non-performance. It is as if the penalty never existed. Conversely, if the penal clause is void,
the principal still remains valid and demandable.

MODULE 4: Extinguishment of Obligations

Article 1231. Obligations are extinguished by:

1. Payment or performance;
2. Loss of the due;
3. The condonation or remission of debt;
4. The confusion or merger of the rights of the creditor and debtor;
5. Compensation;
6. Novation

Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of a

resolutory condition, and prescription, are governed elsewhere in this Code.

The enumeration is NOT exclusive. Other causes are:

1. Renunciation or waiver by the obligee or creditor;

2. Compromise between the parties;
3. Arrival of the resolutory term or period;
4. Death of one of the contracting parties in purely personal obligations;
5. The will of one of the contracting parties in certain contracts;
6. The agreement of both contracting parties/mutual assent or dissent;
7. Impossibility of fulfillment;
8. Happening of a fortuitous event;
9. Change in civil status in some cases.

Payment or Performance

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

◆ Under the Civil Code, you are considered paid if you have fulfilled the necessary actions
required by an obligation. Once you have completed your obligation, you are deemed to
have met your payments.

◆ Payment is not limited to a sum of money. It includes other ways to perform the
obligation such as the giving of a thing (other than money), the doing of an act, or not
doing of an act.

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 ◆ Thus, if the obligation is to paint a portrait, payment consists in the performance of the
service. Or if the obligation is to deliver a certain ring, payment consists in the delivery of
the thing.

Kinds of Payment or Performance

1. Voluntary or Normal - when the debtor complies exactly in the manner agreed upon;
2. Involuntary or Abnormal - when the obligation is not complied with voluntarily by the
debtor, fulfillment is forced on him by means of judicial proceeding either by complying
with the prestation in the form agreed upon or by an equivalent performance as in the
payment of damages.

Characteristics of Payment

1. Integrity - means the obligation must be completely and faithfully complied with
2. Identity - The very thing or service due must be delivered or performed
◆ Exceptions to Identity:
● Where the obligation is facultative, that is, the debtor may substitute
another in lieu of that which is promised.
● Dation in Payment – Where the debtor may deliver a different thing or
perform a different prestation.
● Indivisibility - The creditor is entitled to full compliance and the debtor
must fully comply with the prestation.

How Payment Must Be Made

1. There must be delivery of the thing or rendition of the service that was contemplated.

Article 1244. The debtor of a thing cannot compel the creditor to accept a different one
although the latter may be of the same value as, or more valuable than, that which is due.

In obligations to do or not to do, an act or forbearance cannot be substituted by another act

or forbearance against the obligee’s will.

➔ The first paragraph refers to a real obligation to give a determinate thing.

➔ The second paragraph refers to a personal obligation to do or not to do.
➔ You cannot force someone to accept something new that you are offering because you
made a specific promise. The creditor still has the authority to decide whether they will
accept it or not.
◆ Example: X obliged himself to deliver to Y a specific car. X cannot require Y to
accept another car although it commands a higher price; neither can X require Y
to deliver another car belonging to X although it can be sold only at a much lower
price.

Article 1246. In obligations to give a generic thing whose quality and circumstances have
not been stated, the creditor cannot demand a thing of superior quality. Neither can the
debtor deliver a thing of inferior quality. The purpose of the obligation and other

37
 circumstances shall be taken into consideration.

Indeterminate or Generic Things

◆ The kind, quantity and quality of the thing must be agreed upon by parties.
◆ If there is disagreement between the debtor and the creditor as to the quality of the thing
delivered, the court should decide whether it complies with the obligation, taking into
consideration the purposes and the circumstances of the obligation
i. Example: In a restaurant, you ordered 10 live chickens. If the type and quality of
the chickens to be provided are not specified, the buyer or creditor cannot
demand premium-quality chickens because those are considered expensive.
Conversely, the seller or debtor cannot provide lower-quality chickens, such as
those that are sick or of poor quality, as it would not meet the reasonable
expectation of the buyer.

➔ If the obligation is a monetary obligation, the payment must be in legal tender.

◆ Legal tender is the money or currency which the debtor may compel his creditor to
accept in payment of his debt, whether public or private.
◆ Payment of debts in money must be made in the currency which is legal tender in the
Philippines. However, the parties may stipulate that the payment may be made in
currency other than Philippine legal tender at the time of payment (RA No. 8183).
◆ Under Monetary Board Resolution No. 862 dated July 6, 2006, in relation to Section 52
of the New Central Bank Act, the following are legal tender in the Philippines:
i. PHP1,000 for denominations of 1 peso, 5 peso, 10 peso coins.
ii. PHP100 for denominations of 1 sentimo, 5 sentimo, 10 sentimo, and 25 sentimo.
iii. All bills are legal tender up to any amount.
iv. Negotiable paper or mercantile documents are NOT legal tender.

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

Extraordinary Inflation and Deflation

◆ Inflation - A general increase in prices coinciding with a fall in the real value of money.
◆ Deflation - A general decline in the price of goods and services.
◆ Extraordinary Inflation or Deflation - that which is unusual or beyond the common
fluctuations in the value of the currency, which the parties could not have reasonably
foreseen or which was manifestly beyond their contemplation at the time when the
obligation was constituted.
◆ When the currency is devalued in terms beyond what could have been reasonably
foreseen by the parties, the doctrine of unforeseen risk can be applied, and the effects of
the devaluation should not be borne by the creditors alone.
◆ There must be a declaration of such extraordinary inflation or deflation by the BSP.

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 Article 1249. The payment of debts in money shall be made in the currency stipulated, and
if it is not possible to deliver such currency, then in the currency which is legal tender in the
Philippines.

The delivery of promissory notes payable to order, bills of exchange, or other mercantile
documents shall produce the effect of payment only when they have been encashed, or
when through the fault of the creditor they have been impaired.

In the meantime, the action derived from the original obligation shall be held in the
abeyance.

➔ The general rule regarding the currency for debt payment is that it should be as agreed
upon (not necessarily in Philippine pesos). If it's not possible to deliver the agreed
currency, then Philippine pesos will be used.
➔ A check is not a legal tender and, therefore, cannot constitute a valid tender of payment.
Since a negotiable instrument is only a substitute for money, and not money, the delivery
of such an instrument does not by itself operate as payment. The obligation is not
extinguished and remains suspended until the payment by commercial document is
actually realized.

General Rule:

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

➔ Debt is Considered Paid:

1. Obligation to give - when debtor or obligor has completely delivered the thing
which he had obligated himself to deliver.
2. Obligation to do - when the obligor has completely rendered the service which
he had obligated himself to render.
3. Obligation not to do - obligor has completely refrained from doing that which he
had obligated himself not to do.

Exceptions:

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

Substantial Performance

◆ This is an exception to integrity of payment.

◆ There is an attempt in good faith to perform his contract, but through oversight,
misunderstanding or any excusable neglect, failed to completely perform in
certain negligible respects and the obligee can be adequately compensated by
way of damages.

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 ◆ Once substantial performance is shown, the other party may be held liable under
his obligation and he cannot require the performance of the residue as a
condition precedent to his liability. He must perform his part and rely on his claim
for damages to compensate the portion not completely performed
● Example: X obliged himself to deliver 500 sacks of rice to Y. However,
despite diligent efforts on his part, X was able to deliver only 400 sacks
because of rice shortage.

Take note that X wants to comply with his obligation to deliver the entire
500 bags but he could not do so for reasons beyond his control.

Under Article 1234, X can recover as though there had been complete
delivery less the price of the 100 sacks. X must show, however, that he
attempted in good faith to comply with his obligation.

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

Incomplete or Irregular Performance

◆ This is also an exception to integrity of payment.

◆ Requisites:
● Incomplete/irregular performance by the debtor;
● Creditor accepts the performance; and
● No protest or objections from the creditor.
◆ Obligee may waive his right to insist on complete performance.
◆ To constitute waiver, there must be an intentional relinquishment of a known right. There
must have been acceptance of the defective performance with actual knowledge of the
incompleteness or defect.
● Example: X agreed to paint the house of Y. According to their stipulation, X would
use a particular brand of paint.

If Y accepted the performance of X, knowing that the paint used was another
brand and without expressing any protest or objection, the obligation is deemed
fully complied with.

Unlike in Article 1234, where there is substantial performance, X is not liable for
damages that may be suffered by Y. The reason is that the performance is
considered complete or regular.

When Partial Payments May Be Made

General Rule:

Article 1248. Unless there is stipulation to that effect, the creditor cannot be compelled to
partially receive the prestations in which the obligations consist. Neither may the debtor be
required to make partial payments.

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 However, when the debt is in part liquidated and in part unliquidated, the creditor may
demand and the debtor may effect the payment of the former without waiting for the
liquidation of the latter.

➔ Indivisibility is presumed.
➔ The creditor who refuses to accept partial prestations does not incur delay or mora
accipiendi, except when there is abuse of right or if good faith requires acceptance
◆ Example: X is indebted to Y for P10,000 due today. X is required to pay Y
P10,000 today. He cannot compel Y to accept partial payment unless otherwise
stipulated.

Exceptions:

1. When there is an agreement to that effect (Art. 1248). The payment must still be made in
full at some future time in accordance with the agreement to extinguish the obligation.
2. When the debt is in part liquidated (i.e., the amount is fixed) and in part unliquidated, the
creditor may demand and the debtor may effect the payment of the former without
waiting for the liquidation of the latter (Art. 1248). The unliquidated part, once it is finally
determined, must also be paid, to extinguish the obligation.

Who Must Make the Payment

◆ Payment must be made by the debtor who must possess the following:
● Free disposal of the thing due - the thing to be delivered must not be subject to
any claim or lien or encumbrance (e.g. mortgage, pledge) of a third person.
● The capacity to alienate the thing. - the person is not incapacitated to enter
into contracts and for that matter, to make a disposition of the thing due.

➔ Effects if not complied with:

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

➔ Payor must be the owner of the thing which he delivers in payment, otherwise, he cannot
transfer legitimate ownership to the receiving creditor.
◆ Example: X, 17, obliged himself to deliver to Y a certain diamond ring without the
consent of his parents.

Even if the ring is delivered by X to Y, that delivery or payment is not valid

because of X’s incapacity to alienate it.

As such, the parents of X shall have the right of recovering the ring from Y.

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

41
Payment by a Third Person

General Rule:

Article 1236. The creditor is not bound to accept payment or performance by a third person
who has no interest in the fulfillment of the obligation, unless there is a stipulation to the
contrary,

Whoever pays for another may demand from the debtor what he has paid, except that if he
paid without the knowledge or against the will of the debtor, he can recover only insofar as
the payment has been beneficial to the debtor.

➔ The creditor cannot be compelled to accept performance by a third person who is not
bound under the obligation, because whenever a third person pays there is modification
of the prestation that is due.

Exceptions:

1. When there is a stipulation to that effect; or

2. When the third person has an interest in the fulfillment of the obligation such as a
guarantor or a co-debtor (Art. 1236).

Rights of a Third Person who Makes the Payment

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

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

1. Payment with knowledge and consent of the debtor:

a. He can recover what he has paid (Art. 1236); and
b. He is entitled to be subrogated in the rights of the creditor such as those arising
from mortgage, guaranty, or penalty (Art. 1237).
2. Payment without the knowledge or against the will of the debtor:
a. He can recover only insofar as the payment has been beneficial to the debtor. He
is not entitled to subrogation (Arts. 1236 and 1237).
3. Payment by a third person who does not want to be reimbursed
a. The payment shall be deemed to be a donation which requires the debtor’s
consent.
b. If the debtor does not consent, the payment shall nevertheless be valid to the
creditor who has accepted it (Art. 1238). In such a case, the third person can only
recover insofar as the payment has been beneficial to the debtor; he is also not
entitled to subrogation (Arts. 1236 and 1237).

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 ➔ If a third person made payment that is not due – his remedy would be against the person who
received the payment under such conditions, and not the debtor who did not benefit from the
payment.
➔ If the debtor refuses to give consent, there will be no donation but the payment will be
considered as a valid payment to the creditor in case the latter has accepted the same.
➔ Effect of refusal of debtor to accept donation and payment itself – make payment fall under the
same rule as payment made by third person and he is entitled to be reimbursed to whatever has
been beneficial to the debtor.

Reimbursement vs. Subrogation

Reimbursement Subrogation

Third person merely has the right to be Third person has the right to be refunded
refunded to the amount which the debtor has for the entire amount paid and to the
benefited, without the right to the guarantees guarantees and securities of the original
and securities of the original obligation. obligation.

After payment is made, obligation is There is no real extinction of obligation,

extinguished but only a change of creditor.

To Whom Shall Payment be Made

1. To the creditor (the person in whose favor the obligation has been constituted);
2. To the creditor’s successors in interest, such as his heirs or assigns; or
3. To any person authorized to receive payment (authorized by the creditor or by law).

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

Payment to an Incapacitated Creditor

◆ The creditor must be capacitated to receive the payment. Payment to an incapacitated

creditor is not valid except in the following cases:

a. If he has kept the thing delivered.

b. Insofar as the payment has been beneficial to him (Art. 1241)

Article 1241. Payment to a person who is incapacitated to administer his property shall be
valid if he has kept the thing delivered, or insofar as the payment has been beneficial to him.

Payment made to a third person shall also be valid insofar as it has redounded to the
benefit of the creditor. Such benefit to the creditor need not be proved in the following
cases:
(1) If after the payment, the third person acquires the creditor’s rights;
(2) If the creditor ratifies the payment to the third person;
(3) If by the creditor’s conduct, the debtor has been led to believe that the third person

43
 had authority to receive the payment.

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

Payment to an Unauthorized Third Person

General Rule: Payment to an unauthorized third person is not valid.

Exceptions:

1. If the payment has redounded to the benefit of the creditor, which benefit need not be
proved in the following cases (Art. 1241):
a. If after the payment, the third person acquires the creditor’s rights (e.g., assignee
of the instrument evidencing the credit);
b. If the creditor ratifies the payment to the third person; or
c. If by the creditor’s conduct, the debtor has been led to believe that the third
person had the authority to receive payment (i.e., estoppel).
2. If the payment is made in good faith to a third person in position of the credit (Art. 1242).
In this case, the third person should be both in possession of the instrument and the
credit.

Where Payment Must be Made

◆ If there is a stipulation, then in the place designated.

◆ If there is no stipulation –

● If the obligation is to give a determinate thing, wherever the thing might be at the
time the obligation was constituted.

● If the obligation is to give a generic thing or an obligation to do, then at the

domicile of the debtor (Art. 1251).

Article 1251. Payment shall be made in the place designated in the obligation.

There being no expressed stipulation and if the undertaking is to deliver a determinate thing,
the payment shall be made wherever the thing might be at the moment the obligation was
constituted.

In any other case the place of payment shall be the domicile of the debtor.

If the debtor changes his domicile in bad faith or after he has incurred in delay, the additional
expenses shall be borne by him.

These provisions are without prejudice to venue under the Rules of Court.

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Special Forms of Payment
1. Dation in Payment (dacion en pago)
● Dation in payment (dacion en pago, adjudicacion en pago or dation in solution), is a
special form of payment where the ownership of property of the debtor is transferred to
his creditor to pay a debt in money (Art. 1245).
● It is governed by the law of sales since it partakes in a sense the nature of sale with the
creditor in effect buying the property of the debtor.

Article 1245. Dation in payment, whereby property is alienated to the creditor in

satisfaction of a debt in money, shall be governed by the law of sales.

● What actually takes place in dacion en pago is an objective novation of the obligation
where the thing offered as an accepted equivalent of the performance of an obligation is
considered as the object of the contract of sale, while the debt is considered the
purchase price. In any case, common consent is an essential prerequisite, be it sale or
novation, to have the effect of totally extinguishing the debt or obligation.
● Dation in payment has the same effects as payment extinguishes original obligation as
well as all accompanying accessory obligations.

● Requisites:
1. Existence of monetary obligation;
2. Alienation to the creditor of a property by the debtor with the consent of
the former; and
3. Satisfaction of the money obligation of the debtor.

Example: : X is indebted to Y in the sum of P10,000. If instead of paying in cash, Y accepts from
X a wristwatch worth P10,000, the obligation of X to Y is extinguished by dacion en pago.

2. Application of Payment
● Concepts

Article 1252. He who has various debts of the same kind in favor of one and the same
creditor, may declare at the time of making the payment, to which of them the same
must be applied. Unless the parties so stipulate, or when the application of payment is
made by the party for whose benefit the term has been constituted, application shall
not be made as to debts which are not yet due.

If the debtor accepts from the creditor a receipt in which an application of the payment
is made, the former cannot complain of the same, unless there is a cause for
invalidating the contract.

● It is the designation of the debt to which payment shall be applied when the
debtor owes several debts in favor of the same creditor (Art. 1252).
● Requisites of application of payment:
1. There must be two or more debts;
2. The debts must be of the same kind;
3. The debts are owed by the same debtor to the same creditor; and

45
 4. All debts are due, except:
a. When the parties have stipulated that payment may be
applied to a debt not yet due, or
b. When the application is made by the party for whose
benefit the term has been constituted (Art. 1252).
● How Application is Made
1. The debtor, who is given the preferential right to apply the payment,
designates the debt to be paid.
2. If the debtor does not make the designation, the creditor makes it by
indicating the debt being paid in his receipt. If the debtor accepts the
receipt from the creditor, the debtor cannot complain unless there is a just
cause of invalidating the contract.
3. If neither the debtor nor creditor makes the designation, or application
cannot be inferred from the circumstances, payment shall be applied by
operation of law as follows:
a. Payment shall be applied to the debt, among those due, which is
the most onerous to the debtor.
b. If the debts are of the same nature and burden, payment shall be
applied to all due debts proportionately. (Arts. 1252, 1254)

Article 1253. If the debt produces interest, payment of the principal

shall not be deemed to have been made until the interests have been
covered.

Article 1254. When the payment cannot be applied in accordance with

the preceding rules, or if application can not be inferred from other
circumstances, the debt which is most onerous to the debtor, among
those due, shall be deemed to have been satisfied.

If the debts due are of the same nature and burden, the payment shall
be applied to all of them proportionately.

● Application of Payment - The designation of a debt which is being paid by a

debtor who has several obligations of the same kind in favor of the creditor to
whom payment was made.
○ Requisites:
1. Several debts are due;
2. The same debtor and the same creditor;
3. The debts are all the same kind;
● Cannot apply to prestation to give specific thing
● Can apply to prestation to give generic thing
4. The debts are all due;
● Exceptions:
○ stipulated by the parties that payment may be
applied to an unmatured debt; or

46
 ○payment is applied to an unmatured debt by the
party for whose benefit the period has been
constituted.
5. The payment made is not sufficient to cover all debts.

● Rules in Application of Payment:

1. The right to designate the debt to which the payment shall be applied
belongs to the debtor.
2. If the debtor does not apply, the creditor may designate which debt is paid
by specifying in the receipt.
3. If the creditor did not apply or if application is void, the debt which is the
most onerous is the one satisfied.
4. If the debts are of the same nature and burden, the payment shall be
applied to all of them proportionately.

● When the debts are in the same nature and same burden, there must always be
a pro rata application of the payment, even if the sum paid is exactly the amount
of one of the obligations.
● As to which two debts is more onerous is fundamentally a question of fact, which
courts must determine on the basis of the circumstances of each case.

Bases for Determination of More Onerous Debts:

◆ Secured debts are more onerous than unsecured ones.

◆ Where there are various debts, the oldest ones are more onerous.
◆ Debts earning interest are more onerous than those without interest (even
though the latter is the older obligation) and where both debts bear
interest, the one with the higher rate is more burdensome.
◆ An unsecured debt bearing interest is more onerous than a secured one
without interest.
◆ Debts with penal clause are more onerous than those debts without one.
◆ Debts where the debtor is principally bound is more onerous than those
debts where he is only bound as surety.
● An obligation in which the debtor is in default is more onerous than
one in which he is not.

3. Payment by Cession - an act whereby a debtor abandons all his property to his
creditors so that the latter may apply the proceeds to the satisfaction of their credits.

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

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 ➔ Payment by cession is the abandonment or assignment by the debtor of all his property
in favor of his creditors so that the latter may sell them and recover their claims out of the
proceeds.
➔ The cession or assignment operates only to authorize the creditors to sell the debtor’s
property, hence, ownership is not transferred to them. Unless agreed upon, the cession
releases the debtor from his responsibility only to the extent of the net proceeds of the
things assigned.

➔ Kinds of Payment by Cession

1. Voluntary or Conventional - agreed upon by the parties
2. Legal - cession by operation of law

➔ Requisites of Payment by Cession

1. There must be two or more creditors;
2. The debtor is insolvent;
3. The debtor abandons all his properties except those which are exempt from
execution; and
4. The creditors accept the abandonment.

➔ Effects of Payment by Cession

◆ Creditors do not become the owner; they are merely assignees with authority to
sell.
◆ Debtor is released up to the amount of the net proceeds of the sale, unless there
is a stipulation to the contrary.
◆ Creditors will collect credits in the order of preference agreed upon, or in default
of agreement, in order ordinarily established by law.

➔ Dation in Payment vs. Payment by Cession

Dation in Payment Payment by Cession

There must be two or more creditors Plurality of creditors is not required

The debtor is insolvent The debtor may not be insolvent.

Affects all the debtor’s properties, except Does not affect all the debtor’s properties.
those exempt from execution.

The creditors are authorized to sell only the The creditor becomes the owner of the
debtor’s properties. properties given as payment.

The debtor is not released as a rule. The debtor is released as a rule.

4. Tender of Payment and Consignation

➔ Tender of payment is the act of the debtor offering to his creditor what is due him.

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 ➔ Consignation is the act of depositing the sum or thing due with the judicial
authorities whenever the creditor refuses without just cause to accept the same
or in the cases when the creditor cannot accept it.

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

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

Requisites for Tender of Payment and Consignation to Extinguish the Obligation:

1. There must be a valid tender of payment. Thus, the payment being tendered must be
the other requisites for a valid payment.
2. The creditor refuses without just cause to receive the payment.
3. The persons interested in the fulfillment of the obligation must be notified by the debtor
of his intention to deposit the sum or thing due with the judicial authorities.
4. The sum or thing due is deposited with judicial authorities.
5. The persons interested in the fulfillment of the obligation must again be notified by the
debtor that the consignation has been made.

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

The consignation having been made, the interested parties shall also be notified thereof.

Effect of Consignation Duly Made:

Article 1260. Once the consignation has been duly made, the debtor may ask the judge to
order the cancellation of the obligation.

Before the creditor has accepted the consignation, or before a judicial declaration that the
consignation has been properly made, the debtor may withdraw the thing or the sum
deposited, allowing the obligation to remain in force.

● The obligation shall be extinguished after the creditor has accepted the consignation or
the judge has declared that the consignation has been properly made.

Debtor’s Right to Withdraw the Sum or Thing Consigned:

49
 Article 1261. If, the consignation having been made, the creditor should authorize the
debtor to withdraw the same, he shall lose every preference which he may have over the
thing. The co-debtors, guarantors, and sureties shall be released.

● Before acceptance by the creditor of the consignation or the declaration by the judge
that the consignation has been properly made: The debtor may withdraw the sum or
thing consigned as a matter of right, i.e., the creditor’s consent is not required.
○ Such withdrawal produces the following effects:
■ The obligation shall remain in force; and
■ The co-debtors, guarantors, and sureties are not released
● After acceptance by the creditor of the consignation or the declaration by the judge that
the consignation has been properly made: The debtor may withdraw the sum or thing
consigned only with the consent of the creditor.
○ Such withdrawal produces the following effects:
■ The obligation shall be revived;
■ The creditor shall lose every preference which he may have over the
thing; and
■ The guarantors and sureties are released unless they consented. If there
are several debtors and their obligation is solidary, such obligation will
become a joint obligation.

When Consignation, Without a Previous Tender of Payment, Will Produce the

Same Effect:

1. When the creditor is absent or unknown or does not appear at the place of
payment;
2. When he is incapacitated to receive the payment at the time it is due;
3. When, without just cause, he refuses to give a receipt;
4. When two or more persons claim the same right to collect; or
5. When the title of the obligation has been lost (Art. 1256)

Loss of the Thing Due

● A thing is considered lost when it perishes, or goes out of commerce, or
disappears in such a way that its existence is unknown or it cannot be recovered
(Art. 1189, par. 2).
● Loss includes the physical or legal impossibility of the service in which the
obligation consists.

Effects: Loss of a Determinate Thing

Article 1262. An obligation which consists in the delivery of a determinate thing shall be
extinguished if it should be lost or destroyed without the fault of the debtor, and before he has
incurred in delay.

When by law or stipulation, the obligor is liable even for fortuitous events, the loss of the thing
does not extinguish the obligation, and he shall be responsible for damages. The same rule

50
 applies when the nature of the obligation requires the assumption of risk.

General Rule: Loss of a determinate thing extinguishes the obligation

Exceptions:

● When the loss is due to the fault of the debtor (Art. 1262);
● When the debtor has incurred in delay (Art. 1262);
● When so provided by law (Art. 1262) like when the debtor has promised to deliver the
same thing to two or more persons who do not have the same interest (Art. 1165);
● When it is stipulated by the parties (Art. 1262);
● When the nature of the obligation requires the assumption of risk (Art. 1262); or
● When the debt proceeds from a criminal offense, unless the person who should
● receive it refuses to accept it without just cause (Art. 1268).

Effects: Loss of a Generic Thing

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

● The loss of or destruction of anything of the same kind does not extinguish the obligation
(Art. 1263) because a generic thing does not really perish (“genus nunquam perit”)
● Exception: In the cause of a “delimited generic thing” (e.g. “100 sacks of rice from my
harvest this year” when the harvest got completely destroyed.)

Effects: Loss in Personal Obligations (To Do)

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

● When the prestation becomes legally or physically impossible without the fault of the
debtor, the obligation is extinguished

Article 1267. When the service has become so difficult as to be manifestly beyond the
contemplation of the parties, the obligor may also be released therefrom, in whole or in part.

● Rebus sic stantibus

● The legal and physical impossibility must have occurred after the constitution of the
obligation.

Effects: Partial Loss

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

51
 General Rule: Partial loss does not extinguish the obligation.

Exceptions: When the partial loss or destruction of the thing is of such importance that would
be tantamount to a complete loss or destruction.

Effect of fortuitous event (FE) where the obligation arises from a criminal offense

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

➔ The debtor is NOT exempted from the liability even if the thing due is lost through a
fortuitous event
➔ Exception: when the creditor is mora accipiendi or refuses to accept the thing without
justification, then:
◆ Consignation is not necessary
◆ The debtor must still exercise due diligence (or avoid the loss of the thing through
negligence)
➔ Illustration:
◆ D stole the jewelry of C. Therefore, D is obligated to return the said jewelry to C
because stealing is a criminal act. Even if the jewelry is lost through fortuitous
events (FE), D is still obligated to pay its price to D. However, if D refused to
accept the jewelry before it was lost through FE, the obligation is extinguished. In
either case, if the thing was lost due to D’s negligence, he is still liable.

Creditor’s right if the loss was caused by a third person

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

➔ The debtor’s rights to action against the third person are transferred to the creditor from
the moment the obligation is extinguished

CONDONATION OR REMISSION

➔ gratuitous abandonment by the creditor of his right to go after the debtor for the fulfillment of
the latter’s obligation to the former.
➔ a form of donation
➔ requires the debtor’s consent (Art. 1270)

Kinds of Condonation as to extent:

➔ Total - both obligation and accessory is remitted
➔ Partial - only a part, or only the accessory, is remitted

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Kinds of Condonation as to form:
➔ Express - made orally or in writing. It must comply with the formalities of donation:
◆ When the remission involves immovable (real) property, the remission and acceptance
must be in a public instrument
◆ When the remission involves movable (personal) property:
● Value exceeds P5,000: remission and acceptance must be in writing (public or
private)
● Value is P5,000 or less: remission and acceptance may be in any form (orally or
in writing, public or private). If the remission is oral, simultaneous delivery of the
thing or document representing the right is required to be remitted (Art. 748).
➔ Implied - inferred from the conduct of the parties, such as
◆ When the creditor delivers the private document evidencing the credit to the debtor (Art.
1271)
◆ Whenever the private document in which the debt appears is found in the possession of
the debtor, it shall be presumed that the creditor delivered it voluntarily, unless the
contrary is proved (Art. 1272).
◆ The renunciation of the principal debt shall extinguish the accessory obligations, but the
renunciation of the accessory obligation does not extinguish the principal obligation (Art.
1273).

Kinds of Condonation as to date of effectivity:

➔ Inter vivos - will take effect during the lifetime of the donor
➔ Mortis causa - will become effective upon the death of the donor, must comply with the
formalities of the will.

CONFUSION OR MEGER

➔ meeting in one person of the qualities or the characters of creditor and debtor (Art. 1275).
➔ Requisites:
◆ It must take place between the principal debtor and creditor
◆ The very same obligation must be involved
◆ The confusion or merger must be total or as regards the entire obligation.

Effects of merger when there is a guarantor (Art. 1276)

➔ Merger which takes place in the person of the principal debtor or creditor benefits the guarantor.
◆ both the principal and guaranty are extinguished
➔ Merger which takes place in the person of the guarantor does not extinguish the principal
obligation.
◆ only the guaranty (accessory obligation) is extinguished
➔ Illustration:
◆ M owes A P10,000, for which M issues a promissory note guaranteed by G. A assigns
the promissory note to B, B to C, and C back to M. In this case, M’s debt is extinguished
along with G’s guaranty.
◆ Alternatively, if C assigns the note to G instead, only G’s guaranty is extinguished, while
M’s debt persists.

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COMPENSATION

➔ when two persons, in their own right, are creditors and debtors of one another (Art. 1278)
➔ simultaneous balancing of two obligations

Kinds of Compensation as to amount or extent (Art. 1278):

➔ Total - debts are the same amount

➔ Partial - debts are of different amounts

Kinds of Compensation as to cause or origin:

➔ Legal compensation - by operation of law because the requisites provided by law are present
◆ Requisites of legal compensation (Art. 1279):
● Each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other.
● Both debts consist in a sum of money, or if the things due are consumable, they
be of the same kind, and of the same quality if the latter has been stated.
● Both debts must be due, liquidated, and demandable.
● That over neither of them there be any retention or controversy, commenced by
third persons and communicated in due time to the debtor.

➔ Facultative compensation - can be claimed by one of the parties who, however, has the right
to object to it
➔ Conventional or voluntary compensation - the parties agree to compensate their mutual
obligations even if some requisite is lacking.
➔ Judicial compensation - decreed by the court in a case where there is a counterclaim.

NOVATION

➔ modification or extinguishment of an obligation by another, either by changing the object of the

obligation or by substituting the person of the debtor or subrogating a third person in the
rights of the creditor (Art. 1291)
➔ two functions: (1) extinguish the existing obligation and (2) substitute a new one in its place
➔ Dation in payment (dacion en pago) is one example

Requisites of Novation of Obligation

➔ There must be a previous valid obligation.

➔ There must be agreement of all parties to the new contract.
➔ There must be extinguishment of the old contract.
➔ The new obligation must be valid.

Kinds of Novation as to origin:

➔ Legal – takes place by operation of law.

➔ Conventional – takes place by agreement of the parties.

Kinds of Novation as to form (Art. 1292):

54
 ➔ Express - novation declared in unequivocal terms or explicitly stated in the new object
➔ Implied - when the old and new obligations are incompatible in every material respect

Kinds of Novation as to object or purpose:

➔ Real novation - changing their object or principal conditions (Art. 1291)

➔ Personal novation - substituting the persons of the debtor

Kinds of Personal Novation

Expromision Delegacion

definition third person in his own initiative debtor assigns debt to a third person
assumes the liability

creditor’s consent necessary necessary

debtor’s consent not necessary necessary

effect if new debtor shall not revive the liability of the shall not revive the liability of the
is insolvent original debtor (Art. 1294) original debtor EXCEPT when said
insolvency was already existing or of
public knowledge to the debtor when
he delegated his debt (Art. 1295)

right of recovery ➔ w/ debtor’s consent ➔ w/ debtor’s consent

◆ recover full amount paid ◆ recover full amount paid
➔ w/o debtor’s consent
◆ recover only up to the
amount beneficial to the
debtor

◆ Mixed - Change of object and parties to the obligation.

Kinds of Novation as to extent:

➔ Total or extinctive – when the old obligation is totally extinguished.

➔ Partial or modificatory – when the old obligation still remains in force except as it has been
modified.
Effects if new obligation is void: If the new obligation is void, the novation is void. In such a case, the
original one shall subsist, unless the parties intended that the former relation will be extinguished in any
event (Art. 1297).

Effects if original obligation is void: The novation is void if the original obligation is void (Art. 1298). If
the original obligation is void, there is no obligation to extinguish since it is non-existent.

Effects if the original obligation is voidable: The novation is valid provided that annulment may be
claimed only by the debtor or when ratification extinguishes acts which are voidable (Art 1298). The
novation cures whatever defects present in the original obligation.

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

➔ Illustration: D owes C P10,000. With the consent of both, T (third person) pays C with P5,000.
Thus, C and T are now creditors of D for P5,000 each. If D is ready to pay but not for the whole
amount, C will be preferred over T.

MODULE 4: LAW ON CONTRACTS

Contract, defined

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

Contract vs Obligation
➔ Contract is one of the sources of obligation, whereas obligation is the legal tie which exists after
the contract has been entered into.

Contract vs Agreement
➔ Contract is a binding agreement enforceable by action in the courts of justice, thus it must be
lawful and certain requisites must be present. All contracts are agreements but not all
agreements are contracts

Elements of a Contract
➔ Essential elements
◆ Consent of the contracting parties
◆ Object certain which is the subject matter of the contract
◆ Cause of the obligation which must be established (Art. 1318)
➔ Natural elements
◆ Found in certain contracts unless set aside or suppressed by the parties (e.g. warranty
against eviction and warranty against certain defects in a contract of sale) (Art. 1547)
➔ Accidental elements
◆ Particular stipulation of the parties (e.g. terms and place of payment, interest rate)

Classifications of a Contract
➔ According to perfection or formation
◆ Consensual - perfected by mere consent (e.g. sale and lease)
◆ Real - perfected by the delivery of the object of the contract (e.g. depositum, pledge, and
commodatum)
◆ Formal or solemn - must be in the form provided by law for their perfection (e.g. the
donation of an immovable which, together with the acceptance by the donee, must be in
a public instruments to be valid)
➔ According to cause
◆ Onerous - there is an exchange of valuable considerations (e.g. sale and barter)

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 ◆ Gratuitous or lucrative - one party receives no equivalent consideration (e.g. donation
and commodatum). These contracts are referred to as contracts of pure beneficence, the
cause of which is the liberality of the benefactor
◆ Remuneratory - the cause is the service or benefit remunerated
➔ According to importance or dependence of one upon another
◆ Principal - one that can stand by itself (e.g. sale, loan)
◆ Accessory - one whose existence depends upon another contract (e.g. pledge or
mortgage which is dependent upon a principal contract such as loan
◆ Preparatory - one which serves as a means by which other contracts may be entered
into (e.g. agency and partnership)
➔ According to name or designation
◆ Nominate - have a name under the law (e.g. sale, loan and barter)
◆ Innominate - without any name under the law. Authorities in Civil Law, list the following
as innominate contracts:
● Do ut des - i give that you may give*
● Do ut facias - i give that you may do
● Facio ut des - i do that you may give
● Facio ut facias - i do that you may do

*no longer innominate, otherwise known as barter or exchange

Note for remembering: Do & des = give, Facio & facias = do

Innominate contracts shall be governed by the following rules:

1. stipulation of the parties

2. provisions under obligations and contracts
3. rules governing the most analogous nominate contracts
4. customs of the place (Art. 1307)
➔ According to risk or fulfillment
◆ Commutative - Those were the parties give equivalent values (e.g. sale and barter)
hence, there is real fulfillment
◆ Aleatory - Those whose fulfillment depends upon chance (e.g. insurance contract)
➔ According to the parties obligated
◆ Unilateral - Those were only one of the parties is obligated to give or do something (e.g.
commodatum and gratuitous deposit)
◆ Bilateral or synallagmatic - Those where both parties are required to give or do
something (e.g. sale and barter). They may be reciprocal or non-reciprocal
➔ According to subject matter
◆ Contracts involving things (e.g. sale or barter)
◆ Contracts involving rights or credits (e.g. usufruct or assignment of credits)
◆ Contracts involving services (e.g. agency or lease of service)
➔ According to the time of fulfillment
◆ Executed - One which has been completely performed
◆ Executory - One that has not yet been completely performed
➔ According to dependence of part of contract to other parts
◆ Indivisible or entire - each part is dependent upon other parts of the contract for
satisfactory performance (e.g. sale of cellphone and its charger)

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 ◆ Divisible - one part of the contract may be satisfactorily performed independently of the
other parts (e.g. sale of electric fan and book)
➔ Other classifications
◆ Auto-contract - where only one person represents the two opposite parties to the
contract (e.g. when an agent lends money to his principal whom he represents as
borrower)
◆ Contract of adhesion - where only one party drafted the contract (e.g. insurance)
● Gives no room for negotiation and deprives the latter the opportunity to bargain
on equal footing.

Stages of a Contract

1. Preparation or conception - this involves preliminary negotiations and bargaining, discussion

of terms and conditions, with no arrival yet of a definite agreement.
a. Negotiation begins from the time the prospective contracting parties manifest their
interest in the contract and ends at the moment of their agreement
2. Perfection or birth - this is the point when there is a meeting of minds between the parties on a
definite subject matter and valid a cause
3. Consummation or Death or Termination - this occurs when the parties fulfill or perform the
terms agreed upon in the contract, culminating in the extinguishment thereof

Basic Principles of a Contract

1. Liberty of contract or freedom to stipulate

Art. 1306. The contracting parties may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are not contrary to law, morals, good
customs, public order, or public policy.

The following are some stipulations that have been held to be void:
a. The stipulation that the creditor automatically becomes the owner of the property
pledged or mortgaged if the debtor defaults in his payment.
b. A stipulation in a mortgage contract providing for a specified price (known as ‘tipo” or
upset price) below which the mortgaged property is not supposed to be sold at the
foreclosure sale is void for being contrary to law.
c. An agreement to pay an unconscionable rate of interest is void for being contrary to
morals.
d. An agreement by the debtor to work without pay until he could find money to pay the
debt is void for being contrary to morals as this amounts to involuntary servitude.
e. An agreement to hide a crime, to suppress evidence and to stifle the prosecution of the
offender is void for being contrary to public policy.

2. Mutuality of contracts

Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot
be left to the will of one of them.

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 ➔ Any contract which appears to be heavily weighted in favor of one of the parties so as to
lead to an unconscionable result is void
➔ Determination of performance by a third person
◆ The determination of the performance may be left to a third person, whose
decision shall not be binding until it has been made known to both contracting
parties.
◆ However, such determination shall not be obligatory if it is evidently inequitable.

3. Relativity of contracts

Art. 1311. Contracts take effect only between the parties, their assigns and heirs, except in
cases where the rights and obligations arising from the contract are not transmissible by their
nature, or by stipulation or by provision of law. The heir is not liable beyond the value of the
property he received from the decedent.

Illustration: A owes B P50,000 payable on January 15, 2023. Unfortunately, on January 1, 2023,
A dies leaving a car worth P20,000 to his son C. Therefore, C is liable to pay B only up to
P20,000.

➔ Stipulation pour autrui

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

Art. 1314. In contracts creating real rights, third persons who come into possession of the
object of the contract are bound thereby, subject to the provisions of the Mortgage Law and
the Land Registration Laws.

Illustration: X secured his loan with Y with a mortgage of X’s house. Later on, X sold his house
to Z, who was not aware of the mortgage on the property. If X would not be able to pay the loan,
Y could foreclose the mortgage on the house which also binds Z to comply despite not being a
party involved in X and Y’s transaction. The real right to the house belongs to Y.

Art. 1313. Creditors are protected in cases of contracts intended to defraud them.

➔ Accion pauliana - an action where the creditor files an action in court for the rescission of
acts or contracts entered into by the debtor designed to defraud the former.

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

Illustration: Talent A has an ongoing contract with Manager X. Meanwhile Manager Y saw Talent
A’s potential and induced her to violate her contract with Manager X in order to join Manager Y’s
group instead. Manager X can sue both Talent A and Manager Y for damages, although

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 Manager Y cannot be liable for more damages than Talent A who was the one to principally
violate her contract.

4. Consensuality of contracts

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

➔ Consensual contracts are perfected by mere consent.

➔ Real contracts (e.g. deposits, pledge, commodatum) which are perfected by delivery of
the object. (Art. 1316)
➔ Solemn or formal contracts (e.g. donation of immovable property) which the law requires
to be perfected through the issuance of a public instrument.

5. Obligatory force of contract and compliance in good faith

➔ Obligations arising from contracts shall have the force of law between the contracting
parties and should be complied with in good faith. Upon the perfection of the contract,
the parties are bound to the following:
a. The fulfillment of what has been expressly stipulated
b. All the consequences which, according to their nature, may be in keeping with
good faith, usage and law.

Art. 1317. No one may contract in the name of another without being authorized by the latter, or
unless he has by law a right to represent him.

Article 1317 refers to an unenforceable contract. It is valid as to the definition of a contract but it
cannot be enforced by law should the person to which the name belongs to does not comply with the
stipulations of the contract.

Essential Requisites of Contracts (Art. 1318)

CONSENT

Consent is the manifestation of the meeting of the offer and the acceptance upon the thing and the
cause which are to constitute the contract.

➔ Rules on Consent
1. The parties must have the capacity to enter into a contract. The following cannot give
consent to a contract:
■ Unemancipated minors
● Emancipation takes place by the attainment of the age of majority which
is eighteen years. (Art.234, Family Code, as amended)
■ Insane or demented persons
● Contracts entered into during lucid intervals are valid
● Lucid interval refer to the period of temporary sanity of an insane person
■ Deaf-mutes who do not know how to write

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 ● A contract entered into by the above-named incapacitated persons is
voidable. However, when both parties are incapable of giving consent to a
contract, the contract is unenforceable.
● The incapacity aforementioned is subject to the modifications determined
by law, and is understood to be without prejudice to special
disqualifications established in the laws.
2. Contracts agreed to in a state of drunkenness or during a hypnotic spell are voidable.
This is so because consent given in such states is not freely and intelligently given.
3. A contract where consent is given through mistake, violence, intimidation, undue
influence, or fraud is voidable.
a. MISTAKE
➔ Mistake is the erroneous belief regarding material facts of a contract at
the time it was entered into
➔ Mistake will invalidate consent if the mistake refers to
◆ the substance of the thing which is the object of the contract.
◆ those conditions which have principally moved one or both parties
to enter into the contract.
◆ the identity or qualifications of one of the parties if such identity or
qualifications have been the principal cause of the contract.
◆ legal effect of an agreement when the real purpose of the parties
is frustrated and the same is mutual.
● This refers to a mistake of law which does not generally
vitiate consent because of the rule that ignorance of the
law excuses no one from compliance (ignorantia legis
neminem excusat) therewith.
● However, the contract shall be voidable if the mistake as to
the legal effect of the agreement is mutual and frustrates
the real purpose of the parties.
➔ Mistake does NOT vitiate consent if
◆ the mistake refers to a simple mistake of account which shall only
be corrected
◆ the party alleging it knew the doubt, contingency or risk affecting
the object of the contract.
➔ Rule when one party is unable to read or does not understand the
language of the contract
◆ If the mistake or fraud is alleged, the person enforcing the contract
must show that the terms thereof have been fully explained to the
former
◆ This is an exception to the rule that he who alleges fraud or
mistake must prove the same.
b. VIOLENCE or PHYSICAL COERCION
➔ Violence vitiates consent when:
◆ In order to wrest consent. serious or irresistible force is employed
(Art. 1335)
◆ Third party not involved in the contract does the same (Art. 1336)
c. INTIMIDATION or MORAL COERCION

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 ➔ Intimidation vitiates consent when:
◆ One of the contracting parties is compelled by a reasonable and
well-grounded fear of an imminent and grave evil upon his person
or property, or upon the person or property of his spouse,
descendants, or ascendants to give his consent (Art. 1335)
➔ Factors to be considered in determining the existence of undue influence
◆ age
◆ sex
◆ condition of the person (Art. 1355)
➔ No intimidation exists when:
◆ A threat is made to enforce one’s claim through competent
authority, given that the claim is just and legal
d. UNDUE INFLUENCE
➔ Undue influence vitiates consent when:
◆ a person takes improper advantage of his power over the will of
another, depriving the other of a reasonable freedom of choice
(Art. 1337)
➔ Factors to be considered in determining the existence of undue influence
◆ Confidential, family, spiritual and other relations of the parties
◆ Mental weakness
◆ Ignorance
◆ Financial distress of the person alleged to have been unduly
influenced
e. FRAUD
➔ Fraud exists (dolo causante)
◆ When, through the insidious words or machinations of one of the
contracting parties, the other is induced to enter into a contract
which, without them, he would not have agreed to.
◆ When there is a failure to disclose facts, when there is a duty to
reveal them, as when the parties are bound by confidential
relations.
➔ Requisites to make a contract voidable by reason of fraud
◆ The fraud should be serious
● Fraud was employed to induce consent
◆ The fraud should not have been employed by both contracting
parties
● The bad faith of one will negate the others’. Both will be
considered acting in good faith, hence the contract is valid.
➔ Fraud does NOT exist when:
◆ In case of usual exaggerations in trade, when the other party had
an opportunity to know the facts
◆ In case of a mere expression of an opinion, unless made by an
expert and the other party has relied on the former’s special
knowledge.

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 ◆ In case of misrepresentation by a third person, unless such
misrepresentation has created substantial mistakes and the same
is mutual.
◆ If the misrepresentation was made in good faith. However the
same may constitute error.

Offer is a proposal made by one party (offeror) to another (offeree), showing willingness to enter into a
contract.

➔ Rules on Offer
1. The offer must be certain because there could be no meeting of minds if it is vague or
not definite. Must be “definite, complete and intentional”

Nature of advertisements

i. Business advertisements of things for sale are not definite offers, but mere
invitations to make an offer unless it appears otherwise.
ii. Advertisements for bidders are merely invitations to make proposals and the
advertiser is not bound to accept the highest or lowest bidder, unless the contrary
appears.
2. An offer becomes ineffective upon the death, civil interdiction, insanity or insolvency of
either party before acceptance is conveyed.
➔ Civil interdiction shall deprive the offender during the time of his sentence of the
rights of parental authority, or guardianship, either as to the person or property of
any ward, of marital authority, of the right to manage his property and of the right
to dispose of such property by any act or any conveyance inter vivos. (Act No.
3815, s. 1930, Art. 34)
3. When the offeror has allowed the offeree a certain period to accept, the offer may be
withdrawn at any time before acceptance by communicating such withdrawal, EXCEPT
when the option is founded upon a consideration as something paid or promised.

Option, concept

➔ Option is a contract whereby the offeror gives the offeree a certain period within
which to buy or not to buy a certain object for a fixed price. It may or may not be
for a valuable consideration.
➔ Right of the offeror to withdraw the offer
◆ If there is no consideration for the option, the offeror may withdraw the
offer at any time within the option period provided there has not yet been
any acceptance.
◆ If there is a consideration, the offeror may not withdraw the offer before
the lapse of the period agreed upon. Otherwise he will be liable for
damages to the offeree for breach of contract.

Option Money vs Earnest Money

➔ Option money does not form part of the payment for the object of the contract
whereas earnest money can be considered as partial payment of the purchase
price.

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 ➔ Illustration: John wanted to buy a new laptop worth P35,000 but was not decided
yet on buying the model displayed on the store. The store clerk informed him that
this was their last stock, so John offered to pay P1,000 as option money agreeing
with the store clerk to reserve the item for him until he decides 3 days later. If
John eventually decides to buy the laptop, he will still pay for the full P35,000. On
the contrary, if he does not come back to complete the purchase after 3 days, he
cannot be reimbursed for the P1,000 he paid as option money.

Acceptance is the manifestation of the offeree’s assent. A qualified acceptance constitutes a

counter-offer (modified offer).

➔ Rules on Acceptance
1. The acceptance must be absolute
○ If the acceptance varies the offer, there is no contract since there is no meeting of
minds
○ If the acceptance is qualified, it constitutes a counter-offer; and has the effect of
rejecting the offer.
○ If the offer fixes the time, place and manner of acceptance, all must be complied
with. Otherwise, there will be no meeting of minds.
2. Acceptance made by letter or telegram does not bind the offerer except from the time it
came to his knowledge.
○ The contract in such a case is presumed to have been entered into the place
where the offer was made.
3. Acceptance may express or implied
○ The acceptance is expressed if made orally or in writing. It is implied if it can be
inferred from the conduct of the parties.
4. An offer made through an agent is accepted from the time it is communicated to him.
○ A contract is binding upon the principal although the agent has not
communicated the acceptance to him. This is so because the agent is merely an
extension of the personality of the principal. Therefore, an acceptance by the
agent is deemed an acceptance by the principal.

Simulated Contracts

One that does not intend to have any legal effect on or a change in the juridical situation of the
parties.

➔ Absolutely simulated contract

◆ One where the parties do not intend to be bound at all (Art. 1345)
◆ Being fictitious, it is void (Art. 1346)
➔ Relatively simulated contract
◆ One where the parties conceal their true agreement (Art. 1345)
◆ The parties are bound by their real agreement provided it does not prejudice a
third person and is not intended for any purpose contrary to law, morals, good
customs, public order and public policy (Art. 1346)

OBJECT OF THE CONTRACT

➔ What may be the object of contracts:

➔ All things which are not outside the commerce of men, including future things

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 ◆ The contract involving future inheritance is generally void when the following
requisites concur:
● The succession has not been opened
● The object of the contract forms part of the inheritance; and
● The promissor has, with respect to the object, an expectancy or right
which is purely hereditary in nature.
➔ All rights which are not intransmissible
◆ Rights which are transmissible such as credit rights
◆ Strictly personal rights (e.g. parental authority, political rights) are NOT
transmissible
➔ All services which are not contrary to law, morals, good customs, public order or public
policy
➔ Requisites of object of a contract
➔ It must be within the commerce of men
➔ It must be transmissible
➔ It must not be contrary to law, morals, good customs, public order or public policy .
➔ It must not be impossible
➔ It must be determinate as to kinds or if its quantity is not determinate, it must be possible
to determine the same without the need of a new contract between the parties.
➔ Human internal organs as objects of a contract
◆ R. A. No. 9208 penalizes human trafficking for the removal or sale of internal organs
◆ Human body and its parts cannot be the subject of commercial transactions
◆ Approved organ donors:
● living and related voluntary donor
● non-related voluntary donor
◆ Minors CANNOT be allowed to donate organs for transplantation

CAUSE OF CONTRACTS

Essential reason why parties enter a contract

1. Onerous contracts
2. Remuneratory contract
3. Gratuitous, lucrative or contract of pure beneficence

Type of Contract according to Cause Cause

1. Onerous contract prestation or promise of a thing or service by

another

2. Remuneratory contract service or benefit which is remunerated/rewarded

3. Gratuitous, lucrative or contract of pure liberality of the benefactor

beneficence

➔ Requisites of cause
◆ It must exist
● Presumed to exist

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 ● Contracts without cause produce no effect (Art. 1352)
◆ It must be lawful
● Contracts with unlawful cause produce no effect
● Unlawful if contrary to law, morals, good customs, public order, or public policy
◆ It must be true
● False cause will render a contract void, if it is not founded that they were founded
upon another cause which is true and lawful

➔ Cause vs Motive

Cause Motive

definition essential reason why a party enters private or secret reason of one
into a contract party for entering a contract

validity of contract dependent on the legality or illegality indifferent to the legality or

of the cause illegality of the motive

explicitness usually written in the contract, not always known by the other
known to both parties party

Lesion, defined

Art. 1355. Except in cases specified by law, lesion or inadequacy of cause shall not invalidate a
contract, unless there has been fraud, mistake or undue influence.

Lesion is any damage caused by the fact that the price is unjust or inadequate.

➔ General rule - Lesion does not invalidate a contract

◆ The law assumes that parties have already judged best how much their bargain is worth
➔ Exception - Lesion will invalidate a contract
◆ when there has been fraud, mistake, or undue influence
◆ in cases specified by law (Arts. 1381, pars. 1 and 2; 1098, 1470)

Form of Contracts

➔ Article 1356. Contracts shall be obligatory, in whatever form they may have been entered into,
provided all the essential requisites for their validity are present. However, when the law
requires that a contract be in some form in order that it may be valid or enforceable, or that a
contract be proved in a certain way, that requirement is absolute and indispensable. In such
cases, the rights of the parties stated in the following article cannot be exercised.
◆ The contract is valid as long as all requisites for a contract to be valid are present in the
contract.
◆ A contract is valid even if it is made orally only.
◆ According to the law, there are certain contracts that need to be in writing to be
considered valid.
◆ Contracts that should be in writing for their validity:

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 1. Donation of immovable property must be in a public instrument (together with
acceptance)
● Examples of Immovable Property: Land, House, Building
● If these are donated to other persons, the deed/contract of donation must
be in a public instrument.

● Private instrument - printed contract and signed by both parties

● Public instrument - stamped by the notary public (lawyer, representative
of the court).
○ Proves that the parties entered into a specific contract.
○ Both parties should show up in the notary public to show that they
both willingly, in good faith, entered into the said contract.
○ There are instances when a seller is already dead but he can still
sign contracts (fake signatures/copying of signatures/forgery). This
may be avoided if contracts are notarized because the notary
public will not stamp your contract if one of the parties is not
present. If a problem happens with the contract, in the court, the
witness that the judge will call is the notary public.

Both instruments are valid but it is better if the contract is notarized so

that you will have a witness that both of the parties entered the contract.

Not all contracts are needed to be notarized to be valid.

2. Donation of personal property whose value exceeds P5,000 must be in writing

● Examples of Personal Property: Books, Cellphone, Cars, Shoes
● Can be written in a private or public instrument.
● In the law, if you want your gift worth 5,000 up to be valid, it must be in
writing because a gift is considered a donation.
● If it is not in writing, the donation is considered void.
● If it is not in writing it is voided. If it is voided, the gift that you gave to
someone (as a donation) is not really theirs. If that is the case, you can
take back all of those that you gave.
3. Authority of an agent to sell a piece of land must be in writing
● Authorization letter
● Private instrument
4. Contract of partnership with immovable property contributed must be in a public
instrument
● If one partner invested in a land/building, the contract of partnership
should be in a public instrument (notarized).
5. A stipulation to pay interest
● If only agreed upon orally that there is an interest, the contract is voidable.

➔ Article 1357. If the law requires a document or other special form, as in the acts and contracts
enumerated in the following article, the contracting parties may compel each other to observe

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 that form, once the contract has been perfected. This right may be exercised simultaneously
with the action upon the contract.
➔ Article 1358. The following must appear in a public document:
1. Acts and contracts which have for their object the creation, transmission, modification, or
extinguishment of real rights over immovable property; sales of real property or of an
interest therein are governed by Articles 1403, No. 2, and 1405;
● The selling of land should be in public instrument for convenience
● The selling of land should be in writing, if not it will not be enforceable
2. The cessation, repudiation, or renunciation of hereditary rights or of those of the conjugal
partnership of gains;
● Inheritance
3. The power to administer property or any other power which has for its object an act
appearing or, which should appear in a public document, or should prejudice a third
person;
4. The cession of actions or rights proceeding from an act appearing in a public document.
● Giving up all properties

All other contracts where the amount involved exceeds five hundred pesos must appear in
writing, even a private one. But sales of goods, chattels, or things in action are governed by
Articles 1403 and 1405.

Reformation of Instruments

➔ Article 1359. When there has been a meeting of the minds of the parties to a contract, their true
intention is not expressed in the instrument purporting to embody the agreement, by reason of
mistake, fraud, inequitable conduct, or accident, one of the parties may ask for the reformation
of the instrument to the end that such true intention may be expressed.

If a mistake, fraud, inequitable conduct, or accident has prevented a meeting of the minds of the
parties, the proper remedy is not the reformation of the instrument but the annulment of the
contract.
◆ Should have no problem with the meeting of the minds.
◆ Reformation - Remedy to change/fix the instrument.

◆ Examples:

Scenario 1:

Both buyer and seller will have a Contract of Sale.

For one reason or another, when the contract was made, it was written that it was a
Contract of Donation.

What will happen to the contract? The contract will be reformed because it does not
mirror the real intentions of the parties.

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 There is no problem with the meeting of the minds, the only problem is the written
contract.

Reformation - Remedy to change/fix the instrument.

Scenario 2:

Prevented a meeting of the minds.

One of the parties thought it was a Contract of Donation when in fact, it is not.

The remedy will be not reformation but instead, annulment of the contract (cancellation
of contract).

➔ Article 1364. When through ignorance, lack of skill, negligence, or bad faith on the part of the
person drafting the instrument or of the clerk or typist, the instrument does not express the true
intention of the parties, the courts may order that the instrument be reformed.
◆ Example: Typographical error

➔ Article 1366. There shall be no reformation in the following cases:

1. Simple donations inter vivos (still alive) wherein no condition is imposed;
2. Wills; (Last will and testament)
3. When the real argument is void.

➔ Article 1367. When one of the parties has brought an action to enforce the instrument, he
cannot subsequently ask for its reformation.
◆ You can not ask for a reformation and say that the writing is wrong if previously, you did
an action to enforce it.

➔ Article 1370. If the terms of a contract are clear and leave no doubt upon the intention of the
contracting parties, the literal meaning of its stipulations shall control.

If the words appear to be contrary to the evident intention of the parties, the latter shall prevail
over the former.
◆ Don’t use deep words. Just use simple words with simple meanings.

➔ Article 1371. In order to judge the intention of the contracting parties, their contemporaneous
and subsequent acts shall be principally considered.
◆ Look into the situation to see what contract the two parties really partake in.

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MODULE 5: Defective Contracts

Defective Contracts

➔ Contracts that are not perfectly valid or have defects.

➔ The following are order from least to most defective in regards to the gravity of their defect
◆ Rescissible Contracts
◆ Voidable Contracts
◆ Unenforceable Contracts
◆ Void Contracts

ART. 1380.

➔ Contracts validly agreed upon may be rescinded in the cases established by law.

Meaning of rescissible contracts

➔ Rescissible contracts are those validly agreed upon because all the essential elements exist
and, therefore, legally effective, but in the cases established by law, the remedy of rescission is
granted in the interest of equity.

Binding force

➔ Is valid and enforceable although subject to rescission by the court when there is economic
damage or prejudice to one of the parties or to a third person. In a rescissible contract, there is
no defect at all but by reason of some external facts, its enforcement would cause injustice.

Meaning of rescission

➔ Rescission is an equitable remedy granted by law to the contracting parties and sometimes
even to third persons in order to secure reparation of damages caused them by a valid contract,
by means of the restoration of things to their condition prior to the celebration of said contract.

Requisites of a rescission

➔ Requisites of a rescission
➔ The contract must be validly agreed upon;
➔ There must be lesion or pecuniary prejudice or damage to one of the parties or to a third
person;
➔ The rescission must be based upon a case especially provided by law;
➔ There must be no other legal remedy to obtain reparation for the damage;
➔ The party asking for rescission must be able to return what he is obliged to restore by reason of
the contract;
➔ The object of the contract must not legally be in the possession of third persons who did not act
in bad faith; and
➔ The period for filing the action for rescission must not have prescribed.

ART. 1381.

➔ The following contracts are rescissible:

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 ➔ Those which are entered into by guardians whenever the wards whom they represent suffer
lesion by more than one-fourth of the value of the things which are the object thereof;
◆ For example, Albert is Bruce’s guardian. Alfred sold a mansion worth 25,000,000 for
10,000,000. The mansion was the property of Bruce. The ward or Brce may rescind the
contract once they are of age.
➔ Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the
preceding number;
◆ Similar situation with previous example, the main difference being someone
administering or managing another’s property in virtue of being an absentee.
◆ An absentee is a person who disappears from their domicile, their whereabouts being
unknown, and without an agent to administer their property.
➔ Those undertaken in fraud of creditors when the latter cannot in any other manner collect the
claims due them;
◆ Essentially accion pauliana
➔ 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;
◆ For example, when a piece of land’s ownership is still being disputed in court, if sold,
with the buyer having knowledge of the land’s current affairs, the sale can be rescinded.
➔ All other contracts specially declared by law to be subject to rescission.

ART. 1382.

➔ Payments made in a state of insolvency for obligations to whose fulfillment the debtor could not
be compelled at the time they were effected, are also rescissible.
◆ For example, Adam is insolvent as of the moment. However, he still decides to settle a
liability that is due three years from now. His payment is rescissible. He must priorite
paying those that are due.

ART. 1383.

➔ The action for rescission is subsidiary; it cannot be instituted except when the party suffering
damage has no other legal means to obtain reparation for the same.
◆ If there are other means by which the issue regarding a contract can be resolved, those
must be applied first.

ART. 1384.

➔ Rescission shall be only to the extent necessary to cover the damages caused.

◆ The entire contract need not be set aside by rescission if the damage can be repaired or
covered by partial rescission. The rescission shall only be to the extent of the creditor’s
unsatisfied credit. The policy of the law is to preserve or respect the contract, not to
extinguish it.

ART. 1385.

➔ Rescission creates the obligation to return the things which were the object of the contract,
together with their fruits, and the price with its interest; consequently, it can be carried out only
when he who demands rescission can return whatever he may be obliged to restore.

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 ➔ Neither shall rescission take place when the things which are the object of the contract are
legally in the possession of third persons who did not act in bad faith.

➔ In this case, indemnity for damages may be demanded from the person causing the loss.

ART. 1386.

➔ Rescission referred to in Nos. 1 and 2 of Article 1381 shall not take place with respect to
contracts approved by the courts.

◆ Contracts approved by the courts are valid, whether there is lesion or not.

ART. 1387.

➔ All contracts by virtue of which the debtor alienates property by gratuitous title are presumed to
have been entered into in fraud of creditors, when the donor did not reserve sufficient property
to pay all debts contracted before the donation.

➔ Alienations by onerous title are also presumed fraudulent when made by persons against whom
some judgment has been rendered in any instance or some writ of attachment has been issued.
The decision or attachment need not refer to the property alienated, and need not have been
obtained by the party seeking the rescission.

➔ In addition to these presumptions, the design to defraud creditors may be proved in any other
manner recognized by the law of evidence.

ART. 1388.

➔ Whoever acquires in bad faith the things alienated in fraud of creditors, shall indemnify the latter
for damages suffered by them on account of the alienation, whenever, due to any cause, it
should be impossible for him to return them.

➔ If there are two or more alienations, the first acquirer shall be liable first, and so on successively.

◆ Bad faith does not simply connote bad judgments or negligence. It imports a dishonest
purpose or some moral obliquity and conscious doing of wrong. It means breach of a
known duty through some motive or interest or ill-will. It partakes of the nature of fraud.
◆ If the purchase was made in good faith, rescission will not be available.

ART. 1389.

➔ The action to claim rescission must be commenced within four years.

➔ For persons under guardianship and for absentees, the period of four years shall not begin until
the termination of the former’s incapacity, or until the domicile of the latter is known.

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 ◆ For example, a minor once they become of legal age or no longer be under
guardianship, they will have years to rescind contracts .

◆ For an absentee, the four year period of being able to rescind contracts will only start
upon them being found.

ART. 1390.

➔ The following contracts are voidable or annullable, even though there may have been no
damage to the contracting parties:

➔ Those where one of the parties is incapable of giving consent to a contract;

◆ For example, minors or people suffering from insanity.

➔ Those where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud.

➔ These contracts are binding, unless they are annulled by a proper action in court. They are
susceptible of ratification.

Meaning of voidable contracts and annulment

➔ Voidable or annullable contracts are those which possess all the essential requisites of a valid
contract but one of the parties is legally incapable of giving consent, or consent is vitiated by
mistake, violence,intimidation, undue influence, or fraud.
➔ Annulment is a remedy as well as a sanction provided by law, for reason of public interest, for
the declaration of the inefficacy of a contract based on a defect or vice in the consent of one of
the contracting parties in order to restore them to their original position in which they were
before the contract was executed.

ART. 1391.

➔ The action for annulment shall be brought within four years.

➔ This period shall begin:

➔ In cases of intimidation, violence or undue influence, from the time the defect of the consent
ceases.

➔ In case of mistake or fraud, from the time of the discovery of the same.

➔ And when the action refers to contracts entered into by minors or other incapacitated persons,
from the time the guardianship ceases.

ART. 1392.

➔ Ratification extinguishes the action to annul a voidable contract.

◆ Ratification means that one voluntarily adopts or approves some defective or

unauthorized act or contract which, without his subsequent approval or consent, would

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 be binding on him. It shows an intention on the part of the ratifier to be bound by the
provisions of the contract.
◆ It cleanses the contract from all its defects from the moment it was constituted, thus
making the contract valid. Furthermore, the action to annul is extinguished.

ART. 1393.

➔ Ratification may be effected expressly or tacitly. It is understood that there is a tacit ratification if,
with knowledge of the reason which renders the contract voidable and such reason having
ceased, the person who has a right to invoke it should execute an act which necessarily implies
an intention to waive his right.

◆ An example of a ratification being expressly stated would be to ratify it orally or in writing.

Meanwhile, a ratification being tacitly expressed or implied would be just accepting the
contract without any word of complaint from you.

Requisites of ratification

➔ The requisites for implied ratification are the following:

➔ There must be knowledge of the reason which renders the contract voidable;

➔ Such reason must have ceased; and

➔ The injured party must have executed an act which necessarily implies an intention to waive his
right.

ART. 1394.

➔ Ratification may be effected by the guardian of the incapacitated person.

◆ A contract entered into by an incapacitated person may be ratified by their guardian or

themselves if they are capacitated.

◆ In case the contract is voidable on the ground of mistake, etc., ratification can be made
by the party whose consent is vitiated.

ART. 1395.

➔ Ratification does not require the conformity of the contracting party who has no right to bring the
action for annulment.

◆ Ratification is a unilateral act by which a party waives the defect in his consent. The
consent of the guilty party is not required.

ART. 1396.

➔ Ratification cleanses the contract from all its defects from the moment it was constituted.

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 ◆ The effect of ratification is to make the contract valid from its inception subject to the
prior rights of third persons.

ART. 1397.

➔ The action for the annulment of contracts may be instituted by all who are thereby obliged
principally or subsidiarily. However, persons who are capable cannot allege the incapacity of
those with whom they contracted; nor can those who exerted intimidation, violence, or undue
influence, or employed fraud, or caused mistake base their action upon these flaws of the
contract.

Party entitled to bring an action to annul

➔ There are two different requisites to confer the necessary capacity to bring an action for
annulment of a contract:

◆ The plaintiff must have an interest in the contract.

◆ The victim and not the party responsible for the defect is the person who must assert the
same.

➔ The guilty party and their successor cannot ask for annulment.

ART. 1398.

➔ An obligation having been annulled, the contracting parties shall restore to each other the things
which have been the subject matter of the contract, with their fruits, and the price with its
interest, except in cases provided by law.

➔ In obligations to render service, the value thereof shall be the basis for damages.

◆ If the contract is annulled, as a general rule, the parties must restore to each other the
subject matter of the contracts with its fruits, and the price thereof with legal interest.

◆ In personal obligation, wherein the service had already been rendered, the value thereof
with the corresponding interest is the basis for damages recoverable from the party
benefited by the service.

ART. 1399.

➔ When the defect of the contract consists in the incapacity of one of the parties, the incapacitated
person is not obliged to make any restitution except insofar as he has been benefited by the
thing or price received by him.

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ART. 1400.

➔ Whenever the person obliged by the decree of annulment to return the thing can not do so
because it has been lost through his fault, he shall return the fruits received and the value of the
thing at the time of the loss, with interest from the same date.

◆ If the thing to be returned is lost without the fault of the person obliged to make
restitution (defendant), there is no more obligation to return such thing. But in such a
case, the other cannot be compelled to restore what in virtue of the decree of annulment
he is bound to return.

◆ If it is lost through his fault, his obligation is not extinguished but is converted into an
indemnity for damages consisting of the value of the thing at the time of the loss with
interest from the same date and the fruits received from the time the thing was given to
him to the time of its loss.

ART. 1401.

➔ The action for annulment of contracts shall be extinguished when the thing which is the object
thereof is lost through the fraud or fault of the person who has a right to institute the
proceedings.
➔ If the right of action is based upon the incapacity of any one of the contracting parties, the loss
of the thing shall not be an obstacle to the success of the action, unless said loss took place
through the fraud or fault of the plaintiff.

ART. 1402.

➔ As long as one of the contracting parties does not restore what in virtue of the decree of
annulment he is bound to return, the other cannot be compelled to comply with what is
incumbent upon him.
◆ When a contract is annulled, a reciprocal obligation of restitution is created. The return
by one party of what he is obliged to restore by the decree of annulment may be
regarded as a condition to the fulfillment by the other of what is incumbent upon him.
◆ In effect, there will be no annulment if the party cannot restore what he is bound to
return. This is true even if the loss is due to a fortuitous event

Unenforceable Contracts

➔ Those that cannot be enforced or given effect in court of law or sued upon by reason of certain
defects provided by law until and unless they are ratified according to law.
➔ Still considered as valid if both parties are to comply with the stipulations of the contract.
◆ Unlike rescissible and voidable contracts; contracts that are valid until rescinded or
annulled.

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 ◆ Problem only arises if either party refused to comply with their agreement because the
same could not be enforced.

Article 1403. The following contracts are unenforceable, unless they are ratified:

Kinds of Unenforceable Contracts

1. those that are entered into in the name of another by one without, or acting in excess of,
authority;
2. those that do not comply with Statute of Frauds; and
3. those where both parties are incapable of giving.

(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;

Unauthorized Contracts

➔ Those that are entered into in the name of another personally by one who has been given no
authority or legal representation or who has acted beyond his power.
➔ Governed by Art. 1317 and the principles of agency.

(2) Those that do not comply with the Statute of Frauds as set forth in this number. In the
following cases an agreement hereafter made shall be unenforceable by action, unless the
same, or some note or memorandum, thereof, be in writing, and subscribed by the party
charged, or by his agent; evidence, therefore, of the agreement cannot be received without the
writing, or a secondary evidence of its contents:

Statute of Frauds

➔ Adapted from the statute of the English Parliament during 1677, where it was used to counter
the evil practice of giving false testimony in actions founded on certain kinds of contracts.
➔ Serves not only to prevent fraud but also to guard against the mistake of honest men by
requiring certain agreements to be specified in writing.
◆ Once these certain agreements of the contract were already written, contracts are no
longer considered as unenforceable.
◆ Written contracts may be public or private.

Application of Statute of Frauds

➔ Statute of Frauds is only applicable to contracts that are completely executory. Thus, there
should be no performance has been made yet by both parties.
➔ The writing should express the true agreement of the parties.
◆ This is to avoid using the Statute as a shield for fraud.
➔ If the agreements within the scope of the Statute of Frauds are not in writing, this does not
mean that the contracts are already void but merely unenforceable.

Agreements within the scope of the Statute of Frauds

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 (a) An agreement that by its terms is not to be performed within a year from the making thereof;

➔ Ex: The contract entered on Dec. 25, 2023 with an agreement of A constructing B’s house to
begin on Dec. 25, 2025 should be in writing to be enforceable.

(b) A special promise to answer for the debt, default, or miscarriage of another;

➔ Ex: As a general rule, a contract of guarantee should be in written form signed by the guarantor.
Otherwise, it would be unenforceable.

(c) An agreement made in consideration of marriage, other than a mutual promise to marry;

➔ Agreements entered into by persons who are about to be united in marriage (Marriage
settlements and Donations propter nuptias) must appear in writing to be enforceable. It is for the
purpose of fixing the condition of their relations w/ respect to their present and future property.

(d) An agreement for the sale of goods, chattels or things in action, at a price not less than five
hundred pesos, unless the buyer accept and receive part of such goods and chattels, or the
evidences, or some of them, of such things in action or pay at the time some part of the
purchase money; but when a sale is made by auction and entry is made by the auctioneer in his
sales book, at the time of the sale, of the amount and kind of property sold, terms of sale, price,
names of the purchasers and person on whose account the sale is made, it is a sufficient
memorandum;

➔ A contract of sale of goods worth above P500 should be in writing to be enforceable against
either party.
◆ Exception: If there’s already a delivery or partial or full payment occurred, the contract
may now be enforced even if it was made orally.

(e) An agreement for the leasing for a longer period than one year, or for the sale of real
property or of an interest therein;

➔ Ex: A contract where A agreed to lease his house to B for two years must be in writing to be
enforceable. Unless, it is partially executed.

(f) A representation as to the credit of a third person.

➔ Ex: A is seeking a loan from B. For B to confirm that A is solvent and has a good credit
reputation, he relies upon the representation of C. The representation of C, which is made to
induce the extension of credit to A, must now be in writing to be enforceable.

(3) Those where both parties are incapable of giving consent to a contract.

➔ Ex: When both minors, which are incapable of giving consent to a contract, entered into a
contract.

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 Article 1404. Unauthorized contracts are governed by article 1317 and the principles of
agency in Title X of this Book.

Modes of Ratification under the Statute

Article 1405. Contracts infringing the Statute of Frauds, referred to in No. 2 of article 1403, are
ratified by the failure to object to the presentation of oral evidence to prove the same, or by the
acceptance of benefit under them.

1. Failure to object to the presentation of oral evidence to prove the contract.

◆ Failure to object to the presentation of oral evidence of the other party, where the
requirement is a written form, amounts to a waiver and makes the contract as if it has
been reduced to writing.
2. If there’s already acceptance of benefits under the contract.
◆ In this case, the contract is no longer executory.

Rights of a party where contract is enforceable

Article 1406. When a contract is enforceable under the Statute of Frauds, and a public
document is necessary for its registration in the Registry of Deeds, the parties may avail
themselves of the right under Article 1357.
➔ This article indicates that a contract that is enforceable under the Statute of Frauds and requires
a public document for its registration in the Registry of the Deeds, parties may avail themselves
of the right under Art. 1357.

➔ Example:

◆ When a contract of sale of real property was done in oral form, a party cannot compel
the other to put the contract in public document for purposes of registration as it is
unenforceable.

Article 1407. In a contract where both parties are incapable of giving consent, express or
implied ratification by the parent, or guardian, as the case may be, of one of the contracting
parties shall give the contract the same effect as if only one of them were incapacitated.

If ratification is made by the parents or guardians, as the case may be, of both contracting
parties, the contract shall be validated from the inception.

Effect of ratification by parent or guardian

➔ When only the parent or guardian of one party ratifies and the other does not ratify the contract,
the contract is voidable.
➔ When the parents or guardians of both parties ratify, the contract shall be valid.

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 Article 1408. Unenforceable contracts cannot be assailed by third persons.

➔ The benefit and defense of Statute of Frauds is personal to the parties and cannot be
interposed by strangers to the contract.

Void Contracts

➔ Contracts that generally produce no effect at all due to certain defects.

➔ Considered as inexistent from its inception or from the very beginning.
➔ Not enforceable from the very beginning, regardless of the intention of the parties

Inexistent Contracts

➔ Agreements which:
◆ lack one/ some/ all of the elements of a contract
◆ doesn’t comply with formalities which ar essential for the existence of a contract

Characteristics of a void or inexistent contract

1. Generally, it produces no force effect whatsoever

2. It cannot be ratified
3. The right to set up the defense of illegality, cannot be waived
4. The action or defense for the declaration of its inexistence does not prescribe
5. The defense of illegality is not available to third persons whose interests are not directly affected
6. It cannot give rise to a valid contract

Instances of void or inexistent contracts

Article 1409. The following contracts are inexistent and void from the beginning:

(1) Those whose cause, object or purpose is contrary to law, morals, good customs, public
order or public policy;

➔ Ex: A contract to kill someone in exchange for money.

(2) Those which are absolutely simulated or fictitious;

➔ Ex: A is indebted to B. Upon learning that B is going to enforce his credit, A pretended to sell his
land to C, his neighbor. A did not receive any monetary compensation and still has the property
in his possession.

(3) Those whose cause or object did not exist at the time of the transaction;

➔ Refers to the things that are not capable of coming into existence.

◆ This does not apply to a future thing, as they have potential existence which may legally
be the object of a contract.

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 (4) Those whose object is outside the commerce of men;

➔ Ex: A and B entered into a contract of sale of sidewalks and bridges.

(5) Those which contemplate an impossible service;

➔ Ex: A contract where A agreed to give B P50,000 if he will draw a circle and a square at the
same time is void.

(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.

➔ Examples:

◆ Contracts upon future inheritance except in cases expressly authorized by law

◆ Sale of property between husband and wife except when there is a separation of
property

These contracts cannot be ratified. Neither can the right to set up the defense of illegality be
waived.

Action or dense is imprescriptible

Article 1410. The action or defense for the declaration of the inexistence of a contract does
not prescribe
➔ A party can always bring a court action to declare a void contract as void or inexistent.
➔ On the other hand, a party against whom a void contract is sought to be enforced, can always
raise the defense of nullity, despite the passage time.
➔ Despite the void contract having no effect at all, it is better to bring an action to the court to
declare it as void for a judicial declaration of nullity be secured and avoid taking the law in their
own hands.

Rules where contract is illegal and act constitutes a criminal offense

Article 1411. When the nullity proceeds from the illegality of the cause or object of the
contract, and the act constitutes a criminal offense, both parties being in pari delicto, they shall
have no action against each other, and both shall be prosecuted. Moreover, the provisions of
the Penal Code relative to the disposal of effects or instruments of a crime shall be applicable to
the things or the price of the contract.

This rule shall be applicable when only one of the parties is guilty; but the innocent one may
claim what he has given, and shall not be bound to comply with his promise. (1305)

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 Pari Delicto - When both parties are in fault and guilty

1. Where both parties are in pari delicto - both parties are equally guilty
a. Cause or object constitutes a criminal offense
b. Parties shall have no action against each other
c. Both shall be prosecuted
d. Things or price of the contract, as the effects/ instruments of crime, shall be confiscated
in favor of the government.
2. Where only one party is in delicto - both parties are not equally guilty
a. Cause or object constitutes a criminal offense where only one party is guilty
b. Provision of the article only applies to the guilty party
c. The innocent party may claim what he has given and shall not be bound to comply with
his promise

Rules where contract is illegal and act does not constitutes a criminal offense

Article 1412. If the act in which the unlawful or forbidden cause consists does not constitute a
criminal offense, the following rules shall be observed:

(1) When the fault is on the part of both contracting parties, neither may recover what he has
given by virtue of the contract, or demand the performance of the other's undertaking;

(2) When only one of the contracting parties is at fault, he cannot recover what he has given by
reason of the contract, or ask for the fulfillment of what has been promised him. The other, who
is not at fault, may demand the return of what he has given without any obligation to comply
his promise. (1306)
➔ When the cause of the contract is unlawful or forbidden but there is no criminal offense.

1. Both parties are in pari delicto

a. Neither party may recover what he has given by the virtue of contract.
b. Neither party may demand the performance of the other’s undertaking.
2. Only one party is in delicto
a. Guilty party loses what he has given by reason of contract.
b. Guilty party cannot ask for the fulfillment of the other’s undertaking.
c. Innocent party may demand the return of what he has given.
d. Innocent party cannot be compelled to comply with his promise.

Recovery of Usurious Interest

Article 1413. Interest paid in excess of the interest allowed by the usury laws may be
recovered by the debtor, with interest thereon from the date of the payment.
➔ Under the Usury Law, any paid usurious interest (interest in excess of maximum allowed) may
be recovered together with interest thereon from the date of payment in proper action for the
same.

➔ Stipulation for payment of usurious interest is void.

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 ◆ In this case, a person paying the usurious interest can recover not only the interest in
excess of that allowed by law, but the whole interest paid.

Recovery where contract entered into is for illegal purpose

Article 1414. When money is paid or property delivered for an illegal purpose, the contract
may be repudiated by one of the parties before the purpose has been accomplished, or before
any damage has been caused to a third person. In such case, the courts may, if the public
interest will thus be subserved, allow the party repudiating the contract to recover the money
or property.

➔ Example: A will give B P50,000 if B will kill C. Later, A changed his mind and decided not to kill
C anymore. In this case, A may be allowed by the court to recover any amount he has given B.
➔ For the provision of the article to apply, following requisites must be present:
a. Contract is in illegal purpose
b. Contract is repudiated before the purpose has been accomplished or before any
damage has been caused to a third person
c. Court considers that public interest will be subserved by allowing recovery

Recovery by an incapacitated person

Article 1415. Where one of the parties to an illegal contract is incapable of giving consent, the
courts may, if the interest of justice so demands allow recovery of money or property delivered
by the incapacitated person

➔ Recovery can be allowed if one of the parties is incapacitated and the interest of justice so
demands.
➔ It is not necessary that the illegal purpose has not been accomplished or that no damage has
been caused to a third person.

Recovery where contract is not illegal per se

Article 1416. When the agreement is not illegal per se but is merely prohibited, and the
prohibition by the law is designed for the protection of the plaintiff, he may, if public policy is
thereby enhanced, recover what he has paid or delivered.

➔ Requisites where recovery is permitted:

1. The agreement is not illegal per se but is merely prohibited.
2. The prohibition is designed for the protection of the plaintiff.
3. Public policy would be enhanced by allowing the plaintiff to recover what hehas paid or
delivered.

Recovery of amount paid in excess of ceiling price

Article 1417. When the price of any article or commodity is determined by statute, or by
authority of law, any person paying any amount in excess of the maximum price allowed may
recover such excess

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 ➔ Example: By Executive Order of the President the price per kilo of NFA rice has been fixed at
P50. If A pays P55 for it, he can recover the excess of P5.

Recovery for additional compensation for service rendered beyond limit

Article 1418. When the law fixes, or authorizes the fixing of the maximum number of hours of
labor, and a contract is entered into whereby a laborer undertakes to work longer than the
maximum thus fixed, he may demand additional compensation for service rendered beyond
the time limit.

➔ A laborer may ask for additional compensation provided that he had rendered beyond the
maximum hours fixed.
➔ Labor Code (PD 442) sets forth that the normal hours of work of any employee shall not exceed
eights hours a day.
◆ Applies to employees in all establishments and undertakings, whether for profit or not,
but not to:
a. Government employees
b. Managerial employees
c. Fixed personnel
d. Members of the family of the employer who are dependent upon him for support
e. Domestic helpers
f. Persons in the personal service of another
g. Workers who are paid by results

Recovery of amount less than minimum wage

Article 1419. When the law sets, or authorizes the setting of a minimum wage for laborers,
and a contract is agreed upon by which a laborer accepts a lower wage, he shall be entitled to
recover the deficiency.

➔ An employee may recover the deficiency of the amount he received less than the minimum
wage rate with legal interest.
◆ Even if the contract stipulates.
➔ The employer shall be criminally liable.

Effect of illegality in divisible contracts

Article 1420. In case of a divisible contract, if the illegal terms can be separated from the
legal ones, the latter may be enforced.

➔ If the contract is divisible or severable, the illegal portion can be separated from the legal
portions, and the latter may be enforced.
◆ However, this rule is still subject to the contrary intention of the parties.

Exclusivity of the defense of the illegal contact

Article 1421. The defense of illegality of contract is not available to third persons whose
interests are not directly affected

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➔ Third persons are not allowed to bring an action to annul the said contracts.
◆ However, if the said third person is directly affected by the contract, he may avail the
defense of illegality or set up its nullity.

Article 1422. A contract which is the direct result of a previous illegal contract, is also void
and inexistent.

➔ A void contract cannot give rise to a valid contract

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 PRACTICE EXERCISE: THEORETICAL (OBLIGATIONS)

Instructions: Choose the letter of the correct answer.

1. Obligations derived from law are not:

a. expressed
b. demandable
c. binding
d. presumed
2. Gerard, who was in a critical condition, was brought to the hospital and Peter, who saw Gerard get
caught up in the preceding accident, decided to pay for his bills. Does Gerard owe Peter?
a. Yes, because he benefited from this payment and it would be unfair to let Peter cover his bills;
thus he is obligated under negotiorum gestio.
b. Yes, because he benefited from this payment and it would be unfair to let Peter cover his bills;
thus he is obligated under solutio indebiti.
c. No, because Gerard did not consent for Peter to pay.
d. No, because what Peter did is simply gratuitous.
3. Statement 1. Generally, a criminal liability also entails a civil liability.
Statement 2. Waiver of future fraud is voidable.
a. False, False
b. False, True
c. True, True
d. True, False
4. Statement 1. The delay on the part of the creditor is also known as mora solvendi.
Statement 2. In reciprocal obligations where there is compensatio morae, there is no delay.
a. True, False
b. False, True
c. False, False
d. True, True
5. Tala Jewels was supposed to deliver a jewelry set to Kyla on January 15, 2024. On January 18, the set
was lost due to a fortuitous event. Is Tala Jewels still liable for the lost jewelry?
a. Yes, because it was lost through a fortuitous event.
b. No, because it was lost without the fault of Tala Jewels.
c. Yes, because Tala Jewels is in delay even if it was lost through a fortuitous event.
d. No, because it was lost through a fortuitous event.
6. John is to be given an investment in Jabee Corp. once he graduates from college. Over time, it has
earned a gain of P40,000. How much of this interest is due to John?
a. None, he should only receive the initial value of the investment.
b. Half, because the benefit was incidental.
c. Only 75% according to the provisions of obligations and contracts.
d. Whole amount, because the improvements should inure to his benefit from when the obligation
was declared.
7. JCD promised KDC P1 million if the Paskuhan is successful. This is an obligation with a period known
as:

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 a. Ex die
b. In diem
c. Pour autrui
d. In pari delicto
8. Sanjay, Sasha, and Craig are solidary debtors of Mordecai and Rigby who are joint creditors for 6
million pesos. On December 21, Sanjay managed to ask Rigby for his debt to be forgiven, and Rigby
agreed. Unbeknownst to them, Craig already paid the full amount due to Mordecai. How much should
Sanjay remit to Craig?
a. 6 million
b. 3 million
c. 1 million
d. 0
9. Statement I. An obligation with a condition that someone dies first is always an obligation with a period.
Statement II. A promise to pay when one’s means allow him to do so is an obligation with a condition.
a. True, False
b. False, False
c. False, True
d. True, True
10. Jesyka is going to give Dave a basketball for Christmas, but may exchange it for either a shirt, cap, or
shoes. This is an example of a:
a. Alternative obligation
b. Facultative obligation
c. Joint obligation
d. Solidary obligation
11. X, a third person, pays creditor C in place of debtor D without permission of D. X paid the whole amount
worth 35,000, but D already paid 10,000 to C. To whom will X ask for remuneration regarding his
overpayment?
a. He cannot demand for remuneration because there was no permission from D.
b. 35,000 from D, since he paid the whole debt
c. 25,000 from C, since D already made partial payments
d. 10,000 from C, since he should not have accepted the portion that D already paid
12. The following refer to payment by cession except for:
a. Cession is similar to dacion en pago.
b. Cession is giving up all of your properties
c. It does not transfer ownership, but only a right to sell.
d. The paid portion of the debt is only up to all the proceeds from the sale.
13. What is the order of process in consignation?
I. The debtor shall notify the creditor of the intention to deposit the thing due with judicial
authorities
II. There must be a valid tender of payment
III. The thing due is deposited
IV. The debtor shall again notify the creditor of the consignation
V. Creditor unjustly refuses payment

a. I, II, III, V, IV
b. I, III, IV, V, II

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 c. II, III, V, IV, I
d. II, V, I, III, IV

14. What is the presumption when the debtor is given possession of the private document representing the
credit?
a. That the entire debt is forgiven
b. That the document requires revision
c. That the owner of credit will change
d. That the private document was sent for checking
15. Statement I. A creditor who has agreed to receive payment from a new debtor may return to the original
debtor if the former is unable to pay.
Statement II. The insolvency of the new debtor shall not revive the action for the original debtor if the
insolvency was of public knowledge but the new debtor was unaware of such.
a. True, False
b. True, True
c. False, False
d. False, True

PRACTICE EXERCISE: THEORETICAL (CONTRACTS)

Instructions: Multiple Choice. Choose the best answer.

1. What is the primary focus of the "Preparation" stage of a contract?

a. Birth of the Contract
b. Period of Negotiation and Bargaining
c. Performance of contractual duties
d. Execution of Contractual Obligations

2. What does Article 1306 allow parties to establish?

a. Stipulations within the bounds of law, morals, good customs, public order, and public policy
b. Establishes contract validity
c. Only stipulations aligned within the law
d. None of the above

3. If there is no heir, the debt will not be collected. What article is this under?
a. Article 1309
b. Article 1308
c. Article 1310
d. Article 1311

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4. Article ____ enunciates that ‘In order to judge the intention of the contracting parties, their
contemporaneous and subsequent acts shall be principally considered.’
a. Article 1371
b. Article 1370
c. Article 1364
d. Article 1359

5. Once a contract is perfected, the law allows contracting parties to ignore any required special form.
Contracts become obligatory only if they adhere to the specific forms prescribed by law.
a. First Statement is correct
b. Second Statement is correct
c. Both statements are correct
d. Both statements are incorrect

6. Which of the following is NOT a requisite of Rescission?

I. There must be lesion on pecuniary prejudice to one of the parties or to a third person;
II. There must be other legal remedy to obtain reparation for the damage;
III. The period for filing the action for rescission must not have prescribed;
IV. The object of the contract must legally be in the possession of a third person who did not act in
bad faith.

a. I and II
b. II and III
c. II and IV
d. I and III

7. What is the most defective contract?

a. Unenforceable Contracts
b. Voidable Contracts
c. Void Contracts
d. Rescissible Contracts

8. What are the requisites of ratification?

I. the cause must not exist or continue to exist anymore at the time of ratification.
II. the contracts must be a voidable one.
III. the person ratifying must know the reason for the contract being voidable
IV. the person ratifying must be the injured party.

a. I, II, III
b. II, III, IV
c. I, III, IV
d. I, II, III, IV

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9. Rescission is only applicable to contracts referring to things under litigation if entered into by the
defendant with the knowledge and approval of the litigants or competent judicial authority. All contracts
declared by law to be subject to rescission fall under the category of rescissible contracts.
a. First Statement is correct
b. Second Statement is correct
c. Both statements are correct
d. Both statements are incorrect

10. Contracts entered into by guardians are rescissible if the wards they represent suffer lesion by more
than one-fourth of the value of the things involved. Contracts referring to things under litigation become
rescissible if entered into by the defendant without the knowledge and approval of the litigants or
competent judicial authority.
a. First Statement is correct
b. Second Statement is correct
c. Both statements are correct
d. Both statements are incorrect

ANSWER KEY
THEORETICAL (OBLIGATIONS) THEORETICAL (CONTRACTS)

1. D 1. B

2. A 2. A

3. D 3. D

4. B 4. A

5. C 5. D

6. D 6. C

7. A 7. C

8. C 8. D

9. A 9. B

10. B 10. C

11. D

12. A

13. D

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 14. A

15. C

REFERENCES

De Leon, H. S., & De Leon, H. M., Jr. (2014). The Law on Obligations and Contracts (2014 ed.). Rex Printing
Company, Inc.

Domingo, J. C. (n.d.). Law on Obligations and Contracts Lectures [Video].

Soriano, F. R. (2023). Notes in Business Law (2023 ed., Vol. 1). GIC Enterprises & Co., Inc.

Prepared by:
ANDILAB, Lorence V.
BIÑAS, Sophia Christine V.
BACINILLO, Jysrael Jan Coleen C.
GUINTO, Lynelle Jianne
QUEMI, Edmund Joseph C.
SAGARIO, Aaron Justine T.
SORIANO, Angel Nicole E.
TOLENTINO, Margarita Alessandra

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