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Title: Obligations and Contracts
Author: Open Source / www.RelatedLiterature.ph
Posting Date: November 11, 2012 [EBook #20120000000075]
Language: English
Category: Legal

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BOOK IV
OBLIGATIONS AND CONTRACTS

TITLE I
OBLIGATIONS

CHAPTER 1
GENERAL PROVISIONS

WHAT IS AN OBLIGATION?

An obligation is a juridical necessity to give, to do or not to do (Article
1156).

WHAT ARE THE ELEMENTS OF AN OBLIGATION?

a. An active subject known as the obligee or creditor he is the
possessor of a right in whose favor the obligation is constituted
and who can demand the fulfillment of the obligation;
b. A passive subject known as the obligor or the debtor from whom
the obligation is juridically demanded he who has the duty of
giving, doing or not doing;
c. The fact, prestation or service which constitutes the object or
subject matter of the obligation and may consist of giving a thing,
doing or not doing a certain act. The law speaks of an obligation
as a juridical necessity to comply with a prestation. There is
juridical necessity for non-compliance can result in juridical or
legal sanction.
Page 2 of 145
Notes on Obligations and Contracts

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d. The efficient cause or the vinculum or juridical tie which binds the
parties to the obligation, and which may arise either from
bilateral or unilateral acts of persons this is the reason why the
obligation exists.

Example: A promises to paint Bs picture as a result of an agreement. Here
A is the obligor; B is the obligee; the painting of Bs picture is the object or
prestation; and the agreement is contract which is the efficient cause.

WHAT ARE THE SOURCES OF OBLIGATIONS?

Obligations arise from:

(1) Law (obligations lex lege);
(2) Contracts (obligations ex contractu);
(3) Quasi-contracts (obligations ex-quasi contractu);
(4) Acts or omissions punished by law (obligations ex delicto); and
(5) Quasi-delicts (obligations ex quasi delicto) (Article 1157).

RULES :

Obligations derived from law are not presumed. Only those expressly
determined in this Code or in special laws are demandable, and shall be
regulated by the precepts of the law which establishes them; and as to
what has not been foreseen, by the provisions of this Book (Article 1158).
Obligations arising from contracts have the force of law between the
contracting parties and should be complied with in good faith (Article
1159).
Obligations derived from quasi-contracts shall be subject to the
provisions of Chapter 1, Title XVII, of this Book (Article 1160).
Civil obligations arising from criminal offenses shall be governed by the
penal laws, subject to the provisions of article 2177, and of the pertinent
provisions of Chapter 2, Preliminary Title, on Human Relations, and of
Title XVIII of this Book, regulating damages (Article 1161).
Obligations derived from quasi-delicts shall be governed by the provisions
of Chapter 2, Title XVII of this Book, and by special laws (Article 1162).

Page 3 of 145


CHAPTER 2
NATURE AND EFFECT OF OBLIGATIONS

WHAT IS THE DEGREE OF DILIGENCE REQUIRED OF A PERSON IN THE
PERFORMANCE OF AN OBLIGATION?

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

Notes:

This article involves the prestation to give.
The word something connotes a determinate object which is definite,
known, and has already been distinctly decided and particularly specified
as the matter to be given from among the same things belonging to the
same kind. Example: If the object is a computer, it does not involve any
kind of computer but a very particular computer such as the computer
with serial number 7777.
In case of a contrary stipulation of the parties, such stipulation should not
be one contemplating a relinquishment or waiver of the most ordinary
diligence.
An example where the law requires another standard of care is that which
involves common carriers. Article 1733 provides that common carries are
bound to observe extraordinary diligence in the vigilance over the goods
Page 4 of 145


and for the safety of the passengers. Article 1755 provides that common
carriers is bound to carry the passengers safely as far as human care and
foresight can provide, using the utmost diligence of very cautious persons,
with due regard for all circumstances.

WHAT IS THE DILIGENCE NEEDED IN THE PERFORMANCE OF ONES
OBLIGATION?

The diligence needed is that which is required by the nature of the
obligation and corresponds with the circumstances of the persons, of the time
and of the place. This is diligence of a good father of a family. If the law or
contract does not state the diligence which is to be observed in the performance,
that which is expected of a good father of a family shall be required (Article 1173).

However, if the law or contract provides for a different standard of care,
said law or stipulation must prevail (Article 1163) provided that it should not be
one contemplating a relinquishment or waiver of the most ordinary diligence

IN OBLIGATIONS TO GIVE, WHEN DOES THE CREDITOR ACQUIRE A RIGHT TO
THE THING WHICH CONSTITUTES THE OBJECT OF THE OBLIGATIONS AS WELL AS TO
THE FRUITS THEREOF?

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

Thus, we must distinguish between the time when the creditor acquires a
personal right to the thing and the fruits thereof, and the time when he acquires a
real right thereto.

After the right to deliver the object of the prestation has arisen in favor of
the creditor but prior to the delivery of the same, there is no real right
enforceable or binding against the whole world over the object and its fruits in
favor of the person to whom the same should be given. The acquisition of a real
right means that such right can be enforceable against the whole world and will
prejudice anybody claiming the same object of the prestation. The real right only
occurs when the thing or object of the prestation is delivered to the creditor.

In obligations arising from contracts, the obligation to deliver arises from
the moment of the perfection of the contract, unless there is a stipulation to the
contrary. From this it is clear that before the delivery of the thing and the fruits
thereof, the creditor has merely a personal right against the debtor a right to
ask for the delivery of the thing and the fruits. Once the thing and the fruits are
Page 5 of 145


delivered, then he acquires a real right over them, a right which is enforceable
against the whole world.

EXAMPLE:

On February 1, 2005, A buys a mango orchard from X to be delivered on
March 1, 2005. On the latter date, A shall have the right to the fruits of the mango
orchard. If the property is delivered only on April 1, 2005, A can nevertheless ask
that the fruits accruing since March 1, 2005 be likewise delivered to him. X
cannot resist by saying that he is entitle to the fruits before the actual delivery on
April 1, 2005.

If, however, X sells the fruits on March 20, 2005 to B who does not know
the previous sale to A and who immediately takes possession of the fruits, B shall
have a better right over the said fruits. Considering that there is no delivery of
the property to A on March 20, 2005, A has no real right over the said property at
that time binding upon the whole world. As remedy is to seek damages from X
in connection with the fruits.
If however, the mango orchard has already been delivered, A has a real
right binding upon the whole world. If X sells to B the fruits after the delivery to
A, A can recover from B who in turn can seek damages from X.

WHEN DOES THE OBLIGATION TO DELIVER ARISE?

It depends - If there is no term or condition, then from the perfection of
the contract. If there is a term or condition, then from the moment the term
arrives or the condition happens.

IN OBLIGATIONS TO GIVE, WHAT ARE THE DIFFERENT RIGHTS WHICH ARE
AVAILABLE TO THE CREDITOR?

We must distinguish between the rights which are available to the creditor
when the obligation is determinate and those which are available to him when
the obligation is indeterminate or generic.

1. When what is to be delivered is a determinate thing (in the sense that the
object thereof is particularly designated or physically segregated from all
others of the same class), the rights of the creditor are:

a. The creditor may compel specific performance (compel the debtor
to make the delivery (Article 1165); and
b. To recover damages in case of breach of the obligation (Article
1170).

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2. If the thing is indeterminate or generic, the rights of the creditor are:

a. To ask for performance of the obligation (Article 1246);
b. To ask that the obligation be complied with at the expense of the
debtor (Article 1165, par. 2); and
c. To recover damages in case of breach of the obligation (Article
1170).

WHAT IS THE EFFECT OF FORTUITOUS EVENT IF THE OBLIGOR DELAYS, OR HAS
PROMISED TO DELIVER THE SAME THING TO TWO OR MORE PERSONS WHO DO NOT
HAVE THE SAME INTEREST?

If the obligor delays, or has promised to deliver the same thing to two or
more persons who do not have the same interest, he shall be responsible for any
fortuitous event until he has effected the delivery (Article 1165).

IN OBLIGATION TO GIVE, WHAT ARE THE DIFFERENT DUTIES OR OBLIGATIONS
WHICH ARE IMPOSED UPON THE DEBTOR OR OBLIGOR?

a. If the obligation is determinate, the duties which are imposed upon the
debtor are the following:

a. To deliver the thing which he has obligated himself to give;
b. To take care of the thing with the proper diligence of a good
father of a family (Article 1163);
c. To deliver all its accessions and accessories, even though they
may not have been mentioned. (Article 1166).
d. To pay damages in case of breach of the obligation (Article
1170).

b. If the obligation is indeterminate or generic, the duties which are imposed
are:
a. To deliver a thing that which must be neither of superior nor
inferior quality (Article 1246);
b. To pay damages in case of breach of the obligation (Article 1170).

IN OBLIGATIONS TO DO OR NOT TO DO, WHAT ARE THE DIFFERENT RIGHTS
WHICH ARE AVAILABLE TO THE CREDITOR?

1. In obligations to do:

a) If a person obliged to do something fails to do it, the same shall be executed
at his cost.
Page 7 of 145


b) This same rule shall be observed if he does it in contravention of the tenor of
the obligation.
c) Furthermore, it may be decreed that what has been poorly done be undone
(Article 1167).

2. In obligations not to do:

a. When the obligation consists in not doing, and the obligor does what has
been forbidden him, it shall also be undone at his expense (Article 1168).

IN OBLIGATIONS TO GIVE OR TO DO, WHEN DOES THE OBLIGOR DEEMED TO
HAVE INCURRED IN DELAY?

Those obliged to deliver or to do something incur in delay from the time
the obligee judicially or extrajudicially demands from them the fulfillment of
their obligation
However, the demand by the creditor shall not be necessary in order that
delay may exist:

(1) When the obligation or the law expressly so declare; or
(2) When from the nature and the circumstances of the obligation it appears
that the designation of the time when the thing is to be delivered or the service is
to be rendered was a controlling motive for the establishment of the contract; or
(3) When demand would be useless, as when the obligor has rendered it
beyond his power to perform.

In reciprocal obligations, neither party incurs in delay if the other does not
comply or is not ready to comply in a proper manner with what is incumbent
upon him. From the moment one of the parties fulfills his obligation, delay by
the other begins (Article 1169 par. 1).

WHAT IS MORA SOLVENDI; MORA ACCIPIENDI; MORA MORAE?

Delay or default committed by the debtor is known as mora
solvendi.

The delay is called mora solvendi ex re when the obligation is an
obligation to give and mora solvendi ex persona when the obligation is an
obligation to do.

Delay or default committed by the creditor to accept the delivery of
the thing which is the object of the obligation is known as mora accipiendi.

Page 8 of 145


Compensation morae occurs when in a reciprocal obligation, both
parties are in default (here, it is as if neither is in default).

Note: Delay in the performance of the obligation must either be malicious
or negligent. Hence, if the delay was only due to inadvertence without any
malice or negligence, the obligor will not be held liable under Article 1170.

WHAT ARE THE REQUISITES FOR MORA SOLOVENDI?

a) The obligation must be due, enforceable, and already liquidated or
determinate in amount;
b) There must be non-performance;
c) There must be demand, unless the demand is not required; and
d) The demand must be for the obligation that is due.

Note: There is no mora solvendi in negative obligations (one cannot be late
in not doing or giving). There is no mora also in natural obligations.

WHAT ARE THE EFFECTS OF MORA SOLVENDI?

1. If the debtor is in default, he may be liable for interest or damages;
2. He may have to bear the risk of loss;
3. He is liable for a fortuitous event (although damages may be mitigated if
he can prove that even if he had not been in default, loss would have
occulted just the same [Article 2215])

WHEN IS THE OBLIGOR DEEMED TO BE IN DEFAULT?

For an obligation to become due, there must generally be a demand.
Default generally begins from the moment the creditor demand the performance
of the obligation. Without such demand, judicial or extra-judicial, the effects of
default will not arise. Commencement of a suit is a sufficient demand.
Consequently, an obligor is liable for damages for the delay not from the time the
object of the prestation is to be delivered but from the time of extra-judicial or
judicial demand.

Note that Article 1169 is applicable only when the obligation is to do
something other than the payment of money. In obligations for the payment of
money, Article 2209 shall apply which provides that:

If the obligation consists in the payment of a sum of money,
and the debtor incurs in delay, the indemnity for damages, there
being no stipulation to the contrary, shall be the payment of the
Page 9 of 145


interest agreed upon, and in the absence of stipulation, the legal
interest, which is six per cent per annum.

Hence, in obligation for the payment of sum of money, the interest
replaces the damages.

WHAT ARE THE GROUNDS FOR LIABILITY IN THE PERFORMANCE OF
OBLIGATIONS?

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

Responsibility arising from fraud is demandable in all obligations. Any
waiver of an action for future fraud is void (Article 1171).
Responsibility arising from negligence in the performance of every kind of
obligation is also demandable, but such liability may be regulated by the courts,
according to the circumstances (Article 1172).

WHAT DOES THE PHRASE IN ANY MANNER CONTRAVENE THE TENOR OF THE
OBLIGATION AS STATED UNDER ARTICLE 1170 COVER?

It includes any illicit act or omission which impairs the strict and faithful
fulfillment of the obligation and every kind of defective performance (Arrieta vs.
National Rice and Corn Corp., 10 SCRA 79; Magat vs. Medialdea, L-37120, April 20,
1983)).

WHAT IS MEANT BY FRAUD OR DOLO?

Fraud or dolo consists in the conscious and intentional proposition to
evade the normal fulfillment of an obligation. It is bad faith in the performance of
an obligation oftentimes referred as malice. In contracts it is deceit which if
substantial (dolo causante) may result in annulment of contract.

WHAT ARE THE KINDS OF FRAUD?

1. Fraud in obtaining consent (may be casual or merely incidental);
2. Fraud in performing a contract, which may either be:

A. Casual fraud or dolo causante Fraud in the performance of a pre-
existing obligation;
B. Incidental fraud or dolo incidente Fraud in the perfection of
contract.

Page 10 of 145


WHAT ARE DISTINCTIONS BETWEEN INCIDIENTAL FRAUD AND CAUSAL
FRAUD?

1. The first is present only during the performance of a pre-existing
obligation, whereas the second is present only at the time of the birth of
the obligation;
2. The first is employed for the purpose of evading the normal fulfillment of
an obligation, whereas the second is employed for the purpose of securing
the consent of the other party to enter into the contract;
3. The first results in the non-fulfillment or breach of the obligation, whereas
the second, if it is the reason for the other party upon whom it is
employed for entering into the contract, results in the vitiation of his
consent;
4. Dolo causante or causal fraud in Article 1338 are 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.
Dolo incidente or incidental fraud in Article 1344 are those which are not
serious in character and without which the other party would still have
entered into the contract;
5. Dolo causante determines or is the essential cause of the consent; while dolo
incidente refers only to some particular or accident of the obligation;
6. The effects of dolo causante are the nullity of the contract and the
indemnification of damages; dolo incidente obliges the person employing it
to pay damages.
7. The first gives rise to a right of the creditor or obligee to recover damages
from the debtor or obligor, whereas the second gives rise to a right of the
innocent party to ask for the annulment of the contract if the fraud is
casual (dolo causante) or to recover damages if it is incidental (dolo
incidente) (Vide Articles 1170, 1171, 1338 & 1344).

WHAT IS NEGLIGENCE OR CULPA?

It is the omission of the diligence which is required by the nature of the
obligation and corresponds with the circumstances of the persons, of the time
and of the place. When negligence shows bad faith, the provisions of Articles
1171 and 2201, par. 2, may apply.

If the law or contract does not state the diligence which is to be observed
in the performance, that which is expected of a good father of a family shall be
required (Article 1173).

HOW IS FRAUD DISTINGUISHED FROM NEGLIGENCE?

Page 11 of 145


a) In fraud, there is deliberate intention to cause damage or prejudice; while in
negligence, although voluntary (not done through force), still there is no
deliberate intention to cause damage;
b) Liability arising from fraud cannot be mitigated or reduced by the courts;
while liability due to negligence may be reduced in certain cases;
c) Waiver of an action to enforce liability die to future fraud is void; while
waiver of an action to enforce liability due to future negligence may in a
certain sense be allowed; however, gross negligence can never be excused in
advance for this would be contrary to public policy; but simple negligence
may in certain cases be excused or mitigated.

WHAT IS THE TEST OF NELIGENCE?

The test by which we can determine the existence of negligence in a
particular case may be stated as follows:

Did the defendant in doing the alleged negligent act use the reasonable
care and caution which an ordinarily prudent person would have used in the
same situation? If not, then he is guilty of negligence. The law here in effect
adopts the standard supposed to be supplied by the imaginary conduct of the
discreet pater familias of the Roman law. The existence of negligence in a given
case is not determined by reference to the personal judgment of the actor in the
situation before him. The law considers what would be reckless, blameworthy, or
negligent in the man of ordinary intelligence and prudence and determines
liability by that (Picart vs. Smith, 37 Phil. 809).

WHAT IS THE GENERAL RULE FOR FORTUITOUS EVENT?

No person shall be responsible for those events which could not be
foreseen, or which, though foreseen, were inevitable (Article 1174).

EXCEPTIONS:

1. In cases expressly specified by the law example, those found
in Articles 552, par. 2; 1165, par. 3, 1170; 1268; 1942; 1979; 2147;
2148; 2159 (Civil Code); and 196, par. 6 (Family Code).
1

1
ARTICLE 552 (Par. 2). A possessor in bad faith shall be liable for deterioration or loss in
every case, even if caused by a fortuitous event.
ARTICLE 1165 (Par. 3). If the obligor delays, or has promised to deliver the same thing to
two or more persons who do not have the same interest, he shall be responsible for any fortuitous
event until he has effected the delivery.
ARTICLE 1170. Those who in the performance of their obligations are guilty of fraud,
negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for
damages. (The obligor shall be liable for damages and he cannot escape liability (Nakpil vs. CA,
144 SCRA 596).
Page 12 of 145


2. When it is otherwise declared by stipulation thus, if the
contracting parties expressly agree that the debtor can be held
liable even in case of fortuitous events, such an agreement shall
be binding.
3. When the nature of the obligation requires the assumption of
risk This is an aspect of what is known as the doctrine of
assumption of risk. As applied to obligations, it refers to a

ARTICLE 1268. When the debt of a thing certain and determinate proceeds from a
criminal offense, the debtor shall not be exempted from the payment of its price, whatever may
be the cause for the loss, unless the thing having been offered by him to the person who should
receive it, the latter refused without justification to accept it.
ARTICLE 1942. The bailee is liable for the loss of the thing, even if it should be through a
fortuitous event:
(1) If he devotes the thing to any purpose different from that for which it has been loaned;
cd i
(2) If he keeps it longer than the period stipulated, or after the accomplishment of the use for
which the commodatum has been constituted;
(3) If the thing loaned has been delivered with appraisal of its value, unless there is a
stipulation exempting the bailee from responsibility in case of a fortuitous event;
(4) If he lends or leases the thing to a third person, who is not a member of his household;
(5) If, being able to save either the thing borrowed or his own thing, he chose to save the
latter.
ARTICLE 1979. The depositary is liable for the loss of the thing through a fortuitous
event:
(1) If it is so stipulated;
(2) If he uses the thing without the depositor's permission;
(3) If he delays its return;
(4) If he allows others to use it, even though he himself may have been authorized to use the
same.
ARTICLE 2147. The officious manager shall be liable for any fortuitous event:
(1) If he undertakes risky operations which the owner was not accustomed to embark upon;
(2) If he has preferred his own interest to that of the owner;
(3) If he fails to return the property or business after demand by the owner;
(4) If he assumed the management in bad faith.
ARTICLE 2148. Except when the management was assumed to save the property or
business from imminent danger, the officious manager shall be liable for fortuitous events:
(1) If he is manifestly unfit to carry on the management;
(2) If by his intervention he prevented a more competent person from taking up the
management.

ARTICLE 2159. Whoever in bad faith accepts an undue payment, shall pay legal interest
if a sum of money is involved, or shall be liable for fruits received or which should have been
received if the thing produces fruits.
ARTICLE 129. Upon the dissolution of the conjugal partnership regime, the following
procedure shall apply: x x x (6) Unless the owner has been indemnified from whatever source,
the loss or deterioration of movables used for the benefit of the family, belonging to either
spouse, even due to fortuitous event, shall be paid to said spouse from the conjugal funds, if any.

Page 13 of 145


situation in which the obligor or debtor, with full knowledge of
the risk, voluntarily enters into some obligatory relation with
the creditor. It is based on the principle of violenti non fit injuria
no wrong is done to one who consents. This is illustrated by
obligations arising from insurance contracts and workmens
compensation acts.

WHAT IS A FORTUITOUS EVENT?

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

WHAT ARE THE REQUISITES OF FORTUITOUS EVENT?

1. The cause of the breach of the obligation must be independent of
the will of the debtor;
2. The even must either be unforseeable or unavoidable;
3. The event must be such as to render it impossible for the debtor to
fulfill his obligation in a normal manner; and
4. The debtor must be free from any participation in, or aggravation
of, the injury to the creditor.

IS THERE A DIFFERENCE BETWEEN FORTUITOUS EVENTS AND FORCE MAJEURE?

Ordinarily, the terms fortuitous event and force majeure are used
interchangeably. There is, however, a technical difference. Force majeure is a
term that is applicable only to those fortuitous events which are dependent upon
human intervention, such as wars, strikes, riots, etc., while fortuitous event is
the general term that is applicable regardless of whether the event is
independent of or dependent upon human intervention.

NOTE that when the object of the prestation is generic (like payment of a sum
of money as a consequence of a loan contract), the debtor cannot avail of the
benefit of a fortuitous event.

DOES THE CIVIL CODE PROHIBIT USURIOUS TRANSACTIONS?
Article 1175 provides that usurious transactions shall be governed by
special laws. The article in itself does not prohibit usurious contracts. However, it
specifically provides that it shall be governed by special laws. A special law may
prohibit usurious interest, allow it, or merely put a ceiling as to what can be the
highest interest that can be legally imposed.

X IS INDEBTED TO Y IN THE AMOUNT OF P50, 000.0, PAYABLE IN TEN
MONTHLY INSTALLMENBTS AND WITH INTEREST AT 30% PER ANNUM. WHAT IS THE
Page 14 of 145


EFFECT IF Y WOULD BE RECEIVING PAYMENT OF THE PRINCIPAL WITHYOUT
RECEIVING FIRST THE INTEREST?

The receipt of the principal by the creditor, without reservation with
respect to the interest, shall give rise to the presumption that said interest has
been paid (Article 1176, par. 1).

WHAT IS THE EFFECT IF THE OBLIGATION IS PAYABLE FROM JANUARY 2004 TO
OCTOBER 2004 AND X DID NOT PAY THE INSTALLMENT FOR JUNE 2004 BUT WHEN HE
PAID IN JULY 2004, Y ISSUED A RECEIPT FOR JULY 2004?

There is a presumption that the June 2004 installment has already been
paid. The receipt of a later installment of a debt without reservation as to prior
installments, shall likewise raise the presumption that such installments have
been paid (Article 1176).

NOTE that the presumption here is only prima facie. The presumption can
be rebutted by strong evidence to the contrary. The burden of proof to show that
the interest/installment has not been paid shifts to the creditor.

WHAT ARE THE RIGHTS AND REMEDIES WHICH ARE AVAILABLE TO THE
CREDITOR IN ORDER TO PROTECT HIS RIGHTS AGAINST THE DEBTOR?

a) Exact payment;
b) Pursue the property in possession of the debtor to satisfy their claims
(generally through levying by attachments and execution upon all the
property of the debtor, except such as are exempt by law from execution),
c) Exercise all the rights and bring all the actions of the latter for the same
purpose, save those which are inherent in his person (accion subrogatoria);
d) Impugn the acts which the debtor may have done to defraud them (accion
pauliana) (Article 1177).

NOTES:

The third and the fourth remedies are merely subsidiary to the
second.

The above-cited rights are not absolute as the creditor cannot bring
those which are inherent in the person of the obligor.

Article1381 (1) which provides that a contract entered into by the
debtor is rescissible if it were made in fraud of creditors when the latter cannot in
any manner collect the claim due is another remedy.

Page 15 of 145


WHAT IS THE RULE AS TO TRANSMISSIBILITY OF RIGHTS?

All rights acquired in virtue of an obligation are transmissible (Article
1178).

EXCEPTIONS:
a) If there has been no stipulation to the contrary.
b) If the law provides otherwise.
c) If the obligation is purely personal.

CHAPTER 3
DIFFERENT KINDS OF OBLIGATIONS

SECTION 1
PURE AND CONDITIONAL OBLIGATIONS

WHAT ARE THE DIFFERENT CLASSES OF OBLIGATIONS ACCORDING TO THE
CIVIL CODE?

The following is the primary classification of obligations under the Civil
Code:

a) Pure, conditional, and with a term (Articles 1179; 1179 1192; 1193 - 1198);
b) Alternative and facultative (Articles 1199 1206);
Page 16 of 145


c) Joint and solidary (Articles 1207 1222);
d) Divisible and indivisible (Articles 1223 1225); and
e) With and without a penal clause (Articles 1226 1230).

There are however other classifications of a secondary character which can
be gathered from scattered provisions of the Code, such as:

a) Natural and civil (Articles 1156; 1424);
b) Legal, conventional and penal (Articles 1158 1162);
c) Real and personal (Articles 1156; 1163 1168);
d) Determinative and generic (Articles 1163 1166);
e) Positive and negative (Articles 1163 1168);
f) Accessory and principal (Articles 1166, 1230);
g) Unilateral and bilateral (Article 1191);
h) Single and multiple (Articles 1199; 1206); and
i) Individual and collective (Article 1207);

WHAT IS MEANT BY PURE OBLIGATION?

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

Every obligation which contains a resolutory condition shall also be
demandable, without prejudice to the effects of the happening of the event
(Article 1179).

Here, there are no conditions imposed, except if they are resolutory.

WHAT IS THE MOST DISTINCTIVE CHARACTERISTIC OF PURE CONDITIONS?

The most distinctive characteristic of a pure obligation is its
demandability. This quality, however, must not be understood in such a way as
to lead to absurd interpretations which would literally require the obligor or
debtor to comply immediately with his obligation. A distinction must be made
between (1) immediate demadability of the obligation; and (2) its performance or
fulfillment by the obligor or debtor. Although the obligee or creditor can demand
the performance of the obligation immediately, the quality of immediate
demandability is not infringed or violated when a reasonable period is granted
for performance.

WHAT ARE CONDITIONAL OBLIGATIONS?
Page 17 of 145


Conditional obligations are those where the acquisition of a right or the
extinguishment or loss of those already acquired shall depend upon the
happening of an even which constitutes the condition.

What characterizes a conditional obligation is the fact that its efficacy or
obligatory force is subordinated to the happening of a future or uncertain event.

WHAT ARE THE KINDS OF CONDITIONAL OBLIGATIONS?

a) RESOLUTORY CONDITION - is one which is demandable at once, but the
happening of an event would extinguish the obligation. This is because once
the condition is established and acknowledged, the right immediately exists
and therefore the obligation concomitant to the right can be demanded at
once. However, once the future or uncertain event happens which constitutes
the condition, it operates to discharge the obligation. The obligation is
resolved or extinguished by operation of law (but such resolution can be
made effective at some later date if the parties so stipulate in their contract,
such as when the parties stipulate that resolution becomes effective only from
the date of written notice thereof is sent)
b) SUSPENSIVE CONDITION - is one where the happening of an event gives rise to
an obligation. A suspensive obligation is not demandable at once. It can be
demanded only upon the happening of the future or unknown event or a past
event unknown to the parties, which constitutes the condition. Happening of
a suspensive condition gives rise to the performance of the obligation. If the
condition does not take place, the parties would stand as if the conditional
obligation had never existed.
c) POTESTATIVE depends upon the will of the debtor. This is also called
FACULTATIVE condition.
d) CASUAL depends on chance or hazard or the will of a third person
e) MIXED depends partly on the will of one of the parties and partly on chance
or the will of a third person.
f) CONJUNCTIVE if all the conditions must be performed.
g) ALTERNATIVE if only a few of the condition have to be performed.

WHAT IS AN OBLIGATION WITH A TERM OR PERIOD?

That which necessarily must come whether the parties know when it will
happen or not.

A AND B ENTERED INTO A CONTRACT OF LOAN, PROVIDING THAT B SHALL
PAY WHEN HIS MEANS PERMIT HIM TO DO SO. WHAT KIND OF OBLIGATION IS THIS?
WHAT IS THE REMEDY OF A IN CASE OF NON-PAYMENT BY B?

Page 18 of 145


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

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

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

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

DISTINGUISH BETWEEN THE EFFECTS OF SUSPENSIVE AND RESOLUTORY
CONDITIONS.

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

Thus, a resolutory condition affects the obligation to which it is attached
in a manner which is diametrically opposed to that of a suspensive condition. If
the suspensive condition is fulfilled, the obligation arises or becomes effective; if
the resolutory condition is fulfilled, the obligation is extinguished. If the first is
not fulfilled, no juridical relation is created; if the second is not fulfilled, the
juridical relation is consolidated. In other words, in the first, rights are not yet
acquired, but there is a hope or expectancy that they will soon be acquired; in the
second, rights are already acquired, but subject to the threat of extinction.

A suspensive condition is also called a condition precedent while a
resolutory condition is also known as a condition subsequent. A condition
precedent is an act or event, other than a lapse of time, which must exist or occur
before a duty to perform a promised performance arises. If the condition does
not occur and is not excused, the promised performance need not be rendered. A
condition subsequent is an event, the existence of which, by agreement of the
parties, operates to discharge a duty of performance that has arisen.

In case a contract involves a reciprocal obligation, the obligation of one is
a resolutory condition of the obligation of the other, the non-fulfillment of which
entitles the other party to rescind the contract.

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GIVE THE EFFECTS OF POTESTATIVE, CASUAL AND MIXED CONDITIONS UPON
OBLIGATION.

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

The phrase when fulfillment of a condition connotes a suspensive
character of the prestation. There is the expectation of the existence or
accomplishment of a duty to give or to render some service in the future. Thus:

a) If the condition is potestative in the sense that fulfillment of the condition
depends upon the sole will of the debtor, the conditional obligation shall be
void (Article 1182). This happens when the birth of the contract depends upon
the sole will of the debtor. Hence, according to Article 1308, this is likewise
prohibited and may make the whole contract invalid. However, if the
potestative condition is imposed not on the birth of the obligation but on its
fulfillment, only the condition is avoided, leaving unaffected the obligation
itself.
b) If the condition is potestative in the sense that its fulfillment depends upon
the will of the creditor, the conditional obligation shall be valid. This is
because the provision of the first sentence of Article 1182 extends only to
conditions which are potestative to the obligor or debtor. Besides, the creditor
is naturally interested in the fulfillment of the condition since it is only such
fulfillment that the obligation arises or becomes effective.
c) If the condition is casual in the sense that its fulfillment depends partly upon
chance or upon the will of a third person, the obligation shall take effect
(Article 1182).
d) If the condition is mixed in the sense that its fulfillment depends partly upon
the will of a party to the obligation and partly upon chance and/or will of a
third person, the obligation shall be valid.

IN THE EVENT THAT THE CONDITION IS DECLARED VOID BUT THE OBLIGATION
IS STILL VALID, SHOULD THE OBLIGATION BE DECLARED PURE AND
UNCONDITIONAL?

No, because in converting it into a pure and demandable obligation, an
arrangement might be enforced which is not within the contemplation of the
parties. Hence, the best solution is to consider the parties as having intended a
period within which the valid obligation is to be complied with such that the
creditor should ask the court to fix a period for compliance (Patente vs. Omega, 93
Phil. 218).

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SUPPOSE THAT THE DEBTOR EXECUTED A PROMISSORY NOTE PROMISSING TO
PAY HIS OBLIGATION TO THE CREDITOR AS SOON AS HE HAS RECEIVED FUNDS FROM
THE SALE OF HIS PROPERTY IN A CERTAIN PLACE, IS THE CONDITION POTESTATIVE OR
MIXED?

The condition is mixed because its fulfillment depends not only upon the
will of the debtor but also upon the concurrence of other factors, such as the
acceptability of the price and other conditions of the sale as well as the presence
of the buyer, ready, able and willing to purchase the property.

SUPPOSE THAT IN THE ABOVE PROBLEM, THE DEBTOR PROMISED TO PAY HIS
OBLIGATION AS SOON AS HE HAS RECEIVED THE FUNDS DERIVED FROM THE SALE OF
THE PROPERTY IF HE FINALLY DECIDES TO SELL IT, WILL THAT MAKE ANY DIFFERENCE
IN YOUR ANSWER?

Yes, in such case, the condition is potestative with respect to the debtor
because its fulfillment would then depend upon his will. Consequently, the
condition is void. The validity of the obligation is, of course, not affected, because
the rule stated in Article 1182 to the effect that when the fulfillment of the
condition depends upon the sole will of the debtor, the conditional obligation
itself shall be void, is applicable only when the obligation shall depend for its
perfection upon the fulfillment of the condition and not when the obligation is a
pre-existing one.

WHAT ARE THE EXCEPTIONS TO ARTICLE 1182 (CONDITIONAL OBLIGATIONS
DEPENDING UPON THE SOLE WILL OF THE DEBTOR ARE VOID)?

a) The rule is applicable only to a suspensive condition. Hence, if the condition
is resolutory and potestative, the obligation is valid even if the fulfillment of
the condition is made to depend upon the sole will of the debtor. This is
because the position of the debtor when the condition is resolutory is exactly
the same as the position of the creditor when the condition is suspensive.
b) The rule that even the obligation itself shall be void is applicable only to an
obligation which depends for its perfection upon the fulfillment of the
potestative condition and not to a pre-existing obligation. Example, if the
debtor binds himself to pay a previous indebtedness as soon as he decides to
sell his house, although the condition is void because of its potestative
character, the obligation itself is not affected since it refers to a pre-existing
indebtedness. Thus, when the potestative condition is imposed on the
fulfillment of the obligation, the condition alone is voided but not the
obligation.
c) A condition at once facultative and resolutory is valid though the condition is
made to depend upon the will of the obligor.
Page 21 of 145


d) A resolutory condition that depends upon the will of a third person is not
void.

SUMMARY:

a) If potestative (facultative) on the part of the debtor:

If also suspensive both the condition and the obligations are void.
If also resolutory valid.

b) If potestative on the part of the creditor valid.
c) If casual valid.
d) If mixed valid.

WHAT IS THE EFFECT IF IN AN OBLIGTION, IMPOSSIBLE CONDITIONS, ETC. ARE
IMPOSED?

Impossible conditions, those contrary to good customs or public policy
and those prohibited by law shall annul the obligation which depends upon
them. If the obligation is divisible, that part thereof which is not affected by the
impossible or unlawful condition shall be valid.
The condition not to do an impossible thing shall be considered as not
having been agreed upon (Article 1183).

NOTE: It is very clear from the law that it is not only the condition which is
annulled but the whole obligation itself. Thus, an obligation to give money as a
loan only if it snows in the Philippines destroys the efficacy of the prestation. The
condition annuls the prestation. This is also true if the condition is against good
customs, public policy or is prohibited by law.

Also, an impossible thing can never be done. Hence, to make as a
condition the doing of an impossible thing is a useless stipulation which should
not be considered as not having been agreed upon. The whole obligation which
involves an impossible condition can be annulled.

SUMMARY:

1. If the condition is to do an impossible or illegal thing both condition and
the obligation are void;
2. If the condition is not to do the impossible (negative) obligation is valid
but the condition is disregarded.
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3. If the condition is not to do an illegal thing (negative) both condition and
the obligation are valid.

IN OBLIGATIONS WITH POSITIVE CONDITIONS, WHEN DOES THE OBLIGATION
DEEMED EXTINGUISHED?

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

If the period is not fixed in the contract, the court, considering the parties
intentions, should determine what period was really intended (Vide Article 1185,
par. 2).

IN OBLIGATIONS WITH NEGATIVE CONDITIONS, WHEN DOES THE OBLIGATION
DEEMED EFFECTIVE?

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

If no time has been fixed, the condition shall be deemed fulfilled at such
time as may have probably been contemplated, bearing in mind the nature of the
obligation (Article 1185).

WHAT IS THE EFFECT WHEN THE DEBTOR VOLUNTARILY PREVENTS THE
FULFILLMENT OF THE CONDITION?

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

This is known as constructive (or presumed) fulfillment. This generally
applies only to suspensive condition.

WHAT ARE THE REQUISITES IN ORDER THAT CONSTRUCTIVE FULFILLMENT
WILL ARISE?

1. It must be made by the obligor;
2. It must be voluntarily made; and
3. It must actually prevent the performance of the condition.

WHEN DO THE EFFECTS OF THE FULFILLMENT OF A CONDITION IN AN
OBLIGATION TO GIVE RETROACT? WHAT ARE THE EXCEPTIONS?

Page 23 of 145


When a suspensive condition takes effect, the obligation becomes
effective.

The effects of a conditional obligation to give, once the condition has been
fulfilled, shall retroact to the day of the constitution of the obligation. This rule is
applicable only to suspensive conditions because the efficacy of the obligation is
merely suspended or held in abeyance until the condition is fulfilled. This is not
applicable to resolutory conditions because the fulfillment of the event
extinguishes the obligation; hence, retroactivity is not relevant.

There is no retroactivity as to:

a) Fruits or interests in reciprocal and unilateral obligations (unless there is
contrary stipulation);
b) Period of prescription.
c) This principle of retroactivity applies only to consensual contracts. In real
contracts, there is immediate delivery. In consensual ones, delivery may be
made on another day.

WHAT ARRE THE RULES IF THE OBLIGATION (1) IMPOSES RECIPROCAL
OBLIGATIONS; (2) IF THE OBLIGATION IS UNILATERAL; (3) IN OBLIGATIONS TO DO
AND NOT TO DO?

a) When the obligation imposes reciprocal prestations upon the parties, the
fruits and interests during the pendency of the condition shall be deemed to
have been mutually compensated.
b) If the obligation is unilateral, the debtor shall appropriate the fruits and
interests received, unless from the nature and circumstances of the obligation
it should be inferred that the intention of the person constituting the same
was different.
c) In obligations to do and not to do, the courts shall determine, in each case, the
retroactive effect of the condition that has been complied with (Article 1187).

Fruits here refer to natural, industrial, and civil fruits (like rent) (Vide
Article 442).

WHAT IS THE RIGHT OF THE CREDITOR BEFORE THE FULFILLMENT OF THE
CONDITIONS?

The creditor may, before the fulfillment of the condition, bring the
appropriate actions for the preservation of his right (Article 1188, par. 1).

Appropriate action here means to sue in court. Other appropriate
actions that may be undertaken by the creditor:
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1. Ask for security if the debtor is about to be insolvent;
2. Ask the court to prevent alienation or concealment pendente conditionae.

Note that the law says preservation, not preference over the creditor.

BEFORE THE HAPPENING OF A SUSPENSIVE CONDITION, WHAT IS THE RIGHT
OF THE DEBTOR IF HE PAYS BY MISTAKE?

The debtor may recover what during the same time he has paid by
mistake in case of a suspensive condition (Article 1188, par. 2).

IF PAYMENT WAS NOT MADE BY MISTAKE, CAN THERE BE RECOVERY?

It depends. If the condition is fulfilled, there can be no recovery because of
the principle of retroactivity. If the condition is not fulfilled, there should be a
recovery (unless a pure donation was intended).

SUPPOSE THAT AN OBLIGATION IS SUBJECT TO A SUSPENSIVE CONDITION, BUT
BEFORE THE FULFILLMENT OF THE CONDITION THE OBJET OF THE OBLIGATION WAS
LOST, OR IT HAS DETERIORATED, OR IMPROVEMENTS WERE MADE THEREON, WHAT IS
THE EFFECT OF SUCH LOSS, OR DETERIORATION, OR IMPROVEMENTS IF THE
CONDITION IS FINALLY FULFILLED?

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

(1) If the thing is lost without the fault of the debtor, the obligation shall be
extinguished;
(2) If the thing is lost through the fault of the debtor, he shall be obliged to
pay damages;
(3) When the thing deteriorates without the fault of the debtor, the
impairment is to be borne by the creditor;
(4) If it deteriorates through the fault of the debtor, the creditor may choose
between the rescission of the obligation and its fulfillment, with indemnity for
damages in either case;
(5) If the thing is improved by its nature, or by time, the improvement shall
inure to the benefit of the creditor;
(6) If it is improved at the expense of the debtor, he shall have no other right
than that granted to the usufructuary (Article 1189).

NOTES:
Page 25 of 145


a) This article applies only if the suspensive condition is fulfilled and the object
is specific (generic).
b) The option (rescission or demand fulfillment) is given to the creditor,
regardless of the degree of deterioration caused by the debtor.
c) Improvement belongs to the creditor because once the condition is fulfilled,
the effects of the conditional obligation shall retroact to the day of the
constitution of the obligation.
d) Improvement at the expense of the debtor, right of creditor like a
usufructuary A usufruct gives a right to enjoy the property of another with
the obligation of preserving its form and substance unless the title
constituting it or the law provides otherwise (Article 562).

WHAT IS THE MEANING OF LOSS AS CONTEMPLATED IN THE ARTICLE?

It is understood that the thing is lost when it perishes, or goes out of
commerce, or disappears in such a way that its existence is unknown or it cannot
be recovered (Article 1189, par. 2).

ARE THE ABOVE RULES ALSO APPLICABLE IF THE CONDITION IS RESOLUTORY?

Yes, Article 1190 provides that in case of the loss, deterioration or
improvement of the thing, the provisions which, with respect to the debtor, are
laid down in the preceding article (Article 1189) shall be applied to the party who
is bound to return. Thus, while the resolutory condition has not yet been fulfilled
and the (thing) prestation is destroyed with the fault of the obligor, the obligation
to return is extinguished. If the thing is lost through the fault of the debtor, he
shall be liable for damages. If the thing deteriorates without the fault of the
obligor, the impairment is to be borne by the creditor. If the thing deteriorates
through the fault of the obligor, the creditor may choose between the rescission
of the obligation and its fulfillment, with indemnity for damages in either case. If
the thing is improved by nature, or by time, the improvement shall inure to the
benefit of the creditor. Lastly, if the thing improves at the expense of the debtor,
he shall have no other right than that granted to the usufructuary.

However, in applying these rules, the debtor is the person obliged to
return the object of the obligation in case of fulfillment of the condition, while the
creditor is the person to whom the thing or object must be returned.

WHAT ARE THE EFFECTS WHEN A RESOLUTORY CONDITION IS FULFILLED?

a) The obligation is extinguished (Article 1181).
b) The parties, upon the fulfillment of said conditions, shall return to each other
what they have received (Article 1190).
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c) The fruits or the interest thereon should also be returned after deducting the
expenses made for their production, gathering, and preservation (Article 443).
d) In case of the loss, deterioration or improvement of the thing, the provisions
which, with respect to the debtor, are laid down in the preceding article shall
be applied to the party who is bound to return (Article 1190).
e) As for obligations to do and not to do, the provisions of the second paragraph
of article 1187 (the courts shall determine, in each case, the retroactive effect
of the condition that has been complied with) shall be observed as regards the
effect of the extinguishment of the obligation (Article 1190).

WHAT IS MEANT BY RECIPROCAL OBLIGATIONS?

Reciprocal obligations are those which are created or established at the
same time, out if the same cause, and which result in mutual relationship of
creditor and debtor between the parties.

Reciprocal obligations are those which arise from the same cause and in
which each party is both a debtor and a creditor of the other, such that the
obligation one is dependent upon the other (Areola vs. CA, 236 SCRA 643).
WHAT IS THE EFFECT IF ONE OF THE OBLIGORS IN RECIPROCAL OBLIGATIONS
SHOULD NOT COMPLY WITH WHAT IS INCUMBENT UPON HIM?

The power to rescind (more properly to resolve) obligations is implied in
reciprocal ones, in case one of the obligors should not comply with what is
incumbent upon him.

The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period (Article 1191). This means that the implied
power to rescind can only be enforced through court action, in the absence of
stipulation to the contrary. The decision of the court is the revocatory act of
rescission.

In reciprocal obligations, the obligation of one is a resolutory condition of
the obligation of the other, the non-fulfillment if which entitles the other to
rescind the contract. Rescission or resolution here is predicated on the breach of
faith by any of the parties to a contract that violates the reciprocity between
them.

CHOICES OF THE INJURED PARTY:

The injured party may choose between the fulfillment and the rescission
of the obligation, with the payment of damages in either case. He may also seek
rescission, even after he has chosen fulfillment, if the latter should become
impossible (Article 1191). The options are alternative and not conjunctive.
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This is understood to be without prejudice to the rights of third persons
who have acquired the thing, in accordance with articles 1385 and 1388 and the
Mortgage Law (Article 1191, par. 2).

WHAT ARE THE CHARACTERISTICS OF THE RIGHT TO RESCIND OR RESOLVE
UNDER ARTICLE 1191?

1. It exists only in reciprocal obligations;
2. It can be demanded only if the plaintiff is ready, willing and able to
comply with his own obligation and the other party is not.
3. The right to rescind is not absolute; thus:

a. It must be based on a serious or substantial breach of an obligation
as to defeat the object of the parties in making the agreement. A
mere casual breach does not justify rescission of the contract.
Example, if time is not of the essence in the agreement, a slight
delay on the part of the obligor in the performance of his obligation
is not sufficient ground for the resolution of the agreement (Tan vs.
CA, 21 SCRA 284).
b. If there is just cause for fixing the period within which the debtor
can comply, the court will not decree rescission;
c. If the property is already in the hands of an innocent third party
who has lawful possession of the same.

4. The right to rescind needs judicial approval in certain cases as when there
has already been delivery of the object;
5. The right to rescind is implied (presumed) to exist and, therefore, need not
be expressly stipulated upon;
6. The right to rescind may be waived.

NOTES:

a) The article entitles the injured party to payment of damages, regardless of
whether he demands fulfillment or rescission of the obligation (Areola vs. CA,
236 SCRA 643).
b) In case a valid rescission is made, it creates an obligation to return the things
which were the object of the contract. Thus, rescission can only be made when
the one who demands rescission can return whatever he or she may be
obliged to restore.

SUPPOSE THAT THERE IS A RESERVATION OF THE RIGHT TO RESCIND IN CASE
OF BREACH OF THE OBLIGATIONS, IS THERE A NEED TO ASK FOR JUDICIAL
INTERVENTION IN THE RECISSION OF THE CONTRACT?
Page 28 of 145


No, judicial intervention is not necessary for the purpose of obtaining a
judicial declaration rescinding a contract where there is a reserved right to
rescind (Luna vs. Abrigo, January 18, 1990).

WHAT IS THE EFFECT IF BOTH PARTIES HAVE COMMITTED A BREACH?

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

This means that if the violation can be traced to the parties and both of
them committed the beach, the article penalizes the first violator only, if in fact or
by evidence, such first violator can be determined. The subsequent violator will
not be held liable. However, the liability of the first violator shall be equitably
tempered by the court as the injury to the other party-violator might not have
been so great had it not for the subsequent infraction of such other party-violator.
The law however states that if it cannot be determined which of the parties first
violated the contract, the obligation shall be deemed extinguished, and each shall
bear his own damages.

SECTION 2
OBLIGATIONS WITH A PERIOD

DEFINE OBLIGATIONS WITH A TERM OR PERIOD.

Obligations with a term or period may be defined as those whose
demandability or extinguishment are subject to the expiration of a term or
period.

WHAT IS MEANT BY A TERM OR PERIOD?

A term or a period is an interval (or length) of time, which, exerting an
influence of an obligation as a consequence of a juridical act, either suspends its
Page 29 of 145


demandability or produces its extinguishment. If it gives rise to the effectivity of
the obligation, it is a suspensive period. If it extinguishes, it is a resolutory one.

WHAT ARE ITS REQUISITES?

a. Futurity;
b. Certainty;
c. Physical and legal possibility.

DISTINGUISH TERM OR PERIOD FROM CONDITION.

Term and condition may be distinguished form each other in the
following ways:

1. AS TO REQUISITES Whereas a term or period refers to an interval of time
which is future and certain, a condition refers to a fact or event which is
future and uncertain.
2. AS TO FULFILLMENT Whereas a term or period is an interval of time which
must necessarily come, although it may not be known when, a condition is
a future and uncertain fact or event which may or may not happen.
3. AS TO INFLUENCE ON OBLIGATION Whereas a term or period merely exerts
an influence upon the time of the demandability or extinguishment of an
obligation, a condition exerts an influence upon the very existence of the
obligation itself. A condition causes an obligation to arise or to cease, but a
period merely fixes the time or the efficaciousness of an obligation.
4. AS TO RETROACTIVITY OF EFFECTS Whereas a term or period does not have
any retroactive effects unless there is an agreement to the contrary, a
condition has retroactive effects.
5. AS TO THE EFFECT OF WILL OF DEBTOR When a term or period is left
exclusively to the will of the debtor, the existence of the obligation is not
affected, but when a condition is left exclusively to the will of the debtor,
the very existence of the obligation is affected.

GIVE AND DEFINE THE DIFFERENT KINDS OF TERMS OR PERIODS.

1. SUSPENSIVE OR RESOLUTORY

A. Suspensive period(ex die) - when the obligation becomes
demandable only upon the arrival of a day certain;
B. Resolutory period (in diem) - when the obligation is demandable at
once, although terminated upon the arrival of a day certain.

2. LEGAL, CONVENTIONAL OR JUDICIAL

Page 30 of 145


A. Legal period when it is granted by law;
B. Conventional period when it is stipulated by the parties;
C. Judicial period when it is fixed by the court

3. DEFINITE OR INDEFINITE Article 1193 states that a day certain is
understood to be that which must necessarily come, although it may not
be known when. Thus, a period is definite when a date or time is known
beforehand, and indefinite when it can only be determined by an event
which must necessarily come to pass, although it may not be known when

WHAT IS A DAY CERTAIN?

A day certain is understood to be that which must necessarily come,
although it may not be known when (Article 1193, par. 3).

IN OBLIGATIONS WITH A PERIOD OR TERM, WHEN DOES THE PERIOD OF
PRESCRIPTION BEGIN?

The period of prescription commences from the time the term in the
obligation arises, for it is only from that date that it is due and demandable.

IF THE HAPPENING OF A FUTURE EVENT IS FIXED BY THE PARTIES FOR THE
FULFILLEMTN OR EXTINGUISHMENT OF AN OBLIGAGTION, WHAT IS THE NATURE OF
THE OBLIGATION?

It depends If the event will necessarily come, although the date or time
when it will come may be uncertain, the event constitutes a day certain; hence,
the obligation is with a term (Article 1193, par. 3). However, if the uncertainty
consists in whether the day will come or not, the event constitutes a condition;
hence, the obligation is conditional (Article 1193, par. 4).

STATE THE RULES IN CASE OF LOSS, DETERIORATION, OR IMPROVEMENT OF
THE THING BEFORE THE ARRIVAL OF THE TERM OR PERIOD.

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

Thus:

(1) If the thing is lost without the fault of the debtor, the obligation shall be
extinguished;
(2) If the thing is lost through the fault of the debtor, he shall be obliged to
pay damages;
Page 31 of 145


(3) When the thing deteriorates without the fault of the debtor, the
impairment is to be borne by the creditor;
(4) If it deteriorates through the fault of the debtor, the creditor may choose
between the rescission of the obligation and its fulfillment, with indemnity for
damages in either case;
(5) If the thing is improved by its nature, or by time, the improvement shall
inure to the benefit of the creditor;
(6) If it is improved at the expense of the debtor, he shall have no other right
than that granted to the usufructuary (Article 1189).

WHAT IS THE REMEDY OF THE DEBTOR WHO PAID OR DELIVERED BEFORE THE
ARRIVAL OF THE PERIOD?

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

IN OBLIGATIONS WITH A TERM OR PERIOD, FOR WHOSE BENEFIT IS THE TERM
OR PERIOD?

Whenever in an obligation a period is designated, it is presumed to have
been established for the benefit of both the creditor and the debtor, unless from
the tenor of the same or other circumstances it should appear that the period has
been established in favor of one or of the other (Article 1196).

Consequently, the creditor cannot demand the performance of the
obligation before the expiration of the designated period; neither can the creditor
compel the debtor to perform the obligation before the expiration of such period.

This rule, however, is not absolute. If it can be proved either that the tenor
of the obligation or from other circumstances that the period has been
established for the benefit of either the creditor or the debtor, the general rule is
no longer applicable. However, the benefit of the period may be waived by the
person in whose favor it was constituted.

IF THE CONTRACT DOES NOT PROVIDED FOR A PERIOD, CAN THE CREDITOR
DEMAND ITS FULFILLMENT?

No, because an action for the court to fix the period has yet to be filed. In
the meantime, no one can ask for the fulfillment of the obligation after the court
has fixed the period for its compliance (Vda de Ungson vs. Lopez, L-10180, March
10, 1954).

WITHIN WHAT PERIOD SHOULD THE ACTION TO FIX THE PERIOD BE FILED?
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It must be filed within ten (10) years, otherwise, it would prescribe
(Gonzalez vs. Jose, 66 Phil. 369).

WHAT ARE THE DIFFERENT INSTANCES UNDER THE CIVIL CODE WHERE THE
COURTS ARE EMPOWERED TO FIX THE DURATION OF A TERM OR PERIOD?

a. If the obligation does not fix a period, but from its nature and the
circumstances it can be inferred that a period was intended, the courts
may fix the duration thereof (Article 1197, par. 1).
b. The courts shall also fix the duration of the period when it depends upon
the will of the debtor (Article 1197, par. 2).

In every case, the courts shall determine such period as may under
the circumstances have been probably contemplated by the parties. Once
fixed by the courts, the period cannot be changed by them (Article 1197,
par. 3).

c. If the debtor binds himself to pay when his means permit him to do so
(Article 1180). Strictly speaking, however, this case properly falls within
the purview of the second, because in such a case the power to determine
when the obligation will be fulfilled is in effect left exclusively to the will
of the debtor.

NOTE: Article 1197 involves a two-step process. The court must first
determine that the obligation does not fix a period (or that the period is made to
depend upon the will of the debtor), but from the nature and the circumstances it
can be inferred that a period was intended. This preliminary point settled, the
court must then proceed to the second step, and decide what period was
probably contemplated by the parties. So that, ultimately, the court cannot fix a
period merely because in its opinion it is or should be reasonable, but must set
the time that the parties are shown to have intended (Gregorio Araneta, Inc. vs.
Phil. Sugar Estates Development Co., Ltd., 20 SCRA 330).

WHAT ARE THE DIFFERENT INSTANCES UNDER THE CIVIL CODE WHEN THE
DEBTOR SHALL LOSE EVERY RIGHT TO MAKE USE OF THE TERM OR PERIOD?

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

(1) When after the obligation has been contracted, he becomes insolvent,
unless he gives a guaranty or security for the debt; [Insolvency here need not be
judicially declared.]
(2) When he does not furnish to the creditor the guaranties or securities
which he has promised;
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(3) When by his own acts he has impaired said guaranties or securities after
their establishment, and when through a fortuitous event they disappear, unless
he immediately gives new ones equally satisfactory; [Note that the debtor loses
the benefit of a period even if the loss is through a fortuitous event.]
(4) When the debtor violates any undertaking, in consideration of which the
creditor agreed to the period;
(5) When the debtor attempts to abscond (Article 1198).

HOW TERMS OR PERIODS ARE COMPUTED:
When the laws speak of years, months, days or nights, it shall be understood
that years are of three hundred sixty-five days each; months, of thirty days; days,
of twenty-four hours; and nights from sunset to sunrise.

If months are designated by their name, they shall be computed by the
number of days which they respectively have.

In computing a period, the first day shall be excluded, and the last day
included (Article 13).

SECTION 3
ALTERNATIVE OBLIGATIONS

DEFINE ALTERNATITIVE AND FACULTATIVE OBLIGATIONS.

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Alternative obligations refer to those juridical relations which
comprehend several objects or prestations which are due, but the payment or
performance of one of them would be sufficient.

Facultative obligations refer to those juridical relations where only one
object or prestation has been agreed upon by the parties to the obligation, but the
obligor may deliver or render another in substitution.

NOTES:

Under the Civil Code, there are only three prestations namely, (1) to give;
(2) to do; and (3) not to do. Strictly speaking therefore, when the Code
speaks of different prestations, it refers only to these three prestations.
Hence, technically speaking, a person who is bound to give either a house,
a car or a truck has only one prestation which is to give. But a person
who is obliged to either deliver a house or to paint a picture has two
prestations, namely, to give and to do. It appears however that the
phrase different prestations in the law refers to both the strict sense and
the looses sense of the word prestation.

DISTINGUISH ALTERNATIVE FROM FACULTATIVE OBLIGATIONS.

A. AS TO OBJECTS DUE In facultative obligations only one object is due,
whereas in alternative obligations several objects are due;
B. AS TO COMPLIANCE Facultative obligations may be complied by the
delivery of another object or performance of another prestation in
substitution of that which is due, whereas alternative obligations
may be complied with by the delivery of one of the objects or by
the performance of one of the prestations which is alternatively
due;
C. AS TO THE RIGHT OF CHOICE In the first, the right of choice pertains
only to the debtor, whereas in the second, the right of choice may
pertain even to the creditor or to a third person;
D. AS TO EFFECT OF FORTUITOUS LOSS - In the first, the loss or
impossibility of the object or prestation which is due without any
fault of the debtor is sufficient to extinguish the obligation, whereas
in the second, the loss or impossibility of all the objects or
prrestations which are due without the fault of the debtor is
necessary to extinguish the obligation;
E. AS TO EFFECT CULPABLE LOSS In the first, the culpable loss of the
object which the debtor may deliver in substitution before the
substitution is effected does not give rise to any liability on the part
of the debtor; in the second, the culpable loss of any of the objects
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which are alternatively due before the choice is made may give rise
to a liability on the part of the debtor.

WHAT IS THE RULE IF THE OBLIGATION IS ALTERNATIVE?

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

The creditor cannot be compelled to receive part of one and part of the
other undertaking (Article 1199).

Partial performance of the different prestations cannot be considered
fulfillment of the obligation and therefore cannot be done unless the creditor
accepts such partial performance as complete performance. Hence, if the obligor
can either give a house and a car or paint two murals for the satisfaction of his
obligation, he cannot give the car and one mural. The obligation will not be
satisfied through partial fulfillment of several prestations.

IN ALTERNATIVE OBLIGATIONS, WHO HAS THE RIGHT TO CHOOSE OR SELECT
THE OBJECT TO BE DELIVERED OR THE PRESTATION TO BE PERFORMED AMONG THOSE
WHICH ARE ALTERNATIVELY DUE?

In alternative obligations the right to choose or select belongs to the
debtor.

EXCEPTIONS:

a) When the right has been expressly granted to the creditor (Article 1200); and
b) When it has been expressly granted to a third person.

The right of choice belongs to the debtor because he is the passive subject
in an obligation. He, not the creditor, is the only obliged to give, to do or not to
do.

Any doubt as to whom the choice was given must always be interpreted
in favor of the debtor. Only an express grant of choice can a creditor have the
right to choose which prestation is to be performed.

WHAT IS THE LIMITATION ON DEBTORS CHOICE (IF THE RIGHT OF CHOICE
HAS BEEN GRANTED TO HIM)?

The debtor shall have no right to choose those prestations which are
impossible, unlawful or which could not have been the object of the obligation
(Article 1200).
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WHEN ARE THE PARTIES BOUND BY THE CHOICE OF SELECTION?

The choice shall produce no effect except from the time it has been
communicated (Article 1201). Thus the parties are bound by the choice or
selection from the very moment that it has been communicated by the party who
has the right to make it to the other party.

WHEN DOES THE DEBTOR LOSE THE RIGHT OF CHOICE?

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

Note that the law uses the word practicable. Practicable means capable
of being done, or simply feasible (The New Lexicon Websters Dictionary of the
English Language, 1987 Edition, Page 787). However, prestations that are not
practicable may also include lawful and possible prestations but, because of
some special attendant circumstances which do not necessarily make them
unlawful or impossible, they can be done. [Hence, if the debtor has the following
alternatives: to kiss a highly contagious leper, to sing a song, or not to pay taxes,
it is clear that the last alternative is not only impracticable but also unlawful. The
first alternative, although not unlawful and not impossible, is nevertheless
practicable. In this case therefore, the debtor loses his right of choice because
only one prestation is practicable which is to sing.]

WHAT IS THE RULE WHEN THE DEBTOR CANNOT CHOOSE BECAUSE OF THE
CREDITORS ACTS?

If through the creditor's acts the debtor cannot make a choice according to
the terms of the obligation, the latter may rescind the contract with damages
(Article 1203).
IN OBLIGATIONS WHERE THERE ARE THREE OR MORE OBJECTS WHICH ARE
ALTERNATIVELY DUE, IF ONE, OR MORE, OR ALL OF THE OBJECTS ARE LOST OR
DESTROYED, WHAT ARE THE EFFECTS OF SUCH LOSS OR DESTRUCTION UPON THE
OBLIGATION AS UPON THE LIABILITY OF THE DEBTOR?

It depends:

a. IF RIGHT OF CHOICE BELONGS TO THE DEBTOR

If the loss is due to a fortuitous event:

a) If two or more objects remain, the obligation subsists retaining its
alternative character;
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b) If only one remains, the obligation subsists, but it ceases to be
alternative.
c) If none remains, the obligation is extinguished.

In all these cases, the debtor cannot be held liable for
damages, applying the provisions of Articles 1174, 1262 and 1266.

If the loss is due to the fault of the debtor:

alternative character. The debtor in such a case cannot be held
liable for damages because he can still comply with his obligation.
alternative. The debtor in such a case cannot be held liable for
damages because he can still comply with his obligation.
c) If none remains, the obligation is converted into an obligation to
indemnify for damages. The indemnity shall consist of the last
object to be lost plus or that service which last become impossible,
consequential damages (Article 1204). Consequential damages are
damages other than the value of the last thing or service.

b. IF THE RIGHT BELONGS TO THE CREDITOR

If the loss is due to a fortuitous event, the effects are the same as where the
right belongs to the debtor.

If the loss is due to the fault of the debtor:

alternative character. If the creditor chooses any of those remaining,
the debtor cannot be held liable for damages; however, if he
chooses any of those which are lost, the debtor is liable for the
value of the object plus damages.
alternative. In other words, it has become a simple obligation to
deliver the remaining object or to indemnify for damages
depending upon the discretion of the creditor. If the latter chooses
the object remaining, the debtor cannot be held liable for damages;
however, if he chooses any of those which were lost, the debtor is
liable for the value of the object plus damages.
c) If none remains, the obligation is converted into an obligation to
indemnify for damages. The indemnity shall consist of the price of
the object chosen by the creditor plus consequential damages
(Article 1205).
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NOTES:

Note that the debtor will not be liable in any way for reducing the
alternatives from three to two alternatives, provided what remains are
lawful, practicable, possible or consistent with the object of the obligation.
Likewise, the debtor will not be liable for converting his alternative
obligation to a simple one where there is only one lawful and possible
prestation. The debtor may even cause the loss of one of the things, or
render one of the services impossible.
But when the debtor is responsible for losing or rendering impossible all
his alternative prestations, the creditor is entitled to damages.

IN FACULTATIVE OBLIGATIONS, IF THE SUBSTITUTE IS LOST OR DESTROYED
THROUGH THE FAULT OF THE DEBTOR, IS HE LIABLE FOR DAMAGES?

If the loss or destruction took place AFTER the substitution has been made,
undoubtedly, the debtor is liable for damages for the reason that once the
substitution is effected by the debtor by duly notifying the creditor of such fact,
the obligation is converted into a simple one with the substitute as the object of
the obligation.

If the loss or destruction took place BEFORE the substitution could be
effected, it is believed that the debtor cannot be held liable. It does not
affect the principal obligation and hence the debtor will not be liable.

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SECTION 4
JOINT AND SOLIDARY OBLIGATIONS

DEFINE JOINT AND SOLIDARY OBLIGATIONS.

When there is concurrence of two or more creditors or of two or more
debtors in one and the same obligation, such obligation may either be joint
(obligacion mancomunada) or solidary (obligacion solidaria).

A JOINT OBLIGATION is an obligation where there is a concurrence of
several creditors, or several debtors, or of several creditors and debtors, by virtue
of which each of the creditors has a right to demand, while each of the debtors is
bound to render, compliance with his PROPORTIONATE part of the prestation.

A SOLIDARY OBLIGATION is an obligation where there is a concurrence of
several creditors, or of several debtors, or of several creditors and debtors, by
virtue of which each of the creditors has a right to demand, while each of the
debtors is bound to render the ENTIRE compliance with the prestation which
constitutes the object of the obligation.

WHERE THERE IS A CONCURRENCE OF SEVERAL CREDITORS, OR OF SEVERAL
DEBTORS, OR OF SEVERAL CREDITORS AND DEBTORS IN ONE AND THE SAME
OBLIGATION WHAT IS THE NATURE OF THE OBLIGATION IS IT JOINT OR SOLIDARY?

As a general rule, the obligation is JOINT. Article 1207 provides that: The
concurrence of two or more creditors or of two or more debtors in one and the
same obligation does not imply that each one of the former has a right to
demand, or that each one of the latter is bound to render, entire compliance with
the prestation.

WHAT ARE THE CONSEQUENCES OF A JOINT OBLIGATION?

If from the law, or the nature or the wording of the obligations to which
the preceding article refers the contrary does not appear

a) The credit or debt shall be presumed to be divided into as many shares as
there are creditors or debtors,
b) The credits or debts being considered distinct from one another, subject to the
Rules of Court governing the multiplicity of suits (Article 1208).

WHEN IS AN OBLIGATION SOLIDARY?

There is a solidary liability only:
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1. When the obligation expressly so states; or
2. When the law requires solidarity; or
3. When the nature of the obligation requires solidarity (Article 1207).

WHAT ARE THE OBLIGATIONS WHERE THE LAW REQUIRES SOLIDARITY?

1. If two or more heirs take possession of the estate, they shall be solidarily
liable for the loss or destruction of a thing devised or bequeathed, even
though only one of them should have been negligent (Article 927).
2. All partners are liable solidarily with the partnership for everything
chargeable to the partnership under articles 1822 and 1823 (Article 1824).
3. Even when the agent has exceeded his authority, the principal is solidarily
liable with the agent if the former allowed the latter to act as though he
had full powers (Article 1911).
4. If two or more persons have appointed an agent for a common transaction
or undertaking, they shall be solidarily liable to the agent for all the
consequences of the agency (Article 1915).
5. When there are two or more bailees to whom a thing is loaned in the same
contract, they are liable solidarily (1945).
6. The responsibility of two or more officious managers shall be solidary,
unless the management was assumed to save the thing or business from
imminent danger (Article 2146, par. 2).
7. The responsibility of two or more payees, when there has been payment of
what is not due, is solidary (Article 2157).
8. The responsibility of two or more persons who are liable for quasi-delict is
solidary (Article 2194).
9. Several and subsidiary liability of principals, accomplices and accessories
of a felony.

WHAT ARE THE DIFFERENT KINDS OF SOLIDARITY?

1. ACTIVE (among the creditors) A tie or vinculum among several
creditors of one and the same obligation by virtue of which each of
them, in relation to his co-creditors, possesses the character of
creditor only with respect to his share in the obligation, but in
relation to the common debtor or debtors, represents all of the other
creditors. The most fundamental effect of active solidarity is the
creation of a relationship of mutual agency among the solidary
creditors by virtue of which each creditor is empowered to exercise
against the debtor or debtors not only the rights which corresponds
to him, but also all the rights which correspond to the other
creditors, with the consequent obligation to render an account of
his acts to such creditors.
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2. PASSIVE (among the debtors) A ties of vinculum among several
debtors of one and the same obligation by virtue of which each of
the, in relation the common creditor or creditors, represents all of
the other debtors, and in relation to his co-debtors, possesses the
character of debtor only with respect to his share in the obligation.
Here, each solidary debtor, insofar as the creditor or creditors are
concerned, is the debtor of the entire amount; however, with
respect to his co-debtors, he is the debtor only to the extent of his
share of the obligation. Hence, the most fundamental effect of
solidarity among the debtors is the liability of each debtor for the
payment of the entire obligation, with the consequent right to
demand reimbursement from the others for their corresponding
shares once payment has been made.
3. Mixed (among the creditors and the debtors at the same time).

WHAT ARE THE CHARACTERISTICS OF JOINT DIVISIBLE OBLIGATIONS?

1. Each creditor can demand only for the payment of his proportionate share
of the credit, while each of the debtor can be held liable only for the
payment of his proportionate share of the debt (Articles 1207; 1208).
2. A joint creditor cannot act in representation of the other creditors, while a
joint debtor cannot be compelled to answer for the acts or liability of the
other debtors.
3. The demand for the fulfillment made by the creditor upon one of the
debtors does not place the other debtors in default.
4. The interruption of the prescriptive period with respect to one debtor does
not affect the rights of others.
5. The defense of one debtor is not a valid defense of the others.

WHAT IS AN INDIVISIBLE JOINT OBLIGATION?

It is an obligation in which the object is indivisible but the tie between the
parties is joint who are merely proportionately liable.

The indivisibility of an obligation does not necessarily give rise to
solidarity. Nor does solidarity of itself imply indivisibility (Article 1210).
STATE THE RULES IN AN INDIVISIBLE JOINT OBLIGATION.

1. The right of the creditors may be prejudiced only by their collective acts,
2. The debt can be enforced only by proceeding against all the debtors
(demand must be made on all of them),
3. If one of the latter should be insolvent, the others shall not be liable for his
share (Article 1209).
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4. If there be joint creditors, delivery must be made to all, unless one is
specifically authorized by the others.
5. Each joint creditor is allowed to renounce his proportionate credit.

WHAT ARE THE CHARACTERISTICS WHICH DISTINGUISH A JOINT INDIVISIBLE
OBLIGATION FROM A JOINT DIVISIBLE OBLIGATION?

Although in a joint indivisible obligation, the creditor cannot act in
representation of the others and the debtor cannot be compelled to answer for
the acts or liability of the others because of its joint character, yet, a joint
INDIVISIBLE obligation is distinguishable from a joint DIVISIBLE obligation because
of the presence of the following characteristics:

1. If there are two or more debtors, compliance with the obligation requires
the concurrence of all of them, although each for his own share.
Consequently, the obligation can be enforced only be proceeding against
all of the debtors (Article 1209).
2. If there are two or more creditors, the concurrence of all of them, although
each for his own share, is also necessary for the enforcement of the
obligation. This is because the obligation is joint, and therefore, a creditor
cannot act in representation of the others, and it is also indivisible, and
therefore, not susceptible of partial fulfillment.

IN A JOINT INDIVISIBLE OBLIGATION, WHAT IS THE EFFECT IF ANYONE OF THE
DEBTORS SHOULD FAIL TO COMPLY WITH HIS UNDERTAKING?

If anyone of the debtors in a joint indivisible obligation should fail to
comply with undertaking, the obligation is converted into one of indemnity for
damages. However, the debtors who may have been ready to comply with what
is incumbent upon him 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. On the other hand, the debtor who failed or
refused to comply with his undertaking shall pay not only his share of such or
value, but also al of the damages suffered by the creditor or creditors as a result
of the non-fulfillment of the obligation (Article 1224).

DISTINGUISH BETWEEN SOLIDARITY AND INDIVISIBILITY.

1. AS TO NATURE Solidarity refers to the legal tie or vinculum, and
consequently, to the parties of the obligation, whereas indivisibility refers
to the prestation which constitutes the object of the obligation.
2. AS TO REQUISITES Plurality of subjects is indispensable in solidarity,
whereas it is not required in indivisibility.
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3. AS TO EFFECT OF BREACH In solidarity, when the obligation is converted
into one of indemnity for damages because of breach, the solidary
character of the obligation remains, whereas in indivisibility, the
indivisible character of the obligation is terminated.

CAN SOLIDARITY EXIST ALTHOUGH THE CREDITORS AND DEBTORS MAY NOT
BE BOUND IN THE SAME MANNER AND BY THE SAME PERIODS AND CONDITIONS?

Solidarity may exist although the creditors and the debtors may not be
bound in the same manner and by the same periods and conditions (Article 1211).

WHAT ARE THE RULES IN SOLIDARY OBLIGATIONS?

a) Each one of the solidary creditors may do whatever may be useful to the
others, but not anything which may be prejudicial to the latter (Article 1212).
b) A solidary creditor cannot assign his rights without the consent of the others
(Article 1213).

IN SOLIDARY OBLIGATIONS, TO WHOM MUST THE DEBTOR PAY?

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

WHAT IS THE EFFECT OF NOVATION, COMPENSATION, CONFUSION OR
REMISSION OF DEBT MADE BY A SOLIDARY CREDITOR?

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

The creditor who may have executed any of these acts, as well as he who
collects the debt, shall be liable to the others for the share in the obligation
corresponding to them (Article 1215).

IN SOLIDARY OBLIGATION, AGAINST WHOM MAY THE CREDITOR PROCEED?
The creditor may proceed against any one of the solidary debtors or some
or all of them simultaneously. The demand made against one of them shall not
be an obstacle to those which may subsequently be directed against the others, so
long as the debt has not been fully collected (Article 1216).

WHAT IS THE EFFECT OF PAYMENT MADE BY ONE OF THE SOLIDARY DEBTORS?

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

WHAT IS THE RIGHT OF THE SOLIDARY DEBTOR WHO PAID?

He who made the payment may claim from his co-debtors only the share
which corresponds to each, with the interest for the payment already made. If the
payment is made before the debt is due, no interest for the intervening period
may be demanded (Article 1217, par. 2).

STATE THE RULE IF ONE OF THE SOLIDARY DEBTORS CANNOT PAY HIS SHARE
TO THE DEBTOR WHO PAID.

When one of the solidary debtors cannot, because of his insolvency,
reimburse his share to the debtor paying the obligation, such share shall be borne
by all his co-debtors, in proportion to the debt of each (Article 1217, par. 3).

HOWEVER:

Payment by a solidary debtor shall not entitle him to reimbursement from
his co-debtors if such payment is made after the obligation has prescribed or
become illegal (Article 1218).

WHAT IS THE EFFECT OF REMISSION OF A SOLIDARY OBLIGATION EFFECTED BY
A SOLIDARY CREDITOR (1) UPON THE OBLIGATION ITSELF, (2) UPON THE
RELATIONSHIP OF THE CREDITORS THEMSELVES, AND (3) UPON THE RELATIONSHIP
OF THE DEBTORS THEMSELVES?

1. UPON THE OBLIGATION If the remission is total, the entire obligation is
extinguished; if it is partial, the obligation is extinguished in that part or
aspect to which the remission refers (Article 1215).
2. UPON THE SOLIDARY CREDITOR The solidary creditor responsible for the
remission shall be liable to the other solidary creditors for the shares in the
obligation corresponding to them (Ibid).
3. UPON THE SOLIDARY DEBTORS As far as the solidary debtors are concerned,
the effects of remission may be summarized as follows:

a. The remission made by the creditor of the share which affects one
of the solidary debtors does not release the latter from his
responsibility towards the co-debtors, in case the debt had been
totally paid by anyone of them before the remission was effected
(Article 1219).
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b. The remission of the whole obligation, obtained by one of the
solidary debtor, does not entitle him to reimbursement from his co-
debtors (Article 1220).

WHAT IS THE EFFECT OF THE LOSS OF THE THING DUE?

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

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

If through a fortuitous event, the thing is lost or the performance has
become impossible after one of the solidary debtors has incurred in delay
through the judicial or extrajudicial demand upon him by the creditor, the
provisions of the preceding paragraph shall apply (Article 1221).

WHAT ARE THE DEFENSES WHICH ARE AVAILABLE TO A SOLIDARY DEBTOR IF
THE CREDITOR PROCEEDS AGAINST HIM ALONE FOR THE PAYMENT OF THE ENTIRE
OBLIGATION?

A solidary debtor may, in actions filed by the creditor, avail himself of all
defenses which are derived from the nature of the obligation and of those which
are personal to him, or pertain to his own share. With respect to those which
personally belong to the others, he may avail himself thereof only as regards that
part of the debt for which the latter are responsible (Article 1222).

SECTION 5
DIVISIBLE AND INDIVISIBLE OBLIGATIONS

DEFINE DIVISIBLE AND INDIVISIBLE OBLIGATIONS.

Divisible obligations are those which have as their object a prestation
which is susceptible of partial performance without the essence of the obligation
being changed.

Indivisible obligations are those which have as their object a prestation
which is not susceptible of partial performance, because otherwise the essence of
the obligation will be changed.

WHEN IS A THING DIVISBLE OR INDIVISIBLE?

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A thing is divisible when, if separated into parts, its essence is not
changed or its value is not decreased disproportionately, because each of the
parts into which it is divided are homogeneous and analogous to each other as
well as to the thing itself.

A thing is indivisible when, if separated into parts, its essence is changed
or its value is decreased disproportionately.

DISTINGUISH BETWEEN INDIVISIBILITY FROM SOLIDARITY.

SOLIDARITY INDIVISIBILITY
1. Refers to the tie between the parties. 1. Refers to the nature of the obligation.
2. Needs at least two debtors or
creditors.
2. May exist even if there is only one
debtor and only one creditor.
3. The fault of one is the fault of the
bothers.
3. The fault if one is not the fault of the
others.

GIVE AND DEFINE THE DIFFERENT KINDS OF DIVISION.

The division of a thing may be:

a. QUANTITATIVE when the thing can be materially divided into parts and
such parts are homogeneous to each other, such as when the parts are
separated from each other as in the case of movables, or when the limits of
the parts are fixed by metes and bounds as in the case of movables. This
depends on quantity.
b. QUALITATIVE when the thing can be materially divided, but the parts are
not homogenous to each other, such as in the partition of an inheritance.
This depends on quality, irrespective of quantity.
c. IDEAL OR INTELECTUAL OR MORAL when the thing can only be separated
into ideal or undivided parts, not material parts, as in the case of
ownership. This exists only in the mind and not in physical reality.

GIVE THE DIFFERENT KINDS OR CLASSES OF INDIVISIBLITY.

Indivisibility may be:

a. CONVENTIONAL - Indivisible by common agreement;
b. NATURAL OR ABSOLUTE indivisible by the nature of the
object of undertaking; and
c. LEGAL indivisible as provided by law.

DISTINGUISH BETWEEN THE DIVISIBILITY OF AN OBLIGATION AND THE
DIVISIBILITY OF THE THING WHICH CONSTITUTES THE OBJECT OF THE OBLIGATION.
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The divisibility of an obligation refers to the PERFORMANCE of the
prestation which constitutes the object of the obligation, whereas the divisibility
of the thing which constitutes the object if the obligation refers to the PRESTATION
itself.

IF THE THING WHICH CONSTITUTES THE OBJECT OF THE OBLIGATION TO GIVE
IS DIVISIBLE, DOES IT NECESSARILY FOLLOW THAT THE OBLIGATION IS ALSO
DIVISIBLE? SUPPOSE THAT THE THING IS INDIVISIBLE, DOES IT NECESSARILY FOLLOW
THAT THE OBLIGATION TO GIVE IS ALSO INDIVISIBLE?

If the thing which constitutes the object of an obligation to give is by its
nature divisible, the general rule is that the obligation is also divisible since it is
evidently susceptible of partial compliance.

This rule is subject to the following exceptions:

a. That the obligation is indivisible by express provision of law; and
b. That it is indivisible by intention of the parties (Article 1225).

If the thing which constitutes the object of the obligation to give is by its
very nature indivisible, the obligation is also indivisible since it is evident that it
is not susceptible of partial compliance. This rule is absolute in character.

The nature and effect of obligations are very much different from and do
not affect the divisibility or indivisibility of the things that are the object of
obligations in which there is only one debtor and only one creditor (Article 1223).

WHAT IS A JOINT INDIVISIBLE OBLIGATION?

It is an obligation where the object or prestation is indivisible but the
parties are bound jointly. Example: A and B are jointly bound to give a specific
car to C.

WHAT IS THE EFFECT OF NON-COMPLIANCE OF A JOINT INDIVISIBLE
OBLIGATION?

A joint indivisible obligation gives rise to indemnity for damages from the
time anyone of the debtors does not comply with his undertaking. The debtors
who may have been ready to fulfill their promises shall not contribute to the
indemnity beyond the corresponding portion of the price of the thing or of the
value of the service in which the obligation consists (Article 1224).
WHAT OBLIGATIONS ARE DEEMED INDIVISIBLE?

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a. Obligations to give definite things;
b. Those which are not susceptible of partial performance (Article
1225, par. 1);
c. Those so provided by law;
d. Those things which, though physically divisible, are intended by
the parties to be indivisible (Article 1225, par. 3).

WHAT OBLIGATIONS ARE DEEMED DIVISIBLE?

When the obligation has for its object:

a. The execution of a certain number of days of work;
b. The accomplishment of work by metrical units;
c. Analogous things which by their nature are susceptible of partial
performance (Article 1225, par. 2);
d. When the purpose of the obligation is to pay a certain amount in
installment.

IN OBLIGATIONS NOT TO DO, HOW IS THE DIVISIBILITY OR INDIVISIBILITY
THEREOF DETERMINED?

In obligations not to do, divisibility or indivisibility shall be determined
by the character of the prestation in each particular case (Article 1225, par. 4).

WHAT IS THE EFFECT OF ILLEGALITY OF THE TERMS OF A DIVISIBLE
CONTRACT?

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

SECTION 6
OBLIGATIONS WITH A PENAL CLAUSE

DEFINE OBLIGATIONS WITH A PENAL CLAUSE.

An obligation with a penal clause is one with an accessory undertaking by
virtue of which the obligor assumes a greater liability in case of breach of the
obligation.

WHAT IS MEANT BY PENAL CLAUSE OR PENALTY?

A penal clause is an accessory obligation attached to a principal obligation
by virtue of which the obligor is bound to pay a stipulated indemnity or to
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perform an agreed prestation for the purpose of insuring the performance of the
principal obligation.

It is a coercive means to obtain from the debtor compliance of the
obligation.

IN OBLIGATIONS WITH A PENAL CLAUSE, WHEN SHALL THE PENALTY BE
CONSIDERED AS A SUBSTITUTE FOR DAMAGES OR INTERESTS? WHAT ARE THE
EXCEPTIONS?

As a general rule, in obligations with a penal clause, the penalty shall
substitute the indemnity for damages and the payment of interests in case of
noncompliance (Article 1226, par. 1). In such a case, proof of actual damages
suffered by the creditor is not necessary in order that the penalty may be
demanded (Article 1228).

There are three EXCEPTIONS to the rule that a penalty clause shall not be a
substitute for the payment of interest and damages:

1. If there is no stipulation to the contrary;
2. When the obligor is sued for refusal to pay the agreed penalty; and
3. When the obligor is guilty of fraud in the fulfillment of the obligation
(Article 1226, par. 1).

In all of these cases, it is evident that the purpose of the penalty is to
punish the obligor. Consequently, the obligee can recover from him not only the
penalty, but also the damages resulting from the breach of the principal
obligation.

MAY ANY PENALTY BE DEMANDABLE?
No. The penalty may be enforced only when it is demandable in
accordance with the provisions of the Civil Code (Article 1226, par. 2), and one
which states that the penalty may be reduced if it is iniquitous or unconscionable
(Article 1229).

WHAT ARE THE PURPOSES OF A PENAL CLAUSE IN AN OBLIGATION?

A penal clause has three purposes:

a. Funcion coercitiva o de garantia to insure the performance
of the obligation;
b. Funcion liquidatoria to liquidate the amount of damages to
be awarded to the injured party in case of breach of the
principal obligation; and
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c. Funcion estrictamente penal in certain exceptional cases, to
punish the obligor in case of breach of the principal
obligation.

The second is compensatory, while the third is punitive in character; the
first, on the other hand, is the general purpose regardless of whether the penalty
is compensatory or punitive.

WHAT ARE THE DIFFERENT KINDS OF PENALTIES?

Penalty may be classified as follows:

a. AS TO ORIGIN:

a) Legal when it is constituted by law.
b) Conventional when it is constituted by agreement of the parties.

b. AS TO PURPOSE:

a) Compensatory when it is established for the purpose of
indemnifying the damages suffered by the obligee or creditor in
case of breach of the obligation.
b) Punitive when it is established for the purpose of punishing the
obligor or debtor in case of breach of the obligation.

c. AS TO EFFECT:

a) Subsidiary when only the penalty may be demanded in case of
breach of the obligation.
b) Joint when the injured party may demand the enforcement of
both the penalty and the principal obligation.

IS THERE ANY DIFFERENCE BETWEEN THE PENALTY IN OBLIGATIONS WITH A
PENAL CLAUSE AND LIQUIDATED DAMAGES?

As a general rule, there is none. In other words, the penalty in its
compensatory aspect is exactly the same as the liquidated damages defined in
Article 2226 of the Civil Code. In both cases, proof of actual damages suffered by
the creditor is unnecessary. However, the penalty in its punitive aspect is
different from liquidated damages. Thus, when there is a stipulation that the
creditor can recover damages in addition to the penalty, or when the debtor is
sued for refusal to pay the penalty, or when the debtor is guilty of fraud, it is
clear that in such cases the creditor can recover not only the agreed penalty but
also damages suffered by him.
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Imposition of the liquidated damages for breach of contract, such as in a
building contract, bars any award for additional damages at large for the same
breach (Navarro vs. Mallari, 45 Phil. 242).

CAN THE DEBTOR SUBSTITUTE THE PENALTY FOR THE PRINCIPAL
OBLIGATION?

No. The debtor cannot exempt himself from the performance of the
obligation by paying the penalty. He can only do so if the right has been
expressly reserved for him (Article 1227).

This is so because the payment of the penalty is merely an accessory
obligation. It is not the principal obligation.

CAN THE CREDITOR DEMAND BOTH FULFILLMENT AND THE PENALTY AT THE
SAME TIME?

No. The creditor cannot demand the fulfillment of the obligation and the
satisfaction of the penalty at the same time. He can only do so if the right has
been clearly granted him. However, if after the creditor has decided to require
the fulfillment of the obligation, the performance thereof should become
impossible without his fault, the penalty may be enforced (Article 1227).

WHAT ARE THE DIFFERENT CASES UNDER THE CIVIL CODE WHERE COURTS
MAY REDUCE THE PENALTY WHICH IS ATTACHED TO AN OBLIGATION?

A contract is a source of obligation. It is the law between the parties,
hence, neither the law nor the courts will extricate a party from an unwise or
undesirable contract he or she entered into with all the required formalities and
with full awareness of its consequences. One exception to this rule, however is
the matter of penalties. Courts may reduce the penalty attached to an obligation:

1. When the principal obligation has been partly complied with by the
debtor.
2. When the principal obligation has been irregularly complied with by the
debtor.
3. When the penalty is iniquitous or unconscionable, even if there has been
no performance (Article 1229).

A penalty clause is construed against the one enforcing it. If it is so
unconscionable that its enforcement, in effect, constitutes an undue deprivation
or confiscation of the property of the obligor, the courts can strike it down as an
invalid one.
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WHAT ARE THE RULES IN CASE THE PRINCIPAL OBLIGATION OR THE PENAL
CLAUSE IS VOID?

1. The nullity of the penal clause does not carry with it that of the principal
obligation.
2. The nullity of the principal obligation carries with it that of the penal
clause (Article 1230).

The penal clause, being merely an accessory obligation, does not
invalidate the principal obligation in the event that such penalty clause is void or
without effect. Being merely accessory to enforce the main obligation, such penal
clause could never exist if the main obligation does not exist. Hence, the nullity
of the principal obligation carries with it that of the penal clause.

SUMMARY ON RULES IN OBLIGATIONS WITH A PENAL CLAUSE:

1. The penalty shall substitute the indemnity for damages and the payment
of interests in case of noncompliance (Article 1226, par. 1), EXCEPT if there is
no stipulation to the contrary; when the obligor is sued for refusal to pay
the agreed penalty; and when the obligor is guilty of fraud in the
fulfillment of the obligation (Article 1226, par. 1).
2. The debtor cannot exempt himself from the performance of the obligation
by paying the penalty, save in the case where this right has been expressly
reserved for him. Neither can the creditor demand the fulfillment of the
obligation and the satisfaction of the penalty at the same time, unless this
right has been clearly granted him. However, if after the creditor has
decided to require the fulfillment of the obligation, the performance
thereof should become impossible without his fault, the penalty may be
enforced (Article 1227).
3. Proof of actual damages suffered by the creditor is not necessary in order
that the penalty may be demanded (Article 1228).

CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
GENERAL PROVISIONS

WHAT ARE THE DIFFERENT MODES OF EXTINGUISHING OBLIGATIONS?

Obligations are extinguished:

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(1) By payment or performance;
(2) By the loss of the thing due;
(3) By the condonation or remission of the debt;
(4) By the confusion or merger of the rights of creditor and debtor;
(5) By compensation;
(6) By novation.

Other causes of extinguishment of obligations, such as annulment,
rescission, fulfillment of a resolutory condition, and prescription, are governed
elsewhere in this Code (Article 1231).

HOW ARE THE CAUSES OF EXTINGUISHMENT OF OBLIGATIONS CLASSIFIED
ACCORDING TO THE CIVIL CODE?

ORDINARILY BY:

a) Payment of performance
b) Loss of the thing due
c) Condonation or remission of the debt or waiver
d) Confusion or merger of the rights of creditor and debtor
e) Compensation
f) Novation (Article 1231)

OTHER CAUSES IN ARTICLE 1231 BUT GOVERNED BY OTHER CHAPTERS:

a) Annulment
b) Rescission
c) Fulfillment of resolutory condition
d) Prescription

STILL OTHER CAUSES:

a) Death of a party in case the obligation is personal
b) Resolutory term
c) Change in civil status
d) Compromises
e) Mutual dissent
f) Impossibility of fulfillment
g) Fortuitous event

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SECTION 1
PAYMENT OR PERFORMANCE

DEFINE PAYMENT.

Payment is a mode of extinguishing obligations which consists not only
the delivery of money but also the performance, in any other manner, of an
obligation (Article 1232). `

IF A THIRD PERSON PAYS AN OBLIGATION, WHAT ARE THE RIGHTS WHICH ARE
AVAILABLE TO HIM?

If a third person pays the obligation with the knowledge and consent of
the debtor, there are two rights which are available to him:

a. He can recover from the debtor the entire amount which he has paid
(Article 1236, par. 2);
b. He is subrogated to all of the rights of the creditor (Article 1302, No. 2).

However, if the payment is made without the knowledge or against the
will of the debtor, there is only one right which is available to him:

a. He can recover only insofar as the payment has been beneficial to the said
debtor (Article 1236, par. 2).

WHAT ARE THE REQUISITES FOR A VALID PAYMENT?

A debt shall not be understood to have been paid unless the thing or
service in which the obligation consists has been completely delivered or
rendered, as the case may be (Article 1233).
WHAT IS THE EFFECT OF SUBSTANTIAL PERFORMANCE IN GOOD FAITH?

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

WHAT IS THE EFFECT IF THE OBLIGEE ACCEPTS PERFORMANCE KNOWING ITS
INCOMPLETENESS OR IRREGULARITY?

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 (Article 1235).

There is waiver and estoppel here.
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IF THERE IS DEFAULT IN THE PERFORMANCE OF ONES OBLIGATION, WHAT IS
THE EFFECT OF THE ACCEPTANCE OF DELAYED PAYMENT?

Rescission is impliedly waived. Failure to exercise the right of rescission
after the debtor defaulted constitutes a waiver of such right. The continued
acceptance of payments after the default places the debtor in estoppel.

MAY A THIRD PERSON COMPEL THE CREDITOR TO ACCEPT PAYMENT OR
PERFORMANCE OF AN OBLIGATION?

No, as a general rule because there is no privity of contract between the
third person and a party to a contract. This rule is, however subject to the
following exceptions:

a. When it is made by a third person who has an interest in the fulfillment of
the obligation (Article 1236). Thus, a guarantor or a co-debtor can compel
the creditor to accept payment or performance, since in this case, the
payor is not a stranger to the obligation.
b. When there is a stipulation to the contrary (Article 1236). In this case, the
creditor waives his right to refuse to deal with strangers to the obligation.

WHAT IS THE EFFECT IF A THIRD PERSON PAYS ON BEHALF OF THE DEBTOR
WITHOUT HIS KNOWLEDGE OR AGAINST HIS CONSENT?

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

WHAT IS SUBROGATION?

Subrogation means the act of putting somebody into the shoes of the
creditor, hence, enabling the former to exercise all the rights and actions that
could have been exercised by the latter.

Subrogation transfers to the person subrogated the credit with all the
rights thereto appertaining, either against the debtor or against third persons, be
they guarantors or possessors of mortgages, subject to stipulation in a
conventional subrogation (Article 1303).

HOW IS SUBROGATION DISTINGUISHED FORM REIMBURSEMENT?

a) In subrogation, recourse can be had to the mortgage or guaranty or
pledge; in reimbursement, there is no such recourse.
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b) In subrogation, the debt is extinguished in one sense, but a new creditor,
with exactly the same rights as the old one, appears on the scene. In
reimbursement, the new creditor has different rights, so it is as if there has
been an extinguishment of the obligation.
c) In subrogation, there is something more than a personal action for
recovery; in reimbursement, there is only a personal action to recover to
the amount.

Note however, that in both reimbursement and subrogation, there can be
recovery of what the stranger has paid (Article 1236).

WHEN IS PAYMENT BY A STRANGER DEEMED A DONATION?

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

WHAT IS THE EFFECT OF PAYMENT MADE BY AN INCAPACITATED PERSON?

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

If a person has no capacity to give:

a) Payment is not valid if accepted;
b) Creditor cannot be compelled to accept it;
c) The remedy of consignation is not proper.

Exception as provided for in Article 1427:

When a minor below eighteen and twenty-one years of age, who has
entered into a contract without the consent of the parents or guardian voluntarily
pays a sum of money or delivers a fungible thing in fulfillment of the obligation,
there shall be no right to recover the same from the obligee who has spent or
consumed it in good faith.

TO WHOM MUST PAYMENT BE MADE?

Payment shall be made, as a general rule, to:

a) The person in whose favor the obligation has been constituted, or
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b) His successor in interest, or
c) Any person authorized to receive it (Article 1240).

WHAT IS THE EFFECT IF PAYMENT IS MADE TO A PERSON OTHER THAN THOSE
ENUMERATED IN ARTICLE 1240?

The payment shall not be valid; except:

a) Payment made to a third person provided that it has redounded to the
benefit of the creditor;
b) Payment made to the possessor of the credit provided that it was made in
good faith (Articles 1241, par. 2, and 1242).

WHAT IS THE EFFECT OF PAYMENT MADE TO A PERSON INCAPACITATED TO
MANAGE OR ADMINISTER HIS PROPERTY?

Payment to a person who is incapacitated to administer his property shall
be valid only:

a) If he has kept the thing delivered, or
b) Insofar as the payment has been beneficial to him (Article 1241, par. 1).

WHAT IS THE EFFECT OF PAYMENT MADE TO AN UNAUTHORIZED THIRD
PERSON?

Payment made to a third person shall be valid insofar as it has redounded
to the benefit of the creditor (Article 1241, par 2).
MUST THE BENEFIT TO THE CREDITOR BE PROVEN?
Such benefit to the creditor need not be proved in the following cases:

(1) If after the payment, the third person acquires the creditor's rights;
(2) If the creditor ratifies the payment to the third person;
(3) If by the creditor's conduct, the debtor has been led to believe that the
third person had authority to receive the payment (Article 1241).

WHAT IS THE EFFECT OF PAYMENT MADE TO THE CREDITOR BY THE DEBTOR
AFTER THE LATTER HAS BEEN JUDICIALLY ORDERED TO RETAIN THE DEBT?

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

The judicial order in this case may have been prompted by an order of
attachment, injunction or garnishment

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CAN A DEBTOR OF A THING COMPEL THE CREDITOR TO RECEIVE A DIFFERENT
ONE?

The debtor of a thing cannot compel the creditor to receive a different one,
although the latter may be of the same value as, or more valuable than that
which is due (Article 1244, par. 1).

In obligations to do or not to do, an act or forbearance cannot be
substituted by another act or forbearance against the obligee's will (Article 1244,
par 2).

UNDER WHAT CIRCUMSTANCES MAY A DEBTOR COMPEL THE CREDITOR TO
ACCEPT A THING DIFFERRENT FROM THAT WHICH WAS AGREED UPON?

a) When the obligation is a facultative obligation. Here, one prestation has
been agreed upon; but the obligor may render another in substitution of
the same (Article 1206).
b) When there is another contract entered into between the parties resulting
in dacion en pago or novation;
c) When there is a waiver made by the creditor as when he accepted a thing
other than what was agreed upon. This constitutes estoppel.

WHAT IS DATION IN PAYMENT?

Dation in payment, whereby property is alienated to the creditor in
satisfaction of a debt in money, shall be governed by the law of sales (Article
1245)

It is a mode of extinguishing an obligation whereby the debtor alienates in
favor of the creditor, property for the satisfaction of monetary debt.

WHAT ARE THE REQUISITES FOR A VALID DATION IN PAYMENT?

a) Consent of the creditor (for sales presupposes consent of both parties)
b) It must not be prejudicial to the other creditor;
c) The debtor must not have been declared insolvent by judicial decree.

WHAT MUST BE DELIVERED IN OBLIGATIONS TO GIVE INDETERMINATE OR
GENERIC THINGS?

When the obligation consists in the delivery of an indeterminate or
generic thing, whose quality and circumstances have not been stated, the creditor
cannot demand a thing of superior quality. Neither can the debtor deliver a thing
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of inferior quality. The purpose of the obligation and other circumstances shall
be taken into consideration (Article 1246).

WHO PAYS FOR THE EXTRAJUDICIAL EXPENSES REQUIRED BY THE PAYMENT?

The extrajudicial expenses required by the payment shall be for the
account of the debtor. With regard to judicial costs, the Rules of Court shall
govern.

Exception: When there is stipulation to the contrary (Article 1247).

MAY A CREDITOR BE COMPELLED TO PARTIALLY RCEIVE THE PRESTATIONS
CONSTITUTING THE OBLIGATION?

The creditor cannot be compelled partially to receive the prestations in
which the obligation consists. Neither may the debtor be required to make partial
payments (Article 1248).

EXCEPTIONS:

a) When there is stipulation to this effect;
b) When the different prestations are subject to different conditions or
different terms;
c) When the debt is in part liquidated and in part unliquidated, performance
of the liquidated part may be insisted upon either by the debtor or
creditor;
d) When a joint debtor pays his share or the creditor demands the same;
e) When a solidary debtor pays only the part demandable because the rest
are not yet demandable on account of their being subject to different terms
and conditions;
f) In case of compensation, when one debt is larger than the other, it follows
that a balance is left;
g) When work is to be done by parts.

WHAT IS MEANT BY LEGAL TENDER?

Legal tender, within the meaning of Article 1249, refers to such currency
which may be used for the payment of all debts, whether public or private.

It is that which a debtor may compel a creditor to accept in payment of the
debt whether private or public.

IN MONETARY OBLIGATIONS, IN WHAT CURRENCY SHALL PAYMENT BE MADE?

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The payment of debts in money shall be made in the currency stipulated,
and if it is not possible to deliver such currency, then in the currency which is
legal tender in the Philippines (Article 1249).
This has been modified by RA 529 which provides that obligations
incurred after June 16, 1950, which are for the purpose of payment a foreign
currency or an amount of Philippine money to be measured by gold or foreign
currency, shall be null, void and of no effect. However, in such a case, only the
stipulation with respect to the currency is void. The creditor can still demand
payment in Philippine legal tender measured at the exchange rate prevailing not
at the time of payment, but at the time of contracting or incurring the dent.

RA 529 has in turn been amended by RA 4100, which took effect on June
1964 which provides that in import-export and other international banking,
financial investment and industrial transactions, the parties agreement a to
currency in which an obligation will be paid is binding.

CAN A MONETARY OBLIGATION BE PAID WITH PROMISSORY NOTES PAYABLE
TO ORDER, OR BILLS OF EXCHANGE, OR OTHER MERCANTILE DOCUMENTS?

As a general rule, no, except:

a) When they have been cashed or,
b) When through the fault of the creditor they have been impaired, as when
the check its lost its value.
c) When the creditor is in estoppel or he had previously promised he would
accept a check.

In the meantime, the action derived from the original obligation shall be
held in abeyance (Article 1249, par. 2).

A check, even a managers check, is not a legal tender, therefore the
creditor cannot be compelled to accept payment through this means.

IN CASE AN EXTRAORDINARY INFLATION OR DEFLATION OF THE PHILIPPINE
CURRENCY SHOULD SUPERVENE, WHAT VALUE WILL BE THE BASIS OF PAYMENT?

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

Note that this article has no more application today. The article speaks of
the inflation or deflation of the currency stipulated, meaning the currency other
than Philippine legal tender as allowed by Article 1249. But since today, no
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foreign currency can be stipulated under RA 529, it follows that literally
construed, Article 1250 cannot be made used of for the present. By analogy or
extension, it may be possible to include the extraordinary inflation or deflation of
the Philippine currency.

WHERE MUST PAYMENT BE MADE?

RULES:

a) Payment shall be made in the place designated in the obligation.
b) There being no express stipulation and if the undertaking is to deliver a
determinate thing, the payment shall be made wherever the thing might
be at the moment the obligation was constituted.
c) In any other case the place of payment shall be the domicile of the debtor.
d) If the debtor changes his domicile in bad faith or after he has incurred in
delay, the additional expenses shall be borne by him.
e) These provisions are without prejudice to venue under the Rules of Court
(Article 1251).

SUBSECTION 1
Application of Payments
WHAT ARE THE SPECIAL FORMS OF PAYMENT?

a. Application (or imputation) of payment (Article 1252)
b. Dation in payment (adjudication en pago or datio in solutum) (Article
1245)
c. Assignment in favor of creditors (cession) (Article 1255)
d. Tender of payment or consignation (Articles 1256-1261)

DEFINE APPLICATION OF PAYMENT.

Application of payment is the designation of the debt to which the
payment must be applied when the debtor has several obligation of the same
kind in favor of the same creditor.

It is the phrase applied to show which debt, out of two or more debts
owing the same creditor, is being paid.

WHAT ARE THE REQUISITES OF APPLICATION OF PAYMENT?

a. There must be two or more debts;
b. There must only one debtor and only one creditor;
c. There must be two or more debts of the same kind;
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d. All of the debts must be due; and
e. The amount paid by the debtor must not be sufficient to cover the total
amount of all the debts.

WHAT ARE THE EXCEPTIONS TO THE RULE THAT IN APPLICATION OF PAYMENT,
THER MUST BE ONLY ONE DEBTOR AND ONLY ONE CREDITOR?

The case of a solidary debtor who may have obligations other than the
solidary obligation in favor of the creditor to whom payment is made is
sometimes given as an exception. Although there is no question that such a
debtor can designate the debt to which the payment must be applied, yet, this
doe not constitute an exception because of the principle of mutual agency
existing among the solidary debtors.

A real exception is the one given in Article 1792. Under this article, if a
debtor is indebted to a partnership and also to the managing partner at the same
time and both debts are already demandable, such debtor, if he pays, may apply
the payment to his debt to the managing partner, provided that such debt is
more onerous to him. Here, actually there are two creditors since the personality
of the partnership is separate and distinct from that of the partners.

TO WHOM DOES THE RIGHT TO MAKE AN APPLICATION OF PAYMENT BELONG?

As a general rule, the right to make an application of payment belongs to
the debtor. (Similar to a case where the obligation is subject to an alternative
obligation or prestation, the choice as to which debt the payment is to be applied
is given to the debtor. For this purpose, the debtor must make a declaration as to
which debt should the payment be applied.) However, if he does not avail
himself of this right, the creditor may wrest the initiative from him by giving to
him a receipt designating the debt to which the payment shall be applied. But
even this does not really constitute an exception, because the debtor may either
accept or reject the application (Article 1252).

The rule on application of payment by the debtor must conform to the
general rules on payment provided for from Articles 1232 up to 1251. Thus if the
debtor makes a declaration as to the particular debt (from among a number of
debts) to which his payment is to be applied, the creditor can validly refuse such
declaration or application if the payment is to be applied to a debt which will
only partially pay the particular indebtedness. This is so because according to
Article 1233, payment must, as a general rule, be always completely delivered or
rendered, and, according to Article 1248, the creditor cannot be compelled
partially to receive the prestation in which the obligation consists. The debtor
must apply the payment to an indebtedness which, through such application,
shall be completely extinguished.
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IF THE DEBTS ARE NOT YET DUE, MAY THERE BE APPLICATION OF PAYMENT?

Yes, but only:

a. If the parties so stipulate, or
b. When the application of payment is made by the party (which may either
be the debtor or the creditor) for whose benefit the term has been
constituted (Article 1252).

How is application made?

a. The debtor makes the designation (Article 1252, par. 1)
b. If not, the creditor makes it, by so stating in the receipt that he issues
(Article 1251, par. 2)
c. If neither the debtor nor the creditor has made the application, or if the
application is not valid, then application is made by operation of law
(Articles 1253, 1254)

WHAT IS THE RULE IF THE DEBTOR ACCEPTS FROM THE CREDITOR A RECEIPT
IN WHICH AN APPLICATION OF PAYMENT IS MADE?

The law provides that if the debtor accepts from the creditor a receipt in
which an application of payment is made, the former cannot complain of the
same, unless there is a cause for invalidating the contract (Article 1252, par. 2).

It must be noted that the debtor must not only merely receive the receipt
but he must accept the receipt. Thus, if A is indebted to B for P1, 000, P2, 000 and
P900, and A pays B P500 without mentioning as to which debt the P500 will be
applied and if B is agreeable to any partial payment, and issues a receipt
indicating that the P500 shall be applied to the P1, 000 debt, and A readily
accepts the said receipt, A cannot later complain that the P500 should have been
applied to the P2, 000 debt unless there exists a cause to invalidate the contract in
connection with the indebtedness in the amount of P1, 000. This is based on the
doctrine of estoppel. However, if the indebtedness has been obtained through
fraud or intimidation which is a cause to annul the contract, the debtor is not
estopped from questioning the application.

ONCE AN APPLICATION OF PAYMENTS IS MADE, MAY IT BE REVOKED?

No, unless both parties agree. Even if both parties agree, however, still the
revocation or change in the application will not be allowed if third persons
would be prejudiced.

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WHAT IS THE RULE OF THE DEBT PRODUCES INTEREST?

If the debt produces interest, payment of the principal shall not be deemed
to have been made until the interests have been covered (Article 1253).

This article is merely directory, and not mandatory. Although interest
attaches to the principal, the payment of both principal and interest, in effect,
constitutes two payment by the debtor. In fact according to the law, the receipt of
the principal by the creditor without reservation with respect to the interest, shall
give rise to the presumption that the interest has been paid (Article 1176).

WHAT IS MEANT BY LEGAL APPLICATION OF PAYMENT? (WHAT IS THE RULE IF
THE PAYMENT CANNOT BE APPLIED IN ACCORDANCE WITH THE PRECEDING RULES,
OR IF APPLICATION CAN NOT BE INFERRED FROM OTHER CIRCUMSTANCES?)

a. The debt which is most onerous to the debtor, among those due, shall be
deemed to have been satisfied.
b. If the debts due are of the same nature and burden, the payment shall be
applied to all of them proportionately (Article 1254).

EXAMPLES:

a. Where there are various debts which are due and they were incurred at
different dates, the oldest are more onerous.
b. When one bears interest and the other does not, the former is more
onerous.
c. Where one is secured and the other is not, the former is more onerous.
d. Where the debtor is bound as principal in one and as guarantor or surety
in another, the former is more onerous.
e. Where the debtor is bound as a solidary debtor in one and as the sole
debtor in another, the former is more onerous.

SUBSECTION 2
Payment by Cession
WHAT IS PAYMENT BY CESSION?

Cession or assignment may be defined as a special form of payment
whereby the debtor abandons all of his property for the benefit of his creditors in
order that from the proceeds thereof the latter may obtain payment of their
creditors.

Article 1255 provides:

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

WHAT ARE ITS REQUSITES?

In order that the debtor can avail himself of this form of payment, it is
essential that:

a. There must be plurality of debts;
b. There must be more than one creditor;
c. There must be complete or partial or relative insolvency of the debtor;
d. There is abandonment of all debtors property not exempt from execution
(unless exemption is validly waived by the debtor) in favor of creditors;
and
e. It must be accepted by the creditor.

WHAT ARE THE DIFFERENT KINDS OF PAYMENT BY CESSION?

Payment by cession may either be contractual (voluntary) or judicial. The
cession referred to in Article 1255 is contractual, while the cession which is
regulated by the Insolvency Law, and which may be voluntary or involuntary, is
judicial.

WHAT ARE THE EFFECTS OF VOLUNTARY ASSIGNMENT?

1. The creditors do not become the owners; they are merely assignees
with authority to sell (If ownership is transferred, this becomes a
datio in solutum).
2. The debtor is released up to the amount of the net proceeds of the
sale, unless there is a stipulation to the contrary (Article 1255, 2
nd

sentence). The balance remains collectible.
3. Creditors will collect credits in the order of preference agreed
upon, or in default of agreement, in the order ordinarily established
by law.

DISTINGUISH BETWEEN DATION IN PAYMENT AND PAYMENT BY CESSION.

1. As to number of parties: Whereas in dacion en pago there may be only one
creditor, in payment by cession plurality of creditor is essential;
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2. As to financial condition: Whereas in dacion en pago the debtor is not
necessarily in a state of financial difficulty, in payment by cession the
debtor is in a state of partial or relative insolvency.
3. As to object: Whereas in dacion en pago what is delivered by the debtor is
merely a thing to be considered as the equivalent of the performance of
the obligation, in payment by cession what is ceded by the debtor is the
universality of all his property.
4. As to effect: Whereas in dacion en pago the payment extinguishes the
obligation to the extent of the value of the thing delivered either as agreed
upon or as may be proved, unless the silence of the parties signifies that
they consider the delivery of the thing as the equivalent of the
performance of the obligation, in payment by cession the effect is merely
to release the debtor for the net proceeds of the things ceded or assigned,
unless there is a contrary intention.

OTHER DISTINCTIONS:

DACION EN PAGO CESSION
Does not affect all the properties In general, affects all the properties of
the debtor
Does not require plurality of creditors Requires more than one creditor
Only specific or concerned creditors
consent is required
Requires the consent if all the creditors
May take place during the solvency of
the debtor
Requires full or partial insolvency
Transfers ownership upon delivery Does not transfer ownership
This is really an act of novation Not an act of novation

SUBSECTION 3
Tender of Payment and Consignation

DEFINE TENDER OF PAYMENT AND CONSIGNATION.

Tender of payment consists in the manifestation made by the debtor to the
creditor of his decision to comply immediately with his obligation. It is the act of
offering the creditor what is due him together with a demand that the creditor
accept the same. Consignation, on the other hand, refers to the deposit of the
object of the obligation in a competent court in accordance with the rules
prescribed by law after refusal or inability of the creditor to accept the tender of
payment. It generally requires a prior tender of payment.

DISTINGUISH BETWEEN TENDER OF PAYMENT AND CONSIGNATION.

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1. Tender of payment is the antecedent of consignation; in other words,
while the first is the preparatory act, the second is the principal act which
will produce the effects of payment. The priority of tender of payment is
the attempt to make a private settlement before proceeding to the
solemnities of consignation.
2. Tender of payment is by its very nature extrajudicial in character, while
consignation is judicial.

STATE THE RATIONALE FOR CONSIGNATION.
The rationale for consignation is to avoid the performance of an obligation
becoming more onerous to the debtor by reason of causes imputable to him. `

WHAT ARE THE SPECIAL REQUISITES OF CONSIGNATION?

In order that consignation shall produce the effects of payment, it is not only
essential that it must conform with all of the requisites of payment, but it is also
essential that certain special requirements prescribed by law must be complied
with. The debtor must show:

1. That the debt is due;
2. That there must be prior tender, unless tender is excused;
3. The consignation has been made either because the creditor to whom
tender of payment was made refused to accept the payment without just
cause, or because any of the causes stated by law for effective
consignation without previous tender of payment exists (Article 1256);
4. That previous notice of the consignation had been given to the persons
interested in the fulfillment of the obligation (Article 1256);
5. That the thing or amount due had been placed at the disposal of judicial
authority (Article 1258, par. 1) accompanied by proof that tender had been
duly made, unless tender is excused;
6. That after the consignation had been made, the persons interested in the
fulfillment of the obligation had been notified thereof (Article 1258, par. 2).

WHAT IS THE EFFECT OF TENDER WITHOUT CONSIGNATION?

Tender of payment without consignation does not extinguish the debt;
consignation must follow.

WHAT ARE THE EXCEPTIONS TO THE RULE THAT BEFORE CONSIGNATION
SHALL PRODUCE THE EFFECTS OF PAYMENT, IT IS ESSENTIAL THAT THERE MUST BE A
PREVIOUS TENDER OF PAYMENT?

Consignation alone shall produce the same effect in the following cases:

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

WHEN MUST THE SPECIAL REQUISTES OF A VALID AND EFFECTIVE
CONSIGNATION BE PROVED?

Under the law, after the consignation has been made, it is required that
the debtor shall notify the creditor and all of the persons interested in the
fulfillment of the obligation of such fact (Article 1258). It is at this stage that three
possible situations may arise:

1. The creditor may accept the ting or amount deposited. In such a case, the
question of payment is settled altogether. The question as to whether the
consignation is valid or not becomes moot.
2. The creditor may refuse to accept the thing or amount deposited. In such
as case, the debtor shall then bring an action against him in order to
compel him to accept said thing or amount. In order that such action shall
prosper, all of the requisites of a valid and effective consignation must be
proved.
3. The creditor may neither accept nor impugn the consignation because he
is not interested, or he is not known, or he is absent. In such a case, the
debtor shall then file a motion in court asking for the cancellation of the
obligation (Article 1260). In order that such motion shall be granted, all of
the requisites of a valid and effective consignation must be proved.

WHO BEARS THE EXPENSES OF CONSIGNATION?

The expenses of consignation, when properly made, shall be charged
against the creditor (Article 1259).

WHAT ARE THE EFFECTS OF CONSIGNATION DULY MADE?

1. Once the consignation has been duly made, the debtor may ask the judge
to order the cancellation of the obligation (Article 1260).
2. The running of interest is suspended.

WHEN MAY THE DEBTOR WITHDRAW THE THING OR SUM CONSIGNED?

As a matter of right:

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Before the creditor has accepted the consignation, or before a judicial
declaration that the consignation has been properly made, the debtor may
withdraw the thing or the sum deposited, allowing the obligation to remain in
force (Article 1260).

As a matter of privilege:

If, the consignation having been made, the creditor should authorize the
debtor to withdraw the same, he shall lose every preference which he may have
over the thing. The co-debtors, guarantors and sureties shall be released (Article
1261).
SECTION 2
Loss of the Thing Due

DEFINE LOSS OF THE THING DUE.

In its strict sense, loss of the thing due means that the thing which
constitutes the object of the obligation perishes or goes out of commerce of man,
or disappears in such a way that its existence is unknown or it cannot be
recovered (Article 1189, par. 2).

In its broad sense, it means impossibility of compliance with the
obligation through any cause. In other words, it is synonymous with what other
codes term impossibility of performance.

This is the sense in which it is understood in Articles 1262 to 1269.

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

WHAT REQUISITES MUST CONCUR IN ORDER THAT AN OBLIGATION SHALL BE
EXTINGUISHED BY THE LOSS OR DESTRUCTION OF THE THING DUE?

a) The thing which is lost is determinate;
b) The thing is lost without any fault of the debtor. If the thing is lost through
the fault of the debtor, the obligation is transformed into an obligation to
indemnify the oblige or creditor for damages;
c) The thing is lost before the debtor has incurred in delay (Article 1262).

WHAT ARE THE EXCEPTIONS TO THE RULE ABOVE?

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1. When by law, the obligor is liable for fortuitous events, (Article 1262, par.
2).
2. When by stipulation, the obligor is liable for fortuitous events, (Article
1262, par. 2).
3. When the nature of the obligation requires the assumption of risk (Article
1262, par. 2 & 1174).
4. When the loss of the thing is due to the fault of the debtor (Article 1262,
par.1)
5. When the loss of the thing occurs after the debtor has incurred in delay
(Article 1262, par. 1 & Article 1165, par. 3).
6. When the debtor promised to deliver the same thing to two or more
persons who do not have the same interest (Article 1165, par. 3).
7. When the obligation is generic (Article 1263); except when the generic
thing is delimited, or when the generic thing has already been segregated
or set aside..
8. When the debt of a certain and determinate thing proceeds from a
criminal offense, unless the thing having been offered by him to the
person who should receive it, the latter refused without justification to
accept it. (Article 1268).

WHAT IS THE PRESUMPTION IF THE THING IS LOST IN THE POSSESSION OF THE
DEBTOR?

Whenever the thing is lost in the possession of the debtor, it shall be
presumed that the loss was due to his fault, unless there is proof to the contrary,
and without prejudice to the provisions of article 1165. This presumption does
not apply in case of earthquake, flood, storm or other natural calamity (Article
1265).

IN OBLIGATIONS TO DO, WHAT IS THE EFFECT IF THE PRESTATION WHICH
CONSTITUTES THE OBJECT OF THE OBLIGATION BECOMES LEGALLY OR PHYSICALLY
IMPOSSIBLE?

The debtor in obligations to do shall also be released when the prestation
becomes legally or physically impossible without the fault of the obligor (Article
1266); provided that such impossibility was not due to his fault and that it took
place before he has incurred in delay.

CAN THE SAME RULE BE APPLIED TO OBLIGATIONS NOT TO DO?

In rare or exceptional cases, the same rule applies to obligations not to do,
such as when the obligor is compelled to do that which he had obligated himself
to refrain from performing or doing. In such cases, his obligation is extinguished
applying the same principle invoked in Article 1266.
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WHAT IS THE EFFECT OF DIFFICULTY OF THE SERVICE BEYOND THE PARTIES
CONTEMPLATION?

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

WHAT IS THE RIGHT OF THE CREDITOR WHEN THE OBLIGATION HAS BEEN
EXTINGUISHED BECAUSE OF THE LOSS OF THE THING?

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

SECTION 3
Condonation or Remission of the Debt

DEFINE CONDONATION OR REMISSION.

Remission is an act of liberality by virtue of which the oblige, 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.

EXTINGUISHED BY REMISSION?

In order that there will be a remission or condonation which will result in
the total or partial extinguishment of the obligation, it is essential that the
following requisites must concur:

a) The condonation or remission must be essentially gratuitous;
b) There must be acceptance by the obligor. It may be made expressly or
impliedly; and
c) The obligation must be demandable.

WHAT RULES GOVERN REMISSION AND CONDONATION?

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One and the other kind shall be subject to the rules which govern
inofficious donations. Express condonation shall, furthermore, comply with the
forms of donation. (Article 1270)

WHAT ARE THE DIFFERENT KINDS OF REMISSION?

Remission or condonation may be classified as follows:

1. AS TO FORM It may be express or implied. It is express when it is made in
accordance with the formalities prescribed by law for donations. It is
implied when, although it is not made in accordance with the formality
prescribed by law for donations, it can be deduced from the acts of the
obligee or creditor.
2. AS TO EXTENT It may be total or partial. It is total when the entire
obligation is extinguished. It is partial when it refers to the principal or
accessory obligation or to an aspect thereof which affects the debtor, as for
instance solidarity.
3. AS TO CONSTITUTION It may be inter vivos or mortis causa. The first refers
to that which is constituted by agreement of the obligee and the obligor, in
which case it partakes of a donation inter vivos (See Article 725, et. seq.); the
second, on the other hand, refers to that which is constituted of the nature
of a donation mortis causa (See Articles 935, 936 and 937).

WHAT ARE EXAMPLES OF IMPLIED REMISSION?

1. The delivery of a private document evidencing a credit, made voluntarily
by the creditor to the debtor, implies the renunciation of the action which
the former had against the latter.

If in order to nullify this waiver it should be claimed to be
inofficious, the debtor and his heirs may uphold it by proving that the
delivery of the document was made in virtue of payment of the debt.
(Article 1271)

2. Whenever the private document in which the debt appears is found in the
possession of the debtor, it shall be presumed that the creditor delivered
it voluntarily, unless the contrary is proved. (Article 1272)

3. It is presumed that the accessory obligation of pledge has been remitted
when the thing pledged, after its delivery to the creditor, is found in the
possession of the debtor, or of a third person who owns the thing. (Article
1274)

WHAT IS THE EFFECT OF RENUNCIATION OF THE PRINCIPAL DEBT?
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The renunciation of the principal debt shall extinguish the accessory
obligations; but the waiver of the latter shall leave the former in force. (Article
1273)

SECTION 4
Confusion or Merger of Rights
DEFINE CONFUSION.

Confusion may be defined as the merger of the characters of creditor and
debtor in the same person by virtue of which the obligation is extinguished
(Article 1275). It is the meeting in the same person of the qualities of creditor and
debtor with respect to one and the same obligation.

EXTINGUISHED BY CONFUSION?

In order that there will be a confusion of rights which will result in the
extinguishment of the obligation, it is essential that the following requisites must
concur:

1. The merger of the characters of creditor and debtor must be in the same
person (Article 1275);
2. It must be placed in the person of either the principal creditor or the
principal debtor (Article 1276); and
3. It must be complete or definite.

The requisite that the merger of rights of creditor and debtor must be
complete and definite does not mean that the extinguishment of the obligation
should be complete or total in character; it merely means that whether the
merger refers to the entire obligation or only a part thereof, it must be of such a
character that there will be a complete and definite meeting of all the qualities of
creditor and debtor in the obligation or in the part or aspect thereof which is
affected by the merger.

WHAT IS THE EFFECT OF MERGER IN THE PRINCIPAL DEBTOR OR CREDITOR?
WHAT IS THE EFFECT OF CONFUSION IN THE PERSON OF THE GUARANTORS?

Merger which takes place in the person of the principal debtor or creditor
benefits the guarantors. Confusion which takes place in the person of any of the
latter does not extinguish the obligation. (Article 1276)

WHAT IS THE EFFECT OF CONFUSION IN A JOINT OBLIGATION?

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Confusion does not extinguish a joint obligation except as regards the
share corresponding to the creditor or debtor in whom the two characters concur.
(Article 1277)

SECTION 5
Compensation
DEFINE COMPENSATION.

Compensation is a mode of extinguishing in their concurrent amount
those obligations of persons who in their own right are creditors and debtors of
each other. It is a figurative operation of weighing two obligations
simultaneously in order to extinguish them to the extent in which the amount of
one is covered by the amount of the other.

WHAT REQUISITES MUST CONCUR IN ORDER THAT AN OBLIGATION SHALK BE
EXTINGUISHED BY COMPENSATION?

The essential requisites of compensation are:
1. There must be 2 parties who, in their own right, are principal creditors
and principal debtors of each other (Articles 1278, 1279, No. 1);
2. Both debts must consist in money, or if the things due are fungibles
(consumables), they must be of the same kind and quality (Article 1279,
No. 2);
3. Both debts must be due (Article 1279, No. 3);
4. Both debts must be liquidated and demandable (Article 1279, No. 4);
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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
(Article 1279, No. 5);
6. The compensation must not be prohibited by law (Articles 1287, 1288).

GIVE EXAMPLES OF COMPENSATION PROHIBITED BY LAW.

The compensation of the following are prohibited:

1. Debts arising from a depositum (except bank deposits, which are by
law considered as loans to the bank) (Articles 1287, 1980).
2. Debts arising from the obligation of a depositary (Article 1287)
3. Debts arising from the obligations of a bailee in commodatum (Article
1287).
4. Debts arising from a claim for future support due by gratuitous
title (Article 1287).
5. Debts consisting in civil liability from a penal offense (Article 1288).
6. Damages suffered by a partnership thru the fault of a partner
cannot be compensated with profits and benefits which he may
have earned for the partnership by his industry (Article 1794).

WHAT ARE THE DIFFERENT KINDS OF COMPENSATION?

Compensation may be classified into:
AS TO CAUSE:

1. LEGAL when it takes effect by operation of law from the moment all of
the requisites prescribed by law are present. This is the fixed type which is
regulated by Articles 1278 and 1279.
2. VOLUNTARY when the parties who are mutually creditors and debtors
agree to compensate their respective obligations, even though all of the
requisites for compensation may not then be present.
3. JUDICIAL when it takes effect by judicial decree. This occurs, for instance,
where one of the parties to a suit over an obligation has a claim for
damages against the other and the former sets it off by proving his right to
said damages and the amount thereof (Article 1283).

AS TO EFFECT:

1. TOTAL when the debts to be compensated are equal in amount (Article
1281);
2. PARTIAL when the debts to be compensated are not equal in amount
(ibid).

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HOW IS COMPENSATION DISTINGUISHED FROM PAYMENT, CONFUSION AND
COUNTERCLAIM?

Compensation may be distinguished from payment in the following ways:

1. The requisites prescribed by law for compensation are different from
those prescribed by law for payment,
2. Compensation takes effect by operation of law, whereas payment takes
effect by act of the parties.
3. Capacity to give and acquire is not necessary in compensation, but it is
essential in payment.
4. Compensation is, as a rule, partial, whereas payment is, as a rule,
complete and indivisible.

Compensation may be distinguished form confusion in the following ways:

1. As to number of persons, in compensation there must be two persons
who, in their own right, are creditors and debtors of each other; whereas
in confusion there is only one person in whom is merged the qualities of
creditor and debtor.
2. As to number of obligations, in compensation there must be at least 2;
whereas in confusion there is only one.

Compensation may be distinguished from set-off or counter-claim in the
following ways:

1. Compensation requires that the 2 debts must consist in money, or if the
things due are fungibles, they must be of the same kind and quality; but in
counter-claim this is not necessary.
2. Compensation, as a general rule, requires that the debts must be
liquidated, but counter-claim does not.
3. Compensation need not be pleaded, whereas a counter-claim must be
pleaded to be effectual.

MAY A GUARANTOR SET UP COMPENSATION WITH RESPECT TO PRINCIPAL DEBT?

Notwithstanding the provisions of the preceding article, the guarantor
may set up compensation as regards what the creditor may owe the principal
debtor (Article 1280). This is an exception to Article 1279, par. 1, because a
guarantor is subsidiarily liable, nor principally bound.

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WHEN IS THERE CONVENTIONAL OR VOLUNTARY COmpensation?

When the parties may agree upon the compensation of debts which are
not yet due (Article 1282). Here the requisites mentioned in Article 1279 do not
apply.

WHEN IS THERE JUDICIAL COMPENSATION OR SET-OFF?

If one of the parties to a suit over an obligation has a claim for damages
against the other, the former may set it off by proving his right to said damages
and the amount thereof. (Article 1283)

Pleading and proof of the counter-claim must be made. All the requisites
mentioned in Article 1279 must be present except that at the time of pleading, the
claim need not yet be liquidated. The liquidation (or fixing of the proper sum)
must be made in the proceedings.

MAY THERE BE COMPENSATION IF ONE OR BOTH DEBTS ARE RESCISSIBLE OR
ANNULABLE?

When one or both debts are rescissible or voidable, they may be
compensated against each other before they are judicially rescinded or avoided
(Article 1284). This is so because these debts are valid until rescinded or voided,
hence compensation is allowed.

WHAT IS THE EFFECT OF ASSIGNMENT ON COMPENSATION OF DEBTS?

1. The debtor who has consented to the assignment of rights made by a
creditor in favor of a third person, cannot set up against the assignee the
compensation which would pertain to him against the assignor, unless the
assignor was notified by the debtor at the time he gave his consent, that he
reserved his right to the compensation.
2. If the creditor communicated the cession to him but the debtor did not
consent thereto, the latter may set up the compensation of debts previous
to the cession, but not of subsequent ones.
3. If the assignment is made without the knowledge of the debtor, he may
set up the compensation of all credits prior to the same and also later ones
until he had knowledge of the assignment. (Article 1285)

WHEN IS THERE COMPENSATION BY OPERATION OF LAW?

Compensation takes place by operation of law, even though the debts may
be payable at different places, but there shall be an indemnity for expenses of
exchange or transportation to the place of payment. (Article 1286)
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This takes place when all the requisites mentioned in article 1279 are
present, compensation takes effect by operation of law, and extinguishes both
debts to the concurrent amount, even though the creditors and debtors are not
aware of the compensation. (Article 1290)

WHAT RULE SHOULD BE APPLIED IF A PERSON SHOULD HAVE AGAINST HIM
SEVERAL DEBTS WHICH ARE SUSCEPTIBLE OF COMPENSATION?

If a person should have against him several debts which are susceptible of
compensation, the rules on the application of payments shall apply to the order
of the compensation. (Article 1289)

SECTION 6
Novation

DEFINE NOVATION.

Novation is the substitution or change of an obligation by another,
resulting in its extinguishment or modification, either by:

1. Changing its object or principal conditions, or
2. By substituting another in place of the debtor, or
3. By subrogating a third person in the rights of the creditor (Article 1291).

It is one of the modes of extinguishing obligations through the creation of a
new one effected by the change or substitution of an obligatory relation by
another with the intention of substantially extinguishing or modifying the same.

WHAT ARE THE KINDS OF NOVATION?

Novation may be classified into:

1. AS TO ITS ESSENCE it may be:

a) Objective or real when it refers to the change either in the
cause, object of principal conditions of the obligation (Article
1291, No. 1);
b) Subjective or personal when the substitution of another in
the person of the debtor or to the subrogation of a third
person in the rights of the creditor (Article 1291, Nos. 2 and
3). Kinds:

a. Passive when there is substitution of the debtor.
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b. Active when there is subrogation in the rights of
the creditor.
c. Mixed when there is combination of objective and
subjective novation.

2. AS TO ITS FORM it may be:

a) Express when it is declared in unequivocal terms that the
obligation is extinguished by a new one which substitutes the same.
b) Tacit when the old and the new obligations are incompatible with
each other on every point (Article 1292).

3. AS TO ITS EXTENT OR EFFECT it may be total or partial, depending upon
whether there is an absolute extinguishment of the old obligation or
merely a modification.

WHAT REQUISITES MUST CONCUR IN ORDER THAT AN OBLIGATIN SHALL BE
EXTINGUISHED OR MODIFIED BY NOVATION?

In order that an obligation may be extinguished by another which
substitute the same, there are four requisites:

a. A previous valid obligation;
b. Agreement of the parties to the new obligation;
c. Extinguishment of the old obligation; and
d. Validity of the new obligation (Tiu Siuco vs. Habana, 45 Phil. 707).

WHEN CAN AN OBLIGATION BE IMPLIEDLY EXTINGUISHED BY ANOTHER
WHICH SUBSITUTE THE SAME?

In order that an obligation may be extinguished by another which
substitutes the same, it is imperative that it be so declared in unequivocal terms,
or that the old and the new obligations be on every point incompatible with each
other. (Article 1292)

The test of incompatibility between the old and the new obligations is to
determine whether or not both of them can stand together, each having its own
independent existence. If they can stand together, there is no incompatibility;
consequently, there is no novation. If they cannot stand together, there is
incompatibility; consequently, there is novation (Borja vs. Mariano, 66 Phil. 93;
Guerrero vs. Court of Appeals, 29 SCRA 791; Millar vs. Court of appeals, 38 SCRA
642).

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SUPPOSE THAT IN A SECOND AND NEW CONTRACT, THE DEBTOR
ACKNOWLEDGES OR RATIFIES THE OLD CONTRACT, IS THERE NOVATION?

There is no novation. It is clear that the first contract and the second
contract can stand together; and consequently, there can be no incompatibility
between them (Ramos vs. Gibbon, 67 Phil. 371; Padilla vs. Levy Hermanos, Inc., 69
Phil. 681; Pablo vs. Sapungan, 71 Phil. 145; Magdalena Estate, Inc. vs. Rodriguez, 18
SCRA 967; Millar vs. Court of Appeals, supra).

SUPPOSE THAT IN THE SECOND AND NEW CONTRACT, THERE IS A
POSTPONEMENT OF THE DATE OF PAYMENT OR AN EXTENSION OF THE PERIOD OF
PAYMENT, IS THERE A NOVATION?

There is no novation because in such cases there is no clear case of
incompatibility between the 2 obligations; neither is there a change in the
obligatory relation between the parties which will alter the essence of the old
obligation (Ynchausti & Co., vs. Yulo, 34 Phil. 978; Pascual vs. Lacsamana, 100 Phil.
381; La Tonden!a, Inc. vs. Alto Surety & Insurance Co., 101 Phil. 879).

SUPPOSE THAT IN A SECOND AND NEW CONTRACT, THERE IS ANOTHER
METHOD OF PAYMENT AGREED UPON, OR THERE IS AN ADDITIONAL SECURITY, IS
THERE A NOVATION?

There is no novation. It is clear that the two contracts can stand together;
and consequently, there can be no incompatibility between them (Zapanta vs. De
Rotaeche, 21 Phil. 154; Bank of the P.I. vs. Herridge, 47 Phil. 57; Millar vs. Court of
Appeals, supra).

SUPPOSE THAT IN A SECOND AND NEW CONTRACT, A SURETY BOND IS FILED,
OR A THIRD PERSON ASSUMES PAYMENT OF THE OBLIGATION AND THE CREDITOR
ACCEPTS PARTIAL PAYMENTS FORM SUCH THIRD PERSON, IS THERE A NOVATION?

There is no novation so long as there is no agreement that the first debtor
shall be released from responsibility. This is so even when a surety bond is filed,
for the simple reason that such bond is not a new and separate contract but
merely an accessory of the original contract. In such a case, the third person who
has assumed payment of the obligation merely becomes a co-debtor or surety. If
there is no agreement as to solidarity, the first and second debtors are considered
obligated jointly (Dungo vs. Lopena, 6 SCRA 1007; Magdalena Estate, Inc. vs.
Rodriguez, supra).

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WHAT ARE THE 2 FORMS OF NOVATION BY SUBSTITUTION OF THE PERSON OF
THE DEBTOR? DEFINE THEM AND GIVE THEIR ESSENTIAL REQUISITES.

There are 2 forms of novation by substitution:

a. Expromision If the substitution of debtors is effected with the consent of
the creditor at the instance of the new debtor even without the knowledge
or against the will of the debtor. There are two 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.

b. Delegacion If the substitution of debtors is effected with the consent of
the creditor at the instance of the old debtor with the concurrence of the
new debtor. In other words, delegacion refers to the substitution of debtors
effected when the original debtors offers and the creditor accepts a third
person who consents to the substitution.

REQUISITES OF EXPROMISION:

a. The initiative for the substitution must emanate from the new debtor; and
b. There must be consent of the creditor to the substitution.
REQUISITES OF DELEGACION:

a) The initiative for the substitution must emanate from the old debtor;
b) Consent of the debtor; and
c) Acceptance by the creditor.

IN EXPROMISION, SUPPOSE THAT THE NEW DEBTOR EVENTUALLY PAID THE
OBLIGATION WHEN IT BECAME DUE AND DEMANDABLE, WHAT ARE THE RIGHTS
WHICH ARE AVAILABLE TO HIM?

According to Article 1293, payment by the new debtor gives him the right
mentioned in Article 1236 and 1237. Consequently

a) If the substitution was effected with the knowledge and consent of the
original debtor; and consequently, payment is made by the new debtor
with or without the knowledge and consent of the original debtor, the
new debtor cannot demand reimbursement form the original debtor the
entire amount which he has paid and, at the same time, be subrogated to
all the rights of the creditor (Article 1236, 1237, 1302, 1303)
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b) If the substitution was effected without the knowledge and consent of the
original debtor, and consequently, payment is made by the new debtor
again without the knowledge and consent of the original debtor; the new
debtor can demand reimbursement from the original debtor only insofar
as the payment has been beneficial to such debtor; but he cannot be
subrogated to the rights of the creditor. However, if payment is made with
the knowledge and consent of the original debtor, although the
substitution had been effected without his knowledge and consent, the
new debtor can still demand reimbursement from the original debtor of
the entire amount which he has paid and, at the same time, be subrogated
to all the rights of the creditor (Articles 1236, 1237, 1302, 1303).

IN DELEGACION, SUPPOSE THAT THE NEW DEBTOR EVENTUALLY PAID THE
OBLIGATION WHEN IT BECAME DUE AND DEMANDABLE, WHAT ARE THE RIGHTS
WHICH ARE AVAILABLE TO HIM?

According to Article 1293, payment by the new debtor gives him the
rights mentioned in Articles 1236 and 1237. Consequently, since the substitution
was effected with the consent of all the parties, the new debtor (delegado) can
demand reimbursement from the original debtor (delegante) of the entire amount
which he has paid (Article 1236) as well as compel the creditor (delegatorio) to
subrogate him in all of his rights (Articles 1302 and 1303).

IN EXPROMISION, IF THE NEW DEBTOR IS UNABLE TO PAY THE OBLIGAION BY
REASON OF INSOLVENCY, CAN THE CREDITOR THEN PROCEED AGAINST THE OLD
DEBTOR FOR PAYMENT?

According to Article 1294, if the substitution was effected without the
knowledge or against the will of the original debtor, the new debtors insolvency
or non-fulfillment of the obligation shall not revive the original debtors liability
to the creditor. Thus, if the substitution was effected with the knowledge and
consent of the original debtor, the new debtors insolvency or non-fulfillment of
the obligation shall revive the original debtors liability to the creditor.

IN DELEGACION, IF THE NEW DEBTOR IS UNABLE TO PAY THE OBLIGATION BY
REASON OF INSOLVENCY, CAN THE CREDITOR THEN PROCEED AGAINST THE OLD
DEBTOR FOR PAYMENT?

If the substitution was effected by delegacion, according to Article 1295, the
right of action of the creditor can no longer be revived except in the following
cases:

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a) When the insolvency of the new debtor (delegado) was already existing and
of public knowledge at the time when the original debtor (delegante)
delegated his debt;
b) When such insolvency was already existing and known to the original
debtor (delegante) when he delegated his debt.

PURPOSE OF THE TWO EXCEPTIONS:

The purpose of the two exceptions is to prevent the commission of fraud.
With regard to the first exception, the condition of the insolvency of the delegado
was of public knowledge and should exist at the time the delegation was made,
because if it were otherwise, the delegante cannot then be held responsible since
he himself was not aware of it.

WHAT IS THE EFFECT OF NOVATION ON ACCESSORY OBLIGATION?

When the principal obligation is extinguished in consequence of a
novation, accessory obligations may subsist only insofar as they may benefit
third persons who did not give their consent. (Article 1296)

This Article applies to extinctive novation. If the novation is merely
modificatory, the rules as to guarantors who did not consent are as follows:

a. If the modified obligation is more onerous, they are liable
only for the original obligation;
b. If the modified obligation is now less onerous, the
guarantors and sureties are still responsible.

WHAT IS THE EFFECT OF NOVATION IF (1) THE NEW OBLIGATION IS VOID OR (2)
IF THE OLD OBLIGATION WAS VOID, OR (3) IF THE ORIGINAL OBLIGATION WAS
CONDITIONAL?

a) If the new obligation is void, the original one shall subsist, unless the
parties intended that the former relation should be extinguished in any
may be agreed upon. (Article 1297)
b) The novation is void if the original obligation was void, except when
annulment may be claimed only by the debtor, or when ratification
validates acts which are voidable. (Article 1298)
c) If the original obligation was subject to a suspensive or resolutory
condition, the new obligation shall be under the same condition, unless it
is otherwise stipulated. (Article 1299)

DEFINE SUBROGATION.

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Subrogation (extinctive and subjective novation by change of the creditor)
is the transfer to a third person of all the rights appertaining to the creditor,
including the right to proceed against guarantors, or possessors of mortgages,
subject to any legal provision or any modification that may be agreed upon.

WHAT ARE THE 2 FORMS OF NOVATION BY SUBROGATING A THIRD PERSON IN
THE RIGHTS OF THE CREDITOR?

a) CONVENTIONAL SUBROGATION that which takes place by the agreement of
the original creditor, the third person substituting the original creditor
and the debtor (Articles 1300 and 1301).
b) LEGAL SUBROGATION that which takes place by operation of law (Articles
1300 and 1302).

DISTINGUISH BETWEEN CONVENTIONAL SUBROGATION AND ASSIGNMENT OF
RIGHTS.

a) AS TO THE Rules WHICH GOVERN Conventional subrogation is governed
by Articles 1300 to 1304, whereas assignment of rights is governed by
Articles 1624 to 1627.
b) AS TO THE NECESSITY OF DEBTORS CONSENT In conventional subrogation,
the debtors consent is required, whereas in assignment of rights it is not.
c) AS TO EFFECT UPON THE OBLIGATION Conventional subrogation has the
effect of extinguishing the obligation and giving rise to a new one,
whereas assignment of rights has the effect of transmitting the rights of
the creditor to another person without modifying or extinguishing the
obligation.
d) AS TO EFFECT UPON VICES In conventional subrogation, defects or vices in
the original obligation are cured, whereas in assignment of rights they are
not.
e) AS TO THE TIME OF EFFECTIVITY In conventional subrogation, the effect
arises from the moment of novation or subrogation, whereas in
assignment of rights the effect, as far as the debtor is concerned, arises
from the moment of notification.

WHAT ARE THE DIFFERENT EXCEPTIONS TO THE RULE THAT LEGAL
SUBROGATION CANNOT BE PRESUMED?

a) When a creditor pays another creditor who is preferred even without the
debtors knowledge;
b) When a third person, not interested in the obligation, pays with the
express or tacit approval of the debtor; and
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c) When, even without the knowledge of the debtor, a person interested in
the fulfillment of the obligation pays, without prejudice to the effects of
confusion as to the latters share (Article 1302)

WHAT IS THE EFFECT OF SUBROGATION?

If the subrogation is total, it transfers to the person subrogated the credit
with all the rights thereto appertaining either against the debtor or, against third
persons, be they guarantors or possessors of mortgages, subject to stipulation in
a conventional subrogation.

If the subrogation is partial, the same rule is applicable, but the creditor to
whom partial payment has been made may exercise his right for the remainder.
In other words, both the right of the subrogee and the right of the creditor shall
co-exist. In case of conflict between the 2, however, the right of the latter shall be
preferred (Article 1304).

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TITLE II
CONTRACTS

CHAPTER 1
GENERAL PROVISIONS

DEFINE 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
(Article 1305).

A contract is defined as a juridical convention manifested in legal form, by
virtue of which one or more persons bind themselves in favor of another or
others, or reciprocally, to the fulfillment of a prestation to give, to do, or not to do
(Jardine Davies vs. CA, G.R. No. 12066, June 19, 2000).

In its broadest sense, a contract has likewise been defined as an agreement
whereby at least one of the parties acquires a right, either in rem or in personam, in
relation to some person, thing, act or forbearance.

DISTINGUISH A CONTRACT FROM AN OBLIGATION.

Contract is the cause, whereas obligation is the effect. There are five
sources of obligations, one of which is contract. Consequently, there can be an
obligation without a contract, but there can be no contract without a resultant
obligation.

WHAT ARE THE ELEMENTS OF A CONTRACT?

The elements of a contract may be classified as follows:

a. ESSENTIAL The essential elements are those without which there can be
no contract. The elements are, in turn, subdivided into:

a) Common those which are present in all contracts, such as consent,
object certain and cause.
b) Special those which are present only in certain contracts, such as
delivery in real contracts or form in solemn ones.
c) Extraordinary those which are peculiar to a specific contract, such
as the price in a contract of sale.

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b. NATURAL - The natural elements are those which are derived from the
nature of the contract and ordinarily accompany the same. They are
presumed by law, although they can be excluded by the contracting
parties if they so desire. Thus, warranty against eviction is implied in a
contract of sale, although the contracting parties may increase, diminish or
even suppress it.

c. ACCIDENTAL The accidental elements are those which exist only when
the parties expressly provided for them for the purpose of limiting or
modifying the normal effects of the contract. They are called accidental
because they may be present or absent, depending upon whether or not
the parties have agreed upon them. Examples of these are conditions,
terms and modes.

WHAT ARE THE CLASSIFICATIONS OF CONTRACTS?

a. ACCORDING TO PERFECTION OR FORMATION:

a) Consensual perfected by mere consent; example sale
b) Real perfected by delivery; examples depositum, pledge,
commodatum
c) Formal or solemn those were special formalities are essential
before the contract may be perfected; example donation inter vivos
of real property requires for its validity a public instrument.

b. ACCORDING TO CAUSE OR EQUIVALENT OF THE VALUE OF PRESTATIONS:

a) Onerous when there is an interchange of equivalent valuable
consideration
b) Gratuitous or lucrative this is free, this one party receives no
equivalent prestation
c) Remunerative one where one prestation is given for a benefit or
service that had been rendered previously.
c. ACCORDING TO IMPORTANCE OF ONE UPON ANOTHER:

a) Principal the contract may stand alone by itself; example, sale,
lease
b) Accessory this depends for its existence upon another contract;
example, mortgage where the principal contract is one of loan.
c) Preparatory here, the parties do not consider the contract as an
end by itself, but as a means thru which future transaction or
contracts may be made; examples, agency, partnership

d. ACCORDING TO THE PARTIES OBLIGATED:
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a) Unilateral where only one of the parties has an obligation;
example, commodatum
b) Bilateral where both parties are required to render reciprocal
prestations; example, sale

e. ACCORDING TO THEIR DESIGNATION:

a) Nominate where the contract is given a particular or special name
like commodatum, partnership, agency, sale, deposit
b) Innominate those which are not given any special name; they lack
individuality and are not regulated by special provisions of law.
These contracts shall be regulated by the stipulation of the parties;
by the general principles of obligations and contracts, by the rules
governing the most analogous nominate contracts, and by the
customs of the place. Example:

1) Du ut des - I give that you give.
2) Du ut facias I give that you do.
3) Facio ut facias I do that you do.

f. ACCORDING TO THE RISK OF FULFILLMENT:

a) Commulative where the parties contemplate a real fulfillment;
therefore, equivalent values are given, like sale, lease
b) Aleatory where the fulfillment is dependent upon chance, thus
the values may vary because of the risk or chance, like an insurance
contract.

g. ACCORDING TO THE TIME OF PERFORMANCE OR FULFILLMENT:

a) Executed one completed at the time the contract is entered into,
that is, the obligations are complied with at this time; example, a
sale of property which has already been delivered and which has
already been paid for.
b) Executory one where the prestations are to be complied with at
some future time; example, a perfected sale where the property has
not yet been delivered and where the price has not yet been given

h. ACCORDING TO SUBJECT MATTER:

a) Contracts involving things (like sale)
b) Contracts involving rights and credits (like usufruct or assignment
of credits)
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c) Contracts involving services (like agency, contract of common
carrier)

i. ACCORDING TO OBLIGATIONS IMPOSED AND REGARDED BY THE LAW:

a) Ordinary like sale
b) Institutional like contract of MARRIAGE

j. ACCORDING TO THE EVIDENCE FOR ITS PROOF:

a) Those requiring merely oral or parol evidence
b) Those requiring written proof (like contracts enumerated under the
Statute of Frauds)

k. ACCORDING TO THE NUMBER OF PERSONS ACTUALLY AND PHYSICALLY
ENTERING INTO THE CONTRACT:

a) Ordinary where two parties are represented by different persons,
like sale
b) Auto-contracts where only one person represents two opposite
parties but in different capacities

l. ACCORDING TO THE NUMBER OF PERSONS WHO PARTICIPATED IN THE DRAFTING
OF THE CONTRACT:

a) Ordinary like an ordinary sale
b) Contract of adhesion like one prepared by a real estate company
for the sale of real estate; or one prepared by an insurance company
where the buyer or the person interested in being insured signifies
his consent by signing the contract
m. ACCORDING TO THE NATURE OF THE CONTRACT:

a) Personal
b) Impersonal

WHAT ARE THE DIFFERENT PHASES/ STAGES IN THE LIFE OF A CONTRACT?

a) PREPARATION OR GENERATION where the parties are progressing with
their negotiations; they have not yet arrived to any definite agreement,
although there may have been a preliminary offer and bargaining.
Negotiation covers the period from the time the prospective contracting
parties indicate interest in the contract to the time the contract is
concluded (perfected).
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b) PERFECTION OR BIRTH where the parties have at long last came to a
definite agreement, the elements of definite subject matter and valid cause
have been accepted by mutual consent. The perfection takes place upon
the concurrence of the essential elements thereof.
c) CONSUMMATION where the terms of the contract are performed, and the
contract may be said to have been fully executed. The stage of
consummation begins when the parties perform their respective
undertakings under the contract culminating in the extinguishment
thereof.

WHAT ARE THE BASIC PRINCIPLES OR CHARACTERISTICS OF A CONTRACT?

a) FREEDOM TO STIPULATE OR AUTONOMY OF CONTRACTS the contracting
parties are free to enter into a contract and to establish such stipulations,
clauses, terms and conditions as they may deem convenient provided they
are not contrary to law, morals, good customs, public order, or public
policy
b) OBLIGATORY FORCE OR CHARACTER OF CONTRACTS AND COMPLIANCE IN GOOD
FAITH once the contract has been perfected, it shall be of obligatory force
upon both of the contracting parties
c) PERFECTION BY MERE CONSENT as a rule
d) BOTH PARTIES ARE MUTUALLY BOUND OR MUTUALLY OF CONTRACTS the
essential equality of the contracting parties whereby the contract must
bind both of them
e) RELATIVITY generally, it is binding only between the parties, their assigns
and heirs.

WHAT ARE THE LIMITATIONS UPON THE RIGHT OF THE CONTRACTING
PARTIES TO ESTABLISH SUCH STIPULATIONS, CLAUSES, TERMS, AND CONDITIOS AS
THEY MAY DEEM CONVENIENT?

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

This is the principle of freedom to stipulate or autonomous nature of
contracts. Freedom to stipulate terms and conditions is the essence if the
contractual system provided such stipulations are not contrary to law, morals,
good customs, public order, or public policy. This freedom also prohibits a party
from coercing or intimidating or unduly influencing another to enter into a
contract.
WHAT LAWS GOVERN CONTRACTS?

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It is a rule that only laws existing at the time of the execution of a contract
are applicable thereto and that later statutes do not govern contracts unless the
latter is specifically intended to have a retroactive effect. A later law which
enlarges, abridges or in any manner changes the intent of the parties to the
contract necessarily impairs the contract itself and cannot be given retroactive
effect without violating the constitutional prohibition against impairment of
contracts. However, non-impairment of contracts or vested rights clauses will
have to yield to the superior and legitimate exercise by the State of police power.

WHAT ARE THE KINDS OF INNOMINATE CONTRACTS AND HOW ARE THEY
REGULATED?

1) Du ut des - I give that you give.
2) Du ut facias I give that you do.
3) Facio ut facias I do that you do

Innominate contracts shall be regulated by:

1) The stipulations of the parties,
2) The provisions of Titles I and II of this Book,
3) The rules governing the most analogous nominate contracts, and
4) The customs of the place (Article 1307).

WHAT IS MEANT BY MUTUALITY OF CONTRACTS?

The mutuality of contracts refers to the position of essential equality
which must be occupied by both of the contracting parties in relation of the
contract.

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

CAN THE DETERMINATION OF THE PERFORMANCE BE LEFT TO A THIRD
PERSON?

The determination of the performance may be left to a third person, whose
decision shall not be binding until it has been made known to both contracting
parties (Article 1309).

WHEN IS THE DECISION OF THE THIRD PERSON BINDING?

The determination shall not be obligatory if it is evidently inequitable. In
such case, the courts shall decide what is equitable under the circumstances
(Article 1310).
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WHAT IS MEANT BY RELATIVITY OF CONTRACTS?

Relativity of contracts refers to the principle of the civil law that a contract
can only bind the parties who had entered into it or their successors who have
assumed their personality or their judicial position, and that, as a consequence,
such contract can neither favor or prejudice a third person, in conformity with
the axiom res inter alios acta aliis nocet prodest (the act, declaration, or omission of
another, cannot affect another, except as otherwise provided by law or
agreement) [Vide Section 25, Rule 130, Rules of Evidence]. Thus Article 1311
declares that contracts take effect only between the parties, their assigns and
heirs.

WHAT ARE THE EXCEPTIONS TO THE PRINCIPLE OF RELATIVITY (WHERE A
CONTRACT MAY EITHER FAVOR OR PREJUDICE A THIRD PERSON)?

a) Where the rights and obligations arising from the contract are not
transmissible by their nature, or by stipulation or by provision of law. The
heir is not liable beyond the value of the property he received from the
decedent (Article 1311).
b) Stipulation Pour Autrui where a contract contains a beneficial stipulation
in favor of a third person provided he communicated his acceptance to the
obligor before its revocation. (Article 1311, par. 2).
c) In contracts creating real rights where third persons come into possession
of the object of the contract, subject to the provisions of the Mortgage Law
and the Land Registration Laws (Article 1312).
d) Where the contract is entered into in order to defraud a third person, in
which case, creditors are protected in cases of contracts intended to
defraud them (Article 1313).
e) Where the third person induces a contracting party to violate his contract.
The third person who induces another to violate his contract shall be liable
for damages to the other contracting party (Article 1314). This is called
TORT INTERFERENCE.
f) Where, in some cases, third persons may be adversely affected by a
contract where they did not participate (Articles 2150, 2151).
g) Where the law authorizes the creditor to sue on a contract entered into by
his debtor (Accion Directa).

WHAT IS MEANT BY STIPULATION POUR AUTRUI? WHAT REQUISITES MUST
CONCUR IN ORDER THAT SUCH A STIPULATION MAY BE ENFORCED?
A stipulation pour autrui is a stipulation in a contract, clearly and
deliberately conferred by the contracting parties as a favor upon a third person
who must accept it.

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Before such a stipulation may be enforced, it is necessary that the

a) That it must be for the benefit or interest of the third person;
b) The stipulation must be a part, not the whole of the contract;
c) That such benefit or interest must not be merely incidental;
d) That the contracting parties should have clearly and deliberately
conferred such benefit or interest upon the third person;
e) That neither of the contracting parties bears the legal representation or
authorization of the third party; and
f) That the third person should have communicated his acceptance or
interest to the obligor before its revocation (Article 1311, par. 2).

It is not, however necessary that such third person be always named in the
contract.

WHAT ARE THE REQUISITES FOR TORT INTERFERENCE?

a) Existence of a valid contract;
b) Knowledge on the part of the third person of the existence of contract; and
c) The interference of the third person is without legal justification or excuse.

HOW ARE CONTRACTS PERFECTED?

Distinguish:

a) If the contract is consensual (Consensuality of Contracts)

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

b) If the contract is real-

Real contracts, such as deposit, pledge and commodatum, are not
perfected until the delivery of the object of the obligation (Article 1316).

MAY A PERSON CONTRACT IN THE NAME OF ANOTHER? WHAT ARE THE
EFFECTS?

No one may contract in the name of another, except when

1. He has been authorized or
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2. Unless he has by law a right to represent him,
or
3. Unless it is ratified, expressly or impliedly, by
the person on whose behalf it has been
executed, before it is revoked by the other
contracting party (Article 1317).

A contract entered into in the name of another by one who has no
authority or legal representation, or who has acted beyond his powers, shall be
unenforceable (Article 1317, par 2.).

CHAPTER 2
ESSENTIAL REQUISITES OF CONTRACTS
GENERAL PROVISIONS

WHAT ARE THE ESSENTIAL REQUISITES OF A CONTRACT?

There is no contract unless the following requisites concur:

(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of the contract;
(3) Cause of the obligation which is established (Article 1318).

This applies to consensual contracts. If the contract is real, a fourth
requisite delivery is required, if the contract is formal or solemn, there must
be compliance with the formalities required by law.

When the law uses the word concur, it means that all the three (3)
requisites must be present. The absence of one requisite negates the existence of a
contract.

SECTION 1
CONSENT

WHAT IS MEANT BY CONSENT?

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As applied to contracts, consent signifies the concurrence of the wills of
the contracting parties with respect to the object and the cause which shall
constitute the contract.

It is the concurrence of the will of the offerer and the acceptor as to the
thing and the cause which constitute a contract. An offer is a manifestation of a
willingness to enter into a bargain so made as to justify another person in
understanding that his assent to that bargain is invited and will conclude it.

It is manifested by the meeting of the offer and the acceptance upon the
thing and the cause which are to constitute the contract (Article 1319).

WHAT ARE THE REQUISITES OF CONSENT?

In order that there is consent, the following elements must concur:

1. The consent must be manifested by the concurrence
of the offer and the acceptance (Articles 1319-1326).
2. The contracting parties must possess the necessary
legal capacity (Articles 1327-1329)
3. The consent must be intelligent, free, spontaneous
and real (Articles 1330-1346).

The first is expressly stated in the Code; the second and third are implied.

WHEN ARE CONTRACTS PERFECTED?

In general, contracts are perfected from the moment there is a
manifestation of the concurrence between the offer and the acceptance with
respect to the object and the cause which shall constitute the contract (Article
1319, par. 1).

However, if the acceptance is made by letter or telegram, we must
distinguish. According to Article 1319, par. 2, the contract is perfected from the
moment that the offeror has knowledge of such acceptance. The said article
provides that Acceptance made by letter or telegram does not bind the offerer
except from the time it came to his knowledge. The contract, in such a case, is
presumed to have been entered into in the place where the offer was made.

An acceptance may be express or implied (Article 1320).

WHAT ARE THE DIFFERENT THEORIES AS APPLIED TO PERFECTION OF
CONTRACTS?
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There are actually four different theories which have been advanced in
order to pin-point the exact moment when a contract is perfected if the
acceptance by the offeree is made by a letter or telegram. They are:

1. MANIFESTATION THEORY the contract is perfected from the
moment the acceptance is declared or made. This is the
theory which is followed by the Code of Commerce.
2. EXPEDITION THEORY the contract is perfected from the
moment the offeree transmits the notification of acceptance
to the offeror, as when the letter is placed in the mailbox.
This is the theory which is followed by the majority if
American courts.
3. RECEPTION THEORY the contract is perfected the moment
that the notification of acceptance is in the hand of the
offeror in such a manner that he can under conditions,
procure the knowledge of its contents, even if he is not able
actually to acquire such knowledge by reason of absence,
sickness or some other cause. This is the theory which is
followed by the German Civil Code.
4. COGNITION THEORY the contract is perfected from the
moment the acceptance comes to the knowledge of the
offeror. This is the theory followed in the Philippines as
provided by Article 1319 of the Civil Code.

X SENT A LETTER TO Y AND OFFERED HIS HOUSE AND LOT FOR SALE. TWO
DAYS AFTER RECEIPT, Y SENT X A LETTER ACCEPTING THE OFFER, BUT WHEN THE
LETTER OF ACCEPTANCE REACHED XS RESIDENCE, HE WAS ALREADY DEAD. WAS
THERE A MEETING OF THE MINDS?

None. Acceptance made by a letter does not bind the offerer except from
the time it came to his knowledge (Article 1319). Since X was already dead when
the letter of acceptance reached his residence, he could not have known the said
acceptance.

SUPPOSE THE ACCEPTANCE WAS COMMUNICATED TO THE AGENT OF X WHO
WAS ALIVE AT THE TIME HIS AGENT CAME TO KNOW OF SUCH ACCEPTANCE, IS THERE
A BINDING CONTRACT?

Yes, because the act of the agent or knowledge acquired by the agent duly
authorized is also the act of the principal, provided tat he acted within the scope
of his authority.

IF THERE IS AN OFFER AND THERE IS AN ACCEPTANCE WITH CONDITIONS, IS
THERE A PERFECTED CONTRACT?
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None, because an offer must be clear and definite while an acceptance
must be unconditional in order that their concurrence can give rise to a perfected
contract. If there are conditions imposed, there is no meeting of the minds, as the
same is a mere counter-offer.

WHAT ARE THE THINGS THAT MAY BE FIXED BY THE OFFEROR?

The person making the offer may fix the time, place, and manner of
acceptance, all of which must be complied with (Article 1321).

WHEN IS THERE ACCEPTANCE WHEN OFFER IS MADE THRU AN AGENT?

An offer made through an agent is accepted from the time acceptance is
communicated to him (Article 1322).

WHEN DOES AN OFFER BECOME INEFFECTIVE?

An offer becomes ineffective upon the death, civil interdiction, insanity, or
insolvency of either party before acceptance is conveyed (Article 1323)

The phrase before acceptance is conveyed means before acceptance has
come to the actual knowledge of the offeror.

WHAT IS THE NATURE AND CONCEPT OF A CONTRACT OF ADHESION?

A contract of adhesion is one where its terms are prepared by only one
party while the other party merely affixes his signature signifying his adhesion
thereto. Such contracts are not void in themselves. They are binding as ordinary
contracts. However, contracts of adhesion are construed against the party
preparing such contracts.

WHAT IS AN OPTION?

It is a contract granting a person the privilege to buy or not to buy certain
objects at anytime within the agreed period at a fixed price. The contract of
option is a separate and distinct contract from the contract which the parties may
enter into upon the consummation of the contract. Therefore, an option must
have its own cause or consideration, a cause distinct from the selling price itself.

WHAT IS THE RULE ON OPTIONS?
When the offerer has allowed the offeree a certain period to accept, the
offer may be withdrawn at any time before acceptance by communicating such
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withdrawal, except when the option is founded upon a consideration, as
something paid or promised (Article 1324).

Thus, we must distinguish between the effect of an option which is
without a consideration and one which is founded upon a consideration upon
the right of the offeror to withdraw his offer or proposal. If the option is without
any consideration, the offeror may withdraw his offer by communicating such
withdrawal to the offeree at any time before acceptance; if it is founded upon a
consideration, the offeror can not withdraw his offer. Upon the expiration of the
option period and the person given such option does not manifest his or her
acceptance, the offeror may offer the intended contract to somebody else.

DISTINGUISHED FROM EARNEST MONEY:

Option money in an option contract must be differentiated from an
earnest money. Earnest money is considered part of the price in a contract of sale
and can be proof of perfection of the contract. However, it is not the giving of the
earnest money per se but the proof of the concurrence of all the essential elements
of the contract of sale which establishes the existence of a perfected sale.

WHAT IS THE RULE WITH RESPECT TO BUSINESS ADVERTISEMENTS AND
ADVERTISEMENTS FOR BIDDERS?

a) Unless it appears otherwise, business advertisements of things for
sale are not definite offers, but mere invitations to make an offer
(Article 1325).
b) Advertisements for bidders are simply invitations to make
proposals, and the advertiser is not bound to accept the highest or
lowest bidder, unless the contrary appears (Article 1326).

WHO ARE INCAPACITATED TO GIVE THEIR CONSENT?

The following cannot give consent to a contract:

a) Unemancipated minors;
b) Insane or demented persons, and deaf-mutes who do not know how to write
(Article 1327) ;
c) Deaf-mutes who do not know how to write;
d) Married women of age in cases specified by law;
e) Persons suffering from civil interdiction; and
f) Incompetents under guardianship (Rules 93-94, Rules of Court).
The incapacity declared in article 1327 is subject to the modifications
determined by law, and is understood to be without prejudice to special
disqualifications established in the laws (Article 1329).
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Under the Family Code, emancipation takes place by the attainment of the
age of majority and, unless otherwise provided, majority commences at the age
of eighteen years.

WHAT ARE THE EXCEPTIONS TO THE RULE THAT A CONTRACT ENTERED INTO
BY AN UNEMANCIAPTED MINOR WITHOUT THE CONSENT OF HIS PARENTS OR
GUARDIAN IS VOIDABLE?

a) Where the contract is entered into by a minor who misrepresents his age,
applying the doctrine of estoppel;
b) Where the contract involves the sale and delivery of necessaries to the
minor (Article 1489, par. 2);
c) Where it involves a natural obligation and such obligation is voluntarily
fulfilled by the minor (Articles 1426 and 1427);

WHAT IS THE STATUS OF A CONTRACT ENTERED INTO DURING LUCID
INTERVALS, IN A STATE OF DRUNKENESS OR DURING HYPNOTIC SPELLS, OR WHEN
CONSENT WAS GIVEN THROUGH MISTAKE, VIOLENCE, INTIMIDATION, UNDUE
INFLUENCE OR FRAUD?

Contracts entered into during a lucid interval are valid. Contracts agreed
to in a state of drunkenness or during a hypnotic spell are voidable (Article 1328).

Lucid interval is that period of time when an insane person acts with
reasonable understanding, comprehension and discernment with respect to what
he is doing.

Contracts entered into a state of drunkenness may likewise be annullable.
However, the intoxication must be of such character as to perpetuate undue
advantage over the drunken person.
A contract where consent is given through mistake, violence, intimidation,
undue influence, or fraud is voidable (Article 1330)

WHAT ARE THE VICES OF CONSENT?

a) VICES OF THE WLL - mistake, violence, intimidation, undue influence, or
fraud (Article 1330)
b) VICES OF DECLARATION comprehends all forms of simulated contracts.

WHAT ARE THE REQUISITES IN ORDER THAT MISTAKE MAY INVALIDATE
CONSENT?

In order that mistake may invalidate consent, it should refer to:
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a) The substance of the thing which is the object of the contract, or
b) Those conditions which have principally moved one or both parties to
enter into the contract.

DEFINE MISTAKE OF FACT AND MISTAKE OF LAW.

There is mistake of fact when one or both of the contracting parties believe
that a fact exists when in reality it does not, or that such fact does not exist when
in reality it does. On the other hand, there is a mistake of law when one or both
of the contracting parties arrive at an erroneous conclusion regarding the
interpretation of a question of law or the legal effects of a certain act or
transaction.

WHICH OF THESE MISTAKES CAN VITIATE CONSENT RENDERING THE
CONTRACT VOIDABLE?

As a general rule, it is only a mistake of fact which will vitiate consent,
thus rendering the contract voidable; a mistake of law, on the other hand, does
not render the contract voidable because of the well-known principle that
ignorance of the law does not excuse anyone from compliance therewith.

WHAT MISTAKES OF FACT WILL RENDER A CONTRACT VOIDABLE?

a) MISTAKE AS TO THE OBJECT OF THE CONTRACT (Error in re) This may refer
to:

1) Mistake as to the identity of the thing, or
2) Mistake as to the substance of the thing, or
3) Mistake as to the condition of the thing, provided such condition
has principally moved one or both of the parties to enter into the
contract; or
4) Mistake as to the quantity of the thing, provided that the extent or
dimension of the thing was one of the principal reasons of one or
both of the parties for entering into the contract.

b) MISTAKE AS TO PERSON:

1) Mistake as to the identity or qualifications of one of the parties will
vitiate consent only when such identity or qualifications have been
the principal cause of the contract.
2) A simple mistake of account shall give rise to its correction (Article
1331).

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WHAT IS THE RULE IN CASE OF INABILITY TO READ OR UNDERSTAND?

When one of the parties is unable to read, or if the contract is in a
language not understood by him, and mistake or fraud is alleged, the person
enforcing the contract must show that the terms thereof have been fully
explained to the former (Article 1332).

WHAT IS THE EFFECT OF KNOWLEDGE OF DOUBT OR RISK?

There is no mistake if the party alleging it knew the doubt, contingency or
risk affecting the object of the contract (Article 1333). It does not therefore vitiate
consent.

IS THERE ANY EXCEPTION TO THE RULE THAT A MISTAKE OF LAW CANNOT
VITIATE CONSENT RENDERING THE CONTRACT VOIDABLE?

Mistake of law as a rule will not vitiate consent? There is however an
exception to this rule. According to Article 1334, mutual error as to the legal
effect of an agreement when the real purpose of the parties is frustrated, may
vitiate consent.

Three requisites are therefore necessary:

a) The mistake or error must be with respect to the legal effect of an
agreement;
b) The mistake or error must be mutual; and
c) The real purpose of the parties must be frustrated.

WHAT IS MEANT BY VIOLENCE AND INTIMIDATION?

There is violence when in order to wrest consent, serious or irresistible
force is employed.

There is intimidation when one of the contracting parties is compelled by
a reasonable and well-grounded fear of an imminent and grave evil upon his
person or property, or upon the person or property of his spouse, descendants or
ascendants, to give his consent.
To determine the degree of intimidation, the age, sex and condition of the
person shall be borne in mind.

A threat to enforce one's claim through competent authority, if the claim is
just or legal, does not vitiate consent (Article 1335).

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WHAT ARE THE REQUISITES OF VIOLENCE AND INTIMIDATION WHICH WILL
RENDER THE CONTRACT VOIDABLE?

In order that consent is vitiated through violence, it is essential that the

a) The force employed to wrest consent must be serious and irresistible; and
b) It must be the determining cause for the party upon whom it is employed
in entering into the contract.

Intimidation, on the other hand, requires the concurrence of the following
requisites:

a) One of the contracting parties is compelled to give his consent by a
reasonable and well-grounded fear of evil;
b) The evil must be imminent and grave;
c) Upon his person, property, or upon the person or property of his spouse,
descendants, or ascendants.
d) The evil must be unjust, an actionable wrong; and
e) The evil must be the determining cause for the party upon whom it is
employed in entering into the contract.

DISTINGUISH BETWEEN VIOLENCE AND INTIMIDATION.

a) While violence is external, intimidation is internal
b) While violence prevents the expression of the will substituting it with a
material act dictated by another, intimidation influences the operation of
the will, inhibiting it in such a way that the expression thereof is
apparently that of a person who has freely given his consent.
c) Violence is physical compulsion, while intimidation is moral compulsion.

WHAT IS THE EFFECT IF VIOLENCE OR INTIMIDATION WAS EMPLOYED BY
THIRD PERSON?

Violence or intimidation shall annul the obligation, although it may have
been employed by a third person who did not take part in the contract (Article
1336).
WHAT IS MEANT BY UNDUE INFLUENCE?

There is undue influence when a person takes improper advantage of his
power over the will of another, depriving the latter of a reasonable freedom of
choice.

The following circumstances shall be considered:
Page 103 of 145


a. the confidential, family, spiritual and other relations between the parties,
or
b. the fact that the person alleged to have been unduly influenced was
suffering from mental weakness, or was ignorant or in financial distress
(Article 1337).

WHAT ARE THE REQUISITES FOR UNDUE INFLUENCE TO VITIATE CONSENT?

a) Improper advantage
b) Power of the will of another
c) Deprivation of the latters will of a reasonable freedom of choice

WHAT IS MEANT BY FRAUD?

There is fraud when, through insidious words or machinations of one of
the contracting parties, the other is induced to enter into a contract which,
without them, he would not have agreed to (Article 1338).

WHAT ARE THE DIFFERENT CLASSES OF CIVIL FRAUD?

Civil fraud may be classified as:

a. FRAUD IN THE PERFECTION [OR CELEBRATION] OF THE CONTRACT (Article 1338,
et seq.) Fraud which is employed by a party to the contract in securing
the consent of the other party. This may either be:

1) DOLO CAUSANTE OR CAUSAL FRAUD refers to those deceptions or
misrepresentations of a serious character employed by one party
without which the other party would not have entered into the
contract.
2) DOLO INCIDENTE OR INCIDENTAL FRAUD Refers to those incidental
deceptions and misrepresentations employed by one party without
which the other party would still have entered into the contract.

b. FRAUD IN THE PERFORMANCE OF THE OBLIGATION (Article 1170) Fraud
which is employed by the obligor in the performance of an existing
obligation

WHAT ARE THE REQUISITES OF FRAUD [DOLO CAUSANTE] WHICH WILL RENDER
A CONTRACT VOIDABLE?

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In order that the consent of a party to a contract is vitiated by fraud thus
rendering such contract voidable, it is essential that the following requisites must
concur:

a) Fraud or insidious words or machinations must be employed by one of
the contracting parties;
b) The fraud or insidious words or machinations must be serious;
c) There must be deliberate intent to deceive or to induce;
d) The fraud or insidious words or machinations must induce the other party
to enter into the contract, that is, the other party must have relied on the
untrue statement and must himself not be guilty of negligence in
ascertaining the truth; and
e) The fraud should not have been employed by both of the contracting
parties or by third persons.

DISTINGUISH BETWEEN DOLO CAUSANTE AND DOLO INCIDENTE.

Dolo causante (Article 1338) and Dolo incidente (Article 1344) may be
distinguished from each other in the following ways:

a) The first refers to a fraud which is serious in character, whereas the second
is not serious;
b) The first is the cause which induces the party upon whom it is employed
in entering into the contract, whereas the second is not the cause;
c) The effect of the first is to render the contract voidable, whereas the effect
of the second is to render the party who employed it liable for damages.

DOES FAILURE TO DISCLOSE FACTS TO THE OTHER PARTY, EXAGGERATION IN
TRADE, EXPRESSION OF AN OPINION CONSTITUTE FRAUD WHICH WILL RENDER A
CONTRACT VOIDABLE?

Failure to disclose facts, when there is a duty to reveal them, as when the
parties are bound by confidential relations, constitutes fraud (Article 1339).

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

WHAT IS THE EFFECT IF THERE IS MISREPRESENTATION BY THIRD PERSON?

Misrepresentation by a third person does not vitiate consent, unless:

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a) Such misrepresentation has created substantial mistake and
b) Such misrepresentation is mutual (Article 1342).

WHAT IS THE EFFECT OF MISREPRESENTATION MADE IN GOOD FAITH?

Misrepresentation made in good faith is not fraudulent but may constitute
error (Article 1343).

WHEN SHALL FRAUD MAKE A CONTRACT VOIDABLE? [REQUISITES FOR FRAUD
TO VITIATE CONSENT]

In order that fraud may make a contract voidable:

a) Fraud should be serious, and
b) Fraud should not have been employed by both contracting parties [the
parties must not be in pari delicto] (Article 1344).

This refers to causal fraud. If the fraud is merely incidental fraud, it only
obliges the person employing it to pay damages.

WHAT IS MEANT BY SIMULATION OF CONTRACTS?

Simulation of a contract which is referred to as vices of declaration is the
process of intentionally deceiving others by producing the appearance of a
contract that really does not exist (absolute simulation) or which is different from
the true agreement (relative simulation). Simulation is absolute when the parties
do not intend to be bound at all, as when a debtor simulates the sale of his
properties to a friend in order to prevent their possible attachment by creditors;
while simulation is relative when the parties conceal their true agreement, as
when a person conceals donation by simulating a sale of the property to the
beneficiary for a certain consideration (Article 1345).

WHAT ARE THE REQUISITES FOR SIMULATION?

a) An outward declaration of will different from the will of the parties;
b) The false appearance must have been intended by mutual agreement;
c) The purpose is to deceive third persons.

WHAT ARE THE EFFECTS OF SIMULATION?

An absolutely simulated or fictitious contract is void. A relative
simulation, when it does not prejudice a third person and is not intended for any
purpose contrary to law, morals, good customs, public order or public policy
binds the parties to their real agreement (Article 1346).
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SECTION 2
OBJECT OF CONTRACTS

WHAT IS MEANT BY OBJECT OF CONTRACTS?

The object of a contract may be defined as the thing, right or service which
is the subject matter of the obligation which is created or established.

WHAT REQUISITES MUST CONCUR IN ORDER THAT A THING, RIGHT OR
SERVICE MAY BE THE OBJECT OF CONTRACTS?

As a general rule, all things, rights or services may be the object of
contracts. It is however, essential that the following requisites must concur:

a) The object should be within the commerce of men; in other words, it
should be susceptible of appropriation and transmissible from one person
to another;
b) The object should be real and possible; in other words, it should exist at
the moment of the celebration of the contract, or at least, it can exist
subsequently or in the future;
c) The object should be licit; in other words, it should not be contrary to law,
morals, good customs, public order or public policy;
d) The object must be transmissible;
e) The object should be determinate, or at least, possible of determination, as
to its kind. The fact that the quantity is not determinate shall not be an
obstacle to the existence of the contract, provided it is possible to
determine the same, without the need of a new contract between the
parties (Article 1349).

WHAT THINGS, RIGHTS OR SERVICES CANNOT BE THE OBJECT OF CONTRACTS?

a) Things which are outside the commerce of men, including future things;
b) Rights which are intransmissible;
c) Future inheritance except in cases expressly authorized by law;
d) Services which are contrary to law, morals, good customs, public order or
public policy (Article 1347);
e) Impossible things or services (Article 1348);
f) Objects which are not determinate as to their kind (Article 1349).

If the parties enter into a contract with respect to the above contracts, the
contract is void or inexistent.

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SECTION 3
CAUSE OF CONTRACTS

WHAT IS MEANT BY CAUSE OF CONTRACTS?

In general, cause is the why of the contract or the essential reason which
moves the contracting parties to enter into the contract. In other words, it is the
immediate, direct or proximate reason which explains and justifies the creation
of an obligation through the will of the contracting parties.

In particular:

a) In onerous contracts the cause is understood to be, for each contracting
party, the prestation or promise of a thing or service by the other;
b) In remuneratory ones, the service or benefit which is remunerated; and
c) In contracts of pure beneficence, the mere liberality of the benefactor
(Article 1350).

DISTINGUISH CAUSE AND CONSIDERATION.

In this jurisdiction, cause and consideration are used interchangeably.
After all, causa is merely the civil law term, while consideration is the common
law term. However, causa in civil law jurisdictions is broader in scope than
consideration in Anglo-American jurisdictions. Many agreements which cannot
be supported in Anglo-American law for want of consideration can be enforced
under the broader doctrine of causa.

DISTINGUISH THE CAUSE FROM THE OBJECT OF CONTRACTS.

The cause must not be confused with the object of the contract. Of course,
there can be no question about the difference between the two cases of
remuneratory and gratuitous contracts; thus, in the first, the cause is the service
or benefit which is remunerated, while the object is the thing which is given in
remuneration, and in the second the cause is the liberality of the donor or
benefactor.

In onerous contracts, however, there is a tendency to confuse one with the
other. Nevertheless, it is clear that the cause, for each contracting party, is the
prestation or promise of a thing or service by the other, while the object of the
contract, on the other hand, is the thing or service itself.

Thus, in a contract of sale, the cause as far as the vendor is concerned is
the acquisition of the purchase price, and as far as the vendee is concerned, it is
Page 108 of 145


the acquisition of the thing, or stated in a different way, the cause of the
obligation of the vendor is the obligation of the vendee and the cause of the
obligation of the vendee is the obligation of the vendor, while the object of the
contract, on the other hand, is the thing which is sold and the price which is paid
[Castans and Manresas view].

DISTINGUISH THE CAUSE OF A CONTRACT FROM THE MOTIVES OF THE
PARTIES IN ENTERING INTO A CONTRACT.

The particular motives of the parties in entering into a contract are
different from the cause thereof (Article 1351).

The differences between the two are as follows:

a) Whereas the cause is the direct or most proximate reason of the contract,
the motives are the indirect or remote reasons;
b) Whereas the cause is the objective or juridical reason of a contract, the
motives are the psychological or purely personal reasons;
c) Whereas the cause is always the same, the motives may differ for each
contracting party.
d) The motive may be unknown to the other, the cause is always known.
e) The presence of motive cannot cure absence of cause.

IS THERE ANY EXCEPTION TO THE RULE THAT THE PARTICULAR MOTIVES OF
THE PARTIES IN ENTERING INTO A CONTRACT ARE DIFFERENT FROM THE CAUSE
THEREOF?

There is an exception to the rule and that is when the contract is
conditioned upon the attainment of the motive of either contracting parties. In
other words, the motive may be regarded as causa when it predetermines the
purpose of the contract.

WHAT REQUISITES MUST CONCUR IN ORDER THAT THERE WILL BE A
SUFFICIENT CAUSE UPON WHICH A CONTRACT MAY BE FOUNDED?

In order that there will be a sufficient cause upon which a contract may be
founded, it is essential that the following requisites must concur:

a) The cause should be in existence (it must be present);
b) The cause should be licit or lawful; and
c) The cause should be true.

Thus, contracts without cause, or with unlawful cause, produce no effect
whatsoever. The cause is unlawful if it is contrary to law, morals, good customs,
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public order or public policy (Article 1352). The same is true if the cause stated in
the contract is false, unless it is proven that they were founded upon another
cause which is true and lawful (Article 1353).

WHAT IS THE PRESUMPTION AS TO CAUSE?

Although the cause is not stated in the contract, it is presumed that it
exists and is lawful, unless the debtor proves the contrary (Article 1354).

WHAT IS LESION?

It is inadequacy of cause, like insufficient price for a thing sold.

WHAT ARE THE RULES ON LESION?

As a general rule, lesion or inadequacy of price does not invalidate a
contract. Lesion, however, may be evidence of the presence of fraud, mistake or
undue influence.

Exceptions (when lesion may invalidate the contract):

a) When together with lesion, there is fraud, mistake or undue influence
(Article 1355).
b) In cases expressly provided for by law (Articles 1381
2
and 1098
3
)
CHAPTER 3
FORM OF CONTRACTS

AS A RULE, WHAT IS THE FORM OF A CONTRACT IN ORDER THAT IT WILL BE OF
OBLIGATORY FORCE?

Contracts shall be obligatory, in whatever form they may have been
entered into, provided all the essential requisites for their validity are present
(Article 1356).

2
ARTICLE 1381. The following contracts are rescissible:
(1) Those which are entered into by guardians whenever the wards whom they represent
suffer lesion by more than one-fourth of the value of the things which are the object thereof;
(2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in
the preceding number;

3
ARTICLE 1098. A partition, judicial or extra-judicial, may also be rescinded on account
of lesion, when any one of the co-heirs received things whose value is less, by at least one-fourth,
than the share to which he is entitled, considering the value of the things at the time they were
adjudicated. (1074a) aisa dc
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We have therefore retained the spiritual system of the Spanish Civil
Code by virtue of which the law looks more at the spirit rather than at the form
of contracts. Hence, under our legal system, the form in which a contract is
executed has no effect, as a general rule, upon its obligatory force, provided all of
the essential requisites for its validity are present.

However, this principle merely applies to CONSENSUAL CONTRACTS. In
FORMAL CONTRACTS, certain form is required while a REAL CONTRACT requires
delivery in addition to the essential requisites of a contract.

WHAT ARE THE EXCEPTIONS TO THE ABOVE RULE?

When Article 1356 speaks of contracts as being obligatory regardless of
the form in which they may have been entered into, it does not include those
contracts for which the law prescribes form either for validity or for
enforceability. There are therefore exceptions to the general rule:

1. When the law requires that a contract be in some form in order that it may
be valid or enforceable, or
2. That a contract be proved in certain way.

In such instances, the requirement is absolute and indispensable and the
right of the parties stated in the following article cannot be exercised (Article
1356).

WHAT ARE THE DIFFERENT KINDS OF FORMALITIES WHICH ARE PRESCRIBED
BY LAW FOR CERTAIN CONTRACTS?

Article 1358 enumerates certain kinds of contracts which must appear
either in a public instrument or in a private document. The purpose of the
requirement, however, is not to validate or to enforce the contract, but to insure
its efficacy; in other words, the form required is neither for validity or
enforceability but for CONVENIENCE of the contracting parties. Hence, the forms
required by law for the execution of certain contracts may be divided into:

1. Those which are merely for CONVENIENCE (governed by Articles 1356 to
1358);
2. Those which are necessary for the VALIDITY of the contracts (governed by
scattered provisions of the Civil Code and by special laws); and
3. Those which are necessary for the ENFORCEABILITY of the contract
(governed by the Statute of Frauds).

WHAT IS THE RIGHT OF THE CONTRACTING PARTIES IF THE LAW REQUIRES A
DOCUMENT OR OTHER SPECIAL FORM?
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If the law requires a document or other special form, as in the acts and
contracts enumerated in the following article, the contracting parties may compel
each other to observe that form, once the contract has been perfected. This right
may be exercised simultaneously with the action upon the contract (Article 1357).

This article is applicable only when form is needed only for CONVENIENCE,
not for validity or enforceability. In other words, before the contracting parties
may be compelled to execute the needed form, it is essential that the contract be
PERFECTED (valid) (Article 1357) and ENFORCEABLE under the Statute of Frauds
(Article 1356).

The right to compel under Article 1357 cannot be exercised if the law
requires that a contract be in some form in order that it may be VALID and
ENFORCEABLE, because Article 1356 provides that that requirement is ABSOLUTE
and INDISPENSABLE.

WHAT ARE THE FORMALITIES WHICH ARE MERELY FOR THE CONVENIENCE OF
THE CONTRACTING PARTIES?

The following must appear in a public document:

(1) Acts and contracts which have for their object the creation, transmission,
modification or extinguishment of real rights over immovable property; sales of
real property or of an interest therein are governed by articles 1403, No. 2, and
1405;
(2) The cession, repudiation or renunciation of hereditary rights or of those of
the conjugal partnership of gains;
(3) The power to administer property, or any other power which has for its
object an act appearing or which should appear in a public document, or should
prejudice a third person;
(4) The cession of actions or rights proceeding from an act appearing in a
public document (Article 1358).

All other contracts where the amount involved exceeds five hundred
pesos must appear in writing, even a private one. But sales of goods, chattels or
things in action are governed by articles 1403, No. 2 and 1405 (Article 1358).

Note that the necessity for the public document in the contracts
enumerated above is only for CONVENIECE, not for VALIDITY or ENFORCEABILITY.
Formal requirements are for the benefit or third parties. Noncompliance
therewith does not adversely affect the validity of the contract or the contractual
rights and obligations of the parties thereunder (Fule vs. CA, G.R. No. 112212,
March 2, 1998)
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WHAT ARE THE FORMALITIES WHICH ARE NECESSARY FOR THE VALIDITY OF
CONTRACTS?

These contracts may be classified as follows:

1. Those which must appear in writing;
2. Those which must appear in a public document; and
3. Those which must be registered.

CONTRACTS WHICH MUST APPEAR IN WRITING:

1. Donations of personal property whose value exceeds five thousand pesos.
According to Article 748, the donation and the acceptance shall be made in
writing; otherwise, it shall be void.
2. Sale of piece of land or any interest therein by an agent. According to
Article 1874, if the authority of the agent is not in writing, the sale is void.
3. Antichresis. According to Article 2134, in contracts of antichresis, the
amount of the principal and of the interest shall be specified in writing;
otherwise, the contract shall be void.
4. Agreements regarding payment of interest in contracts of loan. According
to Article 1956, no interest shall be due unless it has been expressly
stipulated in writing. The validity of the contract of loan, however, is not
affected.

CONTRACTS WHICH MUST APPEAR IN A PUBLIC DOCUMENT:

1. Donations of immovable property. According to Article 1749, the donation
must be made in a public document. The acceptance, on the other hand,
may be made in the same deed of donation or in a separate public
document. If the acceptance is made in a separate public document, the
donor shall be notified in authentic form and such fact shall be noted in
both instruments. Noncompliance with any of these formalities shall
render the donation void.
2. Partnerships where immovable property or real rights are contributed to
the common fund. According to Articles 1771 and 1773, in a contract of
partnership where immovable property or real rights are contributed to
the common fund, it is necessary that the contract must appear in a public
instrument and that there must be an inventory of the immovable
property and real rights, signed by the partners, and attached to the public
instrument; otherwise, the contract is void.

CONTRACTS WHICH MUST BE REGISTERED:

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1. Chattel mortgages. According to Article 2140, by a chattel mortgage,
personal property is recorded in the Chattel Mortgage Register as a
security for the performance of an obligation. If the movable, instead of
being recorded, is delivered to the creditor or a third person, the contract
is a pledge and not a chattel mortgage.
2. Sales or transfers of large cattle. According to the Cattle Registration Act,
no sale or transfer of large cattle shall be valid unless it is duly registered
and a certificate of transfer is secured.

CHAPTER 4
REFORMATION OF INSTRUMENTS (N)

WHAT IS THE DOCTRINE OF REFORMATION OF INSTRUMENTS UNDER THE
CIVIL CODE?

When the true intention is not expressed in the instrument purporting to
embody the agreement, by reason of mistake, fraud, inequitable conduct or
accident, one of the parties may ask for the reformation of the instrument to the
end that such true intention may be expressed (Article 1359).

WHAT REQUISITES MUST CONCUR IN ORDER THAT AN INSTRUMENT MAY BE
REFORMED?

1. There must be meeting of the minds of the parties;
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2. Their true intention is not expressed in the instrument; and
3. Such failure to express their true intention is due to mistake, fraud,
inequitable conduct or accident.
4. There must be convincing proof thereof;
5. It must be brought within the proper prescriptive period;
6. The document must not refer to a simple unconditional donation inter
vivos, or to wills, or to a contract where the real agreement is void (Article
1366).

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 (Article 1359).

WHAT ARE THE DISTINCTIONS BETWEEN REFORMATION AND ANNULMENT?

The most fundamental distinctions between an action for reformation of
an instrument and an action for the annulment of a contract are:

1. Whereas the first presupposes a perfectly valid contract in which there has
already been a meeting of the minds of the contracting parties, the second
is based on a defective contract in which there has been no meeting of the
minds because the consent of one of the contracting parties has been
vitiated.
2. Reformation does not invalidate a contract; annulment invalidates a
contract.

WHAT IS THE RULE IN CASE OF CONFLICT BETWEEN THE CIVIL CODE AND THE
PRINCIPLES OF GENERAL LAW ON REFORMATION?

The principles of the general law on the reformation of instruments are
hereby adopted insofar as they are not in conflict with the provisions of this
Code (Article 1360).

WHAT ARE THE INSTANCES IN WHICH REFORMATION MAY BE ASKED?

1. When a mutual mistake of the parties causes the failure of the instrument
to disclose their real agreement, said instrument may be reformed (Article
1361).
2. If one party was mistaken and the other acted fraudulently or inequitably
in such a way that the instrument does not show their true intention, the
former may ask for the reformation of the instrument (Article 1362).
3. When one party was mistaken and the other knew or believed that the
instrument did not state their real agreement, but concealed that fact from
the former, the instrument may be reformed (Article 1363).
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4. When through the ignorance, lack of skill, negligence or bad faith on the
part of the person drafting the instrument or of the clerk or typist, the
instrument does not express the true intention of the parties, the courts
may order that the instrument be reformed (Article 1364).
5. If two parties agree upon the mortgage or pledge of real or personal
property, but the instrument states that the property is sold absolutely or
with a right of repurchase, reformation of the instrument is proper (Article
1365).

WHAT INSTRUMENTS CANNOT BE REFORMED?

There shall be no reformation in the following cases:

(1) Simple donations inter vivos wherein no condition is imposed;
(2) Wills;
(3) When the real agreement is void (Article 1366).

WHAT IS THE EFFECT ON REFORMATION IF ONE OF THE PARTIES HAS BROUGHT
AN ACTION TO ENFORCE THE INSTRUMENT?

When one of the parties has brought an action to enforce the instrument,
he cannot subsequently ask for its reformation (Article 1367).

WHO ARE THE PERSONS WHO MAY ASK FOR REFORMATION OF INSTRUMENT?

Reformation may be ordered at the instance of either party or his
successors-in-interest, if the mistake was mutual; otherwise, upon petition of the
injured party, or his heirs and assigns (Article 1368).

The procedure for the reformation of instrument shall be governed by
rules of court to be promulgated by the Supreme Court (Article 1369).

CHAPTER 5
INTERPRETATION OF CONTRACTS

RULES:

1. If the terms of a contract are clear and leave no doubt upon the intention
of the contracting parties, the literal meaning of its stipulations shall
control. If the words appear to be contrary to the evident intention of the
parties, the latter shall prevail over the former (Article 1370).
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2. In order to judge the intention of the contracting parties, their
contemporaneous and subsequent acts shall be principally considered
(Article 1371).
3. However general the terms of a contract may be, they shall not be
understood to comprehend things that are distinct and cases that are
different from those upon which the parties intended to agree (Article
1372).
4. If some stipulation of any contract should admit of several meanings, it
shall be understood as bearing that import which is most adequate to
render it effectual (Article 1373).
5. The various stipulations of a contract shall be interpreted together,
attributing to the doubtful ones that sense which may result from all of
them taken jointly (Article 1374).
6. Words which may have different significations shall be understood in that
which is most in keeping with the nature and object of the contract (Article
1375).
7. The usage or custom of the place shall be borne in mind in the
interpretation of the ambiguities of a contract, and shall fill the omission
of stipulations which are ordinarily established (Article 1376).
8. The interpretation of obscure words or stipulations in a contract shall not
favor the party who caused the obscurity (Article 1377).
9. When it is absolutely impossible to settle doubts by the rules established
in the preceding articles, and the doubts refer to incidental circumstances
of a gratuitous contract, the least transmission of rights and interests shall
prevail. If the contract is onerous, the doubt shall be settled in favor of the
greatest reciprocity of interests. If the doubts are cast upon the principal
object of the contract in such a way that it cannot be known what may
have been the intention or will of the parties, the contract shall be null and
void (Article 1378).
10. The principles of interpretation stated in Rule 123 of the Rules of Court
shall likewise be observed in the construction of contracts (Article 1379).

DEFECTIVE CONTRACTS

WHAT ARE THE FOUR KINDS OF DEFECTIVE CONTRACTS?

1. Rescissible valid until rescinded; there is a sort of extrinsic defect
consisting of economic damage or lesion.
2. Voidable valid until annulled, unless there has been ratification. The
defect is more or less intrinsic, as in the case of vitiated consent.
3. Unenforceable cannot be sued upon or enforced, unless it is ratified. In a
way, it may be considered a validable transaction, that is, it has no effect
now, but it may be effective upon ratification.
4. Void has no effect at all, it cannot be ratified or validated.
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The contracts provided above are in the decreasing order as to their
effectiveness.

CHAPTER 6
RESCISSIBLE CONTRACTS

DEFINE RESCISSIBLE CONTRACTS.

A rescissible contract is a contract which is valid because it contains all of
the essential requisites prescribed by law, but which is defective because of the
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.

DEFINE RESCISSION.

Rescission is a remedy granted by law to the contracting parties, and even
to third persons, to secure the reparation of damages caused to them by a
contract, even if the same should be valid, by means of the restoration of things
to their condition prior to the celebration of the contract.

DISTINGUISH RESCISSION OF CONTRACTS FROM RESCISSION OR RESOLUTION
OF RECIPROCAL OBLIGATIONS.

Rescission of rescissible contracts must not be confused with the rescission
or resolution of reciprocal obligation under Article 1191 of the Civil Code.
Although there are similarities both with respect to validity and effects, they are
distinguished from each other in the following ways

1. AS TO PARTY WHO MAY INSTITUTE ACTION: In rescission the action may be
instituted not only by a party to the contract but even by third persons,
whereas in resolution the action may be instituted only by a party to the
contract.
2. AS TO CAUSES: In rescission there are several causes or grounds such as
lesion, fraud and others expressly specified by law, whereas in resolution
the only ground is failure of one of the contracting parties to comply with
what is incumbent upon him.
3. AS TO POWER OF THE COURTS: In rescission there is no power of the courts to
grant extension of time for performance of the obligation so long as there
is a ground for rescission, whereas in resolution the law expressly declares
that courts shall have a discretionary power to grant an extension for
performance provided that there is just cause
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4. AS TO CONTRACTS WHICH MAY BE RESCINDED OR RESOLVED: In rescission, any
contract, whether unilateral or reciprocal, may be rescinded; whereas in
resolution only reciprocal contracts may be resolved.

WHAT CONTRACTS ARE RESCISSIBLE?

The following contracts are rescissible:

(1) Those which are entered into by guardians whenever the wards whom
they represent suffer lesion by more than one-fourth of the value of the things
which are the object thereof;
(2) Those agreed upon in representation of absentees, if the latter suffer the
lesion stated in the preceding number;
(3) Those undertaken in fraud of creditors when the latter cannot in any other
manner collect the claims due them;
(4) Those which refer to things under litigation if they have been entered into
by the defendant without the knowledge and approval of the litigants or of
competent judicial authority;
(5) All other contracts specially declared by law to be subject to rescission.
(Article 1381)
(6) Payments made in a state of insolvency for obligations to whose
fulfillment the debtor could not be compelled at the time they were effected, are
also rescissible. (Article 1382)

WHAT REQUISITES MUST CONCUR BEFORE A CONTRACT MAY BE RESCINDED
ON THE GROUND OF LESION?

Whether the contract is entered into by a guardian in behalf of his ward or
by a legal representative in behalf of an absentee, before it can be rescinded on
the ground of lesion, it is indispensable that the following requisites must
concur:

a. The contract must be entered into by the guardian in behalf of his
ward or by the legal representative in behalf of an absentee (Article
1381, Nos. 1 and 2);
b. The ward or absentee suffered lesion of more than one-fourth of the
value of the property which is the object of the contract (ibid);
c. The contract must be entered without judicial approval (Article
1386)
d. There must be no legal means for obtaining reparation for the
lesion (Article 1385, par. 1);
e. The person bringing the action must be able to return whatever he
may be obliged to restore (Article 1385, par. 1); and
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f. The object of the contract must not be legally in the possession of a
third person who did not act in bad faith (Article 1385, par. 1)

WHAT REQUISITES MUST CONCUR BEFORE A CONTRACT ENTERED INTO IN
FRAUD OF CREDITORS CAN BE RESCINDED?

Before a contract can be rescinded on the ground that it has been entered
into in fraud of creditors, it is indispensable that the following requisites must
concur:

a. There must be a credit existing prior to the celebration of the contract;
b. There must be fraud, or at least the intent to commit fraud, to the
prejudice of the creditor seeking rescission;
c. The creditor cannot in any other legal manner collect his credit; and
d. The object of the contract must not be legally in the possession of a third
person who did not act in bad faith.

WHO ARE THE PERSONS WHO MAY INSTITUTE AN ACTION FOR THE
RESCISSION OF A RESCISSIBLE CONTRACT?

The action for rescission may be instituted by the following:

a. The person who is prejudiced, such as the person suffering the
lesion in rescissory actions based on lesion, the creditor who is
defrauded in rescissory actions based on fraud, and other persons
authorized to exercise the same in other rescissory actions;
b. Their representatives;
c. Their heirs; and
d. Their creditors by virtue of the subrogatory action defined in
Article 1177.

IN RESCISSORY ACTIONS BASED ON FRAUD, IT IS ESSENTIAL THAT FRAUD OR
THE INTENT TO DEFRAUD MUST BE PROVED. HOW CAN THIS BE DONE?

Such fraud or the intent to defraud may be either presumed in accordance
with Article 1387 or duly proved in accordance with the ordinary rules of
evidence.
The law presumes that there is fraud of creditors in the following cases:

a. Alienation of property by gratuitous if the donor did not reserve
sufficient property to pay all debts contracted before the alienation.
b. Alienations of property by onerous title if made by persons against
whom some judgment has been rendered in any instance or some
writ of attachment has been issued. The decision or attachment
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need not refer to the property alienated, and need not have been
obtained by the party seeking the rescission. (Article 1387)

WHAT IS THE EXTENT OF RESCISSION?

Rescission shall be only to the extent necessary to cover the damages
caused. (Article 1384)

WHAT ARE THE OBLIGATIONS OF THE PLAINTIFF IN CASE RESCISSION IS
GRANTED?

Rescission creates the obligation to return the things which were the object
of the contract, together with their fruits, and the price with its interest;
consequently, it can be carried out only when he who demands rescission can
return whatever he may be obliged to restore. (Article 1385)

WHAT ARE THE INSTANCES WHEN RESCISSION CANNOT BE DEMANDED?

a. When the plaintiff who demands rescission cannot anymore return
the thing;
b. When the things which are the object of the contract are legally in
the possession of third persons who did not act in bad faith. In this
case, indemnity for damages may be demanded from the person
causing the loss. (Article 1385)
c. Rescission referred to in Nos. 1 and 2 of Article 1381 with respect to
contracts approved by the courts. (Article 1386)

WHAT IS THE LIABLITY OF ONE WHO ACQUIRES IN BAD FAITH THE THINGS
ALIENATED IN FRAUD OF CREDITORS?

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

If there are two or more alienations, the first acquirer shall be liable first,
and so on successively. (Article 1388)

WHAT IS THE PRESCRIPTIVE PERIOD OF RESCISSION?

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

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For persons under guardianship and for absentees, the period of four
years shall not begin until the termination of the former's incapacity, or until the
domicile of the latter is known. (Article 1389)

CHAPTER 7
VOIDABLE CONTRACTS

DEFINE VOIDABLE CONTRACTS.

Voidable contracts are those in which all of the essential elements for
validity are present, but the element of consent is vitiated either by lack of legal
capacity of one of the contracting parties, or by mistake, violence, intimidation,
undue influence, or fraud.

DISTINGUISH VOIDABLE CONTRACTS FROM RESCISSIBLE CONTRACTS.

Voidable and rescissible contracts may be distinguished from each other
in the following ways:

a. In a voidable contract, the defect is instrinsic because it consists of a vice
which vitiates consent, whereas in a rescissible contract the defect is
external because it consists of damage or prejudice either to one of the
contracting parties or to a third person (Articles 1381, 1390);
b. In the former, the contract is voidable even if there is not damage or
prejudice, whereas in the latter, the contract is not rescissibloe if there is
not damage or prejudice;
c. In the former, the annulability of the contract is based on law, whereas in
the latter the rescissibility of the contract is based on equity. Hence,
annulment is not only a remedy but a sanction, whereas rescission is a
mere remedy. Public interest, therefore, predominates in the first, whereas
private interest predominates in the second;
d. The causes of annulment are different from the causes of rescission;
e. The former is susceptible of ratification, whereas the latter is not (Articles
1381, 1390); and
f. Annulment may be invoked only by a contracting party, whereas
rescission may be invoked either by a contracting party or by a third
person who is prejudiced.

WHAT CONTRACTS ARE VOIDABLE?

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

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(1) Those where one of the parties is incapable of giving consent to a contract;
(2) Those where the consent is vitiated by mistake, violence, intimidation,
undue influence or fraud.

These contracts are binding, unless they are annulled by a proper action in
court. They are susceptible of ratification. (Article 1390)

WHAT IS THE PRESCRIPTIVE PERIOD OF ANNULING A VOIDABLE CONTRACT?

The action for annulment shall be brought within four years. (Article 1391)

This period shall begin:

a. In cases of intimidation, violence or undue influence, from the time the
defect of the consent ceases.
b. In case of mistake or fraud, from the time of the discovery of the same.
c. And when the action refers to contracts entered into by minors or other
incapacitated persons, from the time the guardianship ceases.

HOW MAY A VOIDABLE CONTRACT BE CONVALIDATED?

There are 3 ways or modes of convalidating a voidable contract. They are:

a. By prescription of the action for annulment (Article 1391);
b. By ratification or confirmation (Articles 1392-1396); and
c. By the loss of the thing which is the object of the contract through the
fraud or fault of the person who is entitled to institute the action for the
annulment of the contract (Article 1401)

WHAT IS MEANT BY RATIFICATION OF VOIDABLE CONTRACTS? WHAT ARE ITS
REQUISITES?

Ratification, or confirmation as it is known in the Spanish Civil Code, is
defined as the act or means by virtue of which efficacy is given to a contract
which suffers from a vice of curable nullity.

Ratification or confirmation requires the concurrence of the following
requisites:

a. The contract should be tainted with a vice which is susceptible
of being cured (the contract must be a voidable one);
b. The confirmation should be effected by the person who is
entitled to do so under the law;
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c. It should be effected with knowledge of the reason which
renders the contract voidable; and
d. The reason which renders the contract voidable should have
already disappeared.
e. The person ratifying must be the injured party.

HOW MAY RATIFICATION BE MADE?

Ratification may be effected expressly or tacitly.

There is an express ratification if, with knowledge of the reason which
renders the contract voidable and such reason having ceased, the person who has
a right to invoke it should expressly declare his renunciation of his right to annul
the contract.

On the other hand, there is a tacit ratification if, with knowledge of the
reason which renders the contract voidable and such reason having ceased, the
person who has a right to invoke it should execute an act which necessarily
implies an intention to waive his right. (Article 1393)

WHO MAY EFFECT THE RATIFICATION?

Ratification may be effected by the guardian of the incapacitated person.
(Article 1394)

Ratification does not require the conformity of the contracting party who
has no right to bring the action for annulment. (Article 1395)

WHAT IS THE EFFECT OF RATIFICATION?

a. Ratification cleanses the contract from all its defects from the moment it
was constituted. (Article 1396) There is retroactive effect of ratification,
thus, once ratification has taken place, annulment based on the original
defects cannot prosper.
b. The action to annul is extinguished (Article 1392), thus the contract
becomes a completely valid one.

WHO MAY INSTITUTE AN ACTION FOR ANNULMENT OF A VOIDABLE
CONTRACT?

The action for the annulment of contracts may be instituted by all who are
thereby obliged principally or subsidiarily. However, persons who are capable
cannot allege the incapacity of those with whom they contracted; nor can those
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who exerted intimidation, violence, or undue influence, or employed fraud, or
caused mistake base their action upon these flaws of the contract. (Article 1397)

There are therefore 2 different requisites in order that a person may
institute the action for the annulment of a voidable contract:

a. The plaintiff must have an interest in the contract in the sense that
he is obliged thereby either principally or subsidiarily; and
b. The victim and not the party responsible for the vice or defect must
be the one who must assert the same.

IF A PERSON IS NOT OBLIGED PRINCIPALLY OR SUBSIDIARILY UNDER A
CONTRACT, WOULD IT BE POSSIBLE FOR HIM TO INSTITUTE AN ACTION FOR THE
ANNULMENT OF THE CONTRACT?

As a rule, a contract cannot be assailed by one who is not a party thereto.
However, the Supreme Court in several cases has held that a person, who is not a
party obliged principally or subsidiarily under a contract, may bring an action
for annulment of the contract if he 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 (Singson vs. Isablea
Sawmill, 88 SCRA 623, citing Teves vs. Peoples Homesite and Housing Corp, 23 SCRA
1114 and De Santos vs. City of Manila, 45 SCRA 409).

WHAT ARE THE OBLIGATIONS OF THE CONTRACTING PARTIES AFTER AN
OBLIGATION IS ANNULED? WHAT ARE THE EFFECTS OF ANNULMENT?

a. If the contract has not yet been complied with, the parties are
excused from their obligation.
b. If the contract has already been performed, the contracting parties
shall restore to each other the things which have been the subject
matter of the contract, with their fruits, and the price with its
interest, except in cases provided by law.
c. In obligations to render service, the value thereof shall be the basis
for damages. (Article 1398)

WHAT ARE THE INSTANCES WHERE THERE IS NO OBLIGATION TO MAKE ANY
RESTITUTION?

When the defect of the contract consists in the incapacity of one of the
parties, the incapacitated person is not obliged to make any restitution except
insofar as he has been benefited by the thing or price received by him. (1399)

WHAT IS THE LIABILITY OF THE OBLIGOR IF HE CANNOT RETURN THE THING?
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Whenever the person obliged by the decree of annulment to return the
thing can not do so because it has been lost through his fault, he shall return the
fruits received and the value of the thing at the time of the loss, with interest
from the same date. (Article 1400)

WHAT IS THE EFFECT ON THE RIGHT TO ANNUL IF THE THING WHICH IS THE
OBJECT OF THE CONTRACT IS LOST?

The action for annulment of contracts shall be extinguished when the
thing which is the object thereof is lost through the fraud or fault of the person
who has a right to institute the proceedings.

If the right of action is based upon the incapacity of any one of the
contracting parties, the loss of the thing shall not be an obstacle to the success of
the action, unless said loss took place through the fraud or fault of the plaintiff.
(Article 1401)

WHEN MUST THE THING BE RETURNED?

As long as one of the contracting parties does not restore what in virtue of
the decree of annulment he is bound to return, the other cannot be compelled to
comply with what is incumbent upon him. (Article 1402)

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CHAPTER 8
UNENFORCEABLE CONTRACTS (N)

DEFINE UNENFORCEABLE CONTRACTS.

Unenforceable contracts are those which cannot be enforced by a proper
action in court, unless ratified.

WHAT ARE THE KINDS OF UNENFORCEABLE CONTRACT?

a. Those entered into without or in excess of authority (unauthorized
contracts);
b. Those that do not comply with the Statute of Frauds;
c. Those where both of the contracting parties do not possess the
required legal capacity.

DISTINGUISH UNENFORCEABLE CONTRACTS FROM OTHER DEFECTIVE
CONTRACTS.

In general, unenforceable contract may be distinguished from the other
defective contracts in the following ways:

a. FROM RESCISSIBLE CONTRACTS First, unenforceable contracts cannot be
enforced by a proper action in court, whereas rescissible contracts are
valid and enforceable unless they are rescinded. Second, the former cannot
be assailed by third persons, whereas the latter may be assailed by third
persons who are prejudiced.
b. FROM Voidable contracts unenforceable contracts cannot be enforced by a
proper action in court, whereas voidable contracts are binding and
enforceable unless they are annulled by a proper action in court.
c. FROM VOID CONTRACTS There are some unenforceable contracts which are
valid and, therefore, may produce effects, although they cannot be
enforced by a proper action in court; void or inexistent contracts, on the
other hand, do not produce, as a general rule, any effect whatsoever.
Hence, unenforceable contracts are susceptible of ratification, whereas
void contracts are not.

WHAT CONTRACTS ARE UNENFORCEABLE?

The following contracts are unenforceable, unless they are ratified:

(1) Those entered into in the name of another person by one who has been
given no authority or legal representation, or who has acted beyond his powers;

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

(a) An agreement that by its terms is not to be performed within a year
from the making thereof;
(b) A special promise to answer for the debt, default, or miscarriage of
another;
(c) An agreement made in consideration of marriage, other than a
mutual promise to marry;
(d) An agreement for the sale of goods, chattels or things in action, at a
price not less than five hundred pesos, unless the buyer accept and receive part
of such goods and chattels, or the evidences, or some of them, of such things in
action, or pay at the time some part of the purchase money; but when a sale is
made by auction and entry is made by the auctioneer in his sales book, at the
time of the sale, of the amount and kind of property sold, terms of sale, price,
names of the purchasers and person on whose account the sale is made, it is a
sufficient memorandum;
(e) An agreement for the leasing for a longer period than one year, or
for the sale of real property or of an interest therein;
(f) A representation as to the credit of a third person.

(3) Those where both parties are incapable of giving consent to a
contract (Article 1403).

HOW MAY CONTRACTS INFRINGING THE STATUTE OF FRAUDS BE RATIFIED?

Contracts infringing the Statute of Frauds may be ratified either:

a. by the failure to object to the presentation of oral evidence to prove the
same, or
b. by the acceptance of benefits under them (Article 1405).

DISTINGUISH FROM EACH OTHER CONFIRMATION, RATIFICATION, AND
RECOGNITION (OR ACKNOWLEDGMENT).

Ratification is curing the defect of lack of authority in an authorized
contract (entered into by another) (Articles 1317, 1405). Under the present Code,
the term ratification is used to designate the act of validating any kind of
defective contract.

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Confirmation is curing a defect of a voidable contract (Article 1396). It
tends to cure a vice of nullity and ratification is for the purpose of giving
authority to a person who previously acted in the name of another without
authority (Luna vs. Linatoc, 74 Phil. 15).

Recognition or acknowledgment, on the other hand, is merely to cure a
defect of proof (Article 1405). In recognition, there is no vice to be remedied, such
as fraud, violence, or mistake, so that the case is distinguished from
confirmation. In Recognition, the person on behalf of another is duly authorized
to do so, so the situation is different from ratification (Ibid).

Under the new Civil Code, all three terms are now uniformly called
RATIFICATION.

WHAT IS THE REMEDY OF A PARTY WHEN THE CONTRACT IS UNENFORCEABLE
AND A PUBLIC DOCUMENT IS NECESSARY FOR ITS REGISTRATION?

When a contract is enforceable under the Statute of Frauds, and a public
document is necessary for its registration in the Registry of Deeds, the parties
may avail themselves of the right under Article 1357 (Article 1406).
WHAT IS THE EFFECT IF BOTH PARTIES ARE INCAPACITATED, AND THE
GUARDIAN OF ONE OF THEM RATIFIES THE CONTRACT?

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

WHAT IS THE EFFECT IF BOTH PARENTS OR GUARDIANS RATIFY THE
CONTRACT?

If ratification is made by the parents or guardians, as the case may be, of
both contracting parties, the contract shall be validated from the inception
(Article 1407, par. 2).

WHO CAN ASSAIL UNENFORCEABLE CONTRACTS?

It is only the parties who can assail an unenforceable contract. It cannot be
assailed by third persons (Article 1408).

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CHAPTER 9
VOID OR INEXISTENT CONTRACTS

DEFINE VOID AND INEXISTENT CONTRACTS.

In general, void and inexistent contracts may be defined as those which
lack absolutely either in fact or in law one or some or all of those elements which
are essential for its validity.

In particular, void contracts are contracts where all of the requisites
prescribed by law for contracts are present, but the cause, object or purpose is
contrary to law, morals, good customs, public order or public policy, or they are
prohibited by law, or they are decalred by law to be void.

Inexistent contracts, on the other hand, are those contracts which lack
absolutely one or some or all of thoser requisites which are essential for validity.

DISTINGUISH BETWEEN VOID AND INEXISTENT CONTRACTS.

Void and inexistent contracts may be distinguished from each other in the
following ways :

a) Void contracts refer to those where all of the the requisites of a contract
are present but the cause, object or purpose is contrary to law, morals,
good customs, public order or public policy, or the contract itself is
prohibited or declared by law to be void ; inexistent contracts, on the other
hand, refer to those where one or some or all of those requisites which are
essential for validity are absolutely lacking (Liguez vs. Court of Appeals, 102
Phil. 577).
b) The principle of in paru delicto is applicable in the first, but not in the
second. Consequently, the first may produce effects (Articles 1411, 1412),
but the second does not produce any effect whatsoever.

WHAT ARE THE CHARACTERISTICS OF VOID CONTRACTS ?

a. The right to set up the defense of illegality cannot be waived (Article
1409), and may be considered on appeal even if not raised in the trial
court.
b. The action or defense for their declaration as inexistent does not prescribe
(Article 1410)
c. The defense of illegality of contracts is not available to third persos whose
interests are not directly affected (Article 1412)
d. Cannot give rise to a contract ; thus a contract which is the direct result of
a previous illegal contract is also void and inexistent (Article 1422)
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e. Generally produces no effect.
f. They cannot be ratified (Article 1409).

DISTINGUISH VOID AND INEXISTENT CONTRACTS FROM THE OTHER
DEFECTIVE CONTRACTS.

A VOID OR INEXISTENT CONTRACT MAY BE DISTINGUISHED FROM A RESCISSIBLE
CONTRACT IN THE FOLLOWING WAYS :

a. A void or inexistent contract produces, as a rule, no effect even if it is not
set aside by a direct action, whereas a rescissible contract is valid unless it
is rescinded (Articles 1380, 1409).
b. The defect of the former consists in absolute lack in fact or in law of one or
some or all of the essentail elements of a contract, whereas the defect of
the latter consists in lesion or damage to one of the contracting parties or
to third persons.
c. In the former, the nullity or inexistence of the contract is based on the law,
whereas, in the latter its rescissible character is based on equity. Hence, an
actin for declaration of absolute nullity or inexistence is not only a remedy
but a sanction, whereas an action for rescission is a mere remedy. Public
interest, therefore, predominates in the first, whereas private interest
predominates in the second.
d. The action for the declaration of the nullity or inexistence of a contract is
imprescriptible, whereas the action for the rescission of a contract is
prescriptible (Articles 1389, 1410)
e. The nullity or inexistence of a contract cannot as a rule be assailed by third
persons, whereas the rescissible character of a contract may be assailed by
third persons (Articles 1381, 1382, 1409)

A VOID CONTRACT MAY BE DISTINGUISHED FROM A VOIDABLE CONTRACT IN THE
FOLLOWING WAYS:

a. A void or inexistent contract produces, as a general rule, no effect even if
it is not set aside by a direct action, whereas a voidable contract is binding
unless it is annulled (Articles 1390, 1409)
b. The causes for the inexistence or absolute nullity of the former are
different from the causes for the annulability or relative nullity of the
latter (Ibid).
c. The former is not susceptible of ratification, whereas the latter is
susceptible of ratification.
d. The action for the declaration of the nullity or inexistence of a contract is
imprescriptible, whereas the action for the annulment of a contract is
prescriptible (Articles 1391, 1140)
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e. The defense of inexistence or absolute nullity is available to third persons
whose interests are directly affected, whereas the defense of annulability
is not available to third persons (Articles 1397, 1421)
A VOID CONTRACT MAY BE DISTINGUISHED FROM AN UNENFORCEABLE
CONTRACT IN THE FOLLOWING WAYS:

a. In a void or inexistent contract, there is in law or in reality no contract at
all, whereas in an unenforceable contract, there is actually a contract
which cannot be enforced by a court action unless ratified (Articles 1403,
1409).
b. The causes for the inexistence or absolute nullity of the former are
different from the causes for the unenforceability of the latter (Ibid).
c. The former is not susceptible of ratification, while the latter is susceptible
of ratification (Articles 1404, 1405, 1407, 1409).
d. The former can be assailed by third persons whose interests are directly
affected, whereas the latter cannot be assailed by third persons (Articles
1408, 1421).

WHAT CONTRACTS ARE VOID OR INEXISTENT ?

The following contracts are inexistent and void from the beginning:
(1) Those whose cause, object or purpose is contrary to law, morals, good
customs, public order or public policy;
(2) Those which are absolutely simulated or fictitious;
(3) Those whose cause or object did not exist at the time of the transaction;
(4) Those whose object is outside the commerce of men;
(5) Those which contemplate an impossible service;
(6) Those where the intention of the parties relative to the principal object of
the contract cannot be ascertained;
(7) Those expressly prohibited or declared void by law. (Article 1409)

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

In addition, we can also include:

a. Those which are direct results of previous illegal contract (Article 1422);
b. Those where there is no concurrence between offer and acceptance with
regard to the object and the cause of the contract; and
c. Those which do not comply with the required form where such form is
essential for validity.

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WHAT IS THE PRINCIPLE OF IN PARI DELICTO?

When the defect of a void contract consists in the illegality of the cause or
object of the contract, and both parties are at fault or in pari delicto, the law
refuses them every remedy and leaves them where they are. This rule, which is
embodied in Articles 1411 and 1412, is what is commonly known as the principle
of in pari delicto. It is a rule which is expressed in the maxims: Ex dolo malo non
oritur action and In pari delicto potior est condition defendentis. The law will not
aid either party to an illegal agreement; it leaves then where they are.

WHAT IS THE EFFECT IF BOTH PARTIES TO AN ILEGAL CONTRACT ARE IN PARI
DELICTO?

When the nullity proceeds from the illegality of the cause or object of the
contract, and the act constitutes a criminal offense, both parties being in pari
delicto:

a. They shall have no action against each other, and
b. Both shall be prosecuted.
c. Moreover, the provisions of the Penal Code relative to the disposal of
effects or instruments of a crime shall be applicable to the things or the
price of the contract.

This rule shall be applicable when only one of the parties is guilty; but the
innocent one may claim what he has given, and shall not be bound to comply
with his promise. (Article 1411)

WHAT ARE THE EXCEPTIONS TO THE PRINCIPLE OF IN PARI DELICTO?

The exceptions to the principle of in pari delicto are the following:

a. Payment of usurious interest. In such a case, the law allows the debtor to
recover the interest paid in excess of that allowed by the usury laws, with
interest thereon from the date of payment (Article 1413).
b. 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. In such a case, the courts may allow such party to recover
what he ahs paid or delivered, if the public interest will thus be subserved
(Article 1414).
c. Payment of money or delivery of property by an incapacitated person. In
such a care, the courts may allow such person to recover what he ahs paid
or delivered, if the interest of justice so demands (Article 1415).
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d. Agreement or contract which is not illegal per se but is merely prohibited
by law, and the prohibition is designed to the protection of the plaintiff. In
such a case, such plaintiff, if public policy is thereby enhanced, may
recover what he has paid or delivered (Article 1416).
e. Payment of any amount in excess of the maximum price of any article or
commodity fixed by law. In such a case, the buyer may recover the excess
(Article 1417).
f. Contract whereby a laborer undertakes to work longer than the maximum
number of hours fixed by law. In such a case, the laborer may demand for
overtime pay (Article 1418).
g. Contract whereby a laborer accepts a wage lower than the minimum wage
fixed by law. In such case, the laborer may demand for the deficiency
(Article 1419).

WHAT IS THE RULE IF THE ACT IN WHICH THE UNLAWFUL OR FORBIDDEN
CAUSE CONSISTS DOES NOT CONSTITUTE A CRIMINAL OFFENSE?

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

(1) When the fault is on the part of both contracting parties, neither may
recover what he has given by virtue of the contract, or demand the performance
of the other's undertaking;
(2) When only one of the contracting parties is at fault, he cannot recover
what he has given by reason of the contract, or ask for the fulfillment of what has
been promised him. The other, who is not at fault, may demand the return of
what he has given without any obligation to comply his promise. (Article 1412)

WHAT IS THE RULE IF THE CONTRACT IS DIVISIBLE AND THE ILLEGAL TERMS
CAN BE SEPARATED FROM THE LEGAL ONES?

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

WHO CAN RAISE THE DEFENSE OF ILLEGALITY OF A CONTRACT?

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

Page 134 of 145


TITLE III
NATURAL OBLIGATIONS

WHAT ARE THE KINDS OF OBLIGATIONS? DEFINE EACH.

Obligations are civil or natural.

Civil obligations give a right of action to compel their performance.
Natural obligations, not being based on positive law but on equity and
natural law, do not grant a right of action to enforce their performance, but after
voluntary fulfillment by the obligor, they authorize the retention of what has
been delivered or rendered by reason thereof (Article 1423).

DEFINE VOLUNTARY FULFILLMENT.

Voluntary fulfillment means that the debtor complied with the same even
if he knew that he could not have been legally forced to do so. In the case of
partial voluntary fulfillment, the balance cannot be recovered, since on said
balance, there has not been created a legal obligation.

HOW IS UNDUE PAYMENT DISTINGUISHED FROM NATURAL OBLIGATION?

If a debt that has prescribed is paid not knowing it has prescribed, the
payor can recover on the ground of undue payment. But if it is paid knowing
Page 135 of 145


that it has prescribed already, the payor cannot recover for this would be a case
of a natural obligation.

IS THERE A JURIDICAL TIE IN MORAL OBLIGATIONS?

While there is a juridical tie in natural obligations, there is none in moral
obligations.

GIVE EXAMPLES OF NATURAL OBLIGATIONS.

1. When a right to sue upon a civil obligation has lapsed by extinctive
prescription, the obligor who voluntarily performs the contract cannot
recover what he has delivered or the value of the service he has rendered
(Article 1424).
2. When without the knowledge or against the will of the debtor, a third
person pays a debt which the obligor is not legally bound to pay because
the action thereon has prescribed, but the debtor later voluntarily
reimburses the third person, the obligor cannot recover what he has paid
(Article 1425).
3. When a minor between eighteen and twenty-one years of age who has
entered into a contract without the consent of the parent or guardian, after
the annulment of the contract voluntarily returns the whole thing or price
received, notwithstanding the fact that he has not been benefited thereby,
there is no right to demand the thing or price thus returned (Article 1426).
4. When a minor between eighteen and twenty-one years of age, who has
entered into a contract without the consent of the parent or guardian,
voluntarily pays a sum of money or delivers a fungible thing in fulfillment
of the obligation, there shall be no right to recover the same from the
obligee who has spent or consumed it in good faith (Article 1427).
5. When, after an action to enforce a civil obligation has failed the defendant
voluntarily performs the obligation, he cannot demand the return of what
he has delivered or the payment of the value of the service he has
rendered (Article 1428).
6. When a testate or intestate heir voluntarily pays a debt of the decedent
exceeding the value of the property which he received by will or by the
law of intestacy from the estate of the deceased, the payment is valid and
cannot be rescinded by the payer (Article 1429).
7. When a will is declared void because it has not been executed in
accordance with the formalities required by law, but one of the intestate
heirs, after the settlement of the debts of the deceased, pays a legacy in
compliance with a clause in the defective will, the payment is effective
and irrevocable (Article 1439).

TITLE IV
Page 136 of 145


ESTOPPEL (N)

WHAT IS ESTOPPEL?

Through estoppel an admission or representation is rendered conclusive
upon the person making it, and cannot be denied or disproved as against the
person relying thereon. (Article 1431) It is a condition or state by virtue of which
an admission or representation is rendered conclusive upon the person making
it, and cannot be denied or disproved as against the person relying thereon.

WHAT ARE THE KINDS OF ESTOppeL?

Estoppel may be:

a. Estopple in pais (by conduct or equitable estoppel);

This may be estoppel:

a) by conduct or acceptance of benefits;
b) by representation or concealment;
c) by silence;
d) by omission;
e) by laches.

b. Estoppel by deed (technical estoppel (Article 1433);

This may be estoppel:

a) by deed proper (written instrument may also be in the form of a
bond or mortage;
b) by judgment as a court record.

c. Estoppe by laches (Tijam vs. Sibonghanoy, 23 SCRA 29).

DEFINE EACH KIND OF ESTOPPEL.

a. Estoppel in pais or by conduct is that which arises when one by his acts,
representations or admissions, or by his silence when he ought to speak
out, intentionally or through culpable negligence, induces another to
believe that certain facts to exist and such other rightfully relies and acts
on such belief, as a consequence of which he would be prejudiced if the
former is permitted to deny the existence of such facts.
b. Estoppel by deed is a type of technical estoppel by virtue of which a party
to a deed and his privies are precluded from asserting as against the other
Page 137 of 145


party and his privies any right or title in derogation of the deed, or from
denying any material fact asserted therein. On the other hand, estopel by
record is a type of technical estoppel by virtue of which a party and his
privies are precluded from denying the truth of matters set forth in a
record, whether judicial or legislative.
c. Laches, in general sense, is failure or neglect, for an unreasonable and
unexplained length of time, to do that which, by exercising due diligence,
could or should have been done earlier; it is negligence or omission to
assert a right within reasonable time, warranting a presumption that the
party entitled to assert it either has abandoned it or declined to assert it
(Tijam vs. Sibonghanoy, supra; Heirs of Lacamen vs. Heirs of Laruan, 65 SCRA
605). It is therefore, a type of equitable estoppel which arises when a party,
knowing his rights as against another, takes no step or delays in enforcing
them until the condition of the latter, who has no knowledge or notive
that the former would assert such rights, has become so changed that he
cannot, without injury or prejudice, be restored to his former state.

WHAT IS THE BASIS OF THE DOCTRINE OF LACHES?

The doctrine of laches or of stale demands is based on public policy
which requires, for the peace of society, the discouragement of stale claims and,
unlike the statute of limitations, is not a mere question of time but is principally a
question of the inequity or unfairness of permitting a right or claim to be
enforced or asserted (Tijam vs. Sibonghanoy, supra).

WHAT ARE THE ESSENTIAL ELEMENTS OF LACHES?

The four (4) essential elements of laches are:

a. Conduct on the part of the defendant, or of one under whom he claims,
giving rise to the situation of which the complaint seeks a remedy;
b. Delay in asserting the complainants rights, the complainant having had
knowledge or notice of the defendants conduct and having been afforded
an opportunity to institute a suit;
c. Lack of knowledge or notice on the part of the defendant that the
complainant would assert the right on which he bases his suit; and
d. Injury or prejudice to the defendant in the event relief is accorded to the
complainant, or the suit is not held barred (Miguel vs. Catalino, 26 SCRA
234 and cases cited therein).

DISTINGUISH BETWEEN LACHES AND PRESCRIPTION.

The defense of laches applies independently of prescription. Laches is
different from the statute of limitations in that:
Page 138 of 145


a) Prescription is concerned with the fact of delay, whereas laches is concerned
with the effect of delay.
b) Prescription is a matter of time; laches is principally a question of inequity of
permitting a claim to be enforced, this inequity being founded on some
change in the condition of the property or the relation of the parties.
c) Prescription is statutory; laches is not.
d) Laches applies in equity; whereas prescription applies at law.
e) Prescription is based on fixed time, laches is not.
4

f) While prescription is unavailing against a holder of a valid certificate of title,
the equitable doctrine of laches may be applied against the plaintiffs for
failure to assert their ownership for such an unreasonable length of time
against its occupant.
5

WHAT IS MEANT BY ESTOPPEL BY SILENCE?

Estoppel by silence or inaction refers to a type of estoppel in pais which
arises when a party, who has a right and opportunity to speak or act as well as a
duty to do so under the circumstanc4es, intentionally or through culpable
negligence, induces another to believe certain facts to exist and such other relies
and acts on such belief, as a consequence of which he would be prejudiced if the
former is permitted to deny the existence of such facts.

On the other hand, estoppel by acceptance of benefits refers to a type of
estoppel in pais which arises when a party, by accepting benefits derived from a
certain act or transaction, intentionally or through culpable negligence, induces
another to believe certain facts to exist and such other relies and acts on such
belief, as a consequence of which he would be prejudiced if the former is
permitted to deny the existence of such facts.

GIVE AN EXAMPLE OF ESTOPPEL BY SILENCE.

When in a contract between third persons concerning immovable
property, one of them is misled by a person with respect to the ownership or real
right over the real estate, the latter is precluded from asserting his legal title or
interest therein, provided all these requisites are present:

4
Nielson & Co., Inc. v. Lepanto Consolidated Mining Co., 18 SCRA 1040, December 17,
1966, per Zaldivar, J. See also Heirs of Batiog Lacamen v. Heirs of Laruan, 65 SCRA 605, 609, July
31, 1975; Radio Communication of the Philippines, Inc. v. NLRC, 223 SCRA 656; June 25, 1993;
Jimenez v. Fernandez, 184 SCRA 190, 196, April 6, 1990; Santiago v. Court of Appeals, 278 SCRA
98, August 21, 1997, per Hermosisima, Jr. J.
5
Republic vs. Court of Appeals, 204 SCRA 160 [1991].

Page 139 of 145


(1) There must be fraudulent representation or wrongful concealment of facts
known to the party estopped;
(2) The party precluded must intend that the other should act upon the facts
as misrepresented;
(3) The party misled must have been unaware of the true facts; and
(4) The party defrauded must have acted in accordance with the
misrepresentation. (Article 1437)

One who has allowed another to assume apparent ownership of personal
property for the purpose of making any transfer of it, cannot, if he received the
sum for which a pledge has been constituted, set up his own title to defeat the
pledge of the property, made by the other to a pledgee who received the same in
good faith and for value. (Article 1438)

WHAT IS MEANT BY ESTOPPEL BY JUDGMENT?

Estoppel by judgment is merely a type of estoppel by record. It may be
defined as the preclusion of a party to a case from denying the facts adjudicated
by a court of competent jurisdiction.

This type of estoppel must not be confused with res judicata. Estoppel by
judgment bars the parties from raising any question that might have been put in
issue and decided in a previous litigation, whereas res judicata makes a judgment
conclusive between the same parties as to the matter directly adjudged (Phil.
Natl. Bank vs. Barreto, 52 Phil. 818; NAMARCO vs. Macadaeg, 52 Off. Gaz. 182).

WHAT IS THE EFFECT IF A PERSON WHO IS NOT THE OWNER OF A THING SELLS
OR ALIENATES AND DELIVERS IT AND LATER THE SELLER OR GRANTOR ACQUIRES
TITLE THERETO?

When a person who is not the owner of a thing sells or alienates and
delivers it, and later the seller or grantor acquires title thereto, such title passes
by operation of law to the buyer or grantee (Article 1434).

WHAT IS THE EFFECT IF A PERSON IN REPRESENTATION OF ANOTHER SELLS OR
ALIENATES A THING VIZ A VIS THE BUYER OR GRANTEE?

If a person in representation of another sells or alienates a thing, the
former cannot subsequently set up his own title as against the buyer or grantee
(Article 1435).

CAN A LESSEE OR BAILEE ASSERT TITLE TO THE THING LEASED OR RECEIVED?

Page 140 of 145


A lessee or a bailee is estopped from asserting title to the thing leased or
received, as against the lessor or bailor (Article 1436).

WHO ARE THE PERSONS BOUND BY ESTOPPEL?

Estoppel is effective only as between the parties thereto or their
successors-in-interest (Article 1439).

TITLE V
TRUSTS (N)
CHAPTER 1
GENERAL PROVISIONS

DEFINE TRUST.

Trust may be defined as the legal relationship between one person having
an equitable ownership over a certain property and another having the legal title
thereto.

WHO ARE THE PARTIES TO A TRUST?

A person who establishes a trust is called the trustor (or settler); one in
whom confidence is reposed as regards the property for the benefit of another
person is known as the trustee (he holds the property in trust for the benefit of
another); and the person for whose benefit the trust has been created is referred
to as the beneficiary or cestui que trust (Article 1440). The trustor may at the same
time be the beneficiary.

GIVE AND DEFINE THE DIFFERENT KIND OF TRUSTS.

Trusts are either express or implied.

EXPRESS TRUSTS are created by the intention of the trustor or of the parties.

IMPLIED TRUSTS come into being by operation of law (Article 1441). They
are those which, without being expressed, are deducible from the nature of the
transaction as matters of intent, or which are superinduced on the transaction by
operation of law as matters of equity, independently of the particular intention of the
parties. They are ordinarily subdivided into resulting and constructive trusts.

Implied trusts may be resulting or constructive.

Page 141 of 145


A RESULTING TRUST (bare or passive trust), in its more restricted sense, is a
trust raised by implication of law and presumed always to have been
contemplated by the parties, the intention as to which is to be found in the nature
of the transaction, but not expressed in the deed or instrument of conveyance.
A CONSTRUCTIVE TRUST, in its more restricted sense, as contradistinguished
from a resulting trust, is a trust not created by words, either expressly or
impliedly evincing a direct intention to create a trust, but by the construction of
equity in order to satisfy the demands of justice. If a person obtains legal title to
property by fraud or concealment, courts of equity will impress upon the title a
so-called constructive trust in favor of the defrauded party (Ramos vs. Ramos, 61
SCRA 284). A constructive trust is not, therefore, a trust in the technical sense
(Article 1456).

DISTINGUISH BETWEEN EXPRESS TRUST AND IMPLIED TRUST.

Express trust and implied trust may be distinguished from each other in
the following ways:

a) Express trust is one created by the intention of the trustor or of the parties,
while an implied trust is one that comes into being by operation of law.
b) Express trusts are those created by the direct and positive acts of the parties,
by some writing, or deed, or will, or by words evidencing an intention to
create a trust. On the other hand, implied trusts are those which, without
being expressed, are deducible from the nature of the transaction by
operation of law as matters of equity, independently of the particular
intention of the parties.
c) Thus, if intent to establish a trust is clear, the trust is express; if the intent to
establish a trust is to be taken from the circumstances or other matters
indicative of such intent, then the trust is implied (Cuaycong vs. Cuaycong, 21
SCRA 1192).
d) No express trust concerning an immovable or any interest therein may be
proved by parol evidence (Article 1443), while the existence of an implied
trust may be proved by parol evidence.
e) Laches and prescription do not constitute a bar to enforce an express trust, at
least while the trustee does not openly repudiate the trust, and make known
such repudiation to the beneficiary, while laches and prescription may
constitute a bar to enforce an implied trust, and no repudiation is required
unless there is a concealment of the facts giving rise to the trust (Fabian vs.
Fabian, 21 SCRA 213).

WHAT ARE THE CHARACTERISTICS OF TRUST?

a. It is a fiduciary relationship.
b. It is created by law or by agreement.
Page 142 of 145


c. It is one where the legal title is held by one, and the equitable title or
beneficial title is held by another.

HOW IS TRUST DISTINGUISHED FROM STIPULATION POUR AUTRUI?

a. A trust may exist because of a legal provision or because of an agreement;
a stipulation pour autrui can arise only in the case of contracts.
b. A trust refers to specific property; a stipulation pour autrui refers to
specific property or to other things.

CHAPTER 2
EXPRESS TRUSTS

WHAT ARE THE FORMALITIES OF EXPRESS TRUSTS?

No express trusts concerning an immovable or any interest therein may be
proved by parol evidence (Article 1443). Therefore:

a. The requirement that the express trust be in writing is only for
enforceability, not for validity between the parties. Hence, this Article may
by analogy be included under the Statute of Frauds.
b. By implication, for a trust over personal property, an oral agreement is
valid and enforceable between the parties.
c. Regarding third persons, the trust must be in a public instrument and
registered in the Registry of Property, if it concerns real property.

HOW IS AN EXPRESS TRUST CREATED?

No particular words are required for the creation of an express trust, it
being sufficient that a trust is clearly intended (Article 1444). An express trust is
therefore created:

a. By conveyance to the trustee by an act inter vivos or mortis causa (as in a
will).
b. By admission of the trustee that he holds the property only as trustee.

WHAT IS THE EFFECT OF THE EXPRESS TRUST IF THE TRUSTEE APPOINTED
DECLINES THE DESIGNATION?

No trust shall fail because the trustee appointed declines the designation,
unless the contrary should appear in the instrument constituting the trust.
(Article 1445)

WHAT IS REQUIRED IN ORDER TO CREATE AN EXPRESS TRUST?
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Acceptance by the beneficiary is necessary. Nevertheless, if the trust
imposes no onerous condition upon the beneficiary, his acceptance shall be
presumed, if there is no proof to the contrary. (Article 1446)

HOW ARE EXPRESS TRUSTS ENDED?

a. Mutual agreement by all the parties
b. Expiration of the term
c. Fulfillment of the resolutory condition
d. Rescission or annulment (as in contracts)
e. Loss of the subject matter of the trust
f. Order of the court
g. Merger
h. Accomplishment of the purpose of the trust

CHAPTER 3
IMPLIED TRUSTS

WHAT ARE EXAMPLES OF RESULTING TRUSTS?
a) There is an implied trust when property is sold, and the legal estate is granted
to one party but the price is paid by another for the purpose of having the
beneficial interest of the property. The former is the trustee, while the latter is
the beneficiary. However, if the person to whom the title is conveyed is a
child, legitimate or illegitimate, of the one paying the price of the sale, no
trust is implied by law, it being disputably presumed that there is a gift in
favor of the child. (Article 1448)
b) There is also an implied trust when a donation is made to a person but it
appears that although the legal estate is transmitted to the donee, he
nevertheless is either to have no beneficial interest or only a part thereof.
(Article 1449)
c) When land passes by succession to any person and he causes the legal title to
be put in the name of another, a trust is established by implication of law for
the benefit of the true owner. (Article 1451)
d) If two or more persons agree to purchase property and by common consent
the legal title is taken in the name of one of them for the benefit of all, a trust
is created by force of law in favor of the others in proportion to the interest of
each. (Article 1452)
e) When property is conveyed to a person in reliance upon his declared
intention to hold it for, or transfer it to another or the grantor, there is an
implied trust in favor of the person whose benefit is contemplated. (Article
1453)

WHAT IS AN EXAMPLE OF CONSTRUCTIVE TRUST?
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a. If the price of a sale of property is loaned or paid by one person for the
benefit of another and the conveyance is made to the lender or payor to
secure the payment of the debt, a trust arises by operation of law in favor
of the person to whom the money is loaned or for whom it is paid. The
latter may redeem the property and compel a conveyance thereof to him.
(Article 1450)
b. If an absolute conveyance of property is made in order to secure the
performance of an obligation of the grantor toward the grantee, a trust by
virtue of law is established. If the fulfillment of the obligation is offered by
the grantor when it becomes due, he may demand the reconveyance of the
property to him. (Article 1454)
c. When any trustee, guardian or other person holding a fiduciary
relationship uses trust funds for the purchase of property and causes the
conveyance to be made to him or to a third person, a trust is established
by operation of law in favor of the person to whom the funds belong.
(Article 1455)
d. If property is acquired through mistake or fraud, the person obtaining it
is, by force of law, considered a trustee of an implied trust for the benefit
of the person from whom the property comes. (Article 1456)

WHAT IS THE PERIOD OF PRESCRIPTION OF AN ACTION FOR RECONVEYANCE
OF REAL PROPERTY BASED ON IMPLIED TRUST?

It depends:

a) If the action for reconveyance involves the annulment of a voidable contract
which became the basis for the fraudulent registration of the subject property,
then the period of prescription is 4 years from the discovery of the fraud. This
finds codal support in Article 1391, par. 4 of the Civil Code (Gerona vs. De
Guzman, 11 SCRA 153; Fabian vs. Fabian, 22 SCRA 231; Carantes vs. Court of
Appeals, 76 SCRA 514; Alarcon vs. Bidin, 120 SCRA 390).
b) If the action does not involve the annulment of a contract, but there was fraud
in the registration of the subject property, then the period of prescription is 10
years from the discovery of the fraud. This finds codal support in Article 1144,
No. 2 (Bueno vs. Reyes, 27 SCRA 1179; Varsity Hills, Inc. vs. Navarro, 43 SCRA
503; Escay vs. Court of Appeals, 61 SCRA 360; Jaramil vs. Court of Appeals, 78
SCRA 420; Vda. De Nacalaban vs. Court of Appeals, 80 SCRA 428; Duque vs.
Domingo, 80 SCRA 654).
c) If the action involves the declaration of nullity or inexistence of a void or
inexistent contract which became the basis for the fraudulent registration of
the subject property, then the action is imprescriptible. This finds codal support
in Article 1410 (Article Tongoy vs. Court of Appeals, 123 SCRA 718).
Page 145 of 145


d) If the action for reconveyance is in reality an action to quiet title and the
legitimate owner of the subject property which was fraudulently registered in
the name of another had always been in possession thereof so that the
constructive notice rule cannot be applied, then the action is imprescriptible
(Caragay-Lagno vs. Court of Appeals, 133 SCRA 718).

CAN A TRUSTEE ACQUIRE ABSOLUTE OWNERSHIP OVER THE PROPERTY HELD
IN TRUST BY ACQUISITIVE PRESCRIPTION?

Whether the trust is express or implied, as a general rule, the trustee
cannot acquire absolute ownership over the trust by acquisitive prescription.

However, if (1) he repudiates the right of the beneficiary; and (2) such act
of repudiation is brought to the knowledge of the beneficiary, and (3) the
evidence thereon is clear and conclusive, he may be able to acquire absolute
ownership over the trust but only (4) after the lapse of the period fixed by law.

HOW MAY IMPLIED TRUST BE PROVED?

An implied trust may be proved by oral evidence. (Article 1457)

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