Obligations and

Contracts:
Essential Notes

OBLIGATIONS

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
3

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.

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

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

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

Sources are Exclusive

SC in Sagrado Orden de Predicadores
vs. Nacoco (91 Phil 503) declared
The occupants obligation to pay rentals, like any
other obligation, must arise from law, contract, quasicontract, 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.

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

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.

10

1159
Obligations 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.

11

In Cui vs. Arellano University, the Supreme

Court declared that the stipulation that a
students 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.

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.

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

14

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.
15

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.

16

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)

17

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. 21442153)

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)

18

19

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

20

REAL OBLIGATIONS
Specific
Determinate

Generic
Indeterminate

Principal Art. 1244

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

Art. 1246
xxx the creditor cannot demand a
thing of superior quality. Neither
can the debtor deliver a thing of
inferior quality.

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
21

Specific
Determinate

Generic
Indeterminate

Art. 1166
Deliver all accessions and Ibid.
accessories of the thing although
not mentioned.
Not applicable

Art. 1165, par. 1; Art. 1170

Liable for damages in case of
breach by the debtor due to delay,
fraud, negligence and COTOTTO.

Art. 1165, par. 2

Creditor may ask that the
obligation be complied with at the
expense of the debtor.
Art. 1170
Liable for damages in case of
breach due to delay, fraud,
negligence and COTOTTO.

22

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 obligees will.
forbearance against the obligees
will.
Art. 1167
- Have the obligation performed
or executed at the expense of
obligor
- Ask what has been poorly done
be undone
- Recover damages
Except: when the personal
qualification of the obligor is the
principal motive of the obligation

Art. 1168
- If the obligor does what he has
been forbidden, obligee can have
it undone at obligors expense
- Recover damages
Except: (1) Effects of the act
which is forbidden are definite in
character;
(2) It is physically or
legally impossible to undo what
has been done
23

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.

2)Voluntary debtor, in the performance of the

obligation, is guilty of:
(a)
(b)
(c)
(d)

Default (mora)
Fraud (dolo)
Negligence (culpa)
Breach through contravention of tenor of the
obligation
Note: Debtor is liable for damages.
24

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)

25

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)

26

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

27

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)
28

3) Compensatio morae delay of the

parties or obligors in reciprocal
obligation

29

Rules on Default
1)Unilateral Obligation
Demand is necessary. No demand-nodelay.
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)
30

Pantaleon vs. American Express

(May 8, 2009)
Unreasonable
delay
in
approving/
disapproving credit card purchase is MORA
SOLVENDI, subject to damages.

31

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

32

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

33

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.
34

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 respective obligation
should be simultaneous. Hence, NO DEMAND is
generally necessary because once a party fulfills
his obligation and the other party does not fulfill
his, 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.
35

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.

36

Civil Frauds Distinguished

Fraud/Dolo in the Performance
of Incidental Fraud (Dolo
Incidente) Art. 1170
Present
only
performance of
obligation

Causal Fraud (Dolo Causante)

Arts. 1338 and 1344

during
the Present only during the time of
a pre-existing birth or perfection of the 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
37

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.

38

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

39

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.

40

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)Wat between the subjects of a neutral country

41

Cathay Pacific Airways vs. Vasquez

The Vasquezes had the right to waive the
PRIORITY (FIRST CLASS) and by Cathays
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. Vasques are
only entitled to nominal and NOT moral
damages.

42

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 theres
supposed to be continuity in Insurance.

43

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

44

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.

45

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

46

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.
47

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.

48

All-Time Favorite Cases

Republic vs. Luzon Stevedoring
(21 SCRA 279)
Presumption of negligence; case at bar.
Considering that the Nagtahan bridge was an
immovable and stationary object and xxx
provided with adequate openings for the
passage of water craft xxx it is undeniable that
the unusual event that the barge xxx rammed
the bridge support raises a presumption of
negligence xxx.
49

The appellant strongly stresses 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 L-1892; that it assigned
to the task the more competent and experienced
among its patrons, had the towlines, engines
and equipment double-checked and inspected;
that 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.

50

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) by
definition,
are
extraordinary
events not
foreseeable or avoidable, "events that could not
be foreseen, or which, though foreseen, were
inevitable" (Art. 1174, Civ. Code of the
Philippines). It is, therefore, 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
51

Otherwise stated, the appellant, Luzon

Stevedoring Corporation, knowing and
appreciating the perils posed 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

52

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.

53

Held: Far East Bank is liable for nominal

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

54

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

55

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.

56

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.

57

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

58

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)

59

Remedies of Creditor to Protect Credit

(Art. 1177)
1)To exhaust the property in possession of the
debtor generally by attachment, subject to
exemptions provided by law
2)Accion subrogatoria to be subrogated to all the
rights and actions of the debtor save those which
are inherent in his person
3)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
60

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
61

62

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.

63

CONDITIONAL OBLIGATION
The effectivity is subordinated to the
fulfillment or non-fulfillment of a future AND
uncertain fact or event.

64

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)

65

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

66

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)

67

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

68

Potestative Condition
When it depends exclusively upon the will of
creditor condition and obligation is valid
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

69

 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

70

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 preexisting, not depending on fulfillment of the condition
which is impossible for its existence, only the
condition is void
71

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.

72

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 evidence that the event cannot occur,
although the time indicated has not yet lapsed.
The intention of the parties, taking into consideration
the nature of the obligation, shall govern if no time has
been fixed for the fulfilment of the condition.

73

Positive/negative condition is different

from positive/negative obligation

74

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 willful in character.
Reason:
One must not profit by his own fault.

75

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

76

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)

77

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)

78

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

79

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 debtors
extinguished

fault

obligation

is

b) With debtors fault obligation is converted

into one of indemnity for damages

80

2) Deterioration any reduction or

impairment in the substance or value of a
thing which does not amount to a loss
a) Without debtors fault impairment to be
borne by the creditor
b) With debtors 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

81

3) Improvement anything added to,

incorporated in, or attached to the thing
that is due
a) By the things nature or by time shall inure
to the benefit of the creditor
b) At the debtors 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)
82

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)

83

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)

84

 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

85

 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)

86

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)

87

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.

88

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)

89

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 resoution in Art. 1191
NOT Rescission in Art. 1389

90

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.

91

Ayala Life Insurance vs. Ray Burton

Devt. (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.
In contract of sale, non-payment
Negative Resolutory Condition

is

92

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. (Victorias Planters vs.
Victorias Milling Co., G.R. No. L-6648, July 25, 1955)

Fortuitous event does NOT interrupt the

running of the period.

93

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.

94

Judicial Term/Period
When fixed by a competent
accordance with the causes
recognized by law.

court in
expressly

Once fixed, the period can no longer be

judicially changed.

95

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)
96

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
97

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

98

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

99

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

100

Limitations Upon the Right of Choice

The debtor cannot choose
undertakings which are:

prestations/

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.
101

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.

102

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

103

2) Due to debtors 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

104

3) Due to creditors fault (Art. 1203)

-

If through the creditors act the debtor

cannot make a choice according to the
terms of the obligation, the latter may
RESCIND with damages

105

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

106

2) Due to debtors 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

107

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
effective.

is

necessary

to

make

substitution

Only debtor has choice.

108

JOINT OBLIGATION
(Obligacion Mancomunada)

The whole obligation is to be paid or fulfilled

proportionately by different debtors or
demanded
proportionately
by
different
creditors.

109

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.

110

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.

111

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

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

112

3) Nature of the obligation requires

solidarity
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

113

Heirs of George Poe vs. Malayan Insurance

(April 7, 2009)
Solidary xxx cannot lightly be inferred. It exists only
when the obligation expressly so state xxx law
provides xxx nature of obligation so requires.
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 liablity 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.
114

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)

115

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.

116

Breach of Joint Indivisible Obligation

(Art. 1224)
Obligations can be enforced only
proceeding against all the creditors.

by

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)
117

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)

118

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

119

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.

120

Effect of Novation, Compensation,

Confusion and Remission in Solidary
Obligations (Art. 1215, Arts. 1219-1220)
Note:
Do only what is useful/beneficial
prejudicial. (Art. 1212)

NOT

121

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 of the
obligation, such creditor shall be liable to the others
for the share which corresponds to them, not only
in the obligation, but also in the benefits;

122

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 in case there is deficiency in
performance or in case damages are incurred
by the other solidary creditors as a result of
the substitution;
4) If effected by subrogating a third person in the
rights of the solidary creditor responsible for
the novation, the obligation of the debtor or
creditors is not in reality extinguished; the
relation between the other creditors not
substituted and the debtor/s is maintained;

123

5) If the novation is effected by subrogating a

third person in the rights of all the solidary
creditors, the creditor responsible for such
novation is liable to the other creditors for the
share which corresponds to them in the
obligation.

124

B. Compensation and Confusion

1) PARTIAL rules on application of payment shall
apply, without prejudice to the right of other
creditors who have not caused the confusion or
compensation to be reimbursed to the extent that
their rights are diminished or affected;
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.
125

C. Remission
1) Entire obligation obligation is totally
extinguished but the solidary debtor who obtained
it does not entitle him to reimbursement from his
co-debtors; said debtor gives or loses nothing
2) For the benefit of one of the debtors covering his
entire share he is completely released from the
creditor/s
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

126

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)

127

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.

128

Solidary debtor who made the payment

merely entitles him to claim from hs codebtors the share which correspondents to
them 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.

129

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.

130

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

131

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.
Prescription: Indivisible (Art. 1248)

132

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)

133

General Rule: Creditor cannot be compelled

partially to receive the prestation in which the
obligation consists; 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
134

OBLIGATION WITH A PENAL CLAUSE

An obligation to which an accessory
undertaking (penal clause/penalty) is attached
for the purpose of insuring its performance by
virtue of which the obligor is bound to pay a
stipulated indemnity or perform a stipulated
prestation in case of breach.

135

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)

136

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.

137

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
3)When the obligor is guilty of fraud (Art. 1170)

138

Limitation Upon the Right of the Debtor in

Obligations with a Penal Clause (Art. 1227)
General Rule: Debtor cannot exempt himself
from the performance of the principal
obligation by paying the stipulated penalty
Except:
Unless this right has been clearly and expressly
granted to him

139

Limitation on the Right of the Creditor in

Obligations with a Penal Clause (Art. 1227)
General Rule: Creditor cannot demand the
fulfillment of the principal obligation and demand
the satisfaction of the penalty at the same time.
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, he may
still demand satisfaction of the penalty.
If there was fault on the part of debtor, creditor may demand not
only satisfaction of penalty but also the payment of damages.

140

Compagnie Franco-Indochinoise vs.

Deutsched (29 Phil 474)
Property of plaintiff transported on board
steamship of defendant company, 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 that the amount recoverable
cannot exceed the amount of freight under the
penal clause which stated penalty for nonperformance xxx, proved damages, not
exceeding the estimated amount of freight. Is
contention tenable?
141

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.
142

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
143

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 inidivisible

144

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.
145

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

146

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 Cecillevilles
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
reimbursement.

147

Cecilleville clearly has an interest in the fulfillment of

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 and
becomes entitled, not only to recover what it has
paid, but also to exercise all the rights which
Prudential could have exercised. There is, in such
cases, not a real extinguishment of the obligation,
but a change in the active subject.

148

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

149

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

150

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.

151

Benefit to the creditor is presumed in the

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

152

Republic, PNP vs. Thi Thu Thuy De Guzman

(June 15, 2011)
Facts: The PNP replied that payment was made to
"Montaguz Builders, via Land Bank of the
Philippines (LBP) Check , received by one
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

153

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:

Payment made by the debtor to the person of the creditor or to one
authorized by him or by the law to receive it extinguishes the
obligation. 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.
154

In general, a payment in order to be effective to discharge an

obligation, must be made to the proper person. xxx. Payment
made to one having apparent authority to receive the money will,
as a rule, be treated as though actual authority had been given
for its receipt. Likewise, if payment is made to one who by law is
authorized to act for the creditor, it will work a discharge. xxx

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.
155

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)

156

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.

157

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

158

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.

159

Place of Payment (Art. 1251)

1)Place stipulated by the parties
2)If there is no stipulation and the obligation is to
deliver 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.

160

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.

161

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.

162

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.

163

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
164

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

165

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

166

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.

167

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

168

D. Tender of Payment and Consignation (Art.

1256)
Tender of Payment Manifestation of the debtor
to the creditor of his decision to comply
immediately with his obligation; preparatory
act and extrajudicial in character
Consignation Deposit of the object of the
obligation in a competent court in accordance
with the rules prescribed by law, after refusal
or inability of the creditor to accept the tender
of payment; principal act and judicial in
character
169

Special Requisites of Consignation

1) Existence of a valid debt which is due;
2) Tender of payment by the debtor; creditors
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

170

3) Previous notice of consignation to person

interested in the fulfillment of the obligation, in
order to give the creditor the opportunity to
reconsider his unjustified refusal and to accept
payment to avoid consignation and the
subsequent litigation

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 (i.e., by way
of warning that should the payment be not accepted the
thing will be deposited in court). Separate notices must
be given to other interested parties such as guarantors.
171

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

172

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

173

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. The rule also applies if the
creditor, prior to the tender of payment, intimated that
he will not accept the debtors payment.
174

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.

175

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;
176

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

177

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.

178

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.

179

Release in obligation to do when

prestation
becomes
legally
or
physically impossible.

180

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 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.

181

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.

182

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.
183

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
Rebus Sic Stantibus

184

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.

185

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.

186

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)

187

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)

188

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

189

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.
Also, SC in Reyes vs. Caltex and Villaruel vs. Manila
Motors favored view that RISK of LOSS is for the
account of creditor.
190

F. Condonation or Remission of the Debt

An act of liberality by virtue of which the
obligee without receiving any price or
equivalent, renounces the enforcement of
the obligation, as a result of which it is
extinguished in its entirety or in that part or
aspect of the same to which the remission
refers.
It is the gratuitous abandonment by the
creditor of his right; a form of donation.

191

Requisites of remission:
1)
2)
3)
4)
5)
6)

It must be gratuitous;
It must be accepted by the obligor;
The obligation must be demandable;
Parties must have the capacity;
Not inofficious; and
Must comply with the forms of donation
SHOULD IT BE EXPRESS (Arts. 748 and
749)

192

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)

193

Implied Remission (Art. 1271)

-Delivery of private document evidencing
a credit made voluntarily by creditor to
debtor

194

To refute implication it should be

claimed to be inefficious

195

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.

196

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.

197

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.

198

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

199

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.

200

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.

201

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.

202

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.

203

Right of guarantor to set up

compensation (Art. 1280)

204

Rule in case of rescissible or

voidable debts (Art. 1284)

205

Effects of assignment of rights.

(Art. 1285)

206

Debts which cannot be compensated:

-Depositum
-Commodatum
-Support
-Criminal offense
-In favor of government

207

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 plaintiffs claim from the moment it is
liquidated by judgment. (Here contract of lease
where Lessee to undertake necessary repairs,
Lessor STRUCTURAL repairs.)
208

Problem:
Is it proper to compensate defendant-appellants
indebtedness of P9k claimed in the complaint,
with the sum of P10k representing the value of
his shares of stock with the plaintiff entity?

209

Answer:
Considering that a share of stock is not an
indebtedness to the owner nor evidence of
indebtedness, it is, therefore, not a credit.
Stockholders as such are not creditors of the
corporation. The capital stock of a corporation is a
trust fund to be used more particularly for the security
of creditors of the corporation who presumably deal
with it on the credit of its capital stock. 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)
210

Problem:

Has a bank the right to apply a deposit

to the debt of a depositor to the bank?

211

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

212

Problem:
X sued Y to collect P20k plus interest and
attorneys 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?

213

Answer:
NO. Pursuant to Arts. 1278, 1279, 1286 and
1290 of the Civil Code, the defendant would
have been entitled to deduct from plaintiffs
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)

214

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.

215

Requisites of novation:
1) Previous valid and existing obligation;

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.

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);
216

4) Substantial difference between the old

obligation and the new obligation
(especially
for
implied
novation),
consequently, extinguishment of the
obligation; and
5) Validity of the new obligation

217

Note:
A change in the rate of interest is merely
collateral agreement between the creditor and
principal debtor that did not affect the surety.
The agreement to pay the additional interest
was an additional burden upon the debtor
only. 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. L80201, Nov. 20, 1990)
218

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.

219

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?

220

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.
The contract was not a new and individual obligation
expressly extinguishing the judgment; neither were
its terms incompatible with the obligations of the
judgment. (Zupanta vs. De Rotaeche, 21 Phil 154)

221

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 therefor.
Was there a novation of a contract?

222

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 of the building and any changes or
alterations which were made were founded upon the
original contract with the understanding that the
contractor would be paid the reasonable value of
such changes and alterations. Hence, there was no
novation. (Tiu Suico vs. Habana, 45 Phil 707)

223

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?

224

Answer:
NO. Because the contract does not stipulate that the
original lessees shall be discharged by such assignment
and an agreement to this effect cannot be implied from
the mere acquiescence of the lessor in the transfer of the
lease. The new obligation assumed by the assignee in
taking over the lease was not at all incompatible with the
continued liability of the original lessee. It is a very
common thing in business affairs for a stranger to a
contract to assure its obligation, and while this may have
the effect of adding to the number of persons liable, it by
no means implies the extinguishment of the liability of the
first debtor. (Rios and Reyes vs. Jacinto Palma, 49 Phil 7)

225

Problem:
The first contract provided for an easement of
right of way for a period of 20 years while the
second contract reduced the period to 7
years. Was there a novation?

226

Answer:
YES. Because insofar as the duration of the right of
way is concerned, the two contracts are incompatible
with each other. The duration of the right of way is
one of the principal conditions of the first as well as
of the second contract and, as said principal
condition has been modified, the contract was
novated. (Kabankalan Sugar Co. vs. Josefa
Pacheco, 55 Phil 555)

227

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.

228

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

229

Kinds of Novation by Substitution of Debtors

1)Expromision 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.

230

Kinds of Substitution by Expromision

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.

231

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
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.

232

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. If the older debtor is not released,
there is no novation; the third person becomes
merely a co-debtor; surety or co-surety (Mercantile
Insurance Co. vs CA, G.R. No. 85647, April 22, 1991)

233

Problem:
In novation by substitution of the debtor, must
the creditors consent be express?

234

Answer:
YES, for the reason that since novation extinguishes the
personality of the first debtor who is to be substituted by a
new one, 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, recognized by the law in declaring that a
waiver of right may not be performed, unless the will to
waive is indisputably shown by him who holds the right.
As the second contract was executed without the consent
of the creditor, evidence tending to prove consent of the
creditor is not in law sufficient. There was no novation.
(Testate Estate of Mota, et al. vs. Serra, 47 Phil 464)

235

However, in Asia Banking Corp. vs. Elser, 34 Phil 994,

the court held that Art. 1205, now Art. 1293 does not
say that the creditors consent to the substitution of
the new debtor for the old, must be express or given at
the time of the substitution. According to Spanish
jurisprudence it is sufficient that the creditors 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.
236

Problem:
X sue 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.

237

Answer:
The conviction must be upheld. Ys novation theory may
perhaps apply prior to the filing of the criminal action in
court by the state prosecutors because up to that time, the
original trust relation may be converted by the parties into
an ordinary creditor-debtor relationship, thereby placing
the complaint in estoppel to insist on the original trust. But
after the justice authorities have taken cognizance of the
crime and instituted action in court, the offended party
may no loner 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, L15923, June 30, 1960)

238

Effects of Insolvency or Non-Fulfillment by New

Debtor (Arts. 1294-1295)
1)Expromision
Tolentino: it shall not revive the original
debtors 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 debtors
liability to the credtiro.

239

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.
240

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.

241

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.
242

Novation by Subrogation (Art. 1300)

A personal novation effected by subrogating
a third person in the rights of the creditor.

243

Legal Subrogation (Art. 1302)

General Rule: Legal subrogation is not
presumed.
Except:
1)When a creditor pays another creditor who is
preferred, without debtors 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
latters share.

244

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.

245

CONTRACTS

246

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/Execuory
3)Consummation/Executed

247

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).

248

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

249

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

250

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

251

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.

252

Mutuality (Art. 1308)

The contract must bind both parties.
Note:
The validity or fulfilment of a contract cannot be
left to the will of one of the contracting parties.
Validity or fulfilment 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.

253

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
254

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.

255

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.

256

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

257

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.

258

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.

259

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)

260

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)
261

 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)

262

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)
263

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

264

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.

265

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

266

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)

267

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.

268

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.

269

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

270

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.

271

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 offerror.
Note:
The stipulation of the parties governs the manner and
moment of acceptance as when they stipulate that it
be expressly accepted.
272

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)

273

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])

274

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.

275

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)
2)
3)
4)

Persons under civil interdiction

Hospitalized lepers, prodigals, deaf & dumb
Unsound mind
Person who cannot take care of themselves
because of age, disease or weak mind.
276

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.

277

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

278

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

279

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.

280

Two (2) General Kinds of Mistake

Mistake of Fact

Mistake of Law

One or both contracting

parties believe that a fact
exists when in reality it does
not or vice versa.

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.

Vitiates consent

Does not vitiate consent

except when it involves
mutual error as to the effect
of an agreement when the
real purpose is frustrated.
281

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)
282

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

283

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.

284

Violence vs. Intimidation

Violence
Refers
to
compulsion

Intimidation
physical Refers to moral compulsion

External or prevents the will Internal or induces

to manifest itself
performance of an act

the

285

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)

286

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.

287

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.

288

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)
289

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

290

Dolo Causante vs. Dolo Incidente

Dolo Causante (Art. 1338)

Dolo Incidente (Art. 1344)

Refers to those deceptions or

misrepresentations of a serious
character employed by one party
and without which the other party
would not have entered into the
contract

Refers to those deceptions or

misrepresentations which are not
serious in character and without
which the other party would have
still entered the 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

291

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)

292

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

293

 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
formers special knowledge (Art. 1341).

294

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.

295

 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.

296

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.

297

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 pupose 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)

298

Two juridical acts in relatively simulated

contracts:
1)Ostensible Act (apparent or fictitious)
pretended contract
2)Hidden Act (real) true agreement

299

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.

300

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

301

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.

302

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
authorized by law:

expressly

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.
303

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.

304

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

305

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

306

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

307

Cause and Motive Distinguished

Cause

Motive

Direct and most proximate Indirect or remote reason

reason of a contract
Objective or juridical reason Psychological or
of a contract
personal reason

purely

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.

308

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

309

Cause
Lesion or
inadequacy of
price

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

310

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)
311

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.

312

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 carriers duty of
extraordinary diligence to ordinary diligence (Art. 1744)

313

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)

314

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.

315

Contracts which must be registered:

1.Chattel mortgages (Art. 2140)
2.Sale/transfer of large cattle
Registration Act)

(Cattle

316

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.

317

 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 fulfilment thereof, it is evident that under them
execution of the required document must precede the
determination of the obligations derived from the
contract.
318

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.

319

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.

320

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.

321

Reformation

Annulment

Presupposes that there is a

valid contract but the
document/instrument
executed does not express
their true intention

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

322

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).

323

Instances when there can be no reformation:

(Art. 1366)
1)Simple donations inter vivos wherein
condition is imposed;
2)Wills;
3)When the real agreement is void (Art. 1366)

no

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)
324

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).

325

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

326

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)

327

Contracts that are rescissible

(Arts. 1381-1382)
A. Lesion
1)Those entered into by guardians where the ward
suffers lesion of more than 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 of the value of
the things which are subject thereof.

328

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 fulfilment the debtor could not be
compelled at the time they were effected.

329

C. Other Causes Stated By Law

1)Art. 1098 partition of inheritance where an heir
suffers LESION of at least 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 1/10th of that
stated
330

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
331

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.

332

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
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.
333

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.

334

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.

335

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.

336

 Accion pauliana resupposes 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.

337

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.

338

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.

339

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.

340

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.

341

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

342

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.

343

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)

344

VOIDABLE Contracts
Those which possess all the essential
elements fr 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.

345

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)

346

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.

347

 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)

348

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.

349

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. Peoples Homesite & Housing
Corp., GR No. 21498, June 27, 1968)

350

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

351

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.

352

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.

353

Mactan-Cebu Intl. 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,

354

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.

355

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)

356

Void and Inexistent Contracts Distinguished

Void

Inexistent

Those where all of the

requisites of a contract are
present but the cause, object
or purpose is contrary to law,
morals, good customs, public
order, or public policy or
contract itself is prohibited or
declared void by law.

Those where one or some or

all of the requisites essential
for the validity of a contract are
absolutely lacking

Principle of
applicable

pari

delicto

May produce legal effects

is Principle of pari delicto is not

applicable
Cannot produce legal effect

Covers Art. 1409 nos. 1, 3, 4, Covers Art. 1409 nos. 2 and 3

5, 6 and 7
357

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.

358

Principle of In Pari Delicto (Arts. 14111417)

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.

359

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 plaintiffs protection (Art. 1416);

360

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

361

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.

362

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 fulfilment of any
obligation from the contract nor may be compelled
to comply with such obligation.

363

-END364