Obligations and

Contracts:
Essential Notes

1
2
1156
An obligation is a juridical necessity to give, to
do, or not to do.
Notes:
Definition NOT comprehensive
-does not say WHO should DO WHAT
-does not say WHO should DO the giving/
receiving
-no names/parties of obligation
-obligation above is only CIVIL OBLIGATION
-does NOT include NATURAL OBLIGATION
3
1423 – Natural Obligation
Not being based on positive law but on equity
and natural law, do NOT grant a right of action
to enforce their performance, but voluntary
fulfillment by the obligor, they authorize the
retention of what has been delivered or
rendered by reason thereof.

4
Important on Natural Obligation
Duty not to recover what has VOLUNTARILY
been paid although payment was NO longer
required.

Note:
Debtor must KNOW that he no longer may be
compelled to pay (prescribed). Otherwise rule
will not apply.

5
Definition
- Juridical relation, created by virtue of certain
facts, between two or more persons, whereby
one of them, known as the creditor or obligee,
may demand of the other, known as the debtor
or obligor a definite prestation.

6
Elements
-Active subject
-Passive subject
-Object/prestation
-Efficient cause/juridical tie

7
Requisites of Prestation
-Physically/legally possible
-Determinate/determinable
-Has a possible equivalent in money

8
1157
Sources of Obligation
-Law
-Contracts
-Quasi contracts
-Acts or omissions punishable by law, and
-Quasi delict

9
Sources are Exclusive
SC in Sagrado Orden de Predicadores vs.
Nacoco (91 Phil 503) declared—
“The occupant’s obligation to pay rentals, like any
other obligation, must arise from law, contract, quasi-
contract, crime or negligence. If occupant took
possession of the property with the permission of the
Alien Property Custodian, without any express or
implied agreement between them that rentals would
be paid for the use and occupation of the enemy
property, NONE may be recovered by pre-war owner.”

10
1158
Obligations arising from LAW never
presumed
-Hence, in cases of doubt, presumption is
AGAINST the existence of an obligation
arising from a particular law

11
- No agreement is necessary before
obligation ex lege can arise.
Example:
One who gambles and wins can be compelled by loser
to return the winnings (Art. 2014)

- Action is called “INDEBITATUS

ASSUMPSIT” (Leung Ben vs. O’Brien, 38
Phil. 182)

12
So-Called Innominate Contracts
(CONTRATOS INNOMINADOS)

i.Du ut des – I give that you may give

ii.Du ut facias – I give that you may do
iii.Facio ut des – I do that you may give
iv.Facio ut facias – I do that you may do

13
Pelayo vs. Lauren
“xxx This liability (to support) originates from the xxx
mutual obligation which the law has expressly
established between the married couple. Within the
meaning of the law, the father and mother-in-law are
strangers with respect to the obligation that devolves
upon the husband to provide support xxx of medical
assistance to his wife xxx it does not appear that a
contract existed between the defendants and plaintiff
physician xxx.”

14
1159
Obligation’s arising from CONTRACTS have
the force of law between the contracting
parties and should be complied with in good
faith.
Except:
Those contrary to law, morals, good customs,
public order, public policy.

15
 In Cui vs. Arellano University, the
Supreme Court declared that the stipulation
that a student’s scholarship is good only if he
continues in the same school and that he
waives his right to transfer without refunding
the equivalent of his scholarship grant in cash
is contrary to public policy, xxx is NULL and
VOID.
N.B. Does not apply if employee given
scholarship to study. Employer may require to
stay

16
 Scholarship are awarded in recognition of
merit and “to help students in whom society
has an established interest or first lien” and
not to keep outstanding students in school to
bolster prestige and increase its business
potential.

17
NOTE:
Obligations arising from CONTRACT need
NOT always be EXPRESS (like those from
LAW). They may be IMPLIED.

18
 Aldaba vs. CA, et al. (27 SCRA 263)
Issue: Was there a contract whether express
or implied?
Ruling: No express agreement to pay for the
services rendered.
No implied contract also because xxx petitioner
did not expect to be paid for the services. xxx
When a person does not expect to be paid for
his services there cannot be a contract implied
in fact to make compensation for said services.

19
To give rise to an implied contract to pay
services, they must have been rendered by
one party in EXPECTATION that the other
party would pay for them xxx and
ACCEPTED by the other party with
KNOWLEDGE of the expectation.

20
Quasi-Contracts
Those juridical relations arising from lawful,
voluntary and unilateral acts, by virtue of
which the parties become bound to each
other, based on the principle that no one shall
be unjustly enriched or benefited at the
expense of another. (Art. 2142)

21
Kinds of Quasi-Contracts
1)Negotiorum Gestio – voluntary management
of the property or affairs of another without the
knowledge or consent of the latter. (Art. 2144-
2153)
2)Solutio Indebiti – juridical relation which is
created when something is received when
there is no right to demand it and it was unduly
delivered by mistake. (Art. 2154-2163)
3)Other cases (Art. 2164-2175)

22
Negotiorum Gestio: Requisites
1)Gestor must voluntary assume agency or
management;
2)Business or property must be neglected or
abandoned;
3)Agency/management must not be
authorized by owner either expressly or
impliedly;
4)Assumption of agency/management must be
made in good faith.

23
Illustration:
X abandoned his fishpond in Marawi. He fled
to Manila. Y seeing fish in the pond for
harvest, took possession, harvested fish and
sold the harvest to Z. Then Y borrowed money
from W to buy supplies of fish fry and prepare
fishpond for next crop.

24
Issues:
i.Juridical relation between X and Y?
• QC-NG
• Y-gestor; X-owner/beneficiary
• Officious manager (Art. 2144)

ii.Obligation of Y to X as regards contract of

Z?
• Y must account of his operations and deliver
to X price of harvested fish (Art. 2145)

25
iii. Obligation of X as regards Y’s contract
with W?
• X must pay loan to W. X must answer for
obligations incurred with 3rd persons in his
interest. (Art. 2150)

iv. Legal effect of X expressly ratifies Y’s

management?
• Shall create express agency and X is liable
to pay commissions habitually received by
gestor. (Art. 2149)

26
Solutio Indebiti: Requisites (Art. 2154)
1)There must be payment;
2)Person who made payment was under NO
obligation to do so;
3)Payment was by mistake

27
28
Classification of Obligations
Based on Prestation
I.Real Obligations – to give
(a) Real obligation to give specific object
(b) Real obligation to give generic object
II.Personal Obligations – to do, not to do, not
to give
(a) Positive personal obligation – to do or to give
(b) Negative personal obligation – not to do or not
to give

29
REAL OBLIGATIONS
Specific Generic
Determinate Indeterminate
Principal – Art. 1244 Art. 1246
‘The debtor of a thing cannot ‘xxx the creditor cannot demand a
compel the creditor to receive a thing of superior quality. Neither
different one, although the latter can the debtor deliver a thing of
may be the same value as, or inferior quality.’
more valuable than that which is
due.”

Supplemental – Art. 1163

‘xxx also obliged to take care of it Not applicable
with the proper diligence of a good
father of a family.
Except :(a) law requires another
(b) agreement states
another

30
 Specific Generic
Determinate Indeterminate
Art. 1166
‘Deliver all accessions and Ibid.
accessories of the thing although
not mentioned.’
Art. 1165, par. 2
Not applicable ‘Creditor may ask that the
obligation be complied with at the
expense of the debtor.’
Art. 1165, par. 1; Art. 1170 Art. 1170
‘Liable for damages in case of ‘Liable for damages in case of
breach by the debtor due to delay, breach due to delay, fraud, no
fraud, negligence and negligence and COTOTTO.’
COTOTTO.’

31
PERSONAL OBLIGATIONS
POSITIVE NEGATIVE
Art. 1244, par. 2 Art. 1244, par. 2
The “xxx act xxx cannot be The “xxx forbearance cannot be
substituted by another act xxx substituted by another xxx
against obligee’s will.” forbearance against the obligee’s
will.”
Art. 1167 Art. 1168
- Have the obligation performed - If the obligor does what he has
or executed at the expense of been forbidden, obligee can have
obligor it undone at obligor’s expense
- Ask what has been poorly done - Recover damages
be undone Except: (1) Effects of the act
- Recover damages which is forbidden are definite in
Except: when the personal character;
qualification of the obligor is the (2) It is physically or
principal motive of the obligation legally impossible to undo what
has been done
32
 No specific performance
 No involuntary servitude

33
Kinds of Breach of Obligations
1)Involuntary – debtor is unable to
comply with his obligation because of
fortuitous event
Note:
Debtor is NOT liable for damages.

34
2) Voluntary – debtor, in the performance
of the obligation, is guilty of:
(a) Default (mora)
(b) Fraud (dolo)
(c) Negligence (culpa)
(d) Breach through contravention of
tenor of the obligation
Note: Debtor is liable for damages.

35
A. Default (Mora): Delay in the fulfillment of
the obligation with respect to time.
-Must be either malicious or negligent
-If due to inadvertence without any malice of
negligence, the obligor cannot be liable under
Art. 1170
(RCBC vs. CA, G.R. No. 133107, March 25, 1999)

36
Requisites in order to consider the obligor
in default
1)Obligation is demandable and already
liquidated
2)The obligor/debtor delays performance
3)The creditor requires performance judicially
or extra-judicially (demand)
(SSS vs. Moonwalk Devt. and Housing Corp., G.R. No.
73345, April 7, 1993)

37
Kinds of Default
1)Mora solvendi – delay of the debtor to
perform his obligation
a) Ex re – obligation is to give
b) Ex persona – obligation is to do

There is no mora solvendi in:

-Negative obligation
-Natural obligation
-Alternative obligation

38
2) Mora accipiendi – delay of the creditor in
accepting delivery of the thing which is the
object of the obligation
Requisites:
a) Offer of performance by the creditor who has the
required capacity;
b) Offer is to comply with the prestation as it should be
performed; and
c) Creditor refuses the performance without just cause.
Remedy:
a) Consign it in court
b) Keep it to himself (not liable for damages)

39
3) Compensatio morae – delay of the
parties or obligors in reciprocal
obligation

40
Rules on Default
1)Unilateral Obligation
Demand is necessary. No demand-no delay.
Mere expiration of the period fixed by the
parties will not cause delay.
Except:
a)Express stipulation that demand is not necessary
b)The law EXPRESSLY so declares (i.e., taxes)
c)Time is of the essence of the contract
• Barzaga vs. CA
d)Demand would be useless (i.e., debtor voluntarily destroy the
thing)
•Jimmy Co v. CA; Broadway Motors (23 June 1998)
41
 Pantaleon vs. American Express
(May 8, 2009)
Unreasonable delay in approving/
disapproving credit card purchase is MORA
SOLVENDI, subject to damages.
N.B. Delay was committed in the obligation to
process loan (for approval or disapproval)
NOT in an obligation to release LOAN

42
 Barzaga vs. CA
(Feb, 12, 1997)
Materials necessary to be delivered in a
particular date so as to complete
construction of Niche before Christmas and
to bury the dead before Dec. 25 as
requested by the deceased – FAILURE is
delay that justifies damages – no demand
necessary – time was MOTIVE

43
Lorenzo Shipping Corp. vs. BJ Mathel
International (Nov. 19, 2004)
-No delay is incurred in the delivery if NO
demand was made by creditor
-By accepting the cylinders that were
delivered after default, creditor waived his
right to sue for damages based on Art.
1169

44
2) Reciprocal Obligation
Fulfillment by both parties should be
simultaneous; one party incurs delay
from the moment the other party fulfills
his obligation, while he himself does not
comply or is not ready to comply in a
proper manner with what is incumbent
upon him. (Art. 1169)
Except:
When different dates for the performance of obligation
is fixed by the parties. Demand is necessary in
such case.

45
In Solar Harvest vs. Davao Corrugated Carton
Corp. (July 26, 2010), SC said “in reciprocal
obligations xxx the general rule is that the
fulfillment of the parties’ x x x obligation should be
simultaneous. Hence, NO DEMAND x x x
necessary because once a party fulfills his
obligation and the other party does not x x x the
latter automatically incurs in delay. But when
different dates for performance xxx are fixed, the
default xxx must be determined by the rules given
by the first paragraph (Art. 1169) xxx incur delay
ONLY from the moment the other party demands
fulfillment xxx.”

46
B. Fraud (Dolo): Conscious and intentional
proposition to evade the normal fulfillment
of an obligation
-Implies some kind of malice or dishonesty
and cannot cover cases of mistake and errors
in judgment made in good faith. In such case,
obligor can be held liable for damages.
-There is deliberate and intentional evasion of
normal fulfillment of obligation

47
Civil Frauds Distinguished
Fraud/Dolo in the Performance Causal Fraud (Dolo Causante or
Art. 1170 Dolo Incidente)
Arts. 1338 and 1344
Present only during the Present only during the time of
performance of a pre-existing birth or perfection of the obligation
obligation
Purpose is to evade the normal Purpose is to secure the consent
fulfillment of the obligation of the other to enter into a
contract
Results in the non-fulfillment or Results in the vitiation of consent
breach of the obligation
Gives rise to a right of the obligee Gives rise to a right of an innocent
to recover damages from the party to annual the contract
debtor and not a cause of
annulment of contract
Valid obligation Voidable obligation
48
 Cathay Pacific Airways vs. Vazquez
(Mar. 14, 2003)
Upgrading of passengers from Business
Class to First Class in this case was NOT
FRAUD. The airline informed passengers
of the change. There were no insidious
words or deceitful machinations or wilful
concealment of material facts.

49
C. Negligence (Culpa): Any voluntary act or
omission, there being no malice, which
prevents the normal fulfillment of an
obligation
Kinds:
1)Civil Negligence
a) Culpa contractual
b) Culpa aquiliana/quasi-delict
2)Culpa Criminal

50
 Meralco vs. Ramoy
(March 4, 2008)
Meralco cutting the electric power of
customers on the basis solely of NPC request
to cut power of houses in NPC property
already ordered evicted by final judgment and
finding in fact that the house of Ramoy was
not in NPC property was NEGLIGENCE.

51
Carnapping Not Necessarily Fortuitous Event
Jimmy Co vs. CA, Broadway Motor Corp.
June 22, 1998

Ruling: It is not a defense for a repair shop xxx to

escape liability xxx because the damage or loss
xxx was due to carnapping. Carnapping per se
cannot be considered as fortuitous event. The fact
that a thing was unlawfully and forcefully taken
from another’s rightful possession xxx does not
automatically give rise to fortuitous event.

52
To be considered xxx it must be proved and
established that the event was an Act of
God or was done solely by third party and
that the claimants or person alleged to be
negligent has any participation.

53
NOTE:
Defendant was also held already in legal
delay. For the car was lost three (3) days
after the obligation to deliver. No demand
was required, apparently because it was
“useless.” Car was not working.

54
NOTE: Art. 2001
The act of a thief or robber who has entered
the hotel is NOT deemed force majeure,
unless it is done with the use of arms or
through irresistible force.

55
Sicam vs. Jorge, 529 SCRA 443

Robbery per se, just like carnapping, is not

a fortuitous event. It does not foreclose the
possibility of negligence on the part of the
obligor. The unforeseen event, the robbery,
must take place without any concurrent fault
on the debtor’s part in order to be
appreciated as a fortuitous event under
Article 1174 of the NCC.

56
The robbery took place in the pawnshop
under the control of petitioners. Petitioners
had the means to screen the persons who
were allowed entrance and to protect itself
from unlawful intrusion but it failed to
exercise precautionary measures. Hence,
the robbery was not considered fortuitous
event because of concurring negligence on
the part of the petitioners.
BUT…

57
Reminders:
In Hernandez vs. Chairman, COA, disbursing
officer of PTA encashed check for salaries of
employees when he was robbed inside a
passenger jeepney in broad daylight on a busy
highway and in the presence of other
passengers. The Court held the robbery here was
a fortuitous event because it could not be the
result of the victim’s imprudence and negligence.
Here, there was no concurring negligence on the
part of the disbursing officer.

58
Tire Blow Out
The explosion of the new tire may not be
considered a fortuitous event. There are human
factors involved in the situation. The fact that the
tire was new did not imply that it was entirely free
from manufacturing defects or that it was properly
mounted on the vehicle. Neither may the tire
bought is of a brand name noted for quality, that it
could not explode within five days’ use. It is settled
that an accident caused either by defects or
through the negligence of its driver is not a caso
fortuito that would exempt the carrier from liability
for damages. (Yobido vs. CA, Oct. 17, 1997; Juntilla
vs. Fontanar, May 31, 1985)

59
Mechanical Defect
In a vehicular accident, a mechanical defect
will not release from liability if shown that
the accident could have been prevented
had he properly maintained and taken good
care of the vehicle. (Perla Compania De
Seguros Inc. vs. Sarangaya, 474 SCRA
191)

60
1997 Asian Financial Crisis
The 1997 financial crisis that ensued in Asia
did not constitute a valid justification to
renege on obligations—the Asian financial
crisis in 1997 is not among the fortuitous
events contemplated under Art. 1174 of the
Civil Code. (Fil-Estate Properties vs. Go,
530 SCRA 621)

61
D. Breach through contravention of tenor
of contract
-Includes not only any illicit act which impairs the
strict and faithful fulfillment of the obligation, but
also every kind of defective performance
The following do not excuse fulfillment:
1)Increase in cost of performance
2) Poverty
3)War between the subjects of a neutral country

62
Cathay Pacific Airways vs. Vasquez
“The Vasquezes had the right to waive the
PRIORITY (FIRST CLASS) and by Cathay’s
imposing the UPGRADE, it breached its
contract of carriage with the Vasquezes.
However, since there is no bad faith or fraud
on the part of Cathay, the Sps. Vasquez are
only entitled to nominal and NOT moral
damages.”

63
Areola vs. CA & Prudential Guarantee &
Insurance
Held: Prudential act of cancelling the
insurance policy entitles Areola to
damages. Even if no harm/damage was
done there was a BREACH because
there’s supposed to be continuity in
Insurance.

64
Defense
Fortuitous event (Art. 1174)
-Acts of God
-Acts of Man

65
Requisites:
1)Event must be independent of the will of the
obligor;
2)It must be either unforeseeable or inevitable;
3)Must be of such a character as to render it
impossible for the obligor to fulfill his obligation in
a normal manner; and
4)Obligor must be free from any participation in
the aggravation of the injury resulting to the
obligee.

66
Liability in case of fortuitous event:
NO LIABILITY
Except:
1)When expressly declared by law (e.g. Arts. 552 (2),
1165 (3), 1268, 1942, 2147, 2148 and 2159 NCC)
2)When expressly declared by stipulation or contract
3)When the NATURE of the obligation requires the
assumption of risk
4)When the object of the prestation is generic

67
 Tanguiling vs. CA (Jan. 2, 1997)
JMT contracted to build windmill.
Downpayment and partial payment made
but complete payment was denied because
the windmill collapsed due to strong wing.
Held: Not fortuitous event because
foreseeable event that strong winds are
present in windmills places.
Windmill should not have collapsed if there
was no defect.

68
 Nakpil & Sons. vs. CA (Oct. 3, 1986)
Earthquake that destroyed building IS NOT
FORTUITOUS EVENT that exempts
designers/contractors from liability if there
were alterations of the plans and
specifications that have been stipulated
with building owner.

69
 Republic vs. Luzon Stevedoring
(21 SCRA 279)
Presumption of negligence; case at bar. –
Considering that the Nagtahan bridge was an
immovable object and xxx provided with
adequate openings for the passage of water
craft xxx the unusual event that the barge xxx
rammed the bridge support raises a
presumption of negligence xxx.”

70
The precautions taken by it on the day in
question: that it assigned two of its most
powerful tugboats to tow down river its barge;
that it assigned to the task the more
competent and experienced among its
patrons, had the towlines, engines and
equipment double-checked and inspected; it
instructed its patrons to take extra precautions;
and concludes that it had done all it was called
to do, and that the accident, therefore, should
be held due to force majeure or fortuitous
event.

71
These very precautions, however, completely
destroy the appellant's defense. For caso
fortuito or force majeure (which in law are
identical in so far as they exempt an obligor
from liability) xxx. It is xxx not enough that the
event should not have been foreseen or
anticipated, as is commonly believed, but it
must be one impossible to foresee or to avoid.
The mere difficulty to foresee the happening is
not impossibility to foresee the same: xxx

72
Otherwise stated, the appellant, xxx
knowing xxx the perils xxx voluntarily
entered into a situation involving obvious
danger; it therefore assured the risk, and
can not shed responsibility merely
because the precautions it adopted
turned out to be insufficient. xxx

73
 Far East Bank & Trust Co. vs. CA
Facts: Luis and Clarita Luna filed an action for
damages against Far East Bank and Trust
Company when it cancelled his FAREAST CARD
after Clarita Luna lost her supplemental credit card.
Luis Luna was forced to pay in cash when he
tendered a despedida lunch for a close friend at the
Bahla Rooftop Restaurant of the Hotel
Intercontinental Manila and his card was not
honored.
Issue: Whether or not Far East Bank is liable for
damages.

74
Held: Far East Bank is liable for nominal
damages.
Far East Bank’s neglect to inform Luis
Luna of the cancellation of his card
constitutes only simple negligence. If Far
East Bank’s omission was gross
negligence and is therefore, tainted with
bad faith, it would have been liable for
moral damages.

75
 Salugada vs. FEU (Apr. 30, 2008)
“We find that respondents failed to
discharge the burden of proving that they
exercised due diligence in providing a safe
learning environment for their students.
They failed to prove that they ensured that
guards met the requirements. xxx”

76
“A school should not be allowed to
completely relinquish or abdicate security
matters in its premises to security agency.
To do so would result to contracting away its
inherent obligation to ensure a safe learning
environment for students.”

77
Extinguishment of Interest and Prior
Installments (Art. 1176)
Receipt of the principal (or later installment)
without reservation as to the interest (or prior
installment) shall give rise to a disputable
presumption that the interest (or prior
installment) has been paid.

78
However, presumptions do not apply:
1)When there is a reservation made orally or
in writing
2)If the receipt does not recite that it was
issued for a particular installment due as when
the receipt is only dated
3)To payment of taxes
4)Where non-payment of the prior obligations
has been proven

79
Compare with Art. 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.”

(Above is CONCLUSIVE PRESUMPTION)

80
Remedies of Creditor to Protect Credit
(Art. 1177)
1)Cession (1250) – to exhaust the property in
possession of the debtor generally by attachment,
subject to exemptions provided by law.
2)Accion pauliana – to impugn all the acts which the
debtor may have done to defraud them by means of
rescissory action at the instance of the creditor who
is prejudiced.
3)Accion subrogatoria – to be subrogated to all the
rights and actions of the debtor save those which
are inherent in his person.

81
Transmissibility of Rights Acquired by
Virtue of an Obligation (Art. 1178)
General Rule: Rights acquired by virtue of an
obligation are transmissible in character
Except:
1)When prohibited by LAW which are purely personal in
character
2)When prohibited by PERSONAL QUALIFICATION or
circumstances of the transferor which is material ingredient
attendant in the obligation
3)When prohibited by STIPULATION of the parties

82
83
PURE OBLIGATION
The effectivity or extinguishment does not
depend on the fulfillment or non-fulfillment
of a condition or on the expiration of a term
or period, and is immediately demandable.
(1179, par. 1)
Seone vs. Franco, 24 Phil 309 – debtor
promise to pay debt “little by little” is an
obligation with period subject to Art. 1197.

84
CONDITIONAL OBLIGATION
•Suspensive Condition
The effectivity is subordinated to the fulfillment
or non-fulfillment of a future AND uncertain
fact or event. (1181)
•Resolutory Condition
Extinguishment of obligation is dependent
upon fulfillment of condition.

85
In Central Philippines University vs. CA
(July 17, 1995), when a person donates
land on condition that donee would build
a school on land, condition is NOT
suspensive BUT resolutory.

86
Effects of Failure to Comply with
Condition
1)PERFECTION of a contract – results in the failure
of the contract
2)PERFORMANCE of the obligation – gives the
other party an option to refuse to proceed with the
compliance of the obligation or to waive the
condition. (i.e., Contract to Sell)

87
Article 1545
“Where the obligation of either party to a
contract of sale is subject to any condition
which is not performed, such party may refuse
to proceed with the contract or he may waive
performance of the condition. xxx"

88
OBLIGATION WITH A PERIOD
Those whose demandability or extinguishment is
subject to the expiration of a term or period.
Term/Period
Interval of time, which, exerting an influence on an
obligation as a consequence of a juridical act, either
suspends its demandability or produces its extinguishment
Requisites:
1)Future;
2)Certain; and
3)Possible, legally and physically

89
Note:
When obligation is demandable at once—
1)Pure obligations (Art. 1179, par. 1)
2)Obligations with a resolutory condition (Art.
1179, par. 2)
3)Obligations with a resolutory term (Art. 1193, par. 2)
4)Obligations with a condition not to do an
impossible thing (Art. 1183, par. 2)

90
Kinds of Condition
1)Potestative – fulfillment of the condition
depends on the will of a party to the obligation
2)Casual – fulfillment of the condition depends on
chance and/or the will of a third person
3)Mixed – fulfillment of the condition depends on
the will of a party to the obligation and party on
chance and/or will of a third person

91
Potestative Condition
•When it depends exclusively upon the will of
creditor – condition and obligation is valid in as
much as creditor is interested in the fulfillment
•When it depends exclusively upon the will of
debtor in case of a suspensive condition –
condition and obligation are void; to allow such
condition would be to sanction illusory obligation,
in direct contravention of the principle announced
in Art. 1308

92
SEBTC vs. CA & Ferrer (Oct. 11, 1995)
Provision in the contract for building construction
that adjustment of (increase) in contract price (due
to increase in prices of supplies) subject to mutual
agreement is POTESTATIVE CONDITION.
Hence, VOID.
Because the “mutual agreement” requirement is in
effect a condition dependent on petitioner bank’s
SOLE WILL, since the (creditor) would naturally
and logically give consent to such an agreement
which would allow him recovery of the interest
cost

93
Catungal, et al. vs. Rodriguez (Mar. 23, 2011)
In a Conditional Deed of Sale the vendee shall pay the
balance of the price when he has successfully
negotiated and secured a road right of way is NOT a
condition on the perfection of the contract nor on the
validity of the entire contract—such condition is NOT
purely potestative—such condition is likewise
depended on chance as there is no guarantee that the
vendee and the 3rd party landowners would come to
an agreement regarding the road right of way, a type
mixed condition expressly allowed under Article 1183.

94
• When it depends exclusively upon the will
of debtor in case of a resolutory condition
– condition and obligation is valid; the
position of the debtor is exactly the same
as the creditor in a suspensive condition
and does not render the obligation
illusory

95
Taylor vs. Uy Tieng Piao and Tan Liuan
43 Phil 83

Employment contract, employee engaged for

2 years, if machinery fail to arrive within 6
months, employer may cancel at his option,
employment contract—potestative, but
resolutory, hence valid.

96
Parks vs. Prov. of Tarlac
49 Phil 142

Donation of property with a condition that

portion be used for a school and park; the
condition is RESOLUTORY because the event
cannot be fulfilled without giving effect to the
donation.

97
Naga Telephone Co. vs. CA (Feb. 24, 1994)
Contract provision—
“That the term or period of this Contract shall be as
long as the party of the first party has need for the
electric light posts of the party of the second party.”
SC: Contract VOID – the condition is PURE
potestative as it depends upon the sole will of
debtor.

98
Catungal, et al. vs. Rodriguez (Mar. 23, 2011)
But—
“It being understood that this contract shall terminate
when for any reason whatsoever the 2nd party is forced
to stop, abandon its operation as a public service and
it becomes necessary to remove the electric light
post.”
SC: Contract is VALID – fulfillment of
obligation does NOT depend upon sole will of
debtor.

99
Effects of Impossible Conditions (Art. 1183)
1)Conditional obligation is void – both obligation and
condition are void
2)Conditional obligation is valid – if condition is
negative, it is disregarded and obligation is rendered
pure and valid
3)Only the affected obligation is void – if the
obligation is divisible, the part not affected by the
impossible condition shall be valid
4)Only the condition is void – if obligation is pre-
existing, not depending on fulfillment of the condition
which is impossible for its existence, only the
condition is void
100
5) Condition considered not imposed – if
impossible/unlawful condition is attached for a
simple or remuneratory donation as well as to a
testamentary disposition, condition is
considered not imposed while the obligation is
valid.
NOTE:
The impossibility of the condition must exist at the
time of the creation of the obligation; a supervening
impossibility does not affect the existence of the
obligation.

101
Cruz vs. Gasilian
Considering that the tract of land was
originally stony and partly forested, the
condition that it be totally cultivated is an
impossible one which the law does not
countenance.

102
Effects of Positive and Negative Condition
(Art. 1184-1185)
•In positive condition, obligation is extinguished as
soon as the time expires or if it becomes
indubitable that the event will not take place.
•In negative condition, the obligation is effective
from the moment the time indicated has lapsed, or
if it has become evident that the event cannot
occur, although the time indicated has not yet
lapsed.

103
Positive/negative condition
is different from
positive/negative obligation

104
Doctrine of Constructive Fulfillment of
Suspensive Condition (Art. 1186)
Condition is deemed fulfilled when the obligor
actually prevented the obligee from complying
with the condition; prevention must have been
voluntary or wilful in character.
Reason:
One must not profit by his own fault.

105
Requisites:
1)Condition is suspensive
2)Debtor actually prevents the fulfillment of the
condition
3)He acts voluntarily

106
Constructive Fulfillment
Int’l Hotel Corp. vs. Joaquin (Apr. 10, 2013)
Mere intention of the debtor to prevent the
happening of the condition or to place
ineffective obstacles to its compliance, without
actually preventing fulfillment is insufficient.

107
Principle of Retroactivity in Suspensive
Condition (Art. 1187)
The principle of retroactivity under Art. 1187 is
limited to the effects of the obligation. The
cause of action for the enforcement of the
obligation accrues and the prescription of the
action must still be computed from the
moment of the happening of the suspensive
condition. (Priority of Rights)

108
Rule on Retroactivity has no application to:
a)Real contracts; they are perfected only by
delivery of the object of the obligation;
principle only applies to consensual contracts;
b)Contracts in which the obligation arising
therefrom can only be realized within
successive periods or intervals (e.g. lease,
hire of service, life annuity)

109
Retroactive effect as to the fruits and
interests in obligations to give
a)Reciprocal obligations – no retroactivity, mutually
compensated (fruits may be natural, industrial or civil)
b)Unilateral obligations – no retroactivity, debtor
appropriates the fruits and interests received because
it is usually gratuitous unless intention was otherwise
as inferred from nature and circumstances.
• In accord with Art. 1164 – Fruits only to be
right of creditor at the time of delivery arise,
hence, subject to suspensive condition.

110
Article 1188
Creditor, may, before the fulfillment of
condition, bring appropriate action for the
preservation of his right.
NB: No preference of credit is granted to the
creditor.

111
Right of Debtor Before Fulfillment of
Condition
-may recover what he paid by mistake before
the happening of the SC
-payment was determinate thing, may file an
accion reinvindicatoria
-payment for generic, solutio indebiti
-payment made with knowledge of condition,
debtor impliedly waives condition and cannot
recover

112
- payment with knowledge but condition
did NOT happen, debtor can recover lest
creditor will be unjustly enriched
- payment not by mistake debtor impliedly
waived condition, he cannot recover
what he has prematurely paid once SC
is fulfilled

113
Effects of Loss, Deterioration and
Improvement in Real Obligations (Art. 1189)
1)Loss – when it perishes; or goes out of
commerce; or disappears in such a way that its
existence is unknown or it cannot be recovered
a) Without debtor’s fault – obligation is
extinguished
b) With debtor’s fault – obligation is converted
into one of indemnity for damages

114
2) Deterioration – any reduction or
impairment in the substance or value of a
thing which does not amount to a loss
a) Without debtor’s fault – impairment to be
borne by the creditor
b) With debtor’s fault – creditor may choose
between bringing an action for rescission of
the obligation OR bringing an action for
specific performance with damages in either
case

115
3) Improvement – anything added to,
incorporated in, or attached to the thing
that is due
a) By the thing’s nature or by time – shall inure
to the benefit of the creditor
b) At the debtor’s expense – debtor shall have
no other right than that granted to a
usufructuary (Arts. 579 and 580)
Consequently, the debtor cannot ask
reimbursement for the expenses incurred for
useful improvements of for improvements for mere
pleasure (Art. 579), he can only ask
reimbursement for necessary expenses. (Art. 546)

116
Above rule applies to the following:
1)Determinate things only because the genus
of a thing never perishes (genus nun quam
peruit)
2)Obligation with a period
3)Those who have a duty to return in case of
loss, deterioration or improvement of the thing
in an obligation with a resolutory condition (Art.
1190, par. 2)

117
N.B.
The happening of a resolutory
condition does NOT ipso jure revert
ownership in the original debtor, he
merely becomes entitled to the
delivery which would give him
ownership anew.

118
HENCE….

Original debtor merely has a personal

right which is enforceable only against
his creditor who has become a debtor
obliged to make restitution.

119
Rescission of Reciprocal Obligations in
General (Art. 1191)
Reciprocal Obligation – Those which are created
or established at the same time, out of the same
cause and which result in mutual relationships of
creditor and debtor between the parties.
General Rule:
If one of the parties fails to comply with what is
incumbent upon him, there is a right on the part of the
other to rescind (or resolve) the obligation (tacit
resolutory condition)

120
• Permitted only for such breaches as are
substantial and fundamental as to defeat the
object of the parties in making the agreement
(Universal Food Corp. vs. CA, G.R. No. L-29155,
May 13, 1970)
• Can be demanded only if the plaintiff is
ready, willing, and able to comply with his
own obligation and the other is not (Seva vs.
Berwin, G.R. No. L-24321, Jan. 11, 1926) and the
party who has not performed his part of the
agreement is not entitled to sue/rescind; the
right belongs to the injured party

121
Sy vs. Andok’s Litson Corp.
(Nov. 21, 2012)

A lease contract is a reciprocal contract. By

signing the lease agreement, the lessor grants
possession over his/her property to the lessee
for a period of time in exchange for rental
payment.
Indeed, rescission is statutorily recognized in a
contract of lease in Art. 1659.

122
Substantial breach—delay on the billboard
construction by another lessee, thereby
preventing Andok to construct and the
lessor’s failure to explain unpaid electric
bills.

123
Substantial Breach
Villamar vs. Mangaoil (Apr. 11, 2012)

Although Article 1458, 1495 and 1498 of the

NCC and case law do not generally require
the seller to deliver to the buyer the physical
possession of the property subject of a
contract of sale and the certificate of title
covering the same, the agreement entered
into by the petitioner and respondent provides
otherwise. xxx

124
In the case of Chua vs. CA xxx which was cited
by petitioner, it was ruled that when the deed of
absolute sale is signed by the parties and
notarized, then delivery of the real property is
deemed made by the seller to the buyer. The
transfer of the certificate of title in the name of
the buyer is not necessary to confer ownership
upon him.
In the case at bar, the ruling in Chua cannot
apply because the contract EXPRESSLY
provides that petitioner shall deliver to the buyer
the physical possession of the property and the
certificate of title.

125
• Must be invoked judicially UNLESS contract
contains a facultative resolutory provision, in
which case, judicial permission to cancel or
rescind the contract is no longer necessary –
act of rescission must be communicated to
other party (Jison vs. CA, G.R. No. L-45349, Aug.
15, 1988)

126
But in Nolasco, et al. vs. Cuerpo (Dec. 9,
2015) where the Contract of Sale stipulates
that seller will cause completion of the
transfer of registration of title to names of
buyer and that “xxx failure xxx shall
automatically authorize (buyers) to
undertake the same xxx and charge seller
the cost xxx.”

127
SC: No, resolution (rescission) allowed. The
failure to comply with provision CANNOT be
said to defeat the object of the parties,
considering that the same provision
provides for a recourse on the part of
buyers. No substantial breach to justify
rescission. Only slight breach.

128
Fil-Estate Properties vs. Ronquillo
(Jan. 13, 2014)

“xxx non-performance of petitioners’ obligation

entitles respondents to rescission under Article
1191 xxx. More in point is Section 23 of PD 957,
the rule governing the sale of condominium which
provides—
“No installment payment made by a buyer xxx in a xxx
condominium project for xxx unit he contracted to buy
shall be forfeited xxx when the buyer after notice to
the owner, desists from further payment due to the
failure of xxx developer to develop xxx condominium
xxx.
129
Such buyer may, at his option, be
reimbursed the total amount paid
including amortization interests but
excluding delinquency interests, with
interest thereon at the legal rate.

130
Effects:
If there is a stipulation granting the right of
rescission on the part of the aggrieved party and
he validly rescinds the contract pursuant to such
express grant, any court decision adjudging the
propriety of the rescission extra-judicially made is
NOT the REVOCATORY act of rescission but
merely DECLARATORY or an affirmation of the
revocation (De Luna vs. Abrigo, G.R. No. 57455, Jan. 18,
1990)

ALSO: 1191 applies only if there has already been

performance by any of the parties.

131
Maglasang vs. Northwestern University
(Mar. 20, 2013)

Construction of a new Integrated bridge

system.
The xxx contracts require no less than
substantial breach before they can be
rescinded (based on 1191). Since the
contracts do not provide for a definition, we
apply definition found in jurisprudence.

132
xxx Cannu vs. Galang, that substantial,
unlike slight or casual breaches of contract,
are fundamental breaches that defeat the
object of the parties in entering into an
agreement, since the law is not concerned
with trifles.
- New IBS was expected to be CHED
compliant. Contractor failed to supply the
same. It was substantial breach.

133
Art. 1191 does NOT apply to the following:
1)Contracts of partnership where a partner fails to pay
the whole amount which he has bound to contribute to
the common fund (Arts. 1786 and 1788)
2)Sales of real or personal property by installments.
The first being governed by Recto Law while the latter
is governed by Maceda Law.
3)Action for rescission is not required upon breach of
compromise agreement; Art. 2041 confers upon the
party concerned the authority to regard it as rescinded
and to insist upon the original demand.

134
NOTE:
Prescriptive period for action of
Resolution is 10 years from the time right
of action accrues according to Art. 1144 –
NOT 4 YEARS (applicable to rescission)

135
Question:
Is petition for rescission a prejudicial
action to warrant suspension of criminal
action for BP 22?

136
In Reyes vs. Rossi (18 Feb. 2013,
Bersamin), SC—
•Issue in BP 22 – WON accused issued
dishonored checks knowing that they had
insufficient funds.
•Issue in 1191 – WON the breach in
fulfilment warranted the rescission of
conditional sale.

137
Hence, if in 1191 case, there is ground to
rescind, it will not mean that accused in
BP 22 will be absolved of crime because
accused already committed the crime
where the sale was still fully binding
(before rescission).

138
 Vicelet & Vicelen Lalicon vs. NHA
(Jul. 13, 2011)
Violation of annotated restriction that
property sold by NHA with mortgage cannot
be sold within five years from release of
mortgage is subject to resolution in Art.
1191 – NOT Rescission in Art. 1389

139
Sps. Felipe & Leticia Conner vs. Sps.
Gil & Fernandina Galang (May 25, 2005)
Non payment of the balance of P45,000 for
a total purchase price of P120,000 after
several demands is a SUBSTANTIAL
BREACH that justify RESOLUTION of the
contract.

140
In ASB Realty Corp. v. Ortigas & Co., Ltd. (9
Dec. 2015, Bersamin), a deed of sale
between Ortigas and Amethyst Peal Corp.
over a property with condition that latter will
build in 4 years. This was annotated in title.
APCorp. assigned property to ASB who
knew of the condition. APC failed to build.
Issue: Can Ortigas (seller) rescind (resolve)
by filing petition against ASB?

141
SC: No. ASB was not party to the contract.
It was APC. Despite annotation in the title
(ASB was aware of), ASB had no legal duty
to fulfil construction of building. It was APC,
that defaulted under the Deed of Sale.
Hence, enforcement of the sale should be
against APC. Rescission cannot take place
anymore for the property legally came into
the juridical possession of ASB, who was a
3rd party to the Deed of Sale.
N.B. There was no novation.

142
Ayala Life Insurance vs. Ray Burton Dev’t.
Jan. 23, 2006
•A contract of sale, title passes to buyer upon
delivery of the thing sold.
•In contract to sell, ownership is reserved in the seller
and is NOT to pass until full payment of price.
 Full payment is positive, suspensive condition.
 No action for specific performance without fulfillment of
condition. (Lim vs. CA, 182 SCRA 564)
•In contract of sale, non-payment is Negative
Resolutory Condition.

143
Effect of Fortuitous Event in Obligation with
a Period
It only relieves the contracting parties from the
fulfillment of their respective obligations
DURING the term/period. (Victoria’s Planters vs.
Victorias Milling Co., G.R. No. L-6648, July 25, 1955)

Fortuitous event does NOT interrupt the

running of the period.

144
Period for Whose Benefit (Art. 1196)
General Rule: For the benefit of both parties.
Except: If it can be shown that the period has
been established in favor of the creditor or
debtor.

145
Ponce de Leon vs. Sujuco (Oct. 31, 1951)

Loan with interest for a period, the debtor

CANNOT compel payment before the period
even if he pays interest because interest is
merely one of the benefits of period. There are
other benefits.

146
Judicial Term/Period
When fixed by a competent court in
accordance with the causes expressly
recognized by law.
Once fixed, the period can no longer be
judicially changed.

147
When Court May Fix Period (Art. 1197)
General Rule: Courts are WITHOUT power to
fix period
Except:
1)If the obligation does not fix a period, but from its
nature and circumstances it can be inferred that a
period was intended;
2)If the duration of the period depends upon the will of
the debtor; and
3)If the debtor binds himself when his means permit
him to do so (Art. 1180)

148
People’s Bank & Trust Co. vs. Odom
64 Phil. 126

When obligation or note is payable on demand,

it is one without a term and becomes due
ONLY upon demand. Hence, court is NOT
authorized to fix period.

149
NOTE:

Fulfillment of obligation cannot be demanded

until after court has fixed period. But an action
for fixing period and enforcement (combined)
may be allowed if it can be shown that
separate action for performance would be a
mere formality because NO additional proofs
other than the admitted facts will be presented
and will serve no other purpose other than to
delay. (Tiglao vs. Manila Railroad Co., 98 Phil. 183)

150
Action to ask court to fix period must be
brought within 10 years from execution or
perfection of notes/contracts. (Gonzales vs.
Jose)

151
When Debtor Loses Right to Make Use of
Period (Art. 1198)
1)He becomes insolvent, unless he gives a guaranty
or security for the debt (the insolvency need not be
judicially declared)
2)He does not furnish to the creditor the guaranties
or securities which he has promised
3)If, after their establishment, the guaranty or
security is impaired through the fault of the debtor,
he shall lose his right to the benefit of the period;
however, if it is impaired without his fault, he shall
retain his right

152
4) If the guaranty or security disappears through
any cause, even without the fault of the
debtor
5) He violates any undertaking, in consideration
of which the creditor agreed to the period (i.e.,
if an employee commits a substantial breach
of his employment contract, the employer
may terminate the employment)
6) He attempts to abscond
• It is not essential that there be actual
absconding

153
ALTERNATIVE OBLIGATION
It is one where out of two or more
prestations which may be given, only one is
due.

154
Right of Choice in Alternative Obligation
(Art. 1200)
General Rule: Right of choice belongs to the
debtor
Except:
1)Expressly granted to creditor
2)Expressly granted to third person

155
Limitations Upon the Right of Choice
The debtor cannot choose prestations/
undertakings which are:
1)Impossible
2)Unlawful
3)Could not have been the object of the obligation
• Undertakings that are not included among others from
those which the obligor may select; or
• Those which are not yet due and demandable at the
time the selection is made; or
• Those by reason of accident or some other cause,
have acquired a new character distinct or different
from that contemplated by the parties when the
obligation was constituted.
156
4) Those that are due and demandable but whose
enforcement is dependent on creditor as when
period fixed is solely for his benefit.
5) The creditor cannot be compelled to receive part of
one and part of the other undertaking.

NB: Communication of the choice renders the

obligation simple and demandable.
Hence, no delay unless alternative is transformed into
simple by communicating the choice.

157
Effects of Loss of Objects of Alternative
Obligation (Arts. 1204-1205)
A.When choice belongs to debtor
1)Due to fortuitous event
a) All are lost – debtor is released from the
obligation
b) Some but not all are lost – deliver that which
he shall choose from among the remainder
c) Only one remains – deliver that which
remains

158
2) Due to debtor’s fault
a) All are lost – creditor shall have a right to
indemnity for damages based on the value
of the last thing which disappeared or
service which become impossible
b) Some but not all are lost – deliver that which
he shall choose from among the remainder
without damages
c) Only one remains – deliver that which
remains

159
3) Due to creditor’s fault (Art. 1203)
- If through the creditor’s act the debtor
cannot make a choice according to the
terms of the obligation, the latter may
RESCIND with damages

160
B. When choice belongs to creditor
1) Due to fortuitous event
a) All are lost – debtor is released from the
obligation
b) Some but not all are lost – deliver that which
he shall choose from among the remainder
c) Only one remains – deliver that which
remains

161
2) Due to debtor’s fault
a) All are lost – creditor may claim the
price/value of any of them with indemnity for
damages
b) Some but not all are lost – creditor may
claim any of those subsisting without a right
to damages OR price/value of the thing lost
with right to damages

162
FACULTATIVE OBLIGATION
An obligation wherein only one object or prestation
has been agreed upon by the parties to the obligation,
but which may be complied with by the delivery of
another or the performance of another prestation in
substitution.
•Art. 1201 can be applied by analogy with respect to the
time/moment when the substitution will take effect.
•Communication is necessary to make substitution
effective.
•Only debtor has choice.

163
JOINT OBLIGATION
(Obligacion Mancomunada)

The whole obligation is to be paid or fulfilled

proportionately by different debtors or
demanded proportionately by different
creditors.

164
SOLIDARY OBLIGATION
(Obligacion Solidaria)

Each one of the debtors is bound to render

and/or each one of the creditors has a right to
demand entire compliance with the prestation.

165
Nature of a Collective Obligation
(Art. 1207)
General Rule: Obligation is presumed joint if
there is concurrence of several creditors OR of
several debtors OR of several creditors and
debtors in one and the same obligation.

166
Exceptions:
1)The obligation expressly states that
there is solidarity:
• Jointly and severally
• Individually and collectively
• “I promise to pay” followed by the
signatures of two or more persons

167
Law Provisions on Solidarity
Art. 17 (g) NIL – 2 parties sign a note “I
promise to pay”
Art. 927 – 2 or more heirs liable for estate they
take possession of even if only one is
negligent
Arts. 1824; 1911; 1915; 1945; 2146; 2157;
2194

168
2) The law requires solidarity.
• tort, quasi-contracts, liability of
principals, accomplices and accessories
of a felony, obligations of devisees and
legatees, bailees in commodatum
3) Nature of the obligation requires
solidarity.

169
4) When a charge or condition is
imposed upon heirs of legatees,
and the testament expressly makes
the charge or condition in solidum.
5) When a solidary responsibility is
imputed by a final judgment upon
several defendants.

170
 Heirs of George Poe vs. Malayan Insurance
(April 7, 2009)
“Where the insurance contract provides for
indemnity against liability to third persons, the
liability of the insurer is DIRECT and such third
person can directly sue the insurer. The direct
liability xxx does NOT mean however xxx the
insurer can be held SOLIDARILY LIABLE with the
INSURED. The liability of the insured xxx is based
on TORT xxx liability of INSURER arises from
CONTRACT xxx.”

171
Note:
Even if the parties stipulated in their contract
that the obligation of the debtor is solidary, but
such contract was superseded by a JUDICIAL
DECISION declaring the obligation to be
merely joint, the said decision must be
enforced in a joint manner (Oriental Phils. Co. vs.
Abeto, G.R. No. L-4239, Oct. 10, 1934)

172
JOINT INDIVISIBLE OBLIGATION
(Art. 1209)
Midway between joint and solidary obligations,
preserving the two characteristics of the joint
obligation, in that no creditor can do an act
prejudicial to others, and no debtor can be
made to answer for others.

173
Breach of Joint Indivisible Obligation
(Art. 1224)
Obligations can be enforced only by
proceeding against all the creditors.
•If anyone of the debtors should fail or refuse to comply
with the obligation, it is converted into one of indemnity for
damages
•Debtors who may have been ready to comply with what is
incumbent upon them shall not contribute to the indemnity
beyond the corresponding portion of the price of the thing
or the value of the service in which the obligation consists.
(Ex. Delivery of horse)

174
Interruption of Period of Prescription in
Joint Indivisible Obligations
1)The act of one joint creditor beneficial to others, as
for instance the interruption of period of prescription, is
sufficient since Art. 1209 merely provides that the right
of creditors may be prejudiced only by their collective
acts. (Manresa)
2)The act of a joint creditor which would ordinarily
interrupt the period of prescription would not be valid
because the indivisible character of the obligation
requires collective action of the creditors. (De Buen)

175
Effects of Assignment of Rights in Solidary
Obligations (Art. 1213)
General Rule: A solidary creditor CANNOT
assign his right as it is predicated upon mutual
confidence, i.e., personal qualification of each
creditor had been taken into consideration
Except:
1)Assignment to a co-creditor
2)Assignment is with consent of c-creditor

176
To Whom Payment Made in Solidary
Obligation (Art. 1214-1216)
General Rule: Payment may be made to any of
the solidary creditors
Except:
If demand, judicial or extra-judicial, has been made
by one of them, payment should be made to him.

177
PNB vs. Independent Planters Ass.

In case of the death of one solidary debtor,

creditor may still proceed against surviving SD
without necessarily filing a claim in the estate
of the deceased debtors. This, notwithstanding
Rule 86, Sec. 6 (Rules) which states that if
obligation of decedent is solidary, claim shall
be filed against decedent as IF HE WERE
THE ONLY DEBTOR. (Art. 1216)

178
Effect of Novation, Compensation,
Confusion and Remission in Solidary
Obligations (Art. 1215, Arts. 1219-1220)
Note:
Do only what is useful/beneficial NOT
prejudicial. (Art. 1212)

179
A. NOVATION
1) If prejudicial, the solidary creditor who
effected the novation shall reimburse the
others for damages incurred by them;
2) If beneficial and the creditor who effected
the novation is able to secure performance
shall be liable to the others for the share;

180
3) If effected by substituting another
person in place of the debtor, the
solidary creditor who effected the
novation is liable for the acts of the new
debtor;
4) Subrogating a third person in the rights
of the solidary creditor responsible for
the novation, the obligation is not
extinguished; the relation between the
other creditors not substituted and the
debtor/s is maintained;

181
5) If the novation is effected by
subrogating a third person in the rights
of all the solidary creditors, the creditor
responsible is liable to the other
creditors for the share.

182
B. COMPENSATION and CONFUSION
1) PARTIAL – rules on application of payment
shall apply, other creditors who have not
caused the confusion or compensation to
be reimbursed to the extent that their rights
are diminished or affected;

183
2) TOTAL – obligation extinguished, what is
left is the ensuing liability for
reimbursement within each group – the
creditor causing the confusion or
compensation is obliged to reimburse the
other creditors; the debtors benefited by
the extinguishment of the obligation are
obliged to reimburse the debtor who
made the confusion or compensation
possible.

184
C. REMISSION
1) Entire obligation – obligation is totally
extinguished but the solidary debtor who
obtained it does not entitle him to
reimbursement
2) For the benefit of one of the debtors covering
his entire share – he is completely released
3) For the benefit of one of the debtors and it
covers only part of his share – his character as
a solidary debtor is not affected

185
4) Total or partial remission – creditor/s
responsible for the remission are liable to
reimburse others for the share in the
obligation corresponding to them
If the creditor/s proceed against any one of
the solidary debtors for the payment of the
entire obligation, such debtor can always avail
himself of the defense of partial remission.
(Art. 1222)
Note:
The above rules cannot be applied in case the debt
has been totally paid by anyone of the solidary
debtors before the remission was effected. (Art.
1219)
186
Effect of Payment by a Debtor (Art. 1217
and Art. 1218)
Payment made by one of the solidary debtors
either totally or partially extinguishes the
obligation depending upon whether the entire
amount of debt is paid or only a part thereof.
•If two or more solidary debtors offer to pay, the
creditor may choose which offer to accept.

187
• Solidary debtor who made the payment
entitles him to claim the share which
correspondents to others with interest from
the time of payment; does not create a real
case of subrogation; if payment was made
before the debt is due, no interest for the
intervening period may be demanded.
Reason: The right of the playing co-debtor to be
reimbursed is not based on the original obligation
but upon the payment made by him.

188
• No reimbursement if payment is made after
the obligation has prescribed or has become
illegal.
• Share of the insolvent solidary debtor shall
be borne by ALL his co-debtors, in
proportion to the debt of each.

189
Effect of Death of Principal Debtor
Stronghold Ins. vs. Republic-Asahi Glass
(Jun. 22, 2006)

The creditor may sue, separately or together,

the principal debtor and the surety, in view of
the solidary nature of their liability. The death
of the principal debtor will not work to convert,
right of solidary creditor. Evidently, despite the
death, the creditor may still sue the surety.

190
DIVISIBLE OBLIGATION
Those which have as their object a prestation
which is susceptible of partial performance
without the essence of obligation changed.

191
INDIVISIBLE OBLIGATION
Those which have as their object a prestation
which is not susceptible of partial
performance, otherwise, the essence of the
obligation will be changed.

Presumption: Indivisible (Art. 1248)

192
Test of Divisibility
Whether the prestation is susceptible of partial
compliance or not. (Art. 1225, par. 1)
The susceptibility of partial compliance should
be understood in the sense of the possibility of
realizing the end or purpose which the
obligation seeks to attain.
•In obligations to give, even though the object may be
physically divisible, the obligation is still indivisible if it is
provided by law or it is so intended by the parties (Art. 1225
par. 3)

193
General Rule: Creditor cannot be compelled
partially to receive the prestation; neither may
the debtor be required to make partial
payments.
Except:
1)When the obligation expressly stipulates the
contrary
2)When the different prestations constituting the
objects of the obligation are subject to different
terms and conditions
3)When the obligation is in part liquidated and in
part unliquidated

194
OBLIGATION WITH A PENAL CLAUSE
An obligation to which an accessory
undertaking (penal clause/penalty) is attached
to insure its performance by virtue of which the
obligor is bound to pay a stipulated indemnity
or perform a stipulated prestation in case of
breach.

195
A penal clause is attached to an obligation
in order to insure performance and has a
double function:
1)to provide for liquidated damages, and
2)to strengthen the coercive force of the
obligation by the threat of greater
responsibility in the event of breach (Filinvest
Land, Inc. vs. CA, G.R. No. 138980, Sept. 20, 2005)

196
 General Insurance & Surety Corp. vs.
Republic (Jan. 31, 1963)
The bond is penal in nature and substitute
indemnity for damages and payment of interest.
Even if bond is worth more than actual
damages.
•Bond is to guarantee DepEd that school will follow
rules/pay salaries. School did not pay salary
amounting to only P2,000, bond was for P10,000.
•If bond less than actual damages, no action for
payment of deficiencies except when there is fault.

197
Effect of Penalty (Art. 1226, par. 1)
General Rule: The penalty shall substitute the
indemnity for damages and payment of
interest in case of non-compliance.
Except:
1)When there is a stipulation to the contrary
2)When the obligor refuses to pay the penalty – entitled
to interest in the amount of penalty (Art. 2209)
3)When the obligor is guilty of fraud (Art. 1170) –
creditor to prove fraud and amount of damages. He is not entitled
only to the penalty plus the difference between the proven
damage and penalty

198
Limitation Upon the Right of the Debtor in
Obligations with a Penal Clause (Art. 1227)
General Rule: Debtor cannot exempt himself
from the performance by paying the stipulated
penalty

Except: Unless this right has been clearly and

expressly granted to him

199
Limitation on the Right of the Creditor in
Obligations with a Penal Clause (Art. 1227)
General Rule: Creditor cannot demand
the fulfilment and demand the
satisfaction of the penalty at the same
time.

200
Except:
Unless this right has been clearly
granted to him
•If creditor has chosen fulfillment of the
principal obligation and performance
thereof became impossible without his
fault.
•If there was fault on the part of debtor.

201
No need for proof of actual damages
in order that penalty may be
demanded. Penalty is liken to
liquidated damages.

202
 Compagnie Franco-Indochinoise vs.
Deutsched (29 Phil 474)
Property of plaintiff transported on steamship of
defendant, was unlawfully detained by the captain
of said steamship, resulting in loss to its owner.
Sued for damage for an amount equal to the
value of cargo, the defendant claimed amount
recoverable cannot exceed the amount of freight
under the penal clause which stated – “penalty for
non-performance xxx, proved damages, not
exceeding the estimated amount of freight”. Is
contention tenable?

203
Held: NO. Assuming limitation expressed in
the penal clause is valid, xxx it was intended
to apply to cases of NON-PERFORMANCE,
that is to cases where defendant is liable for
damages for failure to perform obligations in
contract. The ACT of captain which is basis of
claim is NOT non-performance but amounts to
a conversion of the cargo, AN ACT OF
POSITIVE MISFEASANCE, and not a mere
NON-FEASANCE such as is contemplated in
the penal clause. Recoverable damages are
not limited to the amount of the freight as
stated by the Penal Clause.

204
Article 1229 – Judge may reduce penalty
1)Principal obligation has been partly/
irregularly complied;
2)Even if no performance, the penalty may
also be reduced if iniquitous/ unconscionable

205
Land Bank of Phil. Vs. David

-Foreclosed property sold at public auction for

price that included penalty and interest.
-Courts has discretion to determine whether
penalty/interest rates are unconscionable.
-Having found penalty/interest exorbitant, the
sale at public auction was VOID.

206
Filinvest Land Inc. vs. CA & PepCorp
Sept. 20, 2005

-Penalty of P15K a day of delay agreed. 94%

of work completed. As a general rule, courts
are not at liberty to ignore agreement to a
penalty. But courts may equitably reduced
stipulated penalty in 2 instances: (1) if
principal obligation has been partly or
irregularly complied; (2) if no compliance but
penalty is iniquitous or unconscionable.

207
WON penalty is reasonable or iniquitous is
addressed to sound discretion of court and
on several factors, including type, extent
and purpose of penalty, nature of
obligation, mode of breach or
consequences supervening realities, the
standing and relationship of parties, extent
of prejudice to plaintiff. (Lo vs. CA, 411
SCRA 523)

208
SC held inequitable—
Forfeiture of paid installment of P101,550 as
liquidated damages, particularly after buyer
had tendered balance of P76,050 in full
payment of balance.
Not iniquitous – forfeited amount was only 8%
of stipulated price. (Manila Racing Club vs.
Manila Jockey Club, 69 Phil 55)

209
NOTE:
If the interest rate agreed upon is VOID for
being iniquitous, the rate of interest should be
12% PA computed from judicial or extrajudicial
demand. (Dino vs. Jardines, 481 SCRA 226

210
Modes of Extinguishing Obligations
1)Payment/performance
2)Loss of the thing due
3)Condonation or remission of debt
4)Confusion or merger
5)Compensation
6)Novation
7)Annulment
8)Rescission
9)Fulfillment of a resolutory condition
10)Prescription

211
Payment or Performance (Art. 1232)
•Means delivery of money and the performance, in
any other manner, of an obligation.
•Also means non-performance
Characteristics of payment:
1)Identity – only the prestation agreed upon and no other
must be complied with
2)Completeness – the thing or service must be completely
delivered or rendered
3)Indivisibility – payment or performance must be indivisible

212
Burden of Proof
Party who pleads payment MUST PROVE such
payment. But where the debtor introduces some
evidence of payment, the burden shifts to creditor
to prove non-payment. (Jimenez vs. NLRC, 326
SCRA 89)

213
Requisites of Payment:
1)Must be complete
2)Tendered by the proper party
3)Party must have capacity to pay
4)Paid to proper person
5)Capacity of recipient
6)Identity of prestation preserved
7)Made in proper place

214
 Manila International Airport Authority vs.
Ding Velayo Sports Center (May 30, 2011)
Article 1235 of the Civil Code states that “[w]hen the
obligee accepts the performance, knowing its
incompleteness or irregularity, and without expressing
any protest or objection, the obligation is deemed fully
complied with.” The Contract of Lease was executed on
May 14, 1976, and the one-year period expired on May
14, 1977. Yet, petitioner did not register any protest or
objection to the alleged incompleteness of or
irregularity in the performance by respondent of its
obligation to build and develop improvements on the
subject property.

215
Persons From Whom the Creditor Must
Accept Payment (Art. 1236)
1)Debtor himself or his legal representative
2)Any person who has an interest in the
obligation (like a guarantor) (Monte de Piedad vs.
Rodrigo)
3)A 3rd person who has no interest in the
obligation when there is stipulation that he can
make payment

216
• Person who pays the obligation should
have the necessary legal capacity to
effect such payment (Art. 1239)

NB: Person making payment must have

capacity. Otherwise, payment NOT
VALID.

217
 Cecilleville Realty & Services Corp. vs.
Sps. Acuna (July 13, 2009)
Cecilleville paid the debt of the Acuna spouses to
Prudential as an interested third party.
Even if the Acuna spouses insist that Cecilleville’s
payment to Prudential was without their knowledge
or against their will, Art. 1302 (3) of the Civil Code
states that Cecilleville still has a right to
subrogation.

218
Cecilleville clearly has an interest in the
obligation because it owns the properties
mortgaged to secure the Acuna spouses’
loan. When an interested party pays the
obligation, he is subrogated in the rights of
the creditor. Because of its payment of the
Acuna spouses’ loan, Cecilleville actually
steps into the shoes of Prudential.

219
Effect of Payment by 3rd Person
•Without knowledge or against the will –
recovery is only up to the amount beneficial to
the debtor; no subrogation
•With knowledge – rights of reimbursement
and subrogation

220
To Whom Payment Must Be Made (Art. 1240)
1)The person in whose favor the obligation has
been constituted
2)His successor in interest
3)Any person authorized to receive it – by law
or by the creditor at the time when payment is
due and not when the obligation was
constituted

221
Effect of Payment to Unauthorized Persons
in Obligation to Give
General Rule: It shall NOT be valid, even though
made in good faith.
Except:
1)Provided that it has redounded to the benefit of the
creditor.
2)Payment to the possessor of the credit, made in good faith
(Art. 1242)
•Refers to the possession of credit not the document evidencing it.
3)Debtor pays creditor prior to acquiring knowledge of the
assignment of credit made by the latter. (Art. 1626)

222
Benefit to the creditor is presumed in the
following cases: (Art. 1241)
1)If after the payment, the third person acquires
the creditor’s rights (subrogation);
2)If the creditor ratifies the payment to the third
person (ratification)
3)If by the creditor’s conduct, the debtor has
been led to believe that the third person had
authority to receive the payment (estoppel)

223
Republic, PNP vs. Thi Thu Thuy De Guzman
(June 15, 2011)
Facts: The PNP replied that payment was made to
"Montaguz Builders”, via LBP Check to Edgardo
Cruz (Cruz) who signed for the check due to MGM.
Respondent claimed that payment was made to
Montaguz Builders, her other company, which was
also doing business with the PNP, and not to
MGM, with which the contract was made

224
Held: No, petitioner's obligation consists of payment
of a sum of money. In order for petitioner's payment
to be effective in extinguishing its obligation, it must
be made to the proper person. Art. 1240 of the Civil
Code states:
Art. 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.
In Cembrano v. City of Butuan, SC said:
When payment is made to the wrong party, however, the
obligation is not extinguished as to the creditor who is without
fault or negligence even if the debtor acted in utmost good
faith and by mistake as to the person of the creditor or through
error induced by fraud of a third person.

225
The respondent was able to establish that the
LBP check was not received by her or by her
authorized personnel. The PNP's own records
show that it was claimed and signed for by
Cruz, who is openly known as being connected
to Highland Enterprises, another contractor.
Hence, absent any showing that the respondent
agreed to the payment of the contract price to
another person, or that she authorized Cruz to
claim the check on her behalf, the payment, to
be effective must be made to her.

226
Note:
In obligations to give, payment to incapacitated
person is valid when:
1)The incapacitated has kept the amount or thing
paid or delivered
2)Payment has been beneficial to the incapacitated
person (Art. 1241)

227
Rule in Monetary Obligation (Art. 1249)
Must be made in the currency stipulated; if it is
not possible to deliver such currency, then in
the currency which is legal tender in the
Philippines.

228
Legal Tender
Such currency which may be used for the payment of
all debts, whether private or public. Its significance is
manifested by the fact that it is such which the debtor
may compel a creditor to accept in payment of the debt.
Legal tender in the Philippines would be all NOTES
AND COINS issued by the Bangko Sentral (Circular
No. 537)
1)1-Peso, 5-Pesos and 10-Peso coins: in amounts not
exceeding P1,000.00
2)25 centavo coin or less: in amounts not exceeding
P100.00

229
Take note that bills, regardless of denomination,
are legal tender up to whatever amount.
RA 8163 provides that all monetary obligations
shall be settled in the Philippine currency which
is legal tender in the Philippines. The parties
may agree that the obligation or transaction be
settled in other currency at the time of payment.

230
Rules on Payment in Checks
1)Not legal tender – NOT valid tender of payment
whether manager’s, cashier’s, or personal check.
2)Creditor has option to accept.
3)Shall produce payment ONLY when:
a) Encashed
b) Impaired through fault of creditor (only in
instruments executed by 3rd persons; not those by
debtor)

231
N.B.
When case involves NOT payment but exercise of
RIGHT, e.g. right of redemption—rule on payment
NOT applicable. Hence, mere tender of check is
sufficient to COMPEL redemption. (Biana vs.
Gimenez, 469 SCRA 486)

232
Place of Payment (Art. 1251)
1)Place stipulated by the parties
2)If there is no stipulation, obligation is a
determinate thing, payment shall be made at the
place where the thing might be at the time the
obligation was constituted.
3)In any other case, the payment shall be made at
the domicile of the debtor.

233
Go Sinco vs. CA, et al. (Oct. 9, 2009)
Issue: If there is unjustified refusal to accept
payment, does such act constitute extinguishment
of the obligation”
Rule: NO. The law requires the twin acts of tender
of payment and consignation. If there is tender of
payment but no consignation, it does not have the
effect of payment. The effect of the tender is xxx
debtor is freed from the obligation to pay interest
on the outstanding amount from the time of the
unjust refusal took place.”

234
Special Forms of Payment
A.Application of Payment
Designation of the debt to which the payment
must be applied when the debtor has several
obligations of the same kind in favor of the
same creditor.

235
Requisites:
1)There must be only one debtor and only one
creditor;
2)There must be two or more debts of the same
kind;
3)All the debts must be due except if there is
stipulation to the contrary OR application of
payment is made by the party for whose benefit the
term has been constituted (Art. 1196); and
4)Amount paid by the debtor is insufficient to cover
the total amount of all the debts.

236
Rules on Application of Payment
•The right to designate the debt to which the
payment shall be applied belongs primarily to the
debtor.
•If the debtor does not apply, the creditor may
designate which debt is paid by specifying in the
receipt
•If the creditor did not apply or if application is void,
debt which is the most onerous, is the one
satisfied. It is evident in the circumstances laid by
Art. 1254, that it is the law which makes the
application

237
Limitation:
•Interest first
•Cannot disregard indivisibility
•Those that may be due already, anytime for
debtor but not creditor cause latter has exclusive
benefit of period

238
 Sps. Tan etc. vs. China Banking Corp.
17 August 2016

SC said—

“The right to make application of payment is a

right of debtor which is merely directory xxx
and must promptly be exercised, lest such
right passes to the creditor.”

239
In the case, the Bank foreclosed the
mortgages over properties used to
secure payment. Debtor failed to
manifest preference of application,
Bank used it to first pay for the
interest, then to the principal.

240
No hard and fast rule, however, can be put up.
As last resort when it cannot definitely be
determined whether one debt is more
burdensome than the other.
•Debts due of the same nature, payment shall
be applied proportionately

241
B. Dation in Payment (Dacion en pago)
Delivery and transmission of ownership of a
thing by the debtor to the creditor as an
accepted equivalent of the performance of
the obligation. (Art 1245)

242
C. Payment by Cession (Art. 1255)
Special form of payment whereby the debtor
assigns/abandons ALL of his property for
the benefit of his creditors in order that
from the proceeds thereof, the latter may
obtain payment of their credits.
Requisites:
1) Plurality of debts;
2) Partial or relative insolvency of the debtor; and
3) Acceptance of the cession by the creditors

243
D. Tender of Payment and Consignation
(Art. 1256)
Tender of Payment – Manifestation of the debtor
to the creditor to comply immediately with
obligation; preparatory act and extrajudicial in
character
Consignation – Deposit of the object in a
competent court after refusal or inability of the
creditor to accept the tender of payment;
principal act and judicial in character

244
Special Requisites of Consignation
1) Existence of a valid debt which is due;
2) Tender of payment by the debtor; creditor’s
refusal without just cause to accept it or
any of the cases provided in Art. 1256, par.
2 exists
a) Tender must be precede consignation;
b) It must have been unconditional;
c) Refusal must be without just cause

245
3) Previous notice of consignation to creditor
and others interested in order to give the
creditor the opportunity to reconsider and to
accept payment
• Lack of previous notice does not invalidate the
consignation, but simply makes the debtor liable for
the expenses occasioned thereby
• With respect to the creditor, this notice can be made
simultaneously with the tender of payment.
Separate notices must be given to other interested
parties such as guarantors.

246
4) Consignation – amount or thing due placed at
the disposal of the court
5) Subsequent notice of consignation to enable
the creditor to withdraw the goods or money
deposited
• It would be unjust to make the creditor suffer
the risk of deterioration, depreciation or loss of
such goods or money by reason of lack of
knowledge of the consignation

247
Instances Where Consignation Shall
Produce the Effects of Payment Without
Prior Tender of Payment (Art. 1259, par. 2)
1)Creditor is absent or unknown, or does not
appear at the place of payment
• Absence need not be judicially declared.
He must, however, have no legal
representative to accept the payment
2)Creditor is incapacitated to receive the
payment at the time it is due

248
3) When without just cause, the creditor refuses
to give a receipt
• Refusal to issue a receipt preceded the tender of
payment
4) When two or more persons claim the right to
collect (as in the case of interpleader)
5) When the title of the obligation has been lost
6) Creditor declares he will not accept
Note:
The list is not exclusive.

249
E. Loss of the Thing Due
Effects of Loss in Determinate Obligation to
Give (Art. 1262) – Obligation is
extinguished if the thing is lost or destroyed
without the fault of the debtor and before
he has incurred in delay.

250
General Rule: Loss of a determinate thing due to
a fortuitous event shall extinguish the obligation.
Except:
1)When the law so provides;
2)When the stipulation so provides;
3)When the nature of the obligation requires an
assumption of risk;
4)Loss of the thing is partly due to the fault of the
debtor;
5)Loss of the thing occurs after the debtor
incurred in delay;

251
6) When the debtor promised to deliver the
same thing to two persons who do not have
the same interest;
7) When the obligation to deliver arises from a
criminal offense; and
8) When the obligation is generic
Except: if the class/genus goes OUT of
commerce of man.

252
Effect of Partial Loss (Art. 1264)
General Rule: Partial loss does not extinguish
the obligation.
Except:
When the partial loss or destruction of the thing is
of such importance that would be tantamount to a
complete loss or destruction.

253
Effect of Impossibility of Performance in
Obligation to Do (Art. 1266)
When the obligation becomes legally or physically
impossible without the fault of the debtor, obligor is
released from the obligation.
The legal and physical impossibility must have
occurred after the constitution of the obligation.

254
Release in obligation TO DO when
prestation becomes legally or
physically impossible. Not if obligation
is TO GIVE.

255
 PNCC vs. CA (May 5, 1997)
PNCC leased land for rock crushing plant. Term
for 5 years, beginning on date of issuance of an
industrial clearance by Ministry of Human
Settlement. PNCC given Temporary Permit for 2
years in Jan. 7, 1986, hence Lessor demand
payment for rent 1 year.
PNCC declined because it decided to cancel the
contract as it decided to cancel rock crushing
plant due to financial and technical difficulties.
PNCC cites Art. 1266.

256
Held: NO. Contract of lease was perfected.
PNCC cannot use Art. 1266 because it is
applicable to obligation to ‘DO’. The contract
created obligation to ‘GIVE’. Lease property
delivered and to pay rent are TO GIVE.

257
Temporary Impossibility
Merely delays performance of the obligation NOT
extinguishes the same.
Except:
1)In case of agreement
2)Must be performed within a definite time
BUT if the obstacle is unforeseen or unknown as
to DURATION, obligation may be considered
juridically impossible to perform, hence,
extinguished. Subsequent REMOVAL of the
obstacle does NOT revive the obligation.

258
Effect of Relative Impossibility
(Difficulty of Performance)
Doctrine of Unforeseen Events (Art. 1267) – When the
service has become so difficult as to be manifestly
beyond the contemplation of the parties, the court
should be authorized to release the obligor in whole or
in part. (This is also referred to as the Doctrine of
Frustration of Enterprise)
Also known as—
•Theory of IMPREVISIBILITY
•Theory of Lack of Basis

259
• The intention of the parties should govern
and if it appears that the service turns out
to be so difficult as to have been beyond
their contemplation, it would be doing
violence to the intention to hold the obligor
still responsible.
• The impossibility is RELATIVE because
the difficulty of performance triggers a
manifest disequilibrium in the prestations,
such that one party would be placed at a
disadvantage by the unforeseen event.

260
Difficulty NOT only physical or
‘actual’ difficulty BUT also if
performance would place one party
at a disadvantageous position by the
unforeseen event.

261
Rebus Sic Stantibus
Parties stipulate in the light of certain prevailing
conditions, and once these conditions cease to
exist the contract also ceases to exist.
Unforeseen event is NOT an absolute application
of RSS, which would endanger the security of
contractual relations. Parties to the contract must
be presumed to have assumed the RISK of
unfavorable developments. It is ONLY in
absolutely exceptional.

262
Requisites:
1)The event or change of circumstances could not
have been foreseen at the time of the execution of
contract
2)Makes performance extremely difficult NOT
impossible
3)The event must NOT be due to the act of any of
the parties
4)Contract is for a long period of time or for
successive performances.

263
Natelco vs. CA & Casureco (Feb. 24, 1994)

-Natelco contract with Casureco to use electric

post for telephone lines
-Natelco promised 10 telephone lines for
Casureco
-After 10 years, Casureco filed reformation
because contract was one-sided. More lines
attached, heavier load for post and post not in
City also used.

264
SC: 1267 applicable. Obligation is
extinguished. BUT for the removal will
affect public. SC required NEW contract in
order not to disrupt the basic and essential
services of parties.

265
Effect of Loss on Reciprocal Obligations
•First View: If an obligation is extinguished by the
loss of the thing or impossibility of performance
through fortuitous events, the counter-prestation is
also extinguished. The debtor is released from
liability but he cannot demand the prestation
which has been stipulated for his benefit. He who
gives nothing has no reason to demand. (Tolentino,
Commentaries and Jurisprudence on the Civil Code of the Phils.,
Vol. 4, p. 337-338 [1991])
(Res Perit Domino)

266
• Second View: The loss or impossibility of
performance must be due to the fault of the
debtor. In this case, the injured party may
ask for rescission under Art. 1191 plus
damages. If the loss or impossibility was
due to a fortuitous event, the other party is
still obliged to give the prestation due to the
other. (J.B.L. Reyes)
(Res Perit Creditori)

267
Better View:
Res Perit Creditori general rule
Except:
1) Law requires Res Perit Domino
• Art. 1504 – Sale of Personal Property
• Art. 1655 – In Lease Contracts
• Art. 1717 – Contract for a Piece of Work

Also, SC in Reyes vs. Caltex and Villaruel

vs. Manila Motors favored view that
RISK of LOSS is for the account of
creditor.

268
Rule If Obligation Arises From Criminal
Offense (Art. 1268)
General Rule: Debtor shall not be exempted
from the payment of the price whatever may
be the cause for the loss.
Except:
When the thing having been offered by the debtor to
the person who should receive it, the latter refused
without justification.

269
F. Condonation or Remission of the Debt
• An act of liberality the obligee without
receiving any price or equivalent,
renounces the enforcement of the
obligation, is extinguished in its entirety or
part.
• It is the gratuitous abandonment by the
creditor of his right; a form of donation.

270
Requisites of remission:
1) It must be gratuitous;
2) It must be accepted by the obligor;
3) The obligation must be demandable;
4) Parties must have the capacity;
5) Not inofficious; and
6) Must comply with the forms of donation
SHOULD IT BE EXPRESS (Arts. 748 and
749)

271
Court may NOT condone interest due the
creditor for to condone is an act of
liberality. It is to forgive, or revert a debt.
(Baez vs. Young, Oct. 27, 1952)

272
Implied Remission (Art. 1271)
-Delivery of private document evidencing
a credit made voluntarily by creditor to
debtor

273
To refute implication – it should be
claimed to be inefficious

In order for presumption of remission to

apply, it is necessary that:
1)Document is private (not public)
2)It is an evidence of credit

274
 Lopez Lizo vs. Tambunting
Creditor proved that he sent his receipt to
debtor for purposes of collecting without
intending the document to remain in
possession of debtor – is sufficient proof
to rebut the presumption that creditor
voluntarily delivered document.

275
G. Confusion
It is the merger of the characters of the
creditor and the debtor in one and the
same person by virtue of which the
obligation is extinguished.

276
Requisites of merger:
1) Merger of the characters of the creditor and
debtor must be in the same person;
2) Must take place in the person of either the
principal creditor or the principal debtor; and
3) Whether the merger refers to the entire
obligation or only part thereof, there must be
complete and definite meeting of all qualities
of creditor and debtor in the obligation or in
the part thereof affected by the merger.

277
Effects of Confusion/Merger (Art. 1276-1277)
If confusion takes place:
1) In the person of either the principal creditor or
principal debtor – extinguishment of entire
obligation
2) In the person of a subsidiary creditor or
subsidiary debtor (e.g. guarantor) – no
extinguishment of principal obligation; only
substitution of creditor or debtor

278
3) In one of the joint debtor – principal
obligation is extinguished up to the share
which corresponds to him;
4) In one of the solidary debtors – entire
obligation is extinguished. However, the
debtor in whom confusion took place may
claim reimbursement from co-debtors for
the shares which corresponds to them.

279
H. Compensation
Mode of extinguishing in the concurrent
amount of the obligation of those persons
who are reciprocally debtors and creditors
of each other.
• Most fundamental effect: It extinguishes both
debts to the extent that the amount covered
by the amount of the other.

280
Requisites of compensation (Art. 1279):
1) There must be two parties, who, in their own
right, are principal creditors and principal
debtors of each other except in case of a
guarantor (Art. 1280);
2) Both debts must consist in sum of money, or
if the things due are fungibles (consumables),
they must be of the same kind and quality.
General Rule: Compensation is not possible in
obligations to do because of the difference in the
respective capacities of the obligors.

281
3) Both debts must be due;
Except: Voluntary compensation (Art. 1282)
4) Both debts must be liquidated and
demandable;
5) There must be no retention or controversy
commenced by third persons over either
of the debts and communicated in due
time to the debtor;
6) The compensation must not be prohibited
by law.

282
Debts which cannot be compensated:
-Depositum
-Commodatum
-Support
-Criminal offense
-In favor of government

283
 Lao vs. Special Plans (June 29, 2010)
Issue: When are claims LIQUIDATED for proper
COMPENSATION?
Rule: Claim is liquidated when the amount and time
of payment is FIXED. If acknowledged by debtor,
although NOT in writing, the claim must be
treated as liquidated. When the defendant, who
has an unliquidated claim, sets up by way of
counterclaim, and judgment is rendered
liquidating such claim, it can be compensated
against the plaintiff’s claim from the moment it is
liquidated by judgment. (Here contract of lease
where Lessee to undertake necessary repairs,
Lessor STRUCTURAL repairs.)
284
Problem:
Is it proper to compensate defendant-appellant’s
indebtedness of P9k claimed in the complaint,
with the sum of P10k representing the value of
his shares of stock with the plaintiff entity?

285
Answer:
Considering that a share of stock is not an
indebtedness to the owner, it is, therefore,
not a credit. Stockholders as such are not
creditors of the corporation. xxx Therefore,
since the defendant-appellant stockholder is
not a creditor of the corporation although the
corporation is a creditor of the former, there
can be no compensation. (Garcia vs. Lim
Chua Sing, 59 Phil 562)

286
Problem:
Has a bank the right to apply a deposit
to the debt of a depositor to the bank?

287
Answer:
YES, because an ordinary bank deposit
creates the relationship of creditor and
debtor. (Gullas vs. Philippine National Bank,
62 Phil 519)

288
Problem:
X sued Y to collect P20k plus interest and
attorney’s fees. Y, in his answer, included a
counterclaim for P150 allegedly loaned by
him to X and which was already overdue. X
moved to dismiss the counterclaim which
motion was granted by the lower court. Was
the motion correctly resolved?

289
Answer:
NO. Pursuant to Arts. 1278, 1279, 1286 and
1290 of the Civil Code, the defendant would
have been entitled to deduct from plaintiff’s
claim of P20k if the latter were established—
the sum of P150 involved in the counterclaim
if the allegations thereof were true, even if no
such counterclaim is filed. (Icasiano vs.
Icasiano, L-16592, Oct. 27, 1961)

290
I. Novation
It is the substitution or change of:
1. an obligation by another, resulting in its
extinguishment or modification, either by:
a. changing its object;
b. principal conditions; or
2. by substituting another in place of the
debtor; or
3. by subrogating a third person in the rights
of the creditor.

291
Requisites of novation:
1) Previous valid and existing obligation;
Except:
a) When annulment may be claimed only by
the debtor and he consented to the
novation as in a new contract, recognizing
and assuming a prescribed debt, would be
valid and enforceable. The prescription,
being available to the debtor, can be
waived by him. The novation of a
prescribed debt is thus valid.
b) When ratification validates acts which are
voidable.
292
2) Capacity of the contracting parties (to the
new contract)
3) Animus novandi or intent to novate
(especially for implied novation and
substitution of debtors);
4) Substantial difference between the old
obligation and the new obligation
(especially for implied novation),
consequently, extinguishment of the
obligation; and

293
5) Validity of the new obligation

Except:
If parties clearly intended that the old
obligation be extinguished

294
Inchausti vs. Yulo

Mere extension of the term of payment DOES

NOT constitute EXTINCTIVE novation.
But..
Soncuya vs. Azarraga
Extension of time coupled with payment of
interest on the amount due is extinctive
novation because a new consideration has
been stipulated by the parties.

295
Kabankalan Sugar vs. Pacheco

-Reduction of period is extinctive novation

because the obligation has been materially
altered by making obligation more
burdersome.

296
Note:
A change in the rate of interest is merely
collateral agreement between the creditor and
principal debtor that did not affect the surety.
It did not in any way affect the original
contract. Thus, despite the compounding of
the interest, the liability of the surety remains
only up to the original uncompounded
interest. (Garcia, Jr. vs. CA, G.R. No. L-
80201, Nov. 20, 1990)

297
 Foundation Specialist Inc. vs. Betonval
Ready Concrete Inc. (24 Aug. 2009)
Obligation to pay a sum of money is not
novated by an instrument that changes only
the terms of payment, adds other obligations
not incompatible with old; as the new merely
supplements the old.

298
 Salazar vs. J.Y. Brothers Marketing Corp.
(20 October 2010
The acceptance by the creditor of a new check
in replacement of the dishonored check does
not result in extinctive novation in absence of
an express agreement that debtor is already
discharged from his liability caused by the
dishonored check. Neither is there
incompatibility because both checks were
given precisely to terminate the same
obligation.

299
National Exchange Co. vs. Ramos,
(51 Phil 310)
A corporation with ACS of P250k increased the
CS to P500k. There was novation by changing
the principal condition of the obligation and a
subscriber to shares of the original CS, without
knowledge of such novation is relieved of the
obligation to pay which became extinguished as
a consequence of said novation.

300
Problem:
B secured a money judgment against P.
Subsequently B and P entered into a contract
whereby said judgment was to be extinguished
by monthly payment and that in case of failure to
pay the monthly payment B shall be at liberty to
enter suit against P. Was there a novation of the
judgment?

301
Answer:
NO. Because the contract did not expressly
extinguish the obligation existing in said judgment.
On the contrary, it expressly recognized and modified
the obligations existing in said judgment and
expressly provided a method giving P more time to
extinguish the same, that is by monthly payment.
(Zupanta vs. De Rotaeche, 21 Phil 154)

302
Reyes vs. CA (Nov. 4, 1996)

Co-owners of property entered into Deed of

Partition. Then into a MOA that they shall
share alike and reserve equal shares in
proceeds of sale of property subject of
partition. There was no NOVATION of DOP
with that of MOA, as they can stand together.

303
Dungo vs. Lopena (6 SCRA 1007)

There is NO NOVATION even if in the second

and new contract a surety bond is filed, or a
third person assumes payment of the
obligation and creditor even accepts partial
payment from third party because NO
agreement that the first debtor be released
from debt. Surety bond is not a new and
separate contract but merely an accessory.
Third party merely becomes co-obligor or
surety.

304
Also in Dungo

A owes B P6K. A executed promissory note

and C surety company for P6K without
interest. A failed to pay. B goes after surety C.
C pay P6K without interest. B sues A for
accumulated interest. A defense was
NOVATION.
Held: No Novation. There was no express or
implied release of A from debt. Surety not a
new contract.

305
Problem:
In the course of construction of a building
according to plans and specifications, the
defendant requested a number of changes and
alterations which the contractor made on the
understanding that he would be paid therefore.
Was there a novation of a contract?

306
Answer:
Although numerous changes were made and
there was a minor increase in the cost of the
building there was no material change in its size
or dimensions. The original contract was used as
a basis for the construction and any changes or
alterations were founded upon the original
contract with the understanding that the
contractor would be paid the reasonable value of
such changes. Hence, there was no novation.
(Tiu Suico vs. Habana, 45 Phil 707)

307
Ruby & Francisco Reyes vs. BPI Family
Saving Bank (Mar. 31, 2006)

SC: With respect to obligations to pay sum of

money, there is no novation by an instrument
that expressly recognizes the old, changes
only the terms of the payment, adds other
obligations NOT incompatible with the old
ones, or the new contract merely supplements
the old one.

308
Problem:
The contract of lease contained a stipulation that
the lease shall be obligatory upon and redound
to the benefit not only of the persons who are the
lessees but also their assigns. The lessee firm
having assigned the lease to a third person, was
there a novation by substitution of the debtor?

309
Answer:
NO. Because the contract does not stipulate
that the original lessees shall be discharged
by such assignment. The new obligation
assumed by the assignee was not
incompatible with the continued liability of the
original lessee. (Rios and Reyes vs. Jacinto
Palma, 49 Phil 7)

310
Sps. Reyes vs. BPI Family Bank (Mar. 31, 2006)
Issue: Is there NOVATION if there is a 45-day credit
extension in the payment of an obligation?
Rule: NO. Extinctive novation is never presumed.
There must be an express intention to novate; in cases
where it is implied, the act of the parties must clearly
demonstrate their intent to dissolve the old obligation
as the moving consideration for the emergence of the
new one.
No incompatibility between the old obligation and the
extension of the credit.

311
Kinds of Novation
As to its essence:
1) Objective/Real
2) Subjective/Personal – substitution of debtor or
by subrogation
3) Mixed – change in the object or principal
obligation and change in the persons of either
creditor and debtor of an existing obligation

312
Kinds of Novation by Substitution of Debtors
1)Expromission – effected with the consent of the
creditor at the instance of the new debtor even
without the consent or even against the will of the
old debtor (beneficial reimbursement)
Requisites:
a)Initiative for substitution must emanate from the new
debtor;
b)Consent of the creditor to the substitution; and
c)Old debtor must be released from obligation.
•Creditor’s consent cannot be presumed. It must
be given expressly.

313
Kinds of Substitution by Expromission
a)Substitution with the knowledge and consent of
the old debtor; and
b)Substitution without the knowledge or against
the will of the old debtor.

314
Villanueva vs. Girged (110 Phil 478)

A owes B money. C wrote B that he will take

care of A loan as soon as A makes
shipment of logs to Japan. A did not ship.
C did not pay. Is C liable to B.
SC: No. (1) Expromission did not take place
for NO consent of B was given. (2) C
liability was dependent on suspensive
condition.

315
2) Delegacion – effected with the consent of
the creditor at the instance of the old debtor
(delegante), with the concurrence of the
new debtor (delegado) (reimbursement and
subrogation)
Requisites:
a) Initiative for substitution must emanate from the old
debtor;
b) Consent of the new debtor;
c) Acceptance by the creditor; and
d) Old debtor must be released from obligation.

316
Hodges vs. Rey (111 Phil 219)

A owes B P3K. A authorizes PNB to pay B by

proceeds of loan granted by PNB. PNB
agreed. PNB paid B only P2K. B sued PNB
& A for balance. Is PNB liable also?
SC: No. even if B agreed NO delegacion. PNB
never assumed payment. There was
merely authorization, accepted by PNB.
Loan was only P2K. Hence, PNB only
liable for P2K.

317
Note:
The mere fact that the creditor receives a
guaranty or accepts payment from a third person
who agrees to assume the obligation, when there
is no agreement that the first debtor shall be
released from responsibility, does not constitute
novation, and the creditor can still enforce the
obligation against the original debtor. The third
person becomes merely a co-debtor; surety or
co-surety. (Mercantile Insurance Co. vs CA, G.R.
No. 85647, April 22, 1991)

318
Problem:
In novation by substitution of the debtor, must
the creditor’s consent be express?

319
Answer:
YES. It implies on the part of the creditor a
waiver of the right that he had before the
novation, which waiver must be express
under the principle that renuntiatio non
praesumitur, a waiver of right may not be
performed, unless the will to waive is
indisputably shown by him who holds the
right. (Testate Estate of Mota, et al. vs. Serra, 47
Phil 464)

320
However, in Asia Banking Corp. vs. Elser, 34 Phil
994, the court held that Art. 1205, now Art. 1293
does not say that the creditor’s consent must be
express or given at the time of the substitution.
According to Spanish jurisprudence it is sufficient
the consent be given at any time and in any form
whatever, while the agreement of the debtor
subsists. The existence of the consent may be
inferred from the acts of the creditor since volition
may as well be expressed by deeds as by words.
The holding in Testate Estate of Mota vs. Serra is
not meant to convey the impression that the word
“express” was to be given an unqualified meaning
contrary to the Spanish and American cases cited in
said decision.
321
But...

If creditor is a corporation, its consent must

always be expressed (Pirovano vs. Dela
Rama Steamship)
Except:
In case of veil of corporate fiction is pierced.
(Asia Banking vs. Elser)

322
Problem:
X sued Y for estafa. While the case was
pending, Y entered into a contract with X
where Y promised to pay X in installment the
amount misappropriated by Y. Despite this
stipulation, the court convicted Y for estafa. Y
questioned the legality of the conviction on
the ground of novation.

323
Answer:
The conviction must be upheld. Y’s novation theory
may perhaps apply prior to the filing of the criminal
action in court because up to that time, the original
trust relation may be converted by the parties into an
ordinary creditor-debtor relationship. But after the
justice authorities have taken cognizance of the
crime and instituted action in court, the offended
party may no longer divest the prosecution of its
power to exact the criminal liability as distinguished
from the civil. (People vs. Nery, L-19567, Feb. 5, 1964;
People vs. Benitez, L-15923, June 30, 1960)

BUT…
324
Degaños vs. People (14 Oct. 2013)
•There was consignment of jewelry for sale or return
if unsold.
•Accused claimed his partial payments novated
contract from agency to a LOAN, thereby converting
his liability from criminal to civil.
•He insisted that his failure to complete his payment
PRIOR to filing of criminal complaint notwithstanding,
complainants requiring accused to make formal
proposal before barangay authorities on payment of
balance confirmed NOVATION.

325
SC: NO NOVATION. Partial payment made
and purported agreement to pay remaining
obligations DID NOT equate to NOVATION of
the original contractual relationships of agency
to one of SALE.
Acceptance of partial payments without
change in the original relations between
complainant and accused CANNOT be
NOVATION. There MUST be intent to
extinguish the old relationship. INTENT cannot
be inferred from mere acceptance of partial
payment.

326
Effects of Insolvency or Non-Fulfillment by
New Debtor (Arts. 1294-1295)
1)Expromission
• Tolentino: it shall not revive the original
debtor’s liability to the creditor whether the
substitution is effected with or without the
knowledge or against the will of the original
debtor.
• Jurado: If the substitution was effected with
the knowledge and consent of the original
debtor, it shall revive the original debtor’s
liability to the creditor.

327
2) Delegacion
The right of the creditor can no longer be
revived EXCEPT in the following cases.
a) Insolvency already existing and of public
knowledge at the time when the original
debtor delegated his debt
b) Insolvency was already existing and known
to the original debtor when he delegated his
debt
It is submitted that ACTUAL knowledge of the
creditor that new debtor was insolvent at the time
of delegation, will bar him from recovering from
the old debtor. He must bear the consequences
of his acts knowingly done.
328
Effects of Novation Upon Accessory
Obligations (Art. 1296)
When the principal obligation is extinguished in
consequence of a novation, accessory
obligation may subsist only insofar as they may
benefit third persons who did not give consent.

329
Effects of Condition in Novation
1) If the original obligation was subject to
suspensive/resolutory condition, the new
obligation shall be under the same condition,
unless otherwise stipulated. (Art. 1299)
2) If the new obligation and the old obligation are
subject to different conditions:
a) If the conditions can stand together—
• If both are fulfilled – the new obligation becomes
demandable
• If only the condition affecting the old obligation is fulfilled
– old obligation is revived while the new obligation loses
its force
• If only the condition affecting the new obligation is
fulfilled – there is no novation since the requisite of a
previous valid and effective obligation would be lacking.
330
Novation by Subrogation (Art. 1300)
A personal novation effected by subrogating
a third person in the rights of the creditor.

331
Legal Subrogation (Art. 1302)
General Rule: Legal subrogation is not
presumed.
Except:
1)When a creditor pays another creditor who is
preferred, without debtor’s knowledge;
2)When a third person, not interested in the obligation,
pays with the express or tacit approval of the debtor; or
3)When, even without knowledge of the debtor, a
person interested in the fulfillment of the obligation pays,
without prejudice to the effects of confusion as to the
latter’s share.

332
Effects of Subrogation (Arts. 1303-1304)
1) Total subrogation – Transfers to the
person subrogated the credit will all the
rights the original creditor had against
the debtor or third persons.
2) Partial subrogation – 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.

333
CONTRACTS

334
CONTRACTS
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.
Stages in life of contract:
1)Preparation (conception)
2)Perfection/Executory
3)Consummation/Executed

335
Estate of Orlando Llenado, et al. vs. Llenado
(March 4, 2009)
Lease with option to Lessee to renew must be exercised.
SC – “While the option to renew is an enforceable right, it must be
first exercised to be given effect. xxx the option of the lessee
gives the latter an enforceable right to renew xxx such time as
provided for. xxx In the absence of a stipulation in the lease
requiring notice of the exercise of an option xxx to be given within
a certain time before the expiration of the lease, xxx general rule
is that the lessee must exercise an option xxx to renew xxx and
NOTIFY the lessor thereof BEFORE or at least at the time of the
expiration of the original term xxx (Executory). The silence of
lessee after termination of original period CANNOT mean to be
that they opted to renew xxx (Executed).

336
Effects of Contracts
1) Essential – those without which there can be
no contract (Art. 1318)
a) Common elements – present in all contracts
- Consent
- Object or subject matter
- Cause or consideration
b) Special elements – only in certain contracts
c) Extraordinary elements – peculiar to specific
contract

337
2) Natural – those which are derived from the
nature of the contract and ordinarily
accompany the same; they are presumed by
law
3) Accidental – those which exist only when
the parties expressly provide for them for the
purpose of limiting or modifying the normal
effects of the contract

338
Characteristics of Contracts
1)Obligatory force of contracts
2)Mutuality
3)Autonomy
4)Relativity
5)Consensuality

339
Obligatory Force of Contracts
•This principle is explicitly recognized in Arts.
1159, 1308, 1315 and 1356.
•It is a rule that once the contract is perfected,
it shall be of obligatory force upon both of the
contracting parties.

340
Mutuality (Art. 1308)
The contract must bind both parties.
Note:
The validity or fulfillment of a contract cannot be
left to the will of one of the contracting parties.
Validity or fulfillment may be left to (1) the will of a
third person, whose decision shall not be binding
until made known to both the contracting parties
(Art. 1309) or (2) chance.

341
Philippine Savings Bank vs. Sps. Castillo, et al.
(May 30, 2011)
Held: The unilateral determination and imposition of the
increased rates (of interest in loan) is violative of the
principle of mutuality of contracts under Art. 1308 xxx. A
perusal of the Promissory Note will readily show that the
increase or decrease of interest rates hinges solely on the
discretion of petitioner. It does not require the conformity of
the maker xxx. Any contract which appears to be heavily
weighed in favor of one of the parties so as to lead to an
unconscionable result, thus partaking of the nature of a
contract of adhesion, is void. Any stipulation regarding the
validity or compliance of the contract left solely to the will of
one of the parties is likewise invalid.
BUT…
342
MIAA vs. Ding Velayo Sports Center (May 30,
2011)

An express agreement which gives the lessee the

sole option to renew the lease is frequent and
subject to statutory restrictions, valid and binding
on the parties. This option, which is provided in the
same lease agreement, is fundamentally part of the
consideration in the contract xxx. It is a purely
executory contract and at most confers a right to obtain
a renewal if there is compliance with the conditions on
which the right is made to depend. The right of renewal
constitutes a part of the lessee's interest in the land
and forms a substantial and integral part of the
agreement.

343
The fact that such option is binding only on the
lessor and can be exercised only by the lessee
does not render it void for lack of mutuality.
After all, the lessor is free to give or not to give
the option to the lessee. xxx Mutuality obtains in
such a contract and equality exists between the
lessor and the lessee since they remain with the
same faculties in respect to fulfillment.

344
Autonomy (Art. 1306)
The contracting parties may establish such
stipulations, clauses, terms and conditions as
they deem convenient.
Limitation to the principle of autonomy:
•Stipulations should not be contrary to law, morals,
good customs, public order, or public policy.
•Exercise of Parens Patriae – weakening the
consensual nature of contracts giving undue
advantage to one of the contracting parties

345
Relativity (Art. 1311)
General Rule: Contracts take effect only between
parties, their assigns and heirs.
Limitations: HOWEVER with respect to assignees
or heirs, the general rule under Art. 1311 is not
applicable if the rights and obligations arising from
the contract are not transmissible or purely
personal.

346
Exceptions:
1)Beneficial stipulation/stipulation pour autrui – A
stipulation in favour of a third person.
2)When the third person comes into possession of the
object of a contract creating real rights; (Art. 1312)
3)Where the contract is entered into in order to defraud
a creditor; (Art. 1313)
•Here, the creditor may ask for its rescission.
1)Where the third person induces a contracting party to
violate his contract (Art. 1314). Such third person can
be held liable for damages.

347
5) Contracts creating “status” (marriage
contract)
6) In suspension of payments and compositions
under the Insolvency Law
7) CBA
8) Negotiorum gestio (Art. 2150-2151)
9) Violence & intimidation employed by 3P
(Art. 1336)

348
Essential Requisites of Contracts
CONSENT: conformity of the parties to the
terms of the contract; the acceptance by the
offeree of the offer made by the other
Requisites:
1)Must be manifested by the concurrence of the other
and acceptance; (Arts. 1319-1326)
2)Parties must possess the necessary legal capacity;
(Arts. 1327-1329) and
3)Must be intelligent, free, spontaneous, and real.
(Arts. 1330-1346)

349
• The fact that the signatures of the witnesses
and the notary public were forged does not
negate the existence of the contract for as
long as the parties consented to it. The
signatures of the witnesses and the notary
public are necessary simply to make the
contract binding on the third person (Soriano
v. Soriano, G.R. No. 130348, Sept. 3, 2007)

350
OFFER: Unilateral proposition which one
party makes to the other for the celebration
of a contract
Requisites:
1)It must be defined.
2)It must be intentional.
3)It must be complete.
4)It must be directed to person or persons with
whom the other offeror intends to enter into a
contract except definite offers which are not
directed to a particular person but to the public in
general (i.e. public auction)

351
Withdrawal of Offer
Offer/proposal may be withdrawn so long as
the offeror has no knowledge of acceptance by
offeree
Except: Option Contract (Art. 1324)
Counter-offer
Qualified acceptance; involves a new proposal;
a rejection of the original offer

352
Complex Offers
When a single offer involves two or more
contracts, the perfection, where there is only
partial acceptance, will depend upon the
relation of the contracts between themselves,
whether due to their nature or due to the intent
of the offeror.

353
Rule on Complex Offers
1)Offers are interrelated – contract is perfected
if all the offers are accepted
2)Offers are not interrelated – single
acceptance of each offer results in a perfected
contract unless the offeror has made it clear
that one is dependent upon the other and
acceptance of both is necessary

354
ACCEPTANCE: Must be certain or definite
and absolute in character. A qualified
acceptance constitutes a counter-offer. (Art.
1319)
It may be express or implied (e.g. failure on
the part of the heir to reject the inheritance
within 30 days from notice of the order of
the court distributing the estate). (Art. 1320)

355
Requisites of acceptance:
1)Absolute (no vitiation)
2)Directed to the offeror
3)Made with the intention to be bound
4)Made within the prior time
5)Communicated to the offeror and learned by
him unless the offeror knows of the
acceptance.

356
Amplified Acceptance
Under certain circumstances, a mere
amplification on the offer must be understood
as an acceptance of the original offer, plus a
new offer which is contained in the
amplification.

357
Withdrawal Acceptance
•First View (Manresa) – Although the offeror is not
bound until he learns of the acceptance, the same
thing cannot be said of the offeree who from the
moment he accepts, loses the power to retract
such acceptance xxx
•Second View (Tolentino) – Acceptance may be
revoked before it comes to the knowledge of the
offeror because in such case there is still no
meeting of minds

358
Theories that determine the exact moment of
perfection when acceptance is made by letter or
telegram:
1)Manifestation Theory – perfected from the
moment the acceptance is declared or made.
•Adhered to by the Code of Commerce
1)Expedition Theory – perfected from the moment
the offeree transmits the notification of acceptance
to the offeror.

359
3) Reception Theory – perfected from the
moment that the notification is in the hands
of the offeror in such a manner that he can,
under ordinary conditions, procure the
knowledge of its contents, even if he is not
able to actually acquire such knowledge.
4) Cognition Theory – perfected from the
moment the acceptance comes to the
knowledge of the offeror.
Note:
The stipulation of the parties governs the manner and
moment of acceptance as when they stipulate that it
be expressly accepted.

360
Note:
Silence can be construed as consent.
Requisites:
1) There is a duty or possibility to express oneself;
2) The manifestation of the will cannot be
interpreted in any other way;
3) There is a clear identity in the effect of the
silence and the undisclosed will (Arts. 1670,
1870-1873)

361
OPTION CONTRACT
A preparatory contract in which one party grants to
the other for a fixed period under specified
conditions, to decide whether or not to enter into a
principal contract.
Requisites:
1)It is supported by an independent consideration; and
2)It is exclusive.
If the option is not supported by a consideration which is distinct
from the purchase price, the offer may still be withdrawn even if
the offeree has already accepted it (Jurado, Desiderio, Comments
and Jurisprudence on Obligations and Contracts, p. 413 [2010])

362
Persons Incapacitated to Give Consent
(Art. 1327)
A.Minors
Exceptions:
a)When minor misrepresents his age (It must be an
active not merely constructive representation); physical
attributes;
b)Contracts involving the sale and delivery of
necessaries to minors (Art. 1489)
c)Contracts by guardians or legal representatives.

363
B. Insane or Demented Persons - Unless
the contract was entered into during a
lucid interval (Art. 1328).
C. Deaf-mutes who do not know how to
read and write
N.B. Rule 93, Sec. 2—
Incompetents
1) Persons under civil interdiction
2) Hospitalized lepers, prodigals, deaf & dumb
3) Unsound mind
4) Person who cannot take care of themselves
because of age, disease or weak mind.

364
Are they Incapacitated?
Answer: Incompetents also incapacitated
OBVIOUSLY cannot give consent
BUT
incompetents NOT incapacitated – can give
consent
BUT
if guardian already appointed, then cannot
give consent anymore.

365
Incapacity to give consent (Art. 1327) vs.
Disqualification to contract (Art. 1329)
Article 1327 Article 1329
Restrains the existence Restrains the very right
of the right to contract itself
Based upon subjective Based upon public
circumstances of policy and morality
certain persons
Voidable Void

366
Vices of Consent (Art. 1330)
1)Vices of the will (vicios de la formacion de la
voluntad)
2)Violence
3)Intimidation
4)Mistake
5)Fraud
6)Undue Influence

Vices of Declaration (vicios de la declaracion)

-Simulation of contracts

367
A. Mistake
It must refer to the substance of the thing
which is the object of the contract, or to
those conditions which have principally
moved one or both parties to enter into the
contract. (Art. 1331)
Not only wrong conception of the thing but also
the lack of knowledge with respect to it.

368
 Two (2) General Kinds of Mistake
Mistake of Fact
One or both contracting
parties believe that a fact
exists when in reality it does
not or vice versa.
Vitiates consent
Mistake of Law
One or both parties arrive at
an erroneous conclusion
regarding the interpretation
of a question of law or legal
effects of a certain act or
transaction.
Does not vitiate consent
except when it involves
mutual error as to the effect
of an agreement when the
real purpose is frustrated.
369
Requisites of Art. 1334 which will vitiate
consent:
1)It must be of a past or present fact;
2)It must not be imputable to the party mistaken, i.e.
mistake is not inadvertent and excusable;
3)Mistake must be with respect to the legal effect of an
agreement;
4)It must be mutual; and
5)Parties’ real purpose must have been frustrated.
•There is NO MISTAKE in the party alleging it knew the
doubt, contingency or RISK affecting the object of the
contract (Art. 1333)

370
B. Violence
When in order to wrest consent serious or
irresistible force is employed (Art. 1335)
Requisites:
1) Must be serious or irresistible
2) Must be the determining cause for the party upon
whom it is employed in entering in the contract
3) It is not justified
4) It is sufficient

371
C. Intimidation (Art. 1335)
Requisites:
1) One party is compelled to give his consent by a
reasonable and well-grounded fear of an evil;
2) The evil must be imminent and grave;
3) The evil must be upon his person or property,
spouse, descendants or ascendants; and
4) It is the reason why he enters the contract.
5) The evil must be unjust.

372
 Violence vs. Intimidation

Violence Intimidation
Refers to physical Refers to moral compulsion
compulsion
External or prevents the will Internal or induces the
to manifest itself performance of an act

373
D. Undue Influence (Art. 1337)
When a person takes improper advantage of
his power over the will of another, depriving
the latter of a reasonable freedom of choice.
Test of undue influence:
Whether or not the influence exerted has so
overpowered or subjugated mind of a contracting
party as to destroy his free agency, making him
express the will of another rather than his own.
(Coso v. Fernandez Deza, G.R. No. 16763, December 22,
1921)

374
Circumstances considered to determine
whether the influence exerted is unreasonable:
1)Confidential relations
2)Family relations
3)Spiritual relations
4)Other relations between the parties

•By analogy, undue influence employed by a third

person may annul the contract.

375
N.B.
Reverential fear is fear of displeasing a person
to whom respect and obedience is due.
Here, there is NO unreasonable restraint in
the choice of the party and HENCE NOT
VITIATE CONSENT.

376
E. Fraud (Art. 1338)
When, through insidious words or
machinations of one party, the other is
induced to enter into a contract which
without them, he would not have agreed to.
Kinds of fraud:
1) Fraud in the PERFECTION of the contracts
a) Causal Fraud (Dolo Causante)
b) Incidental Fraud (Dolo Incidente)
2) Fraud in the PERFORMANCE of an obligation (Art.
1170)

377
Requisites of Fraud under Art. 1338:
1)One party must have employed fraud or insidious
words or machinations
2)It must have been serious;
3)It induced the other party to enter into a contract;
4)It must have been employed by one contracting party
upon the other and not employed by both contracting
parties or by third persons;
5)Damage or injury resulted to the other party;
6)It must be made in bad faith, i.e. with knowledge of
its falsify

378
 Dolo Causante vs. Dolo Incidente
Dolo Causante (Art. 1338) Dolo Incidente (Art. 1344)
Refers to those deceptions or Refers to those deceptions or
misrepresentations of a serious misrepresentations which are not
character employed by one party serious in character and without
and without which the other party which the other party would have
would not have entered into the still entered the contract.
contract

Fraud which is serious in character Not serious in character

It is the cause which induces the Not the cause

party to enter into a contract

Renders the contract voidable Liability for damages

379
Bad faith and fraud are allegations of fact that
demand clear and convincing proof. They are
serious accusations that can be so convenient
and casually invoked, and that is why they are
never presumed. (Cathay Pacific Airways, Ltd vs.
Sps. Vazquez, G.R. No. 150843, March 14, 2003)

380
Note:
Failure to disclose facts, when there is a
duty to reveal them, constitutes fraud. (Art.
1339)

381
• The usual exaggerations in trade, when
the other party had an opportunity to
know the facts, are not in themselves
fraudulent (Art. 1340)
• A mere expression of an opinion does
not signify fraud unless made by an
expert and the other party relied on the
former’s special knowledge (Art. 1341).

382
Fraud by third person does not vitiate consent
UNLESS:
a)It has created a substantial mistake and the
same is mutual.
b)Third person makes the misrepresentation
with the complicity, or at least with the
knowledge but without the objection, of the
favoured contracting party.

383
• Misrepresentation made in good faith is
not fraudulent but may constitute error
(Art. 1343)
• When two persons constitute one party
of the contract with respect to another,
the deceit exercised by one of them upon
his co-party is not a cause for annulment
of the contract.

384
Simulation of Contracts
(Arts. 1345-1346)
A deliberate declaration contrary to the will of the
parties.
1)Agreement of the parties to the apparently valid
act.
2)The purpose is to deceive or to hide from third
persons although it is not necessary that the
purpose be illicit or for purposes of fraud.

385
Kinds of simulation of contract:
1)Absolute (simulados) – parties do not intend to be
bound by the contract at all.
•Status: VOID
2)Relative (disimulados) – parties conceal their true
agreement. It binds the parties to their real agreement,
when it does not prejudice a third person and is not
intended for any purpose contrary to law, morals, good
customs, public order or public policy. (i.e. a deed of
sale of a piece of land is executed by the parties to
conceal their two agreement which is a donation)

386
Two juridical acts in relatively simulated
contracts:
1)Ostensible Act (apparent or fictitious) –
pretended contract
2)Hidden Act (real) – true agreement

387
Should the hidden act or the concealed
contract be lawful and does not prejudice a
third person, it is absolutely enforceable. Its
validity and effects will be governed by the
rules applicable to it, and not by those
applicable to the apparent contract.

388
With respect to a third person acting in good
faith, the apparent contract must be considered
as the true contract. The declaration that the
contract is simulated does not prejudice him.

•Relative simulation is presumed by law in

case of Art. 1602

389
OBJECT: The thing, right or service which
is the subject matter of the obligation arising
from the contract.
Requisites:
1)Must be within the commerce of man;
2)Should be real or possible;
3)Should be licit; and
4)Should be determine, or at least possible of
determination as to its kind.

390
Things Which Cannot Be the Object of
Contracts (Art. 1347-1349)
General Rule: All things or services may be the
object of contracts.
Exceptions:
1)Things outside the commerce of men;
2)Intransmissible rights;
3)Future inheritance except in cases expressly
authorized by law:
a)The object of the contract forms part of the inheritance; and
b)The promissor has an expectancy of a right which is purely
hereditary in nature.

391
4) Services contrary to law, morals, good
customs, public order or public policy;
5) Impossible things or services;
6) Objects not possible of determination as to
their kind.

392
Note:
In order that a thing, right or service may be the
object of a contract, it should be in existence at the
moment of the celebration of the contract, or at
least, it can exist subsequently or in the future:
•Future thing may be the object of a contract. Such
contract may be interpreted in two possible ways:
1)Conditional contract – if its efficacy should depend upon
the future existence of the thing
2)Aleatory contract – if one of the contracting parties should
bear the risk that the thing will never come into existence

393
CAUSE: It is the immediate, direct or most
proximate reason which explains and justifies
the creation of an obligation through the will of
the contracting parties.
Essential requisites of cause:
1)Existing at the time of the celebration of the contract;
2)Licit or lawful; and
3)True
 

394
 Cause and Object Distinguished
Cause Object
The service or benefit which The thing which is given in
is remunerated remuneration
The liberality of the donor or The thing which is given or
benefactor donated
Prestation or promise of a The thing or service itself
thing or service by the other
Different with respect of May be the same for both
each party parties

395
 Cause and Motive Distinguished
Cause Motive
Direct and most proximate Indirect or remote reason
reason of a contract
Objective or juridical reason Psychological or purely
of a contract personal reason
Always the same for each Differs for each contracting
contracting party party
Its legality affects the Its legality does not affect
existence or validity of the the existence or validity of
contract contract.

396
Effect of Lack of Cause, Unlawful Cause,
False Cause and Lesion (Arts. 1352-1355)
Cause Effect
Lack of Cause There is a total lack The contract
or absence of confers no right and
cause produces no legal
effect
Illegality of cause The cause is stated The contract is void
but is not true if it should not be
proved that they
were founded upon
another cause
which is true and
lawful

397
 Cause Effect
Lesion or Shall not invalidate
inadequacy of the contract,
price UNLESS:
1)There is fraud,
mistake or undue
influence; or
2)When the parties
intended a donation
or some other
contract.

398
FORMS OF CONTRACTS
General Rule: Contracts shall be obligatory, in
whatever form they may have been entered into,
provided all the essential requisites for their validity are
present (Art. 1356).
Exceptions:
1.When the law requires that the contract be in a
certain form to be valid (Art. 1356)
2.When law requires that the contract be in a certain
form to be enforceable (Statute of Frauds)
3.When required to make the contract effective as
against third parties (Art. 1357-1358)

399
Where the validity of a contract is made to
depend upon a particular formality, an
action under Art. 1357 cannot be brought to
compel the other party to execute such
formality.
Article 1357 presupposes the existence of a
valid contract and cannot possibly refer to
the form to make it valid.

400
Contracts which must appear in writing:
1.Donation of personal property whose value exceeds
five hundred pesos (Art. 748)
2.Sale of a piece of land or any interest therein through
an agent (Art. 1874)
3.Agreements regarding payment of interest in
contracts of loan (Art. 1956);
4.Antichresis (Art. 2134); and
5.Stipulation limiting common carrier’s duty of
extraordinary diligence to ordinary diligence (Art. 1744)

401
Contracts which must appear in public instrument:
1.Donation of immovable properties (Art. 749);
2.Partnership where immovable property or real rights are
contributed (Arts. 1171 and 1773);
3.Acts/contracts which have for their object the creation,
transmission, modification or extinguishment of real rights
over immovable property (Arts. 1358 (1), 1403 (2), 1405);
4.The cession, repudiation or renunciation of hereditary
rights or of those of the conjugal partnership of gains (Art.
1358 (2);
5.The power to administer property or those which should
prejudice a third person (Art. 1358 (3);
6.The cession of actions or rights proceeding from an act
appearing in a public document (Art. 1358 (4)

402
Note:
With respect to those enumerated under Art. 1358
(items 3 to 6 in the preceding list), they are valid
as between the contracting parties. The
requirement that they be executed in a particular
form is for the purpose of making them effective
against third persons. However, with respect to
items 1 and 2, formalities are required for the
validity of the contract.

403
Contracts which must be registered:
1.Chattel mortgages (Art. 2140)
2.Sale/transfer of large cattle (Cattle
Registration Act)

404
Note:
Arts. 1357-1358 do not require the execution of
the contract either in a public/private document in
order to validate/enforce it but only to insure
efficacy, so that after its existence has been
admitted, the party bound may be compelled to
execute the necessary document.

405
• When one of the contracting parties invokes Art. 1357
and 1358 by means of proper action, the effect is to
place the existence of the contract in issue, which must
be resolved by the ordinary rules of evidence.
• Actions to compel the execution of the necessary
document and action upon the contract may be
exercised simultaneously, unless it appears that the
former action must precede the latter.
• Although Art. 1357, in connection with Art. 1358, do not
operate against the validity of the contract nor the
validity of the acts voluntarily performed by the parties
for the fulfillment thereof, it is evident that under them
execution of the required document must precede the
determination of the obligations derived from the
contract.

406
R.A. 8792 (E-Commerce Act)
It provides that the formal requirements to make
contracts effective as against third persons and to
establish the existence of a contract are deemed
complied with provided that the electronic
document is unaltered and can be authenticated
as to be usable for future reference.

407
Reformation of Instruments
Remedy by means of which a written instrument is
made or construed so as to express or conform to
the real intention of the parties when some error or
mistake has been committed.

408
Requisites:
1)Meeting of the minds of the parties;
2)Their true intention is not expressed in the
instrument;
3)Failure to express true intention is due to
mistake, fraud, inequitable conduct or accident;
and
4)Clear and convincing proof of mistake, accident,
relative simulation, fraud, or inequitable conduct.

409
 Reformation
Presupposes that there is a
valid contract but the
document/instrument
executed does not express
their true intention
Annulment
The contract was not validly
entered into as when their
minds did not meet or if the
consent was vitiated

Gives life to the contract by Involves a complete

making the instrument nullification of the contract
conform to the true intention
of the parties

410
When can one party ask for the reformation of the
contract (Arts. 1361-1365)
1)In case of mutual mistake of the parties (Art. 1361)
2)When one party was mistaken and the other party acted
fraudulently (Art. 1362);
3)When one party was mistaken, the other knew or believed
that the instrument does not show their real intent but
concealed that fact to the former (Art. 1363);
4)In case of ignorance, lack of skill, negligence or bad faith
on the part of the person drafting the instrument (Art. 1364);
5)When parties agree upon the mortgage or pledge of a real
or personal property, but the instrument states that the
property is sold absolutely or with a right of repurchase (Art.
1365).

411
Instances when there can be no reformation:
(Art. 1366)
1)Simple donations inter vivos wherein no
condition is imposed;
2)Wills;
3)When the real agreement is void (Art. 1366)
Note:
•If mistake, fraud, inequitable conduct or accident has
prevented a meeting of the minds of the parties, the proper
remedy is not reformation of the instrument but annulment
of the contract (Art. 1359)
•Expediency and convenience are not grounds for the
reformation of an instrument (Multi-Ventures Capital vs. Stalwart,
G.R. No. 157439, July 4, 2007)

412
4) When one of the parties brought an action to
enforce the instrument (Art. 1367)
Note:
• When one of the parties has brought an action to
enforce the instrument, no subsequent reformation
can be asked (principle of estoppel)
• In case of mutual mistakes, reformation may be
ordered at the instance of either parties or his
successors in interest, otherwise it may only be
brought by the petition of the injured party or his
heirs and assigns (Art. 1365).

413
RESCISSIBLE Contracts
Contracts which are valid but are defective
because of injury or damage to either of the
contracting parties or to third persons, as a
consequence of which it may be rescinded by
means of a proper action for rescission.

•Distinguish from ‘RESOLUTION’ in Article

1191

414
Requisites of rescission:
1)Contract must be rescissible under Arts. 1381 and 1382.
2)Party asking for rescission must have no other legal
means to obtain reparation for the damages suffered by him
(Art. 1383)
3)Person demanding rescission must be able to return
whatever he may be obliged to restore if rescission is
granted (Art. 1385)
4)Things which are the object of the contract must not have
passed legally to the possession of a third person acting in
good faith (Art. 1385); and
5)Action must be brought within four years (Art. 1389)

415
Contracts that are rescissible
(Arts. 1381-1382)
A. Lesion
1)Those entered into by guardians where the ward
suffers lesion of more than ¼ of the value of the things
which are objects thereof.
2)Those agreed upon in representation of absentees, if
the latter suffer lesion by more than ¼ of the value of
the things which are subject thereof.

416
B. Fraud
1)Those undertaken in fraud of creditors when the
latter cannot in any manner claim what are due
them. (accion pauliana)
2)Those which refer to things under litigation if they
have been entered into by the defendant without
the knowledge and approval of the litigants and the
court.
3)Payments made in a state of insolvency for
obligations whose fulfillment the debtor could not be
compelled at the time they were effected.

417
C. Other Causes Stated By Law
1)Art. 1098 – partition of inheritance where an heir
suffers LESION of at least ¼ of the share to which he
is entitled
2)Art. 1189 (4) – deterioration of the thing through the
fault of the debtor
3)Art. 1526 (4) – right of unpaid seller to rescind
4)Art. 1538 – deterioration of the object of the sale
5)Art. 1539 – sale of real estate with a statement of its
area at the rate of a certain price for a unit of measure
or number and the vendor failed to deliver the area
stated, which should be not less than 1/10 th of that
stated

418
6) Art. 1542 – the vendee does not accede to the
failure to deliver what has been stipulated
7) Art. 1556 – when through eviction, the vendee loses
a part of the thing sold of such importance, in
relation to the whole, that he would not have bought
it without the said part
8) Art. 1560 – if immovable sold is encumbered with
any non-apparent burden or servitude of such nature
that it cannot be presumed that the vendee could not
have acquired it had he been aware thereof
9) Art. 1567 – election of the vendee to withdraw from
the contract in the cases under Arts. 1561-1566
10) Art. 1659 – rescission by the aggrieved party in a
contract of lease when the other party does not
comply with Arts. 1654 and 1657
419
Requisites before a contract entered into in behalf
of wards of absentees may be rescinded on the
ground of LESION:
Lesion is the injury which one of the parties
suffers by virtue of a contract which is
disadvantageous for him. TO give rise to
rescission, the lesion must be known or could
have been known at the time of making of the
contract.

420
1) Contract was entered into by a guardian in behalf
of his ward or by a legal representative in behalf
of an absentee;
2) It was entered into without judicial approval;
3) Ward or absentee suffered lesion of more than ¼
of the value of the property which is the object
contract.
4) There is no other legal means of obtaining
reparation for the lesion;
5) Person bringing the action must be able to return
whatever he may obliged to restore; and
6) Object of the contract must not be legally in the
possession of a third person who did not act in
bad faith.

421
Note:
A guardian is authorized only to MANAGE the
estate of the ward; should he DISPOSE a
portion thereof without authority from the
court by way of a contract, the same is
unenforceable under Art. 1403 (1),
irrespective of whether there is lesion or not.

422
Requisites before a contract entered into in
FRAUD OF CREDITORS may be rescinded:
1)There is a credit existing prior to the celebration contract;
2)There is fraud, or at least, the intent to commit fraud to the
prejudice of the creditor seeking rescission;
3)Creditor cannot in any legal manner collect his credit; and
4)Object of the contract must not be legally in the
possession of a third person who did not act in bad faith.
The action to rescind contracts in fraud of creditors is
known as accion pauliana.

423
Requisites:
1)The plaintiff asking for rescission has a credit prior to
the alienation;
2)The debtor has made a subsequent contract
conveying a patrimonial benefit to a third person;
3)The creditor has no other legal remedy to satisfy his
claim;
4)The act being impugned is fraudulent; and
5)The third person who received the property
conveyed, if it is by onerous title, has been an
accomplice in the fraud.

424
• Accion pauliana presupposes a judgment
and unsatisfied execution which cannot
exist when the debt is not yet demandable
at the time the rescissory action is brought.
• Even secured creditors are entitled to
accion pauliana.

425
When alienation of property presumed in Fraud
of Creditors:
1)Alienation by gratuitous title if the debtor has not
reserved sufficient property to pay all of his debts
contracted before alienation;
2)Alienation by onerous title if made by a debtor
against whom some judgment has been rendered
in any instance or some writ of attachment has
been issued.

426
Requisites before payment made by
insolvent can be rescinded:
1)It was made in a state of insolvency; and
2)Obligation must have been one which the
debtor could not be compelled to pay at the
time such payment was effected.

427
Asia Banking vs. Noble Jose and Lichauco
& Co., (51 Phil 703)
Where a debtor transfers property to a creditor
supposedly in payment of a debt which has
NOT YET matured at the time when debtor is
INSOLVENT and for a CONSIDERATION
which is grossly inadequate as compared to
the actual value, SC considered the same as
FRAUDULENT and may be set aside.

428
But... it is NOT fraudulent if the
consideration of the sale was a pre-existing
debt and the debt was due and owing and
enforceable at the time of sale.

429
Parties who may institute action:
1)The creditor who is defrauded in rescissory
actions on ground of fraud, and other person
authorized to exercise the same in other
rescissory actions.
2)Their representatives
3)Their heirs
4)Their creditors by virtue of the subrogatory
action define in Art. 1177 of the NCC

430
Effect of Rescission (Art. 1385)
1)As to the parties – mutual restitution together
with the fruits and interest.
Note: This is applicable only to rescissory actions on the
ground of lesion and not to rescissory actions on the ground
of fraud.
2)As to third person
•Bad faith or not legally in possession – obliged to
return
•Legally in possession and not in bad faith – no
rescission; however, indemnity for damages may be
demanded from the person causing the loss.

431
Prescriptive Period: Action for Rescission
(Art. 1389)
1)Under Art. 1381 (1)– within 4 years from the time of the
termination of the incapacity of the ward
2)Under Art. 1381 (2)– within 4 years from the time the
domicile of the absentee is known
3)Under Art. 1381 (3) and (4) as well as Art. 1382 –
within 4 years from the time of the discovery of fraud
4)In certain contracts of sale especially declared by law
to be rescissible – 6 months or even 40 days counted
from the day of delivery (Arts. 1547, 1571, 1577)

432
VOIDABLE Contracts
Those which possess all the essential
elements for validity but the consent is vitiated
either by lack of legal capacity of one of the
contracting parties or by mistake violence,
intimidation, undue influence or fraud even
though there may have been no damage to the
contracting parties.

433
CAUSE
The following contracts are voidable or
annullable:
1)Those where ONE of the parties is incapable of
giving consent to a contract;
2)Those where the consent is vitiated by mistake,
violence, intimidation, undue influence of fraud
(Art. 1390)

434
Prescriptive Period: Action for Annulment
(Art. 1391):
1)Contracts entered into by incapacitated person –
within 4 years from the time guardianship ceases;
2)Where consent is vitiated by violence,
intimidation or undue influence – within 4 years
from the time such violence, intimidation or undue
influence ceases;
3)Where consent is vitiated by mistake or fraud –
within 4 years from the time of the discovery of
such mistake or fraud.

435
• Discovery of fraud must be reckoned
from the time the document was
registered in the Office of the Registry of
Deeds. Registration constitutes
constructive notice to the whole world.
(Carantes vs. CA, 1977)

436
Who May Institute Action for Annulment
(Art. 1397)
General Rule: Action for annulment may be
instituted by all who are thereby obliged principally
or subsidiarily. A stranger to the contract cannot
institute an action for annulment.
Requisites:
1)Plaintiff must have interest in the contract;
2)The victim and not the party responsible for the vice or
defect must assert the same.

437
Exception:
If a third person is prejudiced in his rights with
respect to one of the contracting parties, and
can show detriment which would positively
result to him from the contract in which he has
no intervention (Teves v. People’s Homesite & Housing
Corp., GR No. 21498, June 27, 1968)

438
Effects of Annulment
1)In contract has not yet been consummated
parties shall be released from the obligations
arising therefrom;
2)If contract has already been consummated
rules provided in Arts. 1398-1402 shall govern.
•Arts. 1398-1399 – Obligation of mutual restitution
•Arts. 1400-1402 – Effect of failure to make restitution

439
UNEFORCEABLE Contracts
Those which cannot be enforced by proper
action unless they are ratified, because, either:
1)They are entered into without or in excess of
authority (Art 1403 (1); Art. 1317);
2)They do not comply with the statute or frauds
(Art. 1403 (2);
3)Both contracting parties do not possess the
required legal capacity.

440
Note:
The statute of frauds applies only to EXECUTORY
CONTRACTS, not to those that are partially or
completely fulfilled. Further, the statute does not
apply to actions which are neither for specific
performance of the contract nor for the violation
thereof. Take note that the provision mentions
“unenforceable by action.” The prohibition, thus,
applies on actions which spring from the
enforcement of the contract.

441
 Mactan-Cebu Int’l. Airport Authority vs.
Lozado, Sr. (Feb. 25, 2010)
Held: The Statute of Frauds operates only
with respect to executory contracts, and
does not apply to contracts which have
been completely or partially performed,

442
Ratification of Contracts Infringing the
Statute of Frauds (Art 1405)
Such contracts may be ratified by:
1)Failure to object to the presentation of oral
evidence to prove such contracts; or
2)Acceptance of benefits under these contracts
Note:
The unenforceability of a contract can only be assailed by
parties thereto (Art. 1408). This defense is personal to the
party to the agreement.

443
VOID OR INEXISTENT Contracts
In general, they are those which lack
absolutely either in fact or in law one or some
of the elements essential for its validity.
Note:
The defense of illegality of contract is not available to
third persons whose interests are not directly affected
(Art. 1421)
•A contract which is the direct result of a previous illegal
contract, is also void and inexistent (Art. 1422)

444
Void and Inexistent Contracts Distinguished
Void Inexistent
Those where all of the Those where one or some or
requisites of a contract are all of the requisites essential
present but the cause, object for the validity of a contract are
or purpose is contrary to law, absolutely lacking
morals, good customs, public
order, or public policy or
contract itself is prohibited or
declared void by law.
Principle of pari delicto is Principle of pari delicto is not
applicable applicable
May produce legal effects Cannot produce legal effect
Covers Art. 1409 nos. 1, 3, 4, Covers Art. 1409 nos. 2 and 3
5, 6 and 7
445
Contracts which are INEXISTENT and VOID AB
INITIO (Art. 1409)
1)Those whose cause, object or purpose is contrary to law,
morals, good customs, public order or public policy;
2)Those which are absolutely simulated or fictitious;
3)Those whose cause or object did not exist at the time of the
transaction;
4)Those whose object is outside the commerce of men;
5)Those which contemplate an impossible service;
6)Those where the intention of the parties relative to the principal
object of the contract cannot be ascertained; and
7)Those expressly prohibited or declared void by law.

446
Principle of In Pari Delicto (Arts. 1411-
1417)
General Rule: When the defect of a void
contract consists in the illegality of the cause or
object of the contract and both of the parties
are at fault or in pari delicto, the law refuses
them any remedy and leaves them where they
are.

447
Exceptions:
1)Payment of usurious interest (Art. 1413);
2)Payment of money or delivery of property for an
illegal purpose, where the party who paid or delivered
repudiates the contract before the purpose has been
accomplished, or before any damage has been caused
to a third person (Art. 1414);
3)Payment of money or delivery of property made by
an incapacitated person (Art. 1415);
4)Agreement or contract not illegal per se but merely
prohibited by law, and the prohibition is designed for
the plaintiff’s protection (Art. 1416);

448
5) Payment of any amount in excess of the
maximum price of any article or commodity fixed
by law (Art. 1417);
6) Contract whereby a labourer undertakes to work
longer than the maximum number of hours fixed
by law (Art. 1418);
7) Contract whereby a labourer accepts a wage
lower than the minimum wage fixed by law (Art.
1419);
8) In case of divisible contracts, the legal terms
may be enforced separately from the illegal
terms (Art. 1420); and

449
9) One who lost in gambling because of fraudulent
schemes practiced on him. He is allowed to
recover his losses. [Art. 315, 3(b), RPC] even if
gambling is prohibited.

Note:
The principle of in pari delicto is applicable
ONLY TO VOID CONTRACTS and not to
inexistent contracts.

450
Rules when only one of the parties is at
fault:
1)Executed Contracts – guilty party is barred from
recovering what he has given to the other party by
reason of the contract. Innocent party may
demand for the return of what he has given.
2)Executory Contracts – Neither of the contracting
parties can demand for the fulfillment of any
obligation from the contract nor may be compelled
to comply with such obligation.

451
-END-

452