OBLIGATIONS AND CONTRACTS • Not a thing but a particular conduct of the debtor.

• Giving, doing, or not doing something.

TITLE I: OBLIGATIONS o “to give” – delivery of movable or immovable thing.
o “to do” – all kinds of works and services.
CHAPTER 1: GENERAL PROVISIONS
o “not to do” – abstaining from some act.
Art. 1156. An obligation is a juridical necessity to give, to do or not to do. (n)
REQUISITES OF A PRESTATION:
OBLIGATION 1. It must be possible, physically and juridically.
 Definitions 2. It must be determinate, or at least, determinable
3. It must have a possible equivalent in money.
• The juridical relation, created by virtue of certain facts, between two
or more persons, whereby one of them, known as the creditor or
oblige, may demand of the other, known as the debtor or obligor, a  Efficient Cause
definite prestation (De Diego and Ruggiero). • Juridical tie or vinculum which may be a relation established by:
• An obligation is a juridical tie between two persons, by virtue of which 1. Law (husband and wife)
one of them, the creditor, has the right to demand of the other, the 2. Bilateral Acts (contracts)
debtor, a definite prestation (Brugi). 3. Unilateral Acts (crimes and quasi-delicts)
• It is the legal relation established between one party and another
whereby the latter is bound to the fulfillment of a prestation which the CIVIL OBLIGATIONS NATURAL OBLIGATIONS
former may demand of him (Manresa).
Give right of action to compel their Cannot be enforced by court
• A juridical relation whereby a person (called the creditor) may performance. action but which are binding on the
demand from another (called the debtor) the observance of a party who makes them, in
determinate conduct, and, in case of breach, may obtain satisfaction Can be enforced through court conscience and according to
from the assets of the latter (Aries Ramos). action or coercive power of public equity and justice.
 Correlative to the concept of right. Where there is right or power to authority.
demand, there is a correlative obligation.
Derive binding force from positive Derive their binding effect from
law. equity and natural justice.
ELEMENTS OF AN OBLIGATION:
1. An active subject (obligee or creditor): has the power to demand the
Art. 1157. Obligations arise from:
prestation.
(1) Law;
2. A passive subject (obligor or debtor): bound to perform the prestation. (2) Contracts;
3. An object or the prestation (3) Quasi-contracts;
4. The efficient cause or juridical tie (4) Acts or omissions punished by law; and
(5) Quasi-delicts. (1089a)
 Personal elements:
Sources of Obligations
• Active and Passive subjects  Planiol: obligations arise wither from contract or from law.
• May be individual persons or juridical persons.  Ruggiero: Will of parties and acts of a different nature producing juridical
• Must be determinable. tie.
 More scientific classification: law and acts
 Object or prestation

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Unilateral promise can give rise to obligations
 Anyone who promises a reward for the realization of an act is obliged to
pay that reward,
 Code contains no provision from which we can attribute any obligatory
force to a unilateral promise before acceptance.
 An offer without acceptance is not binding.
Art. 1158. Obligations derived from law are not presumed. Only those
expressly determined in this Code or in special laws are demandable, and
shall be regulated by the precepts of the law which establishes them; and as
to what has not been foreseen, by the provisions of this Book. (1090)
Agreement Unnecessary
Law cannot exist as a source of obligations, unless the acts to which its
principles may be applied exist. But once those acts exist, the obligation
arising therefrom by virtue of express provisions of the law are entirely
independent of the agreement of the parties.
Obligation Not Presumed
Obligations derived from law are not presumed. Only those expressly provided
for in this Code or in special laws are enforceable.
Art. 1159. Obligations arising from contracts have the force of law between the
contracting parties and should be complied with in good faith. (1091a)
Validity of Contract
 Autonomy of will
 Terms should not be contrary to law, morals, good customs, public policy,
or public order.
Falsification of Contract
 Unauthorized insertion of additional stipulations does not avoid the whole
contract.
 Still enforceable
 Disregard only the additional stipulations.
Attorney’s Contracts
 Different footing from contracts of any other services.
 The court may ignore the contract and limit recovery to reasonable
compensation if the amount is found by court to be unreasonable.
Pre-Contractual Obligations
 Pre-contractual obligations are possible.
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 The offeree may incur expenses for trips, testing, plans, and such would
be a total loss if the offeror suddenly withdraws his offer.
 If the offeror is guilty of fault or negligence – Art 2176 (quasi-delicts).
 No fault or negligence but there was abuse of right – Art 19.
Art. 1160. Obligations derived from quasi-contracts shall be subject to the
provisions of Chapter 1, Title XVII, of this Book. (n)
Quasi-Contract
 A juridical relation which arises from certain lawful, voluntary, and
unilateral acts, to the end that no one may be unjustly enriched or
benefited at the expense of another.
 Must be lawful
 Must be unilateral
Art. 1161. 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. (1092a)
CIVIL LIABILITY FROM CRIMES
 Every person criminally liable for a felony is also civilly liable (Art 100).
 Oftentimes, commission of a crime causes not only moral evil but also
material damage.
 NON-LIABILITY FOR CRIME
 Article 12 of RPC – The ff. are exempt from criminal liability:
1. Imbecile or insane, unless the latter acted during a lucid
interval.
2. Under 9 years old
3. Over 9 and under 15, unless he acted with discernment
4. Any person who acts under the compulsion of an irresistible
force.
5. Any person who acts under the impulse of an uncontrollable
fear of an equal or greater injury.
*THEY ARE NOT EXEMPT FROM CIVIL LIABILITY
 SUBSIDIARY LIABILITY FOR CRIME
• Inkeepers, tavernkeepers, and any other persons or corporations
shall be civilly liable for crimes committed in their establishment, in
all cases where a violation of municipal ordinances or some
general or special police regulation have been committed by
them or their employees.
• Inkeepers are also subsidiarily liable for the restitution of goods
taken by robbery or theft within their houses from guests lodging
therein, or for payment of value thereof.
 • Employers, teachers, persons, and corporations for felonies
committed by their servants, pupils, workmen, apprentices, or
employees in the discharge of their duties.
EXTENT OF CIVIL LIABILITY
 RPC (Art 104 – Art 111)
 Civil Code (Art 2202, 2204-2206, 2211, 2219, 2220, 2230)
 EXTINGUISHMENT OF LIABILITY
• Civil liability for crimes is extinguished by the same causes
provided by the Civil Code for the extinguishment of other
obligations.
ENFORCEMENT OF LIABILITY
 When a criminal action is instituted, the civil action for recovery of civil
liability arising from the offense charged is impliedly instituted with the
criminal action, unless offended party expressly reserves this right.
 SEPARATE CIVIL ACTION
• Criminal and Civil actions arising from the same offense may be
instituted separately, but after the criminal action has been
commenced the civil action cannot be instituted until final
judgment has been rendered in the criminal action, except when
allowed by law.
 WRIT OF ATTACHMENT
• In earlier decisions, the SC held that a writ of preliminary
attachment cannot be obtained against the properties of the
accused by the offended party, because there is no rule in the
laws of criminal procedure which permits it, and the rules on
attachment in the Code of Civil Procedure were applicable only
to civil actions.
o No logical reason for this conclusion.
• Upon the filing of a criminal action, there is impliedly filed also a
civil action.
• Namit and Moreno cases granted a writ of preliminary
attachment in an estafa case.
 NO CRIMINAL PROCEEDINGS
• A civil action may be validly instituted, without the necessity of first
instituting the criminal action.
 INDEPENDENT CIVIL ACTION (Art 31-34)
• Cases in which the civil action arising from a criminal act is entirely
independent of the criminal action. Hence, the civil action may
be filed separately without any reservation in the criminal action.
1. Obligations not arising from the act or omission claimed to
be criminal
2. Violations of constitutional rights and liberties of individuals
3. Defamation, fraud, or physical injuries
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OBLIGATIONS AND CONTRACTS | TOLENTINO SUMMARY | MADZ ONG
4. Refusal or failure of members of a local police force to
render protection to life or property
EVIDENCE REQUIRED
 Amount of proof or evidence that is required depends upon the nature of
the proceeding in which the claim is made.
• Criminal: proof beyond reasonable doubt
• Civil Case: preponderance of evidence
EFFECT OF ACQUITTAL
 It is only when the civil action is based on the very same facts on which
the criminal action which ended in acquittal was based, that the
acquittal will bar the civil action.
Art. 1162. Obligations derived from quasi-delicts shall be governed by the
provisions of Chapter 2, Title XVII of this Book, and by special laws. (1093a)
CHAPTER 2: NATURE AND EFFECT OF OBLIGATIONS
CONCEPT OF QUASI-DELICT
 Whoever by act or omission causes damage to another, there being fault
or negligence, is obliged to pay for the damage done.
 DISTINCT FROM CRIME
• An injured party or his heirs has the choice between an action to
enforce civil liability arising from crime under Article 100 of the
RPC and an action for quasi-delict under Articles 2176-2194 of the
Civil Code.
• No need to make a reservation to file a civil action in the criminal
case, as the civil action is based on culpa aquiliana (tort).
 BASIS OF LIABILITY
• Principle of equity: fault or negligence cannot prejudice anyone
else besides its author.
 FAULT OR NEGLIGENCE
• Negligence is merely the want of care required by the
circumstances. It is relative or comparative, and not an absolute
term.
 TEST OF NEGLIGENCE
• ELEMENTS:
1. A duty on the part of the defendant to protect the plaintiff
from the injury of which the latter complains
2. Failure to perform that duty
3. An injury to the plaintiff through such failure
• Criterion for determining the existence of negligence:
 Would a prudent man, in the position of the person to whom 3. There must be a direct causal connection or a relation of cause and effect
negligence is attributed, foresee harm to the person injured as a between the fault or negligence and the damage or injury, or that the
reasonable consequence of the course about to be pursued? fault or negligence be the cause of the damage or injury.

 DOCTRINE OF PROXIMATE CAUSE

 CULPA AQUILIANA VS CULPA CONTRACTUAL • Such adequate and efficient cause as, in the natural order of
events, and under the particular circumstances surrounding the
CULPA AQUILIANA CULPA CONTRACTUAL case, could necessarily produce the event.
Negligence as a source of Negligence in the performance of a
obligation contract. LIABILITY FOR FAULT OF OTHERS
Governed by Art 2176-2194 Governed by Art 1179 et sequel  The obligation arising from quasi-delict is demandable not only for one’s
and other provisions relative to own acts or omissions, but also those of persons for whom one is
contracts responsible.
Quasi-delict • Father and mother – minor
• Guardians – minor
 NEGLIGENCE VS DOLO • Owners and managers of an establishment – employees
• Employers – employees and household helpers
FRAUD/DOLO NEGLIGENCE/CULPA • State – special agent
Involves willfulness or deliberate Mere want of care or diligence • Teachers or heads of establishment or arts and trades – students
intent to cause damage or injury to  DILIGENCE OF EMPLOYERS
another QUASI-DELICT CRIME
Liability of employer is primary Liability of employer is subsidiary
 NEGLIGENCE VS CRIME Employer can avoid liability by Liability is absolute and cannot be
proving that he exercised the avoided by proof of such
QUASI-DELICT CRIME diligence of a good father of a diligence
Nature of the Private right - wrong Public right – wrong against family to prevent damage
right violated against the individual the state All employers are liable Employer is only liable when he is
Condition of Criminal intent is not Criminal intent is necessary engaged in some kind of business
the mind necessary or industry.
Legal basis of Any act or omission An act can be punished as a
liability wherein fault or crime only when there is a CHAPTER 2: NATURE AND EFFECT OF OBLIGATIONS
negligence intervenes. penal law punishing it.
Liability for Every quasi-delict gives There are crimes from which PRESTATIONS IN OBLIGATIONS
damages rise to liability for no civil liability arises. 1. To give
damages. a. A specific or determinate object or thing
b. An indeterminate or generic thing
Form of redress Reparation; Fine or imprisonment;
2. To do
Compensation or Punishment
3. Not to do
indemnification
Compromise Can be compromised Can never be compromised
DELIVERY OF GENERIC OBJECTS
 A generic thing is one that is indicated only by its kinds.
REQUISITES OF LIABILITY
 In the obligation to deliver a generic thing, the object due is
1. That there exists a wrongful act or omission imputable to the defendant by
determinable; the moment it is delivered, it becomes determinate.
reason of his fault or negligence
2. There exists a damage or injury, which must be proven by the person
DELIVERT OF DETERMINATE THING
claiming recovery

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 One that is individualized and can be identified or distinguished from
others of its kind.
 3 incidental or accessory obligations:
1. The obligation to preserve the thing with due care
2. The obligation to deliver the fruits
3. The obligation to deliver the accessions and accessories
Art. 1163. Every person obliged to give something is also obliged to take care
of it with the proper diligence of a good father of a family, unless the law or the
stipulation of the parties requires another standard of care. (1094a)
REASON FOR PROVISION
 The obligation to deliver a thing would be illusory if the debtor were not
also obliged to preserve it.
DILIGENCE REQUIRED
 Diligence of a good father of a family (1173)
EFFECT OF BREACH
 Liability for damages
 Exception: fortuitous events or force majeure
Art. 1164. The creditor has a right to the fruits of the thing from the time the
obligation to deliver it arises. However, he shall acquire no real right over it
until the same has been delivered to him. (1095)
RIGHT TO FRUITS
 The creditor or obligee, in an obligation to deliver a determinate thing, is
entitled to the fruits from the time the obligation to delivery arises.
• Law; Quasi-delicts; Quasi-contract; Crimes – Law
• Suspensive Condition – the moment the condition happens
• Suspensive term – expiration of term
• Neither term nor condition – perfection of contract
REAL AND PERSONAL RIGHTS
 Real Right: the power belonging to a person over a specific thing, without
a passive subject individually determined, against whom such right may
be personally exercised.
 Personal Right: The power belonging to one person to demand of
another, as a definite passive subject, the fulfillment of a prestation to
give, to do, or not to do.
NEED FOR TRADITION OR DELIVERY
 From the time the obligation to deliver a determinate thing arises, the
creditor has only a personal right to the thing itself and to the fruits thereof.
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 The delivery or tradition of a thing constitutes a necessary and
indispensable requisite for the purpose of acquiring the ownership of the
same by virtue of a contract.
Art. 1165. When what is to be delivered is a determinate thing, the creditor, in
addition to the right granted him by Article 1170, may compel the debtor to
make the delivery.
If the thing is indeterminate or generic, he may ask that the obligation be
complied with at the expense of the debtor.
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. (1096)
REMEDIES OF CREDITOR
1. Specific Performance
2. Rescind or resolve the obligation
3. Damages, exclusively or in addition to either of the first actions
 SPECIFIC PERFORMANCE
• Whether the object of the obligation is determinate or generic,
the creditor has the right to ask that the same be performed.
IMPRISONMENT FOR DEBT
 Under the Constitution, no person shall be imprisoned for debt.
 This is without prejudice to subsidiary imprisonment for non-payment of
civil liability imposed in a criminal case or as punishment for contempt.
Art. 1166. The obligation to give a determinate thing includes that of delivering
all its accessions and accessories, even though they may not have been
mentioned. (1097a)
MEANING OF ACCESSORIES
 Those things which, destined for the embellishment, use, or preservation of
another thing of more importance, have for their object the completion of
the latter for which they are indispensable or convenient.
MEANING OF ACCESSIONS
 Accessions include everything which is produced by a thing, or which is
incorporated or attached thereto, either naturally or artificially.
 Do not include fruits.
WHAT TO DELIVER
 Everything that is attached, naturally or artificially, to the principal thing, as
well as that which serves to complete it, even if not attached to it, must
be delivered together with it.
 (3) When demand would be useless, as when the obligor has rendered it
CONTRARY INTENT beyond his power to perform.
 The parties may agree to exclude any accession or accessory of the
thing. 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
Art. 1167. If a person obliged to do something fails to do it, the same shall be upon him. From the moment one of the parties fulfills his obligation, delay by
executed at his cost. the other begins. (1100a)

This same rule shall be observed if he does it in contravention of the tenor of CONCEPT AND NATURE OF DELAY
the obligation. Furthermore, it may be decreed that what has been poorly  Delay in the fulfillment of the obligation – synonymous to mora.
done be undone. (1098)  Non-fulfillment with respect to time
 There can only be delay in positive obligations (to do and to give) and not
PERFORMANCE AT DEBTOR’S COST in negative obligations (not to do and not to give).
 When the debtor does not comply with an obligation to do, the creditor is
entitled to have the thing done in a proper manner, by himself or by a KINDS OF MORA
third person at the expense of the debtor. 1. Mora solvendi – default on the part of the debtor
2. Mora accipiendi – default on the part of the creditor
PERSONAL COMPULSION 3. Compensatio morae – default of both parties in reciprocal obligations
 The law does not authorize the imposition of personal force or coercion
upon the debtor to comply with his obligation.  MORA SOLVENDI
 Sanction: damages • Mora on the part of the debtor is delay, contrary to law, in the
fulfillment of the prestation by reason of a cause imputable to the
INDEMNIFICATION FOR DAMAGES former.
 The application of this article presupposes that the act can be done by • There is no mora in natural obligations.
persons other than the debtor. Where only the debtor can do the thing, • REQUISITES:
the only remedy is to recover damages. 1. That the obligation be demandable and liquidated
2. That the debtor delays performance
Art. 1168. When the obligation consists in not doing, and the obligor does what 3. That the creditor requires performance judicially or
has been forbidden him, it shall also be undone at his expense. (1099a) extrajudicially
• NEED FOR DEMAND
DOING PROHIBITED THING o Default generally begins the moment the creditor
 Right granted under this article does not exclude the right to indemnity for demands the performance of the obligation.
damages. o Demand may be in any form, provided that it can be
proved.
Art. 1169. Those obliged to deliver or to do something incur in delay from the o WHEN DEFAULT BEGINS
time the obligee judicially or extrajudicially demands from them the fulfillment  Where there has been an extra-judicial demand
of their obligation. before action for performance was filed, the
effects of default arise from the date of such
However, the demand by the creditor shall not be necessary in order that extra-judicial demand.
delay may exist: o NATURE OF DEMAND
(1) When the obligation or the law expressly so declare; or  The demand must refer to the prestation that is
(2) When from the nature and the circumstances of the obligation it appears due and not to another.
that the designation of the time when the thing is to be delivered or the service • DEMAND NOT REQUIRED
is to be rendered was a controlling motive for the establishment of the o Four cases where demand is not necessary:
contract; or 1. Where there is an express stipulation to that effect
2. Where the law so provides

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 3. When the period is the controlling motive or the
principal inducement for the creation of the
obligation
4. Where demand would be useless
o PERIOD FIXED
 Intent of parties to constitute the debtor in delay
upon maturity even without demand must clearly
appear in the agreement.
 NATURE OF OBLIGATION
o From the nature and circumstances of the obligation, it
appears that the period was the determining motive for
the creation of the obligation.
 DEMAND WOULD BE USELESS
o Where performance has become impossible, demand
would be useless and will not be necessary to constitute
the debtor in delay:
1. Impossibility is caused by some act or fault of the
debtor.
2. Impossibility is caused by fortuitous events, but the
debtor has bound himself to be liable in cases of such
events.
 ACKNOWLEDGMENT OF DELAY
o Debtor will be in default even without demand, when he
acknowledges that he has incurred delay.
o There must be an express recognition and not merely
requests for extension.
 EFFECTS OF MORA SOLVENDI
1. When it has for its objects a determinate thing, the delay
places the risks of the thing on the debtor
2. He becomes liable for damages for the delay
 MORA ACCIPIENDI
• Delay in the performance based on the omission by the creditor
of the necessary cooperation, especially acceptance on his part.
• REQUISITES:
1. An offer of performance by the debtor who has the required
capacity
2. The offer must be to comply with the prestation as it should be
performed
3. The creditor refuses the performance without just cause
 EFFECTS OF MORA ACCIPENDI
1. The responsibility of the debtor for the thing is reduced and
limited to fraud and gross negligence
2. The debtor is exempted from the risk of loss of the thing which
automatically pass to the creditor
3. All expenses incurred by the debtor for the preservation of the
thing after the mora shall be chargeable to the creditor
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4. If the obligation bears interest, the debtor does not have to
pay the same from the moment of the mora
5. The creditor becomes liable for damages
6. The debtor may relieve himself of the obligation by
consignation of the thing.
 COMPENSATIO MORAE
• In reciprocal obligations, the general rule is that the fulfillment by
the parties should be simultaneous. Where both are in default,
their respective liability for damages shall be offset equitably.
CESSATION OF THE EFFECTS OF MORA – benefits of mora may cease
1. Renunciation by the creditor – express or implied (grants extension)
2. Prescription
Art. 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. (1101)
NON-PERFORMANCE BY FRAUD
 Fraud: voluntary execution of a wrongful act, or a willful omission, knowing
and intending the effects which naturally and necessarily arise from such
act or omission.
 Presence of deliberate intent
 BY FAULT OR NEGLIGENCE
• Culpa Contractual (Art 1173): fault or negligence of the debtor as
an incident in the fulfillment of an existing obligation
• Culpa Aquiliana: fault or negligence which constitutes an
independent source of obligation between parties not previously
bound.
 BY DELAY OR OTHER VIOLATIONS
• Every debtor who fails in the performance of his obligation is
bound to indemnify for the losses and damages caused thereby.
EXCUSE FOR NON-PERFORMANCE
 When the failure of the debtor to perform is due to fortuitous events or
force majeure, he cannot be held liable for damages unless there is an
express agreement to the contrary or the law provides otherwise in
particular cases.
RECOVERABLE DAMAGES
 Include all damages that a human being may suffer.
 PAYMENT OF MONEY
• When obligation consists only in the payment of money, rule (Art
2209) is that “if the obligation consists only 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 interest agreed upon, and in the absence of
stipulation, the legal interest, which is six percent per annum.
• Legal interest is recoverable even if not expressly stated in writing.
Art. 1171. Responsibility arising from fraud is demandable in all obligations.
Any waiver of an action for future fraud is void. (1102a)
PROHIBITED RENUNCIATION
 The renunciation prohibited is that which is made in advance of the fraud.
Art. 1172. 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. (1103)
KINDS OF CULPA
 Culpa Contractual and Culpa Aquiliana
 DEFENSE OF EMPLOYER
• Liability arising from culpa aquiliana, not involving a breach of an
existing obligation, an employer or master, may exculpate or
exempt himself from liability by proving that he had exercised due
diligence.
• Defense of due diligence is not available in culpa contractual.
 LIABILITY OF EMPLOYER
• When the employer is sued jointly with the negligent employee, in
cases of culpa contractual, the employee may be held liable
solidarily with the employer.
 MITIGATION OF DAMAGES
• In culpa contractual, the court is given discretion to mitigate
liability (Art 1172).
STIPULATION ON LIABILITY FOR NEGLIGENCE
 EXEMPTION FROM LIABILITY
• 2 kinds:
1. Party is relieved from the effects of his fault or negligence by
a third person
2. One party renounces in advance the right to enforce liability
arising from the fault or negligence of the other.
 Stipulations exempting from liability from gross negligence are
void because such negligence amounts to fraud.
Art. 1173. The fault or negligence of the obligor consists in the omission of that
diligence which is required by the nature of the obligation and corresponds
with the circumstances of the persons, of the time and of the place. When
negligence shows bad faith, the provisions of Articles 1171 and 2201,
paragraph 2, shall apply.
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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. (1104a)
DEGREE OF DILIGENCE REQUIRED
 Good father of a family
 Anyone who uses diligence below this standard is guilty of negligence
NEGLIGENCE A QUESTION OF FACT
 No fixed standard of diligence applicable to each and every obligation. It
depends upon the circumstances of the particular obligation.
Art. 1174. Except in cases expressly specified by the law, or when it is
otherwise declared by stipulation, or when the nature of the obligation
requires the assumption of risk, no person shall be responsible for those events
which could not be foreseen, or which, though foreseen, were inevitable.
(1105a)
FORTUITOUS EVENT; FORCE MAJEURE
 An event which takes place by accident and could not have been
forseen.
 2 General Causes: (1) Nature, (2) Act of man
 Characteristics:
1. Cause of the unforeseen and unexpected occurrence or the failure
of the debtor to comply with his obligation must be independent of
the human will
2. It must be impossible to foresee the event, or if it can be foreseen, it
must be impossible to avoid
3. The occurrence must be such as to render it impossible for the debtor
to fulfill his obligation in a normal manner
4. The obligor must be free from any participation in the aggravation of
the injury resulting to the creditor
 EFFECT IN GENERAL
• He cannot be held liable for damages or non-performance
 EFFECT OF NEGLIGENCE
• It is necessary that he be free from negligence
 EXPRESS STIPULATION
• Parties may stipulate that the debtor shall be held liable even if
performance is rendered impossible by fortuitous event.
 ASSUMPTION OF RISK
• One of the exceptions: when the nature of the obligation requires
assumption of risk.
ACTS OF CREDITOR
 Debtor is released from liability not only when the non-performance of the
obligation is due to fortuitous event but also when it is due to the act of
the creditor himself.
Art. 1175. Usurious transactions shall be governed by special laws. (n)
INTEREST: Income produced by money in relation to its amount and to the time
that it cannot be utilized by its owner.
USURY: Contracting for or receiving something in excess of the amount
allowed by law for the loan or forbearance of money, goods, or chattels.
Art. 1176. 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.
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. (1110a)
RECEIPT OF PRINCIPAL
 Payment of principal shall not be deemed to have been made until the
interests have been covered.
PAYMENT OF TAXES
 This article is not applicable to payment of taxes because a tax for one
year is independent of the taxes for other years.
Art. 1177. The creditors, after having pursued the property in possession of the
debtor to satisfy their claims, may exercise all the rights and bring all the
actions of the latter for the same purpose, save those which are inherent in his
person; they may also impugn the acts which the debtor may have done to
defraud them. (1111)
RIGHTS OF CREDITORS
1. To levy by attachment and execution upon all the property of the
debtor, except such as are exempt by law from execution
2. To exercise all rights and actions of the debtor except such as are
inherently personal to him
3. To ask for the rescission of the contracts made by the creditor in fraud
of their rights.
 LIABILITY OF DEBTOR’S PROPERTY
• Property of debtor is subject to liability for his obligations
 EXERCISE OF DEBTOR’S RIGHTS
• REQUISITES:
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1.Creditor has an interest in the right or action not only because
of his credit but because of the insolvency of the debtor
2. Malicious or negligent inaction of the debtor in the exercise of
his right or action of such seriousness as to endanger the
claim of the creditor
3. The credit of the debtor against a third person is certain,
demandable, and liquidated
4. The debtor’s right against the third person must be
patrimonial, or susceptible of being transformed to
patrimonial value
 ACCION SUBROGATORIA
o An action which the creditor may exercise in the place of his
negligent debtor in order to preserve or recover for the
patrimony of the debtor the product of such action, and then
obtain therefrom the satisfaction of his own credit.
 PERSONAL RIGHTS OF DEBTOR
• Rights of the debtor which cannot be exercised by the creditor
1. Right to existence
2. Rights or relations of public character
3. Rights of an honorary character
4. Rights consisting of powers which have not been used
5. Non-patrimonial rights
6. Patrimonial rights not subject to execution
7. Patrimonial rights inherent in the person of the debtor.
 RESCISSION OF FRAUDULENT ACT
• ACCION PAULIANA
• Set aside or revoke the acts which the debtor may have done to
defraud them.
o NEW DEBTS
 New debts contracted by the insolvent debtor
are not included because only acts which impair
the assets of the debtor are covered.
Art. 1178. Subject to the laws, all rights acquired in virtue of an obligation are
transmissible, if there has been no stipulation to the contrary. (1112)
ARTICLE APPLIED
 When there is no stipulation with regard to the assignment of an
obligation, all rights acquired by virtue of an obligation are transmissible in
accordance with law.
CHAPTER 3: DIFFERENT KINDS OF OBLIGATIONS
CLASSIFICATION OF OBLIGATIONS:
CIVIL CODE:
1. Pure shall also be demandable, without prejudice to the effects of the happening of
2. Conditional the event. (1113)
3. With a term
4. Alternative PURE OBLIGATIONS
5. Joint or mancommunada  Contains no term or condition.
6. Solidary or several or in solidum  It is immediately demandable and there is nothing to exempt the debtor
7. Divisible from compliance therewith.
8. Indivisible  A demand note is strictly a pure obligation.
9. With a penal clause  When the period originally given has been cancelled or non-fulfillment of
a condition resolves the period stipulated, the obligation must be
OTHER CLASSES OF OBLIGATIONS: considered as pure.
1. Unilateral and bilateral
2. Determinate and generic CONDITIONAL OBLIGATIONS
3. Legal, conventional, and penal  One which is subject to a condition.
 Condition:
• Every future and uncertain event upon which an obligation or
provision is made to depend.
 Natural • Futurity and uncertainty must concur as characteristics of the event.
 Civil  Condition must be imposed by will of the parties and not be a necessary
 Mixed legal requisite (e.g. Donation propter nuptias upon marriage)
 PAST EVENTS
• Must be unknown to the parties.
• The uncertainty in such case exists only in the minds of the parties and
 Unilateral and Bilateral
not in reality.
 Simple or Individual
• What can be a condition is the future knowledge or proof of a past
SANCHEZ  Multiple or collective
event unknown to the parties, but not the event itself.
ROMAN’S • Proof of an unknown past event may, by the will of the parties, be
CLASSIFICATION established as a condition.
OF  Simple and compound or multiple
OBLIGATIONS  Positive and Negative
 Real and Personal CLASSIFICATION OF CONDITIONS:
 Possible and Impossible
 Divisible and Indivisible ACCORDING TO WHEN IT GIVES RISE TO AN OBLIGATION:
 Principal and Accessory 1. SUSPENSIVE: happening of which, gives rise to an obligation
2. RESOLUTORY: happening of which, extinguishes rights already existing.

ACCORDING TO WHAT GIVES RISE TO THE OBLIGATION:

 Pure
1. POTESTATIVE: depends upon the will of the party
 Conditional
2. CASUAL: upon chance
 With a term
3. MIXED: partly upon chance and partly upon the will

ACCORDING TO NATURE:
SECTION 1: PURE AND CONDITIONAL OBLIGATIONS 1. DIVISIBLE: Can be performed in parts
2. INDIVISIBLE: cannot be performed in parts
ARTICLE 1179. Every obligation whose performance does not depend upon a
future or uncertain event, or upon a past event unknown to the parties, is ACCORDING TO PLURALITY OF CONDITIONS:
demandable at once. Every obligation which contains a resolutory condition 1. CONJUNCTIVE: All

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2. ALTERNATIVE: only one  RESOLUTORY:
• extinguishes rights and obligations already existing.
ACCORDING TO ACT OR OMMISSION: • Subsequent
1. POSITIVE: act  CONDITION DOES NOT HAPPEN:
2. NEGATIVE: ommission • Suspensive: conditional creditor loses all hope of becoming a real
creditor.
ACCORDING TO WHETHER STATED OR INFERRED: • Resolutory: creditor's rights become absolute.
1. EXPRESS
2. IMPLIED ARTICLE 1182. When the fulfillment of the condition depends upon the sole will
of the debtor, the conditional obligation shall be void. If it depends upon
ACCORDING TO WHETHER THEY CAN BE FULFILLED OR NOT: chance or upon the will of a third person, the obligation shall take effect in
1. POSSIBLE conformity with the provisions of this Code. (1115)
2. IMPOSSIBLE
DEFINITIONS:
INDIVISIBILITY OF CONDITIONS  Potestative Condition: depends upon the will of one of the contractive
 Fulfillment of conditions is indivisible, even when the object of the parties.
condition is a divisible thing. Hence, partial fulfillment does not give rise to  Casual Condition: depends exclusively by chance, and not upon the will
the existence of part of the obligation. of the contracting parties.
 By the very nature of the condition, by stipulation, or by law, it may be  Mixed Condition: depends upon the will of one of the contracting parties
divisible. and other circumstances, including the will of a third person.

PLURALITY OF CONDITIONS KINDS OF POTESTATIVE CONDITION:

 If several conditions are imposed for the same obligation, the necessity of 1. Simple potestative:
complying with all or one depends upon the intention of the parties. • presupposes not only a manifestation of will but also the realization of
 Alternatively or disjunctively: one is sufficient. an external act.
 Conjunctively: all must be complied with. • On the part of the debtor, does not prevent formation of a valid
obligation.
ARTICLE 1180. When the debtor binds himself to pay when his means permit 2. Purely potestative:
him to do so, the obligation shall be deemed to be one with a period, subject • depends solely and exclusively upon the will.
to the provisions of article 1197. (n) • Destroys efficacy of the legal tie.

COURT TO FIX PERIOD EFFECT POTESTATIVE CONDITION:

 Creditor should file an action to fix a period for the payment of the
obligation.
 Immediate action to enforce without a period previously fixed by court
would be premature.
ARTICLE 1181. In conditional obligations, the acquisition of rights, as well as the
extinguishment or loss of those already acquired, shall depend upon the
happening of the event which constitutes the condition. (1114)
SUSPENSIVE AND RESOLUTORY CONDITIONS
 SUSPENSIVE:
• obligation arises: if condition does not happen, obligations does not
come into existence.
• Condition precedent or antecedent.
 When it depends on the exclusive will of the debtor, it is VOID (not only the
condition but the whole obligation).
 When it depends on the exclusive will of the creditor, it is VALID.
 Applicable only when the condition is suspensive, and cannot apply to
resolutory conditions.
 A condition that is both potestative and resolutory may be valid even if it
depends upon the exclusive will of the obligor.
MIXED CONDITIONS
 depends not only upon the will of the debtor, but also upon chance or
the will of others.
 Valid

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ARTICLE 1183. Impossible conditions, those contrary to good customs or public
policy and those prohibited by law shall annul the obligation which depends
upon them. If the obligation is divisible, that part thereof which is not affected
by the impossible or unlawful condition shall be valid.
The condition not to do an impossible thing shall be considered as not having
been agreed upon. (1116a)
IMPOSSIBLE CONDITIONS
 May be physical or juridical.
 PHYSICAL: contrary to the law of nature
 JURIDICAL: contrary to law, morals, good customs, and public policy.
When it restricts essential rights.
 ILLICIT CONDITIONS
• For a condition to be considered illicit, it must consist of an act or a
fact.
• Illicit character is determined by its effects upon one of the parties.
Intention of the party imposing the condition must be considered.
REASON BEHIND THE LAW
 One who promises something under a condition that is impossible or illicit
knows that it cannot be fulfilled, and, manifests that he does not intend to
be bound.
SCOPE OF THE LAW
 condition must be positive and suspensive.
 If the illicit condition is negative, it is considered as not written and the
obligation is converted into a pure and simple one.
TIME OF IMPOSSIBILITY
 must exist at the time of the creation of the obligation.
 A supervening impossibility does not affect the existence of the obligation.
 If the condition was impossible when the obligation was constituted, the
obligation remains void even if such condition subsequently becomes
possible.
ILLOGICAL CONDITIONS
 Similar effect as to an impossible condition.
DIVISIBLE OBLIGATIONS
 When an obligation is divisible, that part which is not affected by the
impossible or unlawful condition shall be valid.
NEGATIVE IMPOSSIBLE CONDITION
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 Condition not to do an impossible thing shall be considered as not having
been agreed upon: should be understood to include all negative
impossible conditions.
 Obligation is a simple one.
ARTICLE 1184. The condition that some event happen at a determinate time
shall extinguish the obligation as soon as the time expires or if it has become
indubitable that the event will not take place. (1117)
WHERE NO PERIOD STATED
 2nd paragraph of art 1185 is applicable.
 Intention of parties is controlling.
ARTICLE 1185. The condition that some event will not happen at a determinate
time shall render the obligation effective from the moment the time indicated
has elapsed, or if it has become evident that the event cannot occur. If no
time has been fixed, the condition shall be deemed fulfilled at such time as
may have probably been contemplated, bearing in mind the nature of the
obligation. (1118)
ARTICLE 1186. The condition shall be deemed fulfilled when the obligor
voluntarily prevents its fulfillment. (1119)
CONSTRUCTIVE FULFILLMENT
 Debtor may in some way prevent the condition from happening.
 Intention without actually preventing fulfillment is not sufficient.
 2 REQUSITES:
1. Intent of obligor to prevent fulfillment of condition
2. Actual prevention of compliance
 INTENT TO PREVENT COMPLIANCE: intent of debtor to prevent fulfillment is
essential. Any act imputable to the debtor, whether done with or without
fraud or malice will suffice.
• In Exercise of Right
o If in preventing the fulfillment of the condition the debtor acts
pursuant to a right, the condition will not be deemed as fulfilled.
 ACTUAL PREVENTION OF COMPLIANCE: There is constructive fulfillment of
the condition only if the act of the debtor had in fact prevented
compliance with the condition.
PROVOKING RESOLUTORY CONDITION
 When a condition is resolutory but not dependent on the will of the
debtor, and he unjustifiably provokes or produces the condition, which
would not have happened without his doing so, it will be considered as
not having been fulfilled, and there will be no extinguishment of rights.
 Debtor cannot be excused from compliance by the occurrence of an
event which he himself brought about, unless such possibility is permitted
in the contract.
ARTICLE 1187. The effects of a conditional obligation to give, once the
condition has been fulfilled, shall retroact to the day of the constitution of the
obligation. Nevertheless, when the obligation imposes reciprocal prestations
upon the parties, the fruits and interests during the pendency of the condition
shall be deemed to have been mutually compensated. If the obligation is
unilateral, the debtor shall appropriate the fruits and interests received, unless
from the nature and circumstances of the obligation it should be inferred that
the intention of the person constituting the same was different.
In obligations to do and not to do, the courts shall determine, in each case,
the retroactive effect of the condition that has been complied with. (1120)
RETROACTIVITY OF OBLIGATION
 Between the moment of creation of the conditional obligation and the
fulfillment of the suspensive condition: creditor cannot enforce obligation
as his right during that period is a mere expectancy.
 The moment the suspensive condition happens, the obligation becomes
effective and enforceable. The effects shall retroact to the moment when
such obligation was constituted or created.
 REASON: Condition is only an accidental, and not an essential element of
the obligation.
 CONTRACTS OF DEBTOR
• Delivery of a determinate thing: debtor cannot, before the
happening of the suspensive condition, make contracts disposing of
or alienation or encumbering the thing. Creditor retains a superior
right.
• NOTE: under our law tradition – delivery transfers ownership or real
rights over the thing.
o A 3rd person in good faith, who the debtor has made a contract
pendent conditione, and the thing has been delivered to him,
the happening of the suspensive condition will not defeat his
right of ownership.
o 3rd person: in bad faith, cannot invoke protection.
 CONTRACTS OF CREDITOR
• If a creditor, before the happening of the condition, has already
disposed of his expected right (e.g. mortgage over property), the
happening of the suspensive condition makes effective the act
performed pendent conditione.
 INCREASE IN VALUE
• Increase in value before the happening of the suspensive condition,
inured to the benefit of the creditor.
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LIMITS ON RETROACTIVITY: Application of the principle of retroactivity of
conditional obligations is not absolute.
 ACTS OF ADMINISTRATION
• Acts of administration performed by the debtor before the happening
of the suspensive condition, are not affected by the retroactivity of
the effects of the obligation.
• Acts in abuse of right, committed by the debtor in the guise of
administration, should not be allowed to defeat the rights of the
creditor.
 FRUITS AND INTERESTS
• The law does not require delivery or payment of the fruits or interests
accruing before the happening of the suspensive condition.
• Right to the fruits is not within the principle of retroactivity.
• Obligation is reciprocal: fruits and interests pending happening of the
condition are deemed to mutually compensate each other.
• Obligation is unilateral: fruits received by debtor before the
happening of the condition, are kept by him.
• These rues must yield to the contrary intent of the parties.
OBLIGATIONS TO DO, NOT TO DO
 Courts shall determine the retroactive effect of the fulfillment of the
condition.
• To what date retroactivity shall be allowed
• It may even refuse to permit retroactivity.
ARTICLE 1188. The creditor may, before the fulfillment of the condition, bring
the appropriate actions for the preservation of his right.
The debtor may recover what during the same time he has paid by mistake in
case of a suspensive condition. (1121a)
PRESERVATION OF CREDITOR’S RIGHTS:
 Creditor only has an expectancy and cannot compel the debtor to
perform. Acts or events may take place which might render his right
illusory when the condition happens. Hence, the law allows him to take
appropriate steps or bring proper actions for the preservation of his right.
• Actions for the preservation of the creditor’s rights may have for their
objects:
1. To prevent the loss or deterioration of the things which are the
objects of the obligation by enjoining or restraining acts of
alienation or destruction by the debtor or third persons.
2. To prevent concealment of the debtor’s properties which
constitute the guaranty in case of non-performance of the
obligation.
3. To demand security if the debtor becomes insolvent.
 4. To compel the acknowledgement of the debtor’s signature on a
private document or the execution of the proper public
document for registration so as to affect third persons.
5. To register the deeds of sale or mortgages evidencing the
contract.
6. To set aside fraudulent alienations made by the debtor.
7. To interrupt the period of prescription, by actions against adverse
possessors of the thing which are the objects of the obligation.
 NO PREFERENCE: Does not grant any preference of credit but only allows
bringing proper action for the preservation of the creditor’s rights.
PAYMENT BEFORE CONDITION
 Second paragraph permits the debtor who paid before happening of the
condition to recover only when he paid by mistake.
• Accion reivindicatoria: Payment was of a determinate thing and it still
exists in the hands of the creditor.
• Solutio indebiti: Otherwise
 If payment was made with knowledge of the condition, there is an implied
waiver of the condition, and whatever has been paid cannot be
recovered.
 If there has been a mistake in payment, and the debtor was ignorant of
the suspensive condition, subsequent fulfillment of the condition will bar
the recovery of payment.
 No mistake and later on obligation is not fulfilled, debtor will be allowed to
recover.
 FRUITS FROM THING
• Does not provide for recovery of fruits or interest by the debtor who
has paid before the happening of the condition.
• Silence of the law should not bar recovery of fruits or interest by the
debtor.
• Provisions on solution indebiti can be applied (Art 2159).
o “Whoever in bad faith accepts an undue payment, shall pay
legal interest or shall be liable for the fruits received.
o Bad faith: creditor knows that the debtor is paying before the
suspensive condition has happened.
ARTICLE 1189. When the conditions have been imposed with the intention of
suspending the efficacy of an obligation to give, the following rules shall be
observed in case of the improvement, loss or deterioration of the thing during
the pendency of the condition:
(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; it is understood that the thing is lost when it perishes, or goes out
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of commerce, or disappears in such a way that its existence is unknown or
it cannot be recovered;
(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. (1122)
SCOPE OF ARTICLE
 Applies only to obligations to deliver a determinate or specific thing. It can
have no application to generic objects.
 Applies only when the suspensive condition is fulfilled.
 LOSS OF THE THING
• A thing is lost:
1. When it perishes.
2. When it goes out of the commerce of man.
3. When it disappears in such a manner that its existence is unknown
or it cannot be recovered.
 DETERIORATION OF THING
• Reduction or impairment in the substance or value.
• Not imputable to debtor: he is not liable and the creditor must accept
the thing in its impaired condition.
• If the deterioration is due to the fault of the debtor, then the creditor
may demand the thing or ask for rescission, with damages.
 IMPROVEMENT OF THING
• Anything added to, incorporated in, or attached to the thing.
• If caused by nature of the thing: inure to the benefit of the
creditor.
• If improvement was at the expense of the debtor: he shall have
the same rights as a usufructuary (Art 579 and 580).
o Can be removed by the debtor without damage to the thing
due.
o If removal cannot be made without substantial injury to the
thing due, improvement must be delivered together with the
thing to the creditor without the latter paying indemnity.
o If debtor has caused deteriorations to the thing, which he has
also improved at his expense, then the value of the
improvements maybe set off against the damages for
deterioration.
Art. 1190. When the conditions have for their purpose the extinguishment of an
obligation to give, the parties, upon the fulfillment of said conditions, shall
return to each other what they have received.
In case of the loss, deterioration or improvement of the thing, the provisions
which, with respect to the debtor, are laid down in the preceding article shall
be applied to the party who is bound to return.
As for the obligations to do and not to do, the provisions of the second
paragraph of Article 1187 shall be observed as regards the effect of the
extinguishment of the obligation. (1123)
RESOLUTORY CONDITION HAPPENING
 If the resolutory condition happens, rights are extinguished and the
obligation is treated as if it did not exist; hence, each party is bound to
return to the other whatever he has received.
 RIGHTS OF THIRD PERSONS
• When a thing has already been delivered, ownership has passed to
the possessor, without prejudice to the effect of the happening of the
resolutory condition.
• If it is transferred to a third person, the party entitled to restitution
cannot sue the third person directly because he would no longer be
the owner thereof. This is a personal right which he can enforce only
against his creditor. He has no real right that can be enforced against
third persons in good faith.
 DETERIORATION, IMPROVEMENT
• Provisions of Art 1189 shall be applicable.
 FRUITS AND INTERESTS
• Mutual restitution applies also to fruits and interests.
• In reciprocal restitution, the fruits and interests may be compensated
against each other.
• He who receives the fruits has the obligation to pay the expense
made by a third person in their production, gathering, and
preservation. Expenses incurred shall be deducted from the gross
value of the fruits to be returned.
PROTECTION OF RIGHTS
 Party entitled to restitution stands in the same position as a creditor in an
obligation with a suspensive condition, in that he has an expectancy of
recovery of the thing.
 Pending fulfillment, he should be entitled to take the same steps and bring
the same actions allowed to the creditor under the first paragraph of
Article 1188.
Art. 1191. The power to rescind obligations is implied in reciprocal ones, in
case one of the obligors should not comply with what is incumbent upon him.
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The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek
rescission, even after he has chosen fulfillment, if the latter should become
impossible.
The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons who
have acquired the thing, in accordance with Articles 1385 and 1388 and the
Mortgage Law. (1124)
RECIPROCAL OBLIGATIONS
 This article applies only to reciprocal obligations.
 RECIPROCAL OBLIGATIONS: those which arise from the same cause, and in
which each party is a debtor and a creditor of the other, such that the
obligation of one is dependent upon the obligation of the other.
 TACIT RESOLUTORY CONDITION
• Imposed by law – no need for an agreement.
• When one party performed his part of the contract, the other party
incurs in delay; hence, the party who has performed or is ready and
willing to perform may rescind the obligation if the other does not
perform or is not ready and willing to perform.
• Power to rescind is given to the injured party. Two options:
1. Demand performance
2. Ask for resolution
• The party who did not perform is not entitled to insist upon the
performance of the contract by the defendant or recover damages
by reason of his own breach.
• DECLARATION OF RESCISSION
o Rescission may take place by the declaration of the injured
party.
o Rescission is power.
o IF OBLIGATION HAS NOT YET BEEN PERFORMED: extra-judicial
declaration of resolution or rescission would suffice.
o IF OBLIGATION HAS ALREADY BEEN PERFORMED BY THE INJURED
PARTY: he cannot by his own declaration rescind the contract.
o If the debtor impugns the declaration of rescission, it shall be
subject to judicial determination. But if he does not object, such
declaration will produce legal effects.
• NOT ABSOLUTE RIGHT
o Right to resolve or rescind is not absolute.
o Rescission will not be permitted for such a slight or casual breach
of contract, but only for such breaches as are so substantial and
fundamental as to defeat the object of the parties in making the
agreement.
 Right of the injured party to rescind is subordinate to the rights of
o cannot be determined which of the parties first violated the contract, the same
a third person to whom bad faith is not imputable. shall be deemed extinguished, and each shall bear his own damages. (n)
• EFFECTS OF RESCISSION
o Extinguishes the obligatory relation as if it had never been SECTION 2. - Obligations with a Period
created, the extinction having retroactive effect.
Art. 1193. Obligations for whose fulfillment a day certain has been fixed, shall
 ALTERNATIVE REMEDIES be demandable only when that day comes.

TWO REMEDIES OF INJURED PARTY FOR NON-PERFORMANCE BY Obligations with a resolutory period take effect at once, but terminate upon
THE OTHER OF HIS OBLIGATION IN A RECIPROCAL OBLIGATION: arrival of the day certain.
1. SPECIFIC PERFORMANCE
2. RESCISSION OF THE CONTRACT A day certain is understood to be that which must necessarily come, although
it may not be known when.
 These remedies are alternative; the injured party cannot have both.
 Where he asks for rescission, he cannot at the same time ask for If the uncertainty consists in whether the day will come or not, the obligation is
specific performance. conditional, and it shall be regulated by the rules of the preceding Section.
 If the injured party elects to enforce obligation, he will be bound by his (1125a)
election, and he cannot, after having the contract enforced, ask for
its rescission. CONCEPT OF TERM
 He cannot ask for partial rescission and partial fulfillment.  A term or period is a space of time which, exerting an influence on
o However, where performance has become impossible, rescission obligations as a consequence of a juridical act, suspends their
with damages is proper though he had sought specific demandability or determines their exinguishment.
performance.  DISTINGUISHED FROM CONDITION
 So long as there has been no judgment declaring rescission, the CONDITION PERIOD
creditor who has asked for it may change his mind and demand As to Uncertain event Event that must necessarily
specific performance and vice versa, unless he has previously fulfillment come.
renounced one of these remedies. As to Gives rise to an obligation or Has no effect upon the
 DAMAGES RECOVERABLE influence on extinguishes one already existence of obligations,
o Those elements of damages which can be admitted are those the existing. but only their
which are compatible with the choice of remedy. obligation demandability or
 WAIVER performance.
o Right to rescind reciprocal obligations may be waived by the
contracting parties. Does not carry with it any
retroactive effect.
EXPRESS RESOLUTORY CONDITION As to time May refer to past event Always refers to the future
 The parties to a bilateral agreement may stipulate that if one of them does unknown to the parties.
not comply with his obligation, the contract shall be automatically As to will of A condition which depends A period left to the
resolved. debtor exclusively on the will of the debtor’s will merely
debtor annuls the empowers the court to fix
DISAPPEARANCE OF BASIS OF CONTRACT obligation. such period.
 The disappearance of the basis of a contract gives rise to a right of
resolution in favor of the party prejudiced.  REQUISITES OF PERIOD
1. Future
Art. 1192. In case both parties have committed a breach of the obligation, the 2. Certain
liability of the first infractor shall be equitably tempered by the courts. If it 3. Possible

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KINDS OF TERMS OBLIGATION COVERED: Applies only to obligations to give.
 Suspensive and Resolutory
• Suspensive: Must lapse before the performance of the obligation EFFECT OF ARRIVAL OF TERM
can be demanded,  Allows recovery of the thing or money itself, plus the fruits or interests,
• Resolutory: Period after which the performance must be which must be understood as accruing from the moment of payment to
terminated. the date of recovery.
 Legal, Voluntary, or Judicial
• Legal: Period fixed by law RIGHT TO INTERESTS AND FRUITS
• Voluntary: Stipulated by the parties  This article allows the debtor to recover fruits and interests in all cases
• Judicial: Allowed by the courts. where he paid under a mistake as to the period.
 Express or Implied  Creditor who accepts payment in bad faith, or with knowledge that the
• Express: Specifically stated period has not yet arrived, shall pay interest or shall be liable for fruits
• Implied/Tacit: As when a person undertakes to do some work received.
which can be done only during a particular season.  Creditor acted in good faith, he is liable for fruits only in so far as they
 An original period or a period of grace benefited him.
 Definite or indefinite  NO RECOVERY
• Definite: Fixed known date or time 1. When obligation is reciprocal, and there has been premature
• Indefinite: Event which will necessarily happen but the date of performance on both sides.
happening is unknown. 2. When obligation is a loan on which the debtor is bound to pay
interest.
EFFECT OF PERIOD 3. When the period is exclusively for the benefit of the creditor, because
 Obligations with a term are demandable only when the day fixed for their the debtor by paying in advance loses nothing.
performance arrives.
 Period of prescription must also be counted only from such date or BURDEN OF PROOF: Presumed that the debtor knows of the period. He will
maturity and not from the date of the obligation. have the burden of proving ignorance.
 SUSPENSION OF PERIOD
• Relieves the parties from the fulfillment of their respective PAYMENT WITH KNOWLEDGE OF TERM
obligations during that term.  If the payment before the period was made voluntarily, with knowledge
of the period, the payment cannot be recovered.
EFFECT OF MORATORIUM LAWS  Debtor can be considered as having tacitly waived the benefit of the
 MORATORIUM: Postponement of the fulfillment of an obligation; it is an term.
extension of the period for the performance of the obligation, decreed by
statute. Art. 1196. Whenever in an obligation a period is designated, it is presumed to
 True test of the constitutionality of a moratorium statute lies in the have been established for the benefit of both the creditor and the debtor,
determination of the period of suspension of the remedy. It is required that unless from the tenor of the same or other circumstances it should appear that
such suspension be definite and reasonable. the period has been established in favor of one or of the other. (1127)

Art. 1194. In case of loss, deterioration or improvement of the thing before the
arrival of the day certain, the rules in Article 1189 shall be observed. (n)
Art. 1195. Anything paid or delivered before the arrival of the period, the
obligor being unaware of the period or believing that the obligation has
become due and demandable, may be recovered, with the fruits and
interests. (1126a)
BENEFIT OF TERM
 If the term is for the benefit of both parties: creditor cannot demand
payment and the debtor cannot make an effective tender and
consignation of payment
 If the term is for the benefit of the creditor only: creditor may demand
performance at any time, but the debtor cannot compel him to accept
payment before the period expires.

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 If the term is for the benefit of the debtor only: he may oppose a
premature demand for payment, but may validly pay at any time before
the period expires.
 WAIVER BY CREDITOR
• Acceptance of the partial payment in the mortgage contract
where it was provided that the debtor cannot pay principal
before the expiration is a waiver by creditor of term.
 IN FAVOR OF DEBTOR
• A stipulation that the payment is to be made “within” the
stipulated period is for the benefit of the debtor. Hence, although
the creditor cannot enforce or demand payment before the
period fixed, the debtor may waive the period and pay in
advance.
Art. 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. (1128a)
COURT MAY FIX TERM
 Whenever a period is fixed, the court does not amend or modify the
obligation concerned, but merely enforces or carries out an implied
stipulation in the contract.
 When a decision is rendered conformably with compromise agreement
but no time is specified within which the parties should comply with their
commitments, either party may move the court to have a period fixed for
the compliance of their respective commitments.
 e.g. When the debtor promises to pay “little by little,” “when his means
permit him to do so,” or “in partial payments.”
 The court may not fix a term when the obligation expressly states that it is
payable on demand.
ACTION TO FIX TERM
 The only action that can be maintained n obligations falling under this
article, is an action to ask the court to fix a term within which the obligor
must comply with his obligation.
 Where a term of lease has been left to the will of the lessee, the lessor
should first bring and action to ask the court to fix the period of the lease,
and an action for eviction under such contract of lease is premature.
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 Fixing of period and ordering of payment cannot be made in the same
action.
 EFFECT OF TERM
• In fixing the period, the term probably contemplated by the
parties should be ascertained. The court cannot arbitrarily fix a
period out of thin air.
• Once fixed by the court, it becomes part of the contract, and it
cannot be subsequently changed or extended without the
consent of both of the parties.
 PRESCRIPTION
• The action to fix a term is different from the action to enforce the
obligation but both are subject to the rules of prescription.
Art. 1198. The debtor shall lose every right to make use of the period:
(1) When after the obligation has been contracted, he becomes insolvent,
unless he gives a guaranty or security for the debt;
(2) When he does not furnish to the creditor the guaranties or securities which
he has promised;
(3) When by his own acts he has impaired said guaranties or securities after
their establishment, and when through a fortuitous event they disappear,
unless he immediately gives new ones equally satisfactory;
(4) When the debtor violates any undertaking, in consideration of which the
creditor agreed to the period;
(5) When the debtor attempts to abscond. (1129a)
LOSS OF TERM
 In cases provided in this article, the obligation becomes immediately due
and demandable even if the period has not yet expired.
 Converted into a pure obligation.
 INSOLVENCY OF DEBTOR
• It is enough that he is in such state of financial difficulty that he is
unable to pay his debts.
• Insolvency must occur after the obligation is constituted.
• MORATORIUM LAW
o Present article does not apply to the extension of the
period fixed by moratorium statutes.
o Insolvency of the debtor does not deprive him of the
benefit of the moratorium.
 LOSS OF SECURITIES GIVEN
• The disappearance or impairment of the securities given need
not be total when caused by the acts of the debtor.
• If the cause is fortuitous event, there must be total disappearance
in order to deprive the debtor of the benefit of the term.
• Disappear=loss
SECTION 3. - Alternative Obligations
  The debtor cannot select prestations which could not have been the
Art. 1199. A person alternatively bound by different prestations shall object of the obligation.
completely perform one of them.
FORM OF ACTION
The creditor cannot be compelled to receive part of one and part of the other  When the debtor has the right to choose, the plaintiff’s action must be in
undertaking. (1131) alternative form: “either object X or Y, at the election of the debtor.”
 The judgment must also be in alternative form.
OBLIGATIONS WITH SEVERAL OBJECTS
1. Conjunctive: Debtor has to perform several prestations; it is extinguished Art. 1201. The choice shall produce no effect except from the time it has been
only by the performance of all of them. communicated. (1133)
2. Alternative: Several objects being due, the fulfillment of one is sufficient,
determined by the choice of the debtor who generally has the right of NOTICE OF SELECTION
election.  May be in any form provided that it is sufficient to make the other party
3. Facultative: Only one thing is due, but the debtor has reserved the right know that election has been made.
to substitute it with another. 1. Orally
2. In writing
ALTERNATIVE FACULTATIVE 3. Tacitly – performance or acceptance
Loss of one of the things affects the Loss of that which may be given as 4. Other unequivocal means
obligation. a substitute does not affect the  When the debtor, to whom right to choose pertains, performs one of the
obligation. prestations with the intent to discharge the obligation, he is released,
The election may be granted to the The election may NEVER be granted because selection made may be implied in the fact of performance.
creditor. to the creditor.  There is tacit selection by the creditor when he sues for the performance
The loss of one thing does not The loss of that which is due as the of one of the prestations.
extinguish the obligation. object of the obligation, will  CREDITOR’S CONSENT: The law does not require the other party to consent
extinguish such obligation. to the choice made by the party entitled to choose. A mere declaration
of the choice, communicated to the other party, is sufficient.
Art. 1200. The right of choice belongs to the debtor, unless it has been  PLURALITY OF SUBJECTS
expressly granted to the creditor. • Various debtors and creditors
o Obligation is joint: consent of all is necessary to make the
The debtor shall have no right to choose those prestations which are selection effective, because none of them can extinguish
impossible, unlawful or which could not have been the object of the the entire obligation.
obligation. (1132) o Obligation is solidary: the choice of one will be binding
personally upon him, but not as to the others.
ELECTION BY THE DEBTOR  CONDITION OR TERM: Selection cannot be subjected by a party to a
 In alternative obligations, the debtor has the right to choose the method condition or term unless the other party consents thereto.
of meeting the obligation, unless the creditor has expressly reserved that
right to himself. EFFECT OF CHOICE
 ELECTION BY OTHERS: Grant to creditor must be EXPRESSED, it cannot be  The effect of the notice is to limit the obligation to the object or prestation
implied. The choice may also be granted to a third person. selected.
 Obligation is converted into a simple obligation to perform the prestation
LIMITS ON ELECTION chosen.
 Right to choose is INDIVISIBLE. The debtor cannot choose part of one  Once selection has been communicated, it becomes irrevocable.
prestation and part of another.  To allow a change after it has been communicated is to expose the latter
 Debtor cannot choose UNLAWFUL or IMPOSSIBLE undertakings. to damages arising from the preparations he may make on the
• Presence of such does not annul the obligation if there are other assumption that the prestation selected is the one to be performed.
lawful and possible objects.
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 ERROR AS TO OBLIGATION: When the debtor performs one of the
prestations, believing that he has a simple obligation (ignorance of the
alternatives and the right to choose), there is no declaration of the
selection nor a binding performance of the obligation. Debtor can
recover.
DELAY IN MAKING CHOICE
 The right to choose is not lost by the mere fact that the party entitled to
choose delays in making his selection.
 2 theories:
• French
o Court shall give the party, entitled to choose, a period in
which to make a choice.
o If he does not, the court will make a choice or will give
the right to choose to the other party.
• German
o Right to choose passes automatically to the other party.
o This is acceptable under our law.
o Debtor cannot paralyze the remedy of the creditor by
refusing to make a selection. He is deemed to have
waived his right to choose.
Art. 1202. The debtor shall lose the right of choice when among the prestations
whereby he is alternatively bound, only one is practicable. (1134)
OBLIGATION BECOMES SIMPLE
 If all the prestations, except one, are impossible or unlawful, it follows that
the debtor can choose and perform only that one.
 The obligation ceases to be alternative and is converted into a simple
obligation.
 Impossibility must not be due to the creditor’s acts – Article 1203 shall
apply.
WHEN CREDITOR MAY CHOOSE
 This article applies only when the debtor has the right to choose.
 When the creditor is granted the right to choose, article 1205 will apply.
Art. 1203. If through the creditor's acts the debtor cannot make a choice
according to the terms of the obligation, the latter may rescind the contract
with damages. (n)
IMPOSSIBLITY DUE TO CREDITOR
 Based on principles of justice.
 Since one of the prestations had been rendered impossible by the acts of
the creditor, and the debtor precisely may have wanted to choose that
particular prestation, the latter may:
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• Rescind the contract and recover damages
• Elect to perform that which remains.
Art. 1204. The creditor shall have a right to indemnity for damages when,
through the fault of the debtor, all the things which are alternatively the object
of the obligation have been lost, or the compliance of the obligation has
become impossible.
The indemnity shall be fixed taking as a basis the value of the last thing which
disappeared, or that of the service which last became impossible.
Damages other than the value of the last thing or service may also be
awarded. (1135a)
LOSS BY FAULT OF DEBTOR
 This article applies when the debtor has the right to choose.
 If only some of the prestations are rendered impossible, the fault of the
debtor does not make him liable for damages, because he can still
comply with the obligation by performing any of the prestations
remaining.
 He will become liable for damages only when ALL the prestations
become impossible through his fault.
EFFECT OF FORTUITOUS EVENT
 If all the prestations become impossible due to fortuitous event, the
obligation is extinguished; the debtor is not liable for damages.
 If one or more of the prestations due become impossible by fortuitous
event, and the last prestation becomes impossible by the fault of the
debtor, he will be liable for damages, with the value of the last prestation
as the basis.
 If some of the prestations become impossible by fault of the debtor, and
the remaining prestation became impossible by fortuitous event, there are
two views:
• The obligation is extinguished. Impossibility of the first prestation
even by fault of debtor, converted the obligation into a simple
obligation to perform the remaining prestation. If this in turn
becomes impossible by fortuitous event, the obligation is
extinguished. NOTE: This is the better view according to SJP.
• Debtor is liable but the basis of the damages will be the value of
the last prestation which became impossible through his fault. This
is the more acceptable view.
Art. 1205. When the choice has been expressly given to the creditor, the
obligation shall cease to be alternative from the day when the selection has
been communicated to the debtor.
Until then the responsibility of the debtor shall be governed by the following
rules:
(1) If one of the things is lost through a fortuitous event, he shall perform the even when this is valid.
obligation by delivering that which the creditor should choose from among As to choice The right to choose Only the debtor can
the remainder, or that which remains if only one subsists; may be given to the choose the substitute
(2) If the loss of one of the things occurs through the fault of the debtor, the creditor. prestation.
creditor may claim any of those subsisting, or the price of that which, through As to effects of loss Only the impossibility of The impossibility of the
the fault o f the former, has disappeared, with a right to damages; all the prestations due principal prestation is
(3) If all the things are lost through the fault of the debtor, the choice by the without fault of the sufficient to extinguish the
creditor shall fall upon the price of any one of them, also with indemnity for debtor extinguishes the obligation, even if the
damages. obligation. substitute is possible.

The same rules shall be applied to obligations to do or not to do in case one,
some or all of the prestations should become impossible. (1136a)
SELECTION BY CREDITOR
 When creditor has the right to choose, his selection takes effect from the
moment it is communicated to the debtor.
 Selection may be made expressly or tacitly.
EFFECT OF CREDITOR’S DELAY
 When the creditor fails to make a selection in cases where he has the right
to choose, the debtor will not incur delay even if there is a definite period.
 There will be default or delay only when the obligation has become a
simple one.
LOSS OF SUBSTITUTE
 If the substitute prestation becomes impossible due to the fault or
negligence of the debtor, the obligation is not affected, and he cannot
be held liable for damages.
 What if debtor acted in bad faith? Code Commission thought it better to
leave the courts to decide.
 Whatever may be the cause of the impossibility of the substitute prestation
is immaterial. The option to perform is exclusively dependent upon the will
of the debtor, he cannot be compelled to perform it if the principal
prestation becomes impossible.
 Therefore, even if he acts with bad faith, he cannot be held liable for
damages, because he could not have been compelled to perform it
even it were possible.

Art. 1206. When only one prestation has been agreed upon, but the obligor WHEN SUBSTITUTION EFFECTIVE
may render another in substitution, the obligation is called facultative.  Law does not expressly provide when the substitution of the prestation
becomes effective and binding upon the debtor.
The loss or deterioration of the thing intended as a substitute, through the  We believe that the rule with respect to alternative obligations can be
negligence of the obligor, does not render him liable. But once the substitution applied by analogy – from the time the debtor communicates to the
has been made, the obligor is liable for the loss of the substitute on account of creditor that he elects to perform the substitute prestation.
his delay, negligence or fraud. (n) • If the principal prestation thereafter becomes impossible, debtor is
not relieved and should still perform the substitute prestation he
DISTINGUISHED FROM ALTERNATIVE has chosen.
ALTERNATIVE FACULTATIVE • He will be liable for damages for his delay, neglect or bad faith in
As to contents of There are various Only the principal its performance.
the obligation prestations all of which prestation constitutes the
constitute parts of the obligation, the accessory SECTION 4. - Joint and Solidary Obligations
obligation. being only a means to
facilitate payment. Art. 1207. The concurrence of two or more creditors or of two or more debtors
Creditor must demand in one and the same obligation does not imply that each one of the former
all prestations Creditor can demand only has a right to demand, or that each one of the latter is bound to render, entire
the principal prestation. compliance with the prestation. There is a solidary liability only when the
As to nullity Nullity of one prestation Nullity of the principal obligation expressly so states, or when the law or the nature of the obligation
does not invalidate the invalidates the obligation, requires solidarity. (1137a)
obligation. and the creditor cannot
demand the substitute
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Art. 1208. If from the law, or the nature or the wording of the obligations to 5. The defense of res judicata is not extended from one debtor to
which the preceding article refers the contrary does not appear, the credit or another.
debt shall be presumed to be divided into as many shares as there are
creditors or debtors, the credits or debts being considered distinct from one WHEN SOLIDARITY EXISTS
another, subject to the Rules of Court governing the multiplicity of suits. 1. When there is an express stipulation in the contract that the
(1138a) obligation is solidary.
2. When a charge or condition is imposed upon the heirs or legatees,
JOINT AND SOLIDARY OBLIGATIONS and the testament expressly makes the charge or condition in
JOINT SOLIDARY solidum.
 Mancommunada  Mancommunada solidaria 3. When the law expressly provides for solidarity.
 joint and several 4. When a solidary responsibility is imposed by final judgment upon
 in solidum several defendants.
 juntos o separadamente 5. When the nature of the obligation requires solidarity. (Art 19-22 of the
 joint and several Civil Code)
Each of the debtors is liable only for Each debtor is liable for the entire
a proportionate part of the debt, obligation. DYSJUNCTIVE OBLIGATIONS (A binds himself to pay P100 either to X or to Y)
and each creditor is entitled only to  There are two or more creditors or to or more debtors, but they are named
a proportionate part of the credit. disjunctively. That is, they are named as debtors or creditors in the
Each creditor can recover only his Each creditor may enforce the alternative.
share of the obligation, and each entire obligation, and each debtor  The intention of the parties should prevail, in determining whether the rules
debtor can be made to pay only his may be obliged to pay it in full. on solidarity or those on alternative obligations shall apply.
part.  In case of doubt, solidarity is favored as it is more conducive to the
fulfillment of the obligation.
JOINT CHARACTER PRESUMED
 When two persons are liable under a contract or under a judgment and RELATION OF CO-PARTIES
no words appear in a contract or the judgment to make each liable for  Co-creditors or co-debtors may regulate their rights or liabilities in their
the entire obligation, the presumption is that their obligation is joint. internal relations with each other. Thus, they may exclude a division and
 Final judgment against several defendants does not specify that they shall provide for sole responsibility, or they may provide for total reimbursement,
pay the amount thereof solidarily, the liability is joint. or for a division into unequal parts.
 After judgment has become final, the court has no power to amend it to
convert a defendant’s liability into a solidary obligation. DUAL CHARACTER OF OBLIGATION
 EFFECT OF JOINT LIABILITY  The obligation may be joint on the side of the creditors, and solidary on
1. The demand by one creditor upon one debtor, produces the effects the side of the debtors, or vice versa.
of default only with respect to the creditor who demanded and the
debtor on whom the demand was made, but not with respect to Art. 1209. If the division is impossible, the right of the creditors may be
the others. prejudiced only by their collective acts, and the debt can be enforced only
2. The interruption of prescription by the judicial demand of one by proceeding against all the debtors. If one of the latter should be insolvent,
creditor upon a debtor, does not benefit the other creditors nor the others shall not be liable for his share. (1139)
interrupt the prescription as to other debtors.
3. The vices of each obligation arising from the personal defect of a JOINT INDIVISIBLE OBLIGATIONS
particular debtor or creditor does not affect the obligation or rights  Where there are several debtors or creditors, but the prestation is
of others, indivisible, the obligation is joint, unless solidarity has been stipulated.
4. The insolvency of the debtor does not increase the responsibility of  A midway between joint and solidary.
his co-debtors, nor does it authorize a creditor to demand anything  Fulfillment requires the concurrence of all the debtors, although each for
from his co-creditors. his part.

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 On the side of the creditors, collective action is expressly required for acts
which may be prejudicial.
 PLURALITY OF CREDITORS
• Several creditors and only one debtor: obligation can be
performed by delivering the object to all the creditors jointly.
• A debtor who delivers the thing to one creditor only, becomes
liable for damages because of non-performance to other
creditors, unless they have authorized the former to receive the
payment for all of them.
• If only one or some of the creditors demand the prestation, the
debtor may legally refuse to deliver them; he can insist that all the
creditors together receive the thing, and if any of them refuses to
join the others the debtor may deposit the thing in court by way
of consignation.
• In case of non-performance by the debtor, the obligation to to
pay damages arises. With respect to damages, the prestation
becomes divisible, each creditor can recover separately his
proportionate share.
• INTERRUPTION OF PRESCRIPTION
o An act which would ordinarily interrupt prescription,
effected by one creditor or against one of the debtors, is
not valid and has no effect.
o As long as the obligation is joint, the act of one creditor
cannot have any effect as to another creditor.
o If a written demand is made by one creditor only, the
debtor cannot pay to him alone; payment must be
made to all.
• PLURALITY OF DEBTORS
o Where the plurality of subjects is among the debtors, the
indivisible obligation can be performed by them only by
acting together. Hence, all must be sued.
o If any of the debtors is not willing to perform, the
prestation is converted into an indemnification for
damages. Creditor can sue the debtors separately for
their respective shares.
o OBLIGATIONS NOT TO DO
 The indivisibility of the obligation does not imply
solidary liability; the liability is joint unless otherwise
stipulated.
 The obligation not to do, when there are several
debtors, is a joint indivisible obligation.
 The moment there is partial violation, the
obligation is converted to one for the payment of
indemnity for damages, and each will be liable
for his share.
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Art. 1210. The indivisibility of an obligation does not necessarily give rise to
solidarity. Nor does solidarity of itself imply indivisibility. (n)
INDIVISIBILITY AND SOLIDARITY
 Where there are various creditors or various debtors, the obligation is joint
even if the performance is indivisible.
INDIVISIBILE JOINT SOLIDARITY
Each creditor cannot demand Each creditor may demand the
more than his share and each full prestation and each debtor
debtor is not liable for more than has likewise the duty to comply
his share. with the entire prestation.
Prestation is not capable of partial Refers to the legal tie or vinculm
performance. defining the extent of liability.
Art. 1211. Solidarity may exist although the creditors and the debtors may not
be bound in the same manner and by the same periods and conditions.
(1140)
KINDS OF SOLIDARITY
 ACTIVE SOLIDARITY
• Exists among the creditors.
• Essence consists in the authority of each creditor to claim and
enforce rights of all, with the resulting obligation of paying every
one what belongs to him.
• There is mutual representation.
• Juridical effects:
1. Death of a solidary creditor does not transmit the solidarity to
each of his heirs but to all of them taken together.
2. Each creditor represents the others in the act of receiving
payment, and in all other acts which tend to secure the credit
or make it more advantageous. Hence, if he receives only a
partial payment, he must divide it.
3. One creditor, does not represent others in such acts as
novation, compensation, and remission.
4. The credit and its benefits are divided equally unless there is
an agreement to the contrary.
5. The debtor may pay to any solidary creditor, but if a judicial
demand is made on him, he must pay only to the plaintiff.
6. Each creditor may renounce his right even against the will of
the debtor.
 PASSIVE SOLIDARITY
• Exists among the debtors.
• Each debtor can be made to answer for others, with the right on
the part of the debtor-payor to recover from the others their
respective shares.
 • TERMS AND CONDITIONS
o Legal bonds may be uniform: when the debtors are
bound by the same conditions and clauses.
o Varied: where the obligors, although liable for the same
prestation, are nevertheless not subject to the same terms
and conditions.
 Before the fulfillment of the condition or arrival of
the term, an action may be brought against such
debtor or any other solidary debtor for the
recovery of the entire obligation minus the
portion corresponding to the debtor affected by
the condition of the term.
 Upon happening of the condition, creditor may
claim the remaining portion from any of the
debtors.
• Effects:
1. Each debtor can be required to pay the entire obligation; but
after payment, he can recover.
2. The debtor who is required to pay may set up by way of
compensation his own claim against the creditor, the effect is
the same as payment.
3. The total remission of the debt in favor of a debtor releases all
the debtors; but when remission affects only the share of one
debtor, the other debtors are still liable.
4. All the debtors are liable for the loss of the thing due even if
such loss is caused by the fault of only one of them, or by
fortuitous event after incurring delay.
5. The interruption of prescription as to one debtor affects all
others; but the renunciation by one debtor of prescription
already had does not prejudice the others.
6. The interests due by reason of the delay of one are borne by
all of them.
 MIXED SOLIDARITY
• On the part of both creditors and debtors.
Art. 1212. Each one of the solidary creditors may do whatever may be useful
to the others, but not anything which may be prejudicial to the latter. (1141a)
ACTS BENEFICIAL
 Each solidary creditor may interrupt prescription, constitute the debtor in
default, or bring suit.
ACTS PREJUDICIAL
 Solidary creditors cannot do anything prejudicial to the others.
 e.g. remission, novation, compensation, and merger or confusion.
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Art. 1213. A solidary creditor cannot assign his rights without the consent of the
others. (n)
REASON FOR ARTICLE
 Solidary creditor is an agent of the others; hence he cannot assign that
agency to a third person without the consent of the other creditors.
 Mutual agency, which is the essence of active solidarity, implies mutual
confidence which may take into account the personal qualifications of
each creditor.
EFFECT OF UNAUTHORIZED TRANSFER
 The law has omitted to provide for the effects.
 The law seems to imply that since such assignment cannot be made, it
produces no effect and the debtor or debtors are not bound thereby.
 Assignment would produce its effects if made to a co-creditor, because
the assignee is one as to whom the confidence of the others already exist.
Art. 1214. The debtor may pay any one of the solidary creditors; but if any
demand, judicial or extrajudicial, has been made by one of them, payment
should be made to him. (1142a)
JUDICIAL DEMAND
 Creditors are tacitly mutual representatives of each other for demanding
payment.
 The equality of rights of solidary creditors by virtue of this mutual
representation, lasts only until one of them goes ahead of the others and
sues the debtor.
 When a creditor makes a judicial demand for payment, the tacit
representation by the other creditors is considered revoked, and during
the pendency of the action, the creditors who did not sue lose their
representation of the others.
 A payment made to any of the creditors who did not sue would be a
payment to a third person. If the payee does not turn over to the others
their shares in the payment, the debtor can still be required to pay the
plaintiff the full amount.
EXTRA-JUDICIAL DEMAND
 The present article has given to extra-judicial demand the same effect as
judicial demand in terminating the mutual representation among the
solidary creditors and concentrating the agency in the creditor who
made the demand.
DEMAND BY SEVERAL CREDITORS
 If all or several solidary creditors demand payment separately, the debtor
should pay to the one who first notified him.
 If they demand at the same time or collectively, the debtor preserves his
right to choose and may pay anyone of those demanding payment.
PARTIAL PAYMENT
 If debtor has already paid the share of a creditor who made no demand
upon him, his obligation to that extent should be considered reduced.
 He can be required to pay to the creditor who made the demand the full
amount of the debt minus the share of the creditor who had been paid.
IN MIXED SOLIDARITY
 In mixed solidarity, when one creditor makes a demand upon one of the
debtors, the latter cannot pay to any other creditor but the one who
made the demand.
• Does not apply to other debtors upon whom no demand has
been made. They may pay to any creditor who may not be the
one who made the demand.
Art. 1215. Novation, compensation, confusion or remission of the debt, made
by any of the solidary creditors or with any of the solidary debtors, shall
extinguish the obligation, without prejudice to the provisions of Article 1219.
The creditor who may have executed any of these acts, as well as he who
collects the debt, shall be liable to the others for the share in the obligation
corresponding to them. (1143)
NOVATION
 Each solidary debtor may release all the others by binding himself alone,
in their place, in favor of the creditor.
 The debtor who effects the novation cannot, by himself, bind the others to
a new debt without their consent.
 Mere extension of time of payment given to a solidary debtor does not
release the others from the obligation.
 Suretyship: A material alteration of the principal contract, effected by the
creditor and the principal debtor, without the knowledge and consent of
the sureties, completely discharges the sureties from all liability.
 DATION IN PAYMENT
• Dation in payment is the delivery of a specific thing as a substitute
for the performance of the obligation.
• If not immediately effected, but is in the form of a promise, it
amounts to a novation.
• If it is immediately effected, Article 1245 provides that it shall be
governed by the law on sales.
MERGER AND COMPENSATION
 When partial, rules on application of payments shall govern.
 When total, the obligation is extinguished.
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REMISSION
 When one creditor makes a remission, it extinguishes the obligation in the
amount and to the extent in which it is made.
 Creditor who made the remission becomes liable to co-creditors for their
shares.
 The debtor in whose favor the remission has been made, even it be of the
whole obligation, cannot recover anything from his co-debtors, because
remission is a gratuitous act.
EFFECTS OF ACTS
 The relation between creditors and debtors
• Any of these acts will extinguish the obligation, so that no creditor
may thereafter sue any debtor, except in case of novation,
where there may be no change or only partial change of parties.
• The co-debtor as to whom the obligation was extinguished
cannot recover from his other co-debtors more than their
respective shares in whatever he may have given up or lost as the
consideration for the extinguishment of the obligation.
 The relations among creditors
• The act of any of them extinguishing the obligation with respect
to the debtor or debtors does not prejudice the rights of the other
creditors to recover their respective shares.
Art. 1216. The creditor may proceed against any one of the solidary debtors or
some or all of them simultaneously. The demand made against one of them
shall not be an obstacle to those which may subsequently be directed against
the others, so long as the debt has not been fully collected. (1144a)
PASSIVE SOLIDARITY AND SURETYSHIP
Passive Solidarity Suretyship
A solidary debtor, like a surety, stands for some other person.
Both debtor and surety after payment, may require that they be
reimbursed.
Liable not only for his co-debtor’s Liable only for his co-debtor’s
obligation but also for his own.
Primary responsibility Subsidiary responsibility
Extension of time given by the Extension of time would release a
creditor would not release debtor. guarantor or surety.
LIABILITY OF SOLIDARY DEBTORS
 Creditor may bring an action against anyone of them, either alone or
together with the principal debtor.
 Solidary debtor is not released by the mere fact that the creditor brought
an action against a co-debtor first.
ACTIONS BASED ON SOLIDARITY
 Each solidary creditor may bring an action to enforce the obligation and
payment can be made only to the plaintiff in such case.
 Solidary debtors may be sued simultaneously, in one suit or successively in
different suits.
 The parties may validly stipulate that the solidary debtors can only be
sued simultaneously, or they may provide for the order in which the
debtors may be sued individually.
 JUDGMENT AS REGARDS CREDITORS
• If the judgment is favorable to the creditor, there seems to be no
doubt that, under article 1212, this inures to the benefit of the co-
creditors.
• If the judgment is adverse to the creditor, can be set-up against
the other co-creditors in subsequent actions, unless it is founded
on a cause personal to the plaintiff.
 JUDGMENT AS REGARDS DEBTORS
• If judgment is favorable to the plaintiff, but the defendant solidary
debtor is insolvent, the other debtors can still be sued until the
debt is fully paid. A new action must be filed.
• If the first action results in a judgment favorable to the solidary
debtor, the other debtors can invoke the favorable judgment,
provided that it is not based on a defense personal to the plaintiff.
• The judgment in favor of one solidary debtor amounts to an
extinguishment of the obligation with respect to him.
 IDENTITY OF PARTIES
• Because of the unity of the legal tie in solidarity, although the
solidary debtors may be individually distinct from each other, they
constitute legally one and the same party with the same interest.
Art. 1217. Payment made by one of the solidary debtors extinguishes the
obligation. If two or more solidary debtors offer to pay, the creditor may
choose which offer to accept.
He who made the payment may claim from his co-debtors only the share
which corresponds to each, with the interest for the payment already made. If
the payment is made before the debt is due, no interest for the intervening
period may be demanded.
When one of the solidary debtors cannot, because of his insolvency,
reimburse his share to the debtor paying the obligation, such share shall be
borne by all his co-debtors, in proportion to the debt of each. (1145a)
PAYMENT BY SOLIDARY DEBTOR
 Payment by one of the solidary debtors and his subsequent release from
liability results in release from liability of the other debtors to the creditor.
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 The extinction or discharge of the solidary obligation by the payment
made by the co-debtor gives birth to a right in favor of the paying co-
debtor, and imposes on the other co-debtors the duty to pay him their
shares.
PARTIAL PAYMENT
 If a solidary debtor pays the obligation in part, he can recover
reimbursement from the co-debtors only in so far as his payment
exceeded his share of the obligation.
REIMBURSEMENT
 When a solidary debtor pays the entire obligation, the resulting obligation
of the co-debtors to reimburse him becomes joint. If one, by insolvency,
cannot pay his share in the reimbursement, the others (including the one
who paid) shall bear such share proportionately.
Art. 1218. Payment by a solidary debtor shall not entitle him to reimbursement
from his co-debtors if such payment is made after the obligation has
prescribed or become illegal. (n)
EFFECT OF PAYMENT
 If one debtor actually pays an obligation no longer due, he does not
thereby revive the obligation as to the co-debtors. They cannot be made
to pay anything to the debtor who has paid.
 But in other cases where the obligation no longer exists, he can recover
from the creditor the amount paid, under the rules on quasi-contracts.
Art. 1219. The remission made by the creditor of the share which affects one of
the solidary debtors does not release the latter from his responsibility towards
the co-debtors, in case the debt had been totally paid by anyone of them
before the remission was effected. (1146a)
APPLICATION OF ARTICLE
 Co-debtor has already paid the obligation in full when the remission of the
part affecting another co-debtor is made.
 To exempt such co-debtor will give way to fraud.
 After one solidary debtor has paid the entire obligation, it is extinguished,
and there is nothing more to remit.
INSOLVENCY AFTER PARTIAL REMISSION
 After the creditor has made a remission of the share of one solidary
debtor, the credit will be limited to the balance.
 Remission of the share of one of the debtors does not affect his obligation
to contribute to the share of an insolvent debtor.
• In every passive solidarity, there is a dual relationship:
 1. The relation between the creditor and the debtors – when
creditor remits the share of any debtor, he can affect only this
relation.
2. The relation among debtors
Art. 1220. The remission of the whole obligation, obtained by one of the
solidary debtors, does not entitle him to reimbursement from his co-debtors.
(n)
Art. 1221. If the thing has been lost or if the prestation has become impossible
without the fault of the solidary debtors, the obligation shall be extinguished.
If there was fault on the part of any one of them, all shall be responsible to the
creditor, for the price and the payment of damages and interest, without
prejudice to their action against the guilty or negligent debtor.
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. (1147a)
LIMITED TO LOSS OF THING
 This article is limited to the case of non-performance because of loss of
the thing or impossibility of the prestation that is due.
 Loss is through fortuitous event: obligation is extinguished.
 Loss is due to fault of any solidary debtor or FE after debtor has incurred
delay: the obligation is converted to an obligation to pay indemnity.
• The entire indemnity may be recovered by the creditor from the
other debtors who were free from fault or delay. But if any of
these debtors should pay the creditor, they can recover from the
guilty debtor the full amount of the indemnity.
• If the creditor recovers the indemnity from the guilty debtor, the
latter cannot get any contribution from his co-debtors.
NON-PERFORMANCE WITHOUT LOSS
 If the thing is not lost or the prestation has not become impossible, but
there is delay, fraud, fault, or negligence, or some other breach of the
obligation, the creditor may also recover indemnity from any solidary
debtor.
 The guilty debtor cannot be made to shoulder, as part of the indemnity,
the shares of the co-debtors in the original obligation.
Art. 1222. A solidary debtor may, in actions filed by the creditor, avail himself
of all defenses which are derived from the nature of the obligation and of
those which are personal to him, or pertain to his own share. With respect to
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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. (1148a)
DEFENSES OF SOLIDARY DEBTOR
 3 kinds of defenses:
1. defenses derived from the nature of the obligation
2. defenses personal to the debtor-defendant
3. defenses personal to the other solidary debtors
 DEFENSES INHERENT IN OBLIGATION
• Derived from its nature; constitute a total defense:
1. The non-existence of the obligation because of illicit cause or
object, or absolute simulation.
2. Nullity due to defect in capacity or consent of all debtors (minority,
mistake, fraud, violence).
3. Unenforceability because of lack of proper proof under the
Statute of Frauds.
4. Non-performance of suspensive condition or non-arrival of period
affecting entire obligation.
5. Extinguishment of the obligation, such as payment by remission.
6. All other means of defense which may invalidate the original
contract (prescription, res judicata).
DEFENSES PERSONAL TO DEFENDANT
 May be total or partial defense.
 Minority, insanity, fraud, violence, or intimidation.
DEFENSES PERSONAL TO OTHER DEBTORS
 To the debtor-defendant all these are only a partial defense, exempting
hid from payment of the obligation corresponding to the other debtors
who have such personal defenses.
SECTION 5. - Divisible and Indivisible Obligations
Art. 1223. The divisibility or indivisibility of the things that are the object of
obligations in which there is only one debtor and only one creditor does not
alter or modify the provisions of Chapter 2 of this Title. (1149)
DIVISIBILITY OF THINGS
 A thing is indivisible, when, if divided into parts, its value is diminished
disproportionately.
 A thing is divisible when each one of the parts into which it is divided forms
a homogenous and analogous object to the other parts as well as to the
thing itself.
 Qualitative division: thing is not entirely homogenous (e.g. inheritance).
 Quantitative division: thing divided is homogenous (e.g. immovable).
 Ideal division: parts are not separated in a material way, but there are
assigned to several persons the undivided portions pertaining to the, as in
co-ownership.
DIVISIBLE AND INDIVISIBLE OBLIGATIONS
 DIVISIBLE OBLIGATION: one which is susceptible of partial performance.
 INDIVISIBLE OBLIGATION: it cannot be validly performed in parts.
 Refers to the performance of the obligation and not to the thing which is
the object thereof.
Art. 1224. A joint indivisible obligation gives rise to indemnity for damages from
the time anyone of the debtors does not comply with his undertaking. The
debtors who may have been ready to fulfill their promises shall not contribute
to the indemnity beyond the corresponding portion of the price of the thing or
of the value of the service in which the obligation consists. (1150)
Art. 1225. For the purposes of the preceding articles, obligations to give
definite things and those which are not susceptible of partial performance
shall be deemed to be indivisible.
When the obligation has for its object the execution of a certain number of
days of work, the accomplishment of work by metrical units, or analogous
things which by their nature are susceptible of partial performance, it shall be
divisible.
However, even though the object or service may be physically divisible, an
obligation is indivisible if so provided by law or intended by the parties.
In obligations not to do, divisibility or indivisibility shall be determined by the
character of the prestation in each particular case. (1151a)

INDIVISIBLE JOINT OBLIGATION DETERMINATION OF DIVISIBILITY

 Collective fulfillment  The divisibility of the object does not necessarily determine the divisibility
 In case of non-performance by any of the debtors, the obligation is of the obligation.
converted into a liability for losses and damages, which is divisible.  Test of divisibility: whether or not it is susceptible of partial performance.
• If one of the debtors is insolvent, or fails to pay, the others will not  While the indivisibility of the object carries with it the indivisibility of the
be liable for his share. obligation.
• If the transformation causes damage to other debtors, they may  The divisibility of the object does not always mean that the obligation is
recover such damages from the debtor who failed to perform. also divisible.
• Entire liability for other damages is shouldered by defaulting  FACTORS WHICH DETERMINE WHETHER AN OBJECT IS DIVISIBLE OR
debtor. INDIVISIBLE:
1. The will or intention of the parties.
SOLIDARITY AND INDIVISIBILITY 2. The object or purpose of the stipulated prestation.
3. The nature of the thing.
SOLIDARITY INDIVISIBILITY 4. The provisions of law affecting the prestation.
Refers to vinculum and therefore to Refers to the prestation or the  In obligations to give: indivisible
the subjects of the obligation object of the obligation  In obligations to do: indivisibility is also presumed and it is only under
Solidarity remains even when there When converted into one to pay exceptional cases mentioned in paragraph 2 of Art. 1225 that they are
has been non-performance and the damages, the reason for the divisible.
debtors become liable for indivisibility ceases to exist and the
damages. debtor becomes liable for his part EFFECT OF PARTIAL PERFORMANCE
of the indemnity.  Indivisible: debtor who fails to fully perform the work agreed upon cannot
Death of debtor terminates solidarity Affects the heirs of the debtor in recover quantum meruit because in indivisible obligations, partial
which is not transmitted to the heirs. that they remain bound to perform performance is equivalent to non-performance.
the prestation.  2 exceptions:
1. Where the obligation has been substantially performed in good faith,
INDIVISIBLE SOLIDARY OBLIGATIONS the debtor may recover as if there had been complete performance,
 Every debtor is liable for losses and damages, although those ready to minus the damages suffered by the creditor.
perform can later recover from the guilty one. 2. When the creditor accepts performance, knowing its incompleteness,
 The creditor may demand the entire indemnity from any debtor. and without protest, the obligation is deemed fully performed.

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ENTIRE AND SEVERABLE CONTRACTS
 If the consideration is single, the contract is ENTIRE.
 If the consideration is expressly or by implication apportioned, the
contract is SEVERABLE.
 When the consideration is entire and singe, the contract must be held to
be entire.
 If the part to be performed by one party consists in several distinct and
separate items, and the price is apportioned to each of them, the
contract will generally be held to be severable.
 EFFECT OF ILLEGALITY
• If a contract is severable and one part is illegal, the part which is
illegal is void but that part which is legal is enforceable.
• If the contract is entire, and a part is illegal, the whole contract is
unenforceable.
 EFFECT OF NULLITY
• If one of the undertakings is void but not illegal, valid covenants
may be enforced whether the contract is severable or not.
 STATUTE OF FRAUDS
• The enforceability of a contract for the sale of chattels when
affected by the statute of fraud depends on whether it is
severable or entire.
• Separate: each sale for a price below the statutory limit is not
affected by the statute.
• Entire: The contract is affected.
SECTION 6. - Obligations with a Penal Clause
Art. 1226. In obligations with a penal clause, the penalty shall substitute the
indemnity for damages and the payment of interests in case of
noncompliance, if there is no stipulation to the contrary. Nevertheless,
damages shall be paid if the obligor refuses to pay the penalty or is guilty of
fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in accordance with
the provisions of this Code. (1152a)
CONCEPT AND NATURE OF PENALTY
 A penal clause is an accessory undertaking to assume greater liability iin
case of breach.
 Double function:
1. provide for liquidated damages
2. strengthen the coercive force of the obligation
 It may be subsidiary or alternative: upon non-performance, only penalty
can be asked.
 joint or cumulative: both the principal undertaking and the penalty may
be demanded.
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 Purpose may be reparation: substitutes for damages; or
 Punishment: right to damage, besides penalty, subsists.
PENALTY AND DAMAGES
 Mere non-performance of the principal obligation gives rise to the right to
the penalty.
 LIQUIDATED DAMAGES
• No difference between a penalty and liquidated damages.
• The party to whom payment is to be made is entitled to recover
the sum stipulated without the necessity of proving damages.
• The creditor cannot recover more than the penalty stipulated,
even if he proves that the damages suffered by him exceed in
amount such penalty.
 LEGALITY OF CLAUSE
• When the penalty stipulated is not contrary to law, morals, or
public order, it must be enforced against the party liable therefor.
 HOW CONSTRUED
• Strictly
DAMAGES BESIDES PENALTY
 3 cases when damages and interest may be recovered in addition to
penalty:
1. when there is an express provision to that effect
2. when the debtor refuses to pay the penalty
3. when the debtor is guilty of fraud in the non-fulfillment of the
obligation
 EXPRESS STIPULATION
• When the contract expressly stipulates that the obligation shall
bear interest at a given rate from its date until paid, and in
addition there is an agreement for the payment of penalty in
case of failure to pay the obligation, both the penalty ad the
interest can be collected in case of breach.
ENFORCEMENT OF PENALTY
 The enforcement of the penalty can be demanded by the creditor only
when the non-performance is due to fault or fraud of the debtor.
 The non-performance gives rise to the presumption of fault.
 PLURALITY OF DEBTORS
• When there are several debtors, the divisibility of the principal
obligation among the debtors does not necessarily carry with it
the divisibility of the penalty among them.
• Joint: each debtor responds only for his own failure to perform
• Solidary: penalty may be enforced against any debtor for the
non-performance of another debtor.
DISTINGUISHED FROM CONDITIONAL OBLIGATIONS
 CONDITIONAL OBLIGATION
There is no obligation before the
suspensive condition happens; it is
the fulfillment of the condition that
gives rise to the obligation.
The principal obligation itself is
depended upon an uncertain
event.
OBLIGATION WITH A PENAL CLAUSE
There is already an existing
obligation from the very beginning.
It is the accessory obligation
(penalty) which is dependent upon
non-performance of the principal
obligation.
assumed by a third person.
Art. 1227. The debtor cannot exempt himself from the performance of the
obligation by paying the penalty, save in the case where this right has been
expressly reserved for him. Neither can the creditor demand the fulfillment of
the obligation and the satisfaction of the penalty at the same time, unless this
right has been clearly granted him. However, if after the creditor has decided
to require the fulfillment of the obligation, the performance thereof should
become impossible without his fault, the penalty may be enforced. (1153a)

DISTINGUISHED FROM ALTERNATIVE OBLIGATIONS RIGHT OF DEBTOR

ALTERNATIVE OBLIGATION OBLIGATION WITH A PENAL CLAUSE  The debtor cannot avoid performance of the principal obligation by
Two or more obligations are due, There is only one prestation and it is offering to pay the penalty.
but fulfillment of one of them is only when this is not performed that  EXCEPTION: The right to substitute the penalty for the principal obligation
sufficient. the penal clause is enforceable. may be expressly granted to the debtor.
The impossibility of one of the The impossibility of the principal
obligations, without the fault of the obligation extinguishes also the RIGHT OF CREDITOR
debtor, still leaves the other penalty.  Creditor cannot demand performance of the principal obligation and the
subsisting. penalty at the same time.
The debtor can choose which He cannot choose to pay the  EXCEPTIONS:
prestation to fulfill. penalty to relieve himself of the • the creditor may enforce both the principal and the penalty
principal obligation, unless that right when this right is clearly granted to him.
is expressly granted to him. o Must be expressly given to him
• Creditor has demanded fulfillment of the principal obligation but
DISTINGUISHED FROM FACULTATIVE OBLIGATION it cannot be performed. In this case, he may demand the
FACULTATIVE OBLIGATION OBLIGATION WITH A PENAL CLAUSE penalty.
 “Performance thereof should become impossible without his (creditor’s)
The power of the debtor to make The payment of the penalty in lieu
fault”
the substitution is absolute. of the principal obligation can be
• Could refer to FE which will extinguish the obligation. The law
made only by express stipulation.
obviously means that the performance becomes impossible
The creditor can never demand Such right may be granted to him.
through the fault of the debtor.
both prestations.
Art. 1228. Proof of actual damages suffered by the creditor is not necessary in
COMPARED WITH GUARANTY
order that the penalty may be demanded. (n)
GUARANTY OBLIGATION WITH A PENAL CLAUSE
They are both intended to insure performance of the principal obligation.
Art. 1229. The judge shall equitably reduce the penalty when the principal
They are both accessory and subsidiary obligations. obligation has been partly or irregularly complied with by the debtor. Even if
The object of the obligations of the The obligation to pay the penalty is there has been no performance, the penalty may also be reduced by the
principal debtor and the guarantor different from the principal courts if it is iniquitous or unconscionable. (1154a)
is the same. obligation.
The principal debtor cannot be the Principal obligation and the penalty PARTIAL OR IRREGULAR PERFORMANCE
guarantor of the same obligation. can be assumed by the same  Partial performance refers to the extent or quantity or fulfillment; irregular,
person. to the form.
The guaranty subsists even when the The penalty is extinguished by the  Courts will rigidly apply the doctrine of strict construction.
principal obligation is voidable or nullity of the principal obligation,
unenforceable or is a natural one. except when the penal clause is

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 Courts will be slow in exercising the authority conferred by this article
where it appears that in fixing the penalty the parties had in mind a fair
and reasonable compensation for actual damages.
INIQUITOUS OR UNCONSCIONABLE
 The amount or the penalty is not determined by the injury suffered by the
creditor, but by what has been agreed upon.
 A penalty may also become iniquitous by a supervening change of
circumstances, which makes the amount grossly disproportionate to the
damage suffered by the creditor.
 When the penalty is contrary to morals or good customs, it may even be
entirely voided.
 The courts should also consider the gravity of the violation of the
obligation and the benefits which the debtor may have derived from it.
 INTEREST OF CREDITOR
• The penalty is excessive when, taking into account the interest of
the creditor, it is in open contradiction to the demands of justice
and equity.
 NO DAMAGE SUFFERED
• The penalty my be reduced in instances where it is out of
proportion to the actual damage caused by the non-
performance or improper performance of the contract.
• This does not authorize the court under this article to rescind the
penalty altogether, if the plaintiff suffers no damage.
ATTORNEY’S FEES
 The court has jurisdiction to determine the reasonableness of the sum
stipulated, and to reduce the same if excessive.
 It is not necessary to show that it is contrary to law, morals, or public order.
It is sufficient that it is unreasonable or unconscionable.
PENALTY NOT ENFORCEABLE
 The penalty is not enforceable when the principal obligation becomes
impossible due to fortuitous event, or when the creditor prevents the
debtor from performing the principal obligation.
Art. 1230. The nullity of the penal clause does not carry with it that of the
principal obligation.
The nullity of the principal obligation carries with it that of the penal clause.
(1155)
NULLITY OF PRINCIPAL OBLIGATION
 The nullity of the principal obligation also nullifies the penal clause.
 EXCEPTIONS
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1. When the penalty is undertaken by a third person precisely for an
obligation which is unenforceable, voidable, or natural, in which case
it assumes the form of a guaranty which is valid.
2. When the nullity of the principal obligation itself gives rise to liability of
the debtor for damages, such as when the vendor knew that the
thing was inexistent at the time of the contract.
NULLITY OF PENAL CLAUSE
 The penal clause may be void because it is contrary to law, morals, good
customs, public order, or public policy. In such case, the principal
obligation subsists, if valid.
CHAPTER 4 EXTINGUISHMENT OF OBLIGATIONS
GENERAL PROVISIONS
Art. 1231. Obligations are extinguished:
(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. (1156a)
MISCELLANEOUS CAUSES
 Prescription, death, renunciation by the creditor, compromise, fulfillment
of resolutory condition, rescission and nullity, will of one of the parties,
change in civil status, unforeseen events, etc.
 DEATH
• Death of ether the creditor or debtor does not extinguish the
obligation. Obligations actively and passively are transmissible to
the heirs.
• EXCEPTION: When the law, the stipulation of the parties, or the
nature of the obligation prevents such transmission.
 WANT OF INTEREST
• Want of interest of the creditor in the fulfillment of the obligation
does not extinguish it.
• There are cases, however, when the enforcement of the
obligation, if the creditor has no more interest to serve, may
amount to an abuse of right and the debtor should be relieved.
 ABANDONMENT
• There are special cases of extinguishment of obligations by
abandonment of the thing charged with the obligation.
 MUTUAL, UNILATERAL DISSENT
 • Contracts can be terminated by mutual agreement of the • When the existence of a debt is fully established by the evidence,
parties, express or implied. the burden of proving that it has been extinguished by payment
• Mutual agreement can create a contract, mutual disagreement devolved upon the debtor.
can cause its extinguishment. • ISSUANCE OF RECEIPT
 INSOLVENCY o Code does not require the creditor to issue a receipt for
• An obligation is not extinguished by the insolvency of the debtor, the payment.
unless it has been judicially declared and a discharge has been o Issuance of a receipt is a consequence of usage and
given to him. good faith which must be observed.
o Refusal of the creditor to issue a receipt, without just
SECTION 1. - Payment or Performance cause, is a ground for consignation.

Art. 1232. Payment means not only the delivery of money but also the
performance, in any other manner, of an obligation. (n)
CONCEPT OF PAYMENT
 Payment is the fulfillment of the prestation due, a fulfillment that
extinguishes the obligation by realization of the purposes for which it was
constituted.
 Payment and fulfillment are thus identical.
REQUISITES OF PAYMENT
1. The person who pays (must have capacity)
2. The person to whom payment is made
3. The thing due to be paid
4. The manner, time and place of payment (must be in accordance with the
obligation)
KINDS OF PAYMENT
 NORMAL: debtor voluntarily performs the prestation stipulated
 ABNORMAL: when he is forced by means of a judicial proceeding
Art. 1233. A debt shall not be understood to have been paid unless the thing or
service in which the obligation consists has been completely delivered or
rendered, as the case may be. (1157)
IDENTITY AND INTEGRITY
 2 REQUISITES OF PAYMENT
1. The identity of the prestation: that the very thing or service due must
be delivered or released.
2. Its integrity: prestation must be fulfilled completely.
 TIME OF PAYMENT
• The payment or performance must be on the date stipulated.
• Failure to perform on the date stipulated is not excused by the
fact that such date falls on a Sunday and the next day is a legal
holiday.
 PROOF OF PAYMENT
Art. 1234. If the obligation has been substantially performed in good faith, the
obligor may recover as though there had been a strict and complete
fulfillment, less damages suffered by the obligee. (n)
SUBSTANTIAL PERFORMANCE
 There must be an attempt of good faith to perform, without any willful or
intentional departure therefrom.
 The deviation must be slight, and the omission or defect must be technical
and unimportant, and must not be material.
 The non-performance of a material part of a contract will prevent the
performance from amounting to a substantial compliance.
 The party claiming substantial compliance must show that he has
attempted in good faith to perform his contract, but has through
oversight, misunderstanding or any excusable neglect failed to
completely perform in certain negligible respects.
 A party who knowingly and willfully fails to perform his contract in any
respect, or omits to perform a material part of it, cannot be permitted,
under the protection of this rule, to compel the other party to perform.
 EFFECT
• When one has received the benefits of substantial performance
by the other without paying the price agreed upon, and he
cannot or does not return these benefits, it is manifestly unjust to
permit him to retain them without paying, or doing as he
promised.
• The party who has received the benefits of substantial
performance, therefore, cannot require the performance of the
residue as a condition precedent to his liability. He must perform
his part of the contract and rely on his claim for damages in
respect to the defect or omission in the performance.
Art. 1235. When the obligee accepts the performance, knowing its
incompleteness or irregularity, and without expressing any protest or
objection, the obligation is deemed fully complied with. (n)
WAIVER OF DEFECT IN PERFORMANCE

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 A person entering into a contract has a right to insist on its performance in
all particulars. But if he chooses to waive any of the terms introduced for
his own benefit, he may do so.
 There must be an intentional relinquishment of a known right.
 There must have been acceptance of the defective performance with
actual knowledge of the incompleteness or defect.
ESTOPPEL OF CREDITOR
 A creditor cannot object because of defects in performance resulting
from his own acts or directions.
 Where a party makes particular objections to the sufficiency of
performance he is estopped to later set up other objections.
Art. 1236. The creditor is not bound to accept payment or performance by a
third person who has no interest in the fulfillment of the obligation, unless there
is a stipulation to the contrary.
Whoever pays for another may demand from the debtor what he has paid,
except that if he paid without the knowledge or against the will of the debtor,
he can recover only insofar as the payment has been beneficial to the debtor.
(1158a)
REASON FOR ARTICLE
 Whenever a third person pays there is a modification of the prestation
that is due.
 A creditor should not be compelled to accept payment from a third
person whom he may dislike or distrust.
RIGHT OF THIRD PERSON
 A person who pays a debt for the account of another may recover from
the debtor the sum so paid out, at lease to the extent in which the
payment may have been beneficial to the debtor.
 The debtor who knows that another has paid his obligation for him, and
who does not object thereto or repudiate the same at any time, must pay
the amount advanced by the third person.
 AMOUNT OF RECOVERT
• Generally: entitled to recover full amount
• If the debtor has no knowledge or has expressed his opposition:
limits recovery to the amount by which the debtor has been
benefited.
 PRESCRIPTION
• A partial payment made by a stranger of the obligation without
the authorization of the debtor, will not stay the running of the
period of prescription with respect to the remainder of the debt.
 REPURCHASE PRICE
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• When a person has right to repurchase certain property does the
payment by a third person, does it constitute payment by a third
person? The SC has conflicting decisions.
PAYMENT AGAINST THE DEBTOR’S WILL
 It is optional for the creditor to accept payment from a third person.
 If the debtor opposes: 3rd person can only recover the extent that the
payment has benefited him.
 But as between the debtor and the creditor, the obligation is
extinguished.
Art. 1237. Whoever pays on behalf of the debtor without the knowledge or
against the will of the latter, cannot compel the creditor to subrogate him in his
rights, such as those arising from a mortgage, guaranty, or penalty. (1159a)
REIMBURSEMENT AND SUBROGATION
 The right to recover from the debtor is based on the mere fact of payment
and on consideration of justice.
 When subrogation takes place, the payor actually steps into the shoes of
the creditor and becomes entitled, not only to recover what he has paid
but also to exercise all the rights.
 There is a change in the active subject.
SUBROGATION OF CREDITOR
 From the language of this article, it would seem that there may be
subrogation if the creditor willingly and spontaneously permits the third
person who has paid to be subrogated in his rights, even without the
consent of the debtor.
• Not proper
 Creditor may assign his rights
Art. 1238. Payment made by a third person who does not intend to be
reimbursed by the debtor is deemed to be a donation, which requires the
debtor's consent. But the payment is in any case valid as to the creditor who
has accepted it. (n)
Art. 1239. In obligations to give, payment made by one who does not have the
free disposal of the thing due and capacity to alienate it shall not be valid,
without prejudice to the provisions of Article 1427 under the Title on "Natural
Obligations." (1160a)
EFFECT OF INCAPACITY
 Where the person paying has no capacity to make payment, creditor
cannot be compelled to accept it.
 Consignation will not be proper
 In case creditor accepts, it will not be valid
 EXCEPTION: Article 1427

Art. 1240. Payment shall be made to the person in whose favor the obligation
has been constituted, or his successor in interest, or any person authorized to
receive it. (1162a)
TO WHOM PAYMENT TO BE MADE
 The person in whose favor the obligation is constituted, or to another
authorized to receive payment.
 AUTHORIZED PERSON
• Legal or conventional
• Legal: conferred by law
• Conventional: authority has been given by the creditor himself.
PAYMENT TO WRONG PARTY
 Does not extinguish the obligation as to the creditor, if there is no fault or
negligence which can be imputed to the latter.
 DEPOSIT IN BANK
• The deposit of the amount of the obligation by the debtor in a
bank, in the name and to the credit of the creditor, without
authorization of the latter, does not constitute payment.
• But when creditor cannot be found in the place of payment, such
deposit may be a valid excuse for not holding the debtor in
default.
 DEPOSIT IN COURT
• Consignation in court will extinguish the obligation.
Art. 1241. Payment to a person who is incapacitated to administer his property
shall be valid if he has kept the thing delivered, or insofar as the payment has
been beneficial to him.
Payment made to a third person shall also be valid insofar as it has redounded
to the benefit of the creditor. Such benefit to the creditor need not be proved
in the following cases:
(1) If after the payment, the third person acquires the creditor's rights;
(2) If the creditor ratifies the payment to the third person;
(3) If by the creditor's conduct, the debtor has been led to believe that the
third person had authority to receive the payment. (1163a)
PAYMENT TO INCAPACITATED
 When the creditor is incapacitated to receive payment, this must be
made to his legal representative if there is one. If none: consignation in
court.
 If payment is made to the creditor who is incapacitated, it shall be valid in
so far as it accrued to his benefit. In the absence of this benefit, the
debtor may be made to pay again.
 BENEFIT TO CREDITOR
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• Payment shall be considered as having benefited the
incapacitated person, if he made an intelligent and responsible
use thereof, for purposes necessary or useful to him, such as that
which his legal representative would have or could have done
under similar circumstances.
PAYMENT TO THIRD PERSON
 The same principles governing payment to an incapacitated creditor, are
applicable to payments made to a third person.
 The debtor is not released from liability by payment to one who is not the
creditor nor one authorized to receive the payment.
• EXCEPT: to the extent the payment inured to the benefit of the
creditor.
• Payment to a third person releases the debtor:
1. When without notice of the assignment of the credit, he pays to
the original creditor (Art 1626).
2. When in good faith he pays to one in possession of the credit (Art
1242).
 FAULT OF CREDITOR
• If the mistake of the debtor was due to the fault of the creditor,
he cannot demand payment anew even when he receives no
benefit.
Art. 1242. Payment made in good faith to any person in possession of the
credit shall release the debtor. (1164)
POSSESSION OF CREDIT
 EXCEPTION to the rule that payment must be made to the creditor or his
authorized representative.
 Possession of the credit should be distinguished from possession of the title
or evidence of the credit.
 The mere holding of the document will not generally be sufficient, but is
necessary to consider the nature of the credit.
 Payment to the possessor of the document or title does not necessarily
extinguish the credit.
 PAYMENT IN GOOD FAITH
• Payment must also be made in good faith.
• Good faith consists in the belief that the party who presents the
title of the obligation is the true creditor, or that person to whom
payment is made is the owner of the credit.
• Only good faith on the part of the debtor is required.
Art. 1243. Payment made to the creditor by the debtor after the latter has been
judicially ordered to retain the debt shall not be valid. (1165)
EFFECT OF GARNISHMENT
 The payment to the creditor after the credit has been attached or
garnished, is void as to the party who obtained the attachment or
garnishment, to the extent of the amount of the judgment in his favor.
 Debtor can be made to pay again, but he can recover to the same
extent what he has paid to his creditor.
 CONSIGNATION
• The debtor upon whom a garnishment order is served, can always
deposit the money in court by way of consignation.
 IF ACTION FAILS
• If the action of the attaching or garnishing creditor fails, then the
garnishment is of no effect.
• The payment which the garnishee has made to his creditor must
be considered valid.
Art. 1244. 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.
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. (1166a)
SUBSTITUTION OF PRESTATION
 The debtor of a thing cannot compel the creditor to receive a different
one although the latter may be of the same value than that which is due.
WAIVER OF DEFECTS
 The defects of the thing delivered may be waived by the creditor, if he so
expressly declares or if, with knowledge thereof, he accepts the thing
without protest or disposes of it or consumes it.
Art. 1245. Dation in payment, whereby property is alienated to the creditor in
satisfaction of a debt in money, shall be governed by the law of sales. (n)
CONCEPT OF DATION IN PAYMENT
 Dation in payment is the delivery and transmission of ownership of a thing
by the debtor to the creditor as an accepted equivalent of the
performance of the obligation.
 The modern concept of dation in payment considers it as a novation by
change of the object.
 EFFECT ON OBLIGATION
• Dation in payment extinguishes the obligation to the extent of the
value of the thing delivered, either as agreed upon by the parties
or as may be proved.
• EXCEPTION: unless the parties by agreement, express or implied,
or by their silence, consider the thing as equivalent to the
obligation, in which case the obligation is totally extinguished.
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 DISTINGUISHED FROM ASSIGNMENT
• Assignment of property by the debtor to his creditors, provided for
in article 1255, is similar to dation in payment in that both are
substitute forms of performance of an obligation.
• Dation in payment does not involve pluarilty of creditors.
 PLEDGE
• In case where personal property is delivered to the creditor, the
transaction is a pledge, not dation in payment. In case of doubt,
presumption is in favor of pledge.
WARRANTIES OF DEBTOR
 The provision on sales, regarding warranty against eviction and hidden
defects of the thing, are therefore applicable, the debtor being
considered as the vendor.
ERROR IN PAYMENT
 In dation in payment, the obligor who delivers the thing does so for the
purpose of releasing himself from the obligation, and not as a vendor.
 If the debtor proves he paid by mistake, he can recover, not the price but
thing itself which was conveyed.
Art. 1246. 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 of inferior quality. The purpose of the obligation and other
circumstances shall be taken into consideration. (1167a)
DETERMINATION OF QUALITY
 If there is disagreement, the court should decide whether it complies with
the obligation, taking into consideration the purpose and other
circumstances of the obligation.
WAIVER OF BENEFIT
 The creditor or debtor may waive the benefit of this article.
 The creditor may require a thing of inferior quality, and the debtor may
deliver an object of superior quality.
Art. 1247. Unless it is otherwise stipulated, 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. (1168a)
REASON
 Payment is his duty and it inures to his benefit.
Art. 1248. Unless there is an express stipulation to that effect, 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.
However, when the debt is in part liquidated and in part unliquidated, the
creditor may demand and the debtor may effect the payment of the former
without waiting for the liquidation of the latter. (1169a)
PARTIAL PRESTATIONS
 The creditor who refuses to accept partial prestations does not incur in
delay or mora accipiendi.
 EXCEPT: when there is an abuse of right or if good faith requires
acceptance.
• Amount or quantity is so big that performance can reasonable be
expected to be made in various deliveries.
 PLURALITY OF SUBJECTS AND TIES
• The article does not apply to obligations where there are several
subjects or where the various parties are bound under different
terms and conditions.
Art. 1249. The payment of debts in money shall be made in the currency
stipulated, and if it is not possible to deliver such currency, then in the
currency which is legal tender in the Philippines.
The delivery of promissory notes payable to order, or bills of exchange or other
mercantile documents shall produce the effect of payment only when they
have been cashed, or when through the fault of the creditor they have been
impaired.
In the meantime, the action derived from the original obligation shall be held
in the abeyance. (1170)
LEGAL TENDER
 Legal tender means such currency which in a given jurisdiction can be
used for the payment of debts, public and private, and which cannot be
refused by the creditor.
 JAPANESE OCCUPATION
• Payments made during said period with Japanese military notes
were valid.
o LOSS OF VALUE
 Those who accepted Japanese military war
notes during the occupation and held them as
owners, suffered the consequences when such
notes depreciated in value or became worthless.
CURRENCY IN PAYMENT
 This article sanctions payment of debts in currency other than that which is
legal tender in the Philippines, if there is a stipulation to that effect.
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DELIVERY OF INSTRUMENTS
 The provision of the law that the delivery of notes or other commercial
instruments shall produce the effects of payment only when they are
collected, is applicable, not only to those instruments executed by third
persons and delivered by the debtor to the creditor, but also to a note
executed by the debtor himself and delivered to the creditor.
 PAYMENT BY CHECK
• Payment by check may be validly refused by the creditor.
• A check, whether a manager’s check or an ordinary check, is not
legal tender.
 LOSS OF VALUE
• The clause relating to the prejudice caused to the instrument by
the fault of the creditor, is applicable only to instruments
executed by third persons and delivered by the debtor to the
creditor.
Art. 1250. In case an extraordinary inflation or deflation of the currency
stipulated should supervene, the value of the currency at the time of the
establishment of the obligation shall be the basis of payment, unless there is
an agreement to the contrary. (n)

APPLICATION OF LAW
 Applies only where a contract or agreement is involved. It does not apply
where the obligation to pay arises from law.
EXTRAORDINARY INFLATION OR DEFLATION
 That which is unusual or beyond the common fluctuations in the value of
the currency which the parties could not have reasonable foreseen.
 REVALUATION OF CURRENCY
• To determine payment when there has been great fluctuations in
the value of currency, we can resort, considering the
circumstances of each particular case, to the principle of good
faith in Article 1315.
o Parties to contracts 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.
• Effect of devaluation should not be borne by the creditor alone.
Revaluation should be made.
Art. 1251. Payment shall be made in the place designated in the obligation.
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.
In any other case the place of payment shall be the domicile of the debtor.
If the debtor changes his domicile in bad faith or after he has incurred in
delay, the additional expenses shall be borne by him.
These provisions are without prejudice to venue under the Rules of Court.
(1171a)
DETERMINATE THINGS
 Absence of stipulation, performance must be made at the place where
the thing was located at the time the obligation was constituted.
PAYMENT AT DEBTOR’S DOMICILE
 Even when the thing is determinate but its existence at the place where it
was when the obligation was constituted was temporary, the
performance must be at the domicile of the debtor.
 Obligations for a sum of money, it is the duty of the creditor to go to the
domicile of the debtor to collect.
 CREDITOR’S EXPENSES
• If the creditor, in going to the debtor’s domicile to collect, incurs
expenses, the creditor must bear the expenses.
• But if the debtor changes his domicile in bad faith or after he has
incurred in delay, then the additional expenses shall be borne by
him.
RISK OF TRANSMISSION
 When the debtor has been required to remit money to the creditor, the
latter bears the risks and the expenses of the transmission.
SUBSECTION 1. - Application of Payments
CONCEPT: Application of payment is the designation of the debt which is
being paid by a debtor who has several obligations of the same kind in favor
of the creditor to whom payment is made.
Art. 1252. He who has various debts of the same kind in favor of one and the
same creditor, may declare at the time of making the payment, to which of
them the same must be applied. Unless the parties so stipulate, or when the
application of payment is made by the party for whose benefit the term has
been constituted, application shall not be made as to debts which are not yet
due.
If the debtor accepts from the creditor a receipt in which an application of the
payment is made, the former cannot complain of the same, unless there is a
cause for invalidating the contract. (1172a)
DEBTS TO BE PAID
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 Obligations must all be due.
 It is only in cases of mutual agreement of upon the consent of the party in
whose favor the term was established, that payments may be applies to
obligations which have not yet matured.
 It is also necessary that all the debts be for the same kind, generally of
monetary character.
RIGHT OF DEBTOR
 The law grants to the debtor a preferential right to choose the debt to
which his payment is to be applied.
 Limitations on the right of the debtor:
1. If the debtor owes two debts – 50 and 200, and he makes a
payment of 50, he cannot choose to apply it to the 200 debt
because the creditor cannot be compelled to accept partial
payment.
2. If there is only one obligation bearing interest, the debtor cannot
apply the payment to the capital because the law requires its
application to interest first.
3. The debtor cannot apply the payment to a debt that is not yet
liquidated.
4. He cannot choose a debt with a period for the benefit of the
creditor, when the period has not yet arrived.
5. When there is an agreement as to the debts which are to be paid
first, the debtor cannot vary the agreement.
 EFFECT OF CREDITOR’S REFUSAL
• If the debtor makes a proper application of payment, but the
creditor refuses to accept it because he wants to apply it to
another debt, such creditor may incur delay.
APPLICATION BY CREDITOR
 If at the time of payment, the debtor does not exercise his right to apply,
the application shall be understood as provided by law.
 EXCEPT: the creditor makes the application and his decision is accepted
by the debtor.
 Once the debtor has accepted, the former cannot contest such
application.
 An application made by the creditor without the knowledge and consent
of the debtor, is not binding upon the latter.
 CONTESTED BY THE DEBTOR
• The application made by the creditor, stated in the receipt issued
to the debtor, may be contested by the latter if there is a cause
for invalidating the contract.
• Real intent of the law is that the application made by the creditor
can be contested by the debtor.
APPLICATION BY LAW
 When neither the debtor nor the creditor has made a valid application of Art. 1255. The debtor may cede or assign his property to his creditors in
payment, then the application shall take place by operation of law. 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
CHANGE OF APPLICATION thing assigned. The agreements which, on the effect of the cession, are made
 The debtor and the creditor, by agreement, can validly change the between the debtor and his creditors shall be governed by special laws.
application of payment already made, without prejudice to the rights of (1175a)
third persons acquired before such agreement.
CONCEPT OF ASSIGNMENT
Art. 1253. If the debt produces interest, payment of the principal shall not be  The assignment of the universality of the property of the debtor for the
deemed to have been made until the interests have been covered. (1173) benefit of his creditors, in order that such property may be applied to the
payment of the credits.
PAYMENT OF INTEREST  Initiative comes from the debtor but it must be accepted by the creditors.
 Partial payments are to applied first on account of the interest and then  A voluntary assignment cannot be imposed upon a creditor who is not
to reduce the principal. willing to accept it.
 WHAT INTEREST COVERED  Assignment by the debtor has two forms: voluntary and legal.
• No distinction should be made because the law makes no such  The present article deals with voluntary assignment.
distinction (on compensatory interest and interest due to delay).  The assignment gives to the creditors the right to proceed to the sale of
• Delay should worsen, not improve, the position of a debtor. the property, and to pay themselves in the amount which the proceeds of
the sale permit and in the manner agreed upon.
Art. 1254. When the payment cannot be applied in accordance with the  If the proceeds of the property should not cover all the obligations, the
preceding rules, or if application can not be inferred from other unpaid amount remains due and demandable.
circumstances, the debt which is most onerous to the debtor, among those  PROPERTY EXEMPT
due, shall be deemed to have been satisfied. • Support
• Family home
If the debts due are of the same nature and burden, the payment shall be  DISTINGUISHED FROM DATION IN PAYMENT
applied to all of them proportionately. (1174a)
CESSION DATION IN PAYMENT
MOST ONEROUS DEBT Only the possession and Transfers the ownership over the
 It is assumed that if the debtor had chosen the debt to be paid, he would administration are transferred. thing alienated to the creditor.
have relieved himself first of the more burdensome debt. Only extinguishes the credits to the May totally extinguish the obligation
 Basis: extent of the amount realized from
1. Principal and surety: Principal is more onerous the properties unless otherwise
2. Sole and solidary debtor: Sole agreed upon
3. Oldest debt Involves all the properties of the Specific thing
4. Higher interest rate debtor
5. Debt with guaranty Various creditors Transfer is only in favor of one
6. Damages and one with penal clause: damages creditor
7. Liquidated debt
8. Debtor is in default
 NATURE AND BURDEN SUBSECTION 3. - Tender of Payment and Consignation
• Where the debts are of the same nature and burden, there must
always be a pro rata application of the payment. TENDER OF PAYMENT: The manifestation made by the debtor to the creditor of
his desire to comply with his obligation, with the offer of immediate
SUBSECTION 2. - Payment by Cession performance.

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CONSIGNATION: The deposit of the object of the obligation in a competent
court in accordance with rules prescribed by law, after the tender of payment
has been refused or because of circumstances which render direct payment
to the creditor impossible or inadvisable.
Art. 1256. If the creditor to whom tender of payment has been made refuses
without just cause to accept it, the debtor shall be released from responsibility
by the consignation of the thing or sum due.
Consignation alone shall produce the same effect in the following cases:
(1) When the creditor is absent or unknown, or does not appear at the place of
payment;
(2) When he is incapacitated to receive the payment at the time it is due;
(3) When, without just cause, he refuses to give a receipt;
(4) When two or more persons claim the same right to collect;
(5) When the title of the obligation has been lost. (1176a)
TENDER OF PAYMENT
 Tender of payment is required before consignation.
 Tender is not required in the cases enumerated in the five numbered
paragraphs of this article.
 Mere sending of letters by the debtor expressing intent to pay, without
payment, is not a valid tender.
 Tender of payment of only part of the obligation, when the contract calls
for full payment of the balance due upon default of an installment, may
be validly refused.
 EFFECT ON INTEREST
• When a tender of payment is made in such a form that the
creditor could have immediately realized payment if he had
accepted the tender, followed by a prompt attempt of debtor to
deposit the means of payment in court by way of consignation,
the accrual of interest will be suspended.
REQUISITES OF CONSIGNATION
1. That there was a debt due.
2. That the consignation of the obligation was made because of some legal
cause provided in the present article.
3. That previous notice of the consignation has been given to the persons
interested in the performance of the obligation.
4. That the amount or thing due was placed at the disposal of the court.
5. That after the consignation has been made the persons interested were
notified thereof.
 EXISTENCE OF DEBT
• There must be a debt to be paid.
 CAUSE FOR CONSIGNATION
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• For a valid consignation, it is necessary that the creditor must
have refused without just cause to accept payment, or that there
be some other legal cause.
• Mere consignation without one of these causes does not produce
the effect of releasing the debtor.
• UNJUST REFUSAL BY CREDITOR
1. That there was previous tender of payment, without
which the consignation is ineffective.
2. That the tender of payment was of the very thing due, or
in case of money obligations, that legal tender currency,
was offered.
3. That the tender of payment was unconditional.
4. That the creditor refused to accept payment without just
cause.
• ABSENCE OR INCAPACITY OF CREDITOR
o Absence or incapacity need not be legally declared.
o It is not enough that the creditor be absent or
incapacitated, he must have no legal representative. Or
if he has, the debtor, without his fault, does not know such
legal representative.
• VARIOUS CLAIMANTS
o They must have the appearance of a right to collect such
that the debtor would have a reasonable doubt.
• CAUSES NOT ENUMERATED
o The enumeration must not be interpreted in the restrictive
sense, but in light of the purpose of the institution of
consignation, which is to avoid the performance of an
obligation becoming more onerous to the debtor by
reason of causes not imputable to him.
 PREVIOUS NOTICE
• Consignation should be made known or announced to the
creditor and to other persons interested in the obligation.
• Lack of notice does not invalidate the consignation (it invalidates
consignation according to JSP)
• Notices can be made at the same time or in the same act
 DEPOSIT IN COURT
• The thing or amount due must be placed at the disposal of the
judicial authority.
• OBJECT OF CONSIGNATIONS
o Even immovable property can be placed at the disposal
of the court.
 SECOND NOTICE
• After consignation has been made, the interested parties must be
notified thereof.
• After notice, the creditor may
 1. Accept the thing or amount deposited, in which case the
matter or payment is terminated
2. Refuse to accept the thing or amount, in which case a trial
must be held to determine the validity of the consignation.
3. The creditor may neither accept nor refuse, in which case the
debtor may ask the court to cancel the obligation after
showing that the requisites of consignation has been
complied with.
Art. 1257. In order that the consignation of the thing due may release the
obligor, it must first be announced to the persons interested in the fulfillment of
the obligation.
The consignation shall be ineffectual if it is not made strictly in consonance
with the provisions which regulate payment. (1177)
PERSONS TO BE NOTIFIED
 The notice of consignation must be given to all persons interested in the
fulfillment of the obligation, whether they be passive subjects or possible
litigants.
HOW NOTICE IS GIVEN
 Tender of payment and notice may be made in the same act.
Art. 1258. Consignation shall be made by depositing the things due at the
disposal of judicial authority, before whom the tender of payment shall be
proved, in a proper case, and the announcement of the consignation in other
cases.
The consignation having been made, the interested parties shall also be
notified thereof. (1178)
DEPOSIT IN COURT
 The very thing due must be placed at the disposal of the judicial authority.
JUDICIAL AUTHORITY
 Includes the sheriff
 POWER OF COURT
• Order that the property be taken into custody of an officer of the
court or of a receiver to be specially appointed by it.
• The court would likewise have authority in such case to make an
order for the sale of the property.
NOTICE AFTER CONSIGNATION
 This requirement is fulfilled by the service of the summons upon the
defendant together with a copy of the complaint.
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Art. 1259. The expenses of consignation, when properly made, shall be
charged against the creditor. (1178)
EXPENSES BORNE BY THE CREDITOR
1. When after the thing has been deposited in court, the creditor accepts the
consignation without objection and without any reservation of his right to
contest it because of failure to comply with any of the requisites for
consignation.
2. When the creditor objects to the consignation but the court, after proper
hearing, declares that the consignation has been validly made.
Art. 1260. Once the consignation has been duly made, the debtor may ask the
judge to order the cancellation of the obligation.
Before the creditor has accepted the consignation, or before a judicial
declaration that the consignation has been properly made, the debtor may
withdraw the thing or the sum deposited, allowing the obligation to remain in
force. (1180)
WHEN CONSIGNATION TAKES EFFECT
 Consignation is completed at the time the creditor accepts the same
without objections, or, if he objects, at the time the court declares that it
has been validly made in accordance with law.
 Consignation has a retroactive effect.
EFFECTS OF CONSIGNATION
1. Debtor is released
2. Accrual of interest is suspended
3. Deteriorations or loss of the thing without the fault of the debtor must be
borne by the creditor.
4. Any increment or increase inures to the benefit of the creditor.
 RECIPROCAL OBLIGATIONS
• When the debtor is bound simultaneously to perform with the
creditor, he can ask the court that the thing be delivered to the
creditor only upon compliance by the latter with the counter
prestation.
WITHDRAWAL BY DEBTOR
 The right of the debtor to withdraw the thing or amount deposited in
court, depends upon whether or not the consignation has already been
accepted or judicially declared proper.
 Before that time, the debtor is still the owner, and he may withdraw.
 Once consignation has been accepted by the creditor or judicially
declared proper, the debtor loses his right and cannot withdraw without
the consent of the creditor. If the creditor consents, the obligation is
 revived as against the debtor, but all rights of preference of the creditor
over the thing and all his actions against co-debtors, guarantors and
sureties are extinguished.
 When the debtor withdraws the thing, he must bear all the expenses.
 OBJECTION BY OTHER DEBTORS
• Other parties liable for the obligation have no right to oppose his
withdrawal of such thing or amount.
 OBJECTION BY CREDITOR
• Before consignation has been judicially declared proper, the
creditor may prevent the withdrawal by the debtor, by accepting
the consignation even with reservations.
• If no reservations are made, acceptance is a waiver of further
claims.
ATTACHMENT BY THIRD PERSONS
 Before consignation has been accepted, other creditors of the debtor
may still attach the thing consigned as property belonging to the debtor.
DISMISSAL OF ACTION
 If the case in which the consignation is made, is dismissed, the
consignation will become ineffectual.
Art. 1261. If, the consignation having been made, the creditor should authorize
the debtor to withdraw the same, he shall lose every preference which he may
have over the thing. The co-debtors, guarantors and sureties shall be released.
(1181a)
WITHDRAWAL WITH CREDITOR’S CONSENT
 There is a revival of the obligation.
 Third persons who were benefited by the consignation, are not prejudiced
by the revival of the obligation between debtor and creditor.
 Withdrawal of the consignation releases the solidary co-debtor only from
his solidary liability for the share of others, but not from his liability for his
own share.
SECTION 2. - Loss of the Thing Due
CONCEPT OF LOSS OF THE THING
 Not limited to obligations to give
 Extends to those which are personal, embracing therefore all causes
which may render impossible the performance of the prestation.
 Impossibility of performance.
 If impossibility already existed when the contract was made: inefficacy of
the obligation
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Art. 1262. An obligation which consists in the delivery of a determinate thing
shall be extinguished if it should be lost or destroyed without the fault of the
debtor, and before he has incurred in delay.

When by law or stipulation, the obligor is liable even for fortuitous events, the
loss of the thing does not extinguish the obligation, and he shall be responsible
for damages. The same rule applies when the nature of the obligation requires
the assumption of risk. (1182a)
LOSS OF DETERMINATE OBJECT
 Perishes
 Goes out of commerce
 Disappears in such a way that its existence is unknown or it cannot be
recovered.
 SUBJECTIVE IMPOSSIBILITY
• No physical or legal loss, but the thing belongs to another, the
performance by the debtor of the obligation undoubtedly
becomes impossible.
• Debtor must indemnify creditor
EFFECT OF FORTUITOUS EVENT
 An obligation consisting in the delivery of a specified thing, shall be
extinguished when the said thing shall be lost or destroyed without the
fault of the obligor and before he is in default.
 ROBBERY AND THEFT
• If the thing has been lost through robbery with violence, the
debtor must show that he could not resist the violence.
• If the lost is through theft, the debtor is considered negligent.
 EFFECT ON RECIPROCAL OBLIGATIONS
• The entire juridical relation is extinguished, so that if the creditor
has himself an obligation, this is likewise extinguished.
 EXCEPTION
• The debtor who is unable to perform becomes liable for damages
when the thing is lost through a fortuitous event:
1. When the law expressly provides that the debtor shall be
liable even if the loss is due to fortuitous events.
2. When by express stipulation, the obligor is made liable even of
loss occurs through fortuitous events.
3. When the nature of the obligation requires the assumption of
risk
4. When the fault or negligence of the debtor concurs with the
fortuitous event.
5. When the loss occurs after the debtor has incurred in delay.
6. When the debtor has promised to deliver the same though to
two or more different parties.
 7. When the obligation to deliver a determinate object arises
from a criminal act.
Art. 1263. In an obligation to deliver a generic thing, the loss or destruction of
anything of the same kind does not extinguish the obligation. (n)
LOSS OF GENERIC THINGS
 A determinate thing is a concrete particularized object, indicated by its
own individuality.
 A generic thing is one whose determination is confined to that of its
nature, to the genus to which it pertains.
 The loss of the determinate object without fault of the debtor extinguishes
the obligation to give; but the obligation is not extinguished if the object is
indeterminate or generic.
 When all the things of the kind stipulated disappear or perish, the
obligation is extinguished.
 DELIMITED GENERIC THINGS
• When there is a limitation of the generic object to a particular
existing mass or a particular existing mass or a particular group or
of things, the obligation is extinguished by the loss of the particular
mass or group or limited quantity from which the prestation has to
be taken.
Art. 1264. The courts shall determine whether, under the circumstances, the
partial loss of the object of the obligation is so important as to extinguish the
obligation. (n)
EFFECT OF PARTIAL LOSS
 Based on the assumption that partial loss is not imputable to the fault or
negligence of the debtor.
 If the portion that is lost is of such extent or nature that the obligation
would not have been constituted without it, then the obligation is
extinguished.
Art. 1265. 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. (1183a)
APPLICATION OF ARTICLE
 The burden of explaining the loss of a thing in the possession of the debtor,
rests upon the latter.
 The debtor must show that he is free from negligence, for negligence is
presumed from the mere fact of loss.
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 EXCEPTION: In case of natural calamity, where lack of fault on part of
debtor is likely and it is unjust to presume negligence on his part.
Art. 1266. The debtor in obligations to do shall also be released when the
prestation becomes legally or physically impossible without the fault of the
obligor. (1184a)
SUBSEQUENT IMPOSSIBILITY
 Impossible at the time the obligation is constituted: Nullity of the contract
 Impossible at the time of performance: modification or extinguishment of
obligation depending on whether it is imputable to debtor.
 This article refers to an impossibility which arises after the obligation has
been constituted.
 NATURE OF IMPOSSIBILITY
• Physical impossibility: the act, by reason of its nature, cannot be
accomplished.
• Legal impossibility: the act, by reason of a subsequent law, is
prohibited.
• Objective impossibility: the act or service in itself, without
considering the person of the obligor, becomes impossible.
• Subjective impossibility: the act or service cannot be dome by
the debtor himself.
• Objective and subjective impossibility produce the same effect.
EFFECT OF IMPOSSIBILITY
 Releases the debtor from his obligation.
 However, where it is not the prestation that has become impossible, but
an act to be performed after the fulfillment of the prestation, the
obligation is extinguished.
PARTIAL IMPOSSIBILITY
 If at the time performance becomes impossible the debtor has already
fulfilled part of the obligation, the creditor must pay the part done so long
as he benefits from such partial compliance.
 If the debtor has already received something from the creditor, he must
return anything in excess of what corresponds to the part already
performed when the impossibility supervened.
TEMPORARY IMPOSSIBILITY
 Do not extinguish the obligation, but merely delay its fulfillment, unless by
its nature or by the will of the parties it has to be performed at a
determinate time.
RECIPROCAL OBLIGATIONS
 Release of the debtor due to impossibility of performance, also releases
the creditor from the counter-prestation.
 Art. 1269. The obligation having been extinguished by the loss of the thing, the
Art. 1267. When the service has become so difficult as to be manifestly beyond creditor shall have all the rights of action which the debtor may have against
the contemplation of the parties, the obligor may also be released therefrom, third persons by reason of the loss. (1186)
in whole or in part. (n)
EXTENT OF CREDITOR’S RIGHTS
CHANGE OF CIRCUMSTANCES  Refers to right against third persons and indemnity which the debtor may
 Intention of the parties should govern, have already received.
 Based on rebus sic stantibus in public international law. Under this theory,  Applicable to the money obtained from the insurance of the thing lost or
the parties stipulate in the light of certain prevailing conditions, and once destroyed.
these conditions cease to exist the contract also cease to exist.
 The parties to a contract must be presumed to have assumed the risk of SECTION 3. - Condonation or Remission of the Debt
unfavorable developments. It is therefore only in abosolutely exceptional
changes of circumstances that equity demands assistance for the debtor. Art. 1270. Condonation or remission is essentially gratuitous, and requires the
 REQUISITES acceptance by the obligor. It may be made expressly or impliedly.
1. the event or change in circumstance could not have been
foreseen at the time of the execution of the contract. One and the other kind shall be subject to the rules which govern inofficious
2. It makes the performance of the contract extremely difficult but donations. Express condonation shall, furthermore, comply with the forms of
not impossible. donation. (1187)
3. The event must not be due to the act of any of the parties.
4. The contract is for a future prestation. CONCEPT OF REMISSION
 Remission is an act of liberality.
• UNFORSEEN EVENTS  The creditor renounces the enforcement of the obligation, which is
o Any change of circumstances, going beyond these limits extinguished in its entirety or in that part or aspect of the same to which
would be manifestly going beyond the contemplation of the remission refers.
the parties.  Gratuitous
• DIFFICULTY OF PERFORMANCE  KINDS OF REMISSION
o A manifest disequilibrium in the prestation, such that one • FORM
party would be placed at a disadvantage by the o Express: made formally, and should be in accordance
unforeseen event. with the forms of ordinary donations.
o Implied: it can be inferred from the acts of the parties.
LOSS OF PROTECTED INTEREST • EXTENT
 The disappearance of the creditor’s interest which is sought to be o Total
protected by the obligation, will extinguish the obligation. o Partial
• MANNER
Art. 1268. When the debt of a thing certain and determinate proceeds from a o Inter vivos (effective during the lifetime of the creditor)
criminal offense, the debtor shall not be exempted from the payment of its o Mortis causa (effective upon the death of the creditor);
price, whatever may be the cause for the loss, unless the thing having been must be contained in a will or testament
offered by him to the person who should receive it, the latter refused without  APPLICABLE RULES
justification to accept it. (1185) • Condonation or remission is essentially a donation.
• It is a bilateral act which requires acceptance by the debtor.
OFFER OF PAYMENT • It is subject to the rules on donations.
 When the debtor tenders payment and the creditor refuses to receive it  REQUISITES OF REMISSION
without reason, there are 2 alternatives: 1. the debt must be existing and demandable at the time the
1. to consign the thing and relieve himself from any further responsibility remission is made
2. to just keep the thing, with the obligation to use due diligence 2. the renunciation of the debt must be gratuitous, or without any
equivalent or consideration

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 3. debtor must accept the remission
• EXPRESS REMISSION
o The law subjects remission to the same formalities as
donations.
 ACT OF CREDITOR
• To condone is to forgive or remit a debt.
• There is no law which condones payment or interest.
• Party who can condone is the creditor and not the courts of
justice.
 EVIDENCE REQUIRED
• Should be proven by clear and more convincing evidence.
UNILATERAL RENUNCIATION
 Remission requires acceptance, but there is nothing that can prevent a
creditor from making a unilateral renunciation of his right, abandoning his
credit, and thereby extinguishing it.
Art. 1271. 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. (1188)
IMPLIED REMISSION
 Creditor voluntarily destroys or cancels the evidence of the credit, with
the intent to renounce his right.
 LIMITED TO PRIVATE DOCUMENT
• The code presupposes that when the creditor delivers a private
document evidencing a debt to his debtor, he surrenders the
weapon for the enforcement of his right.
• This is not true in the case of a public document because there is
always a copy in the archives.
• The voluntary delivery to the debtor of the first original copy of a
public instrument does not imply remission.
 RELEASE THROUGH ERROR
• The creditor may grant a release by mistake, the debtor may
accept it also in error.
• There is no extinguishment of the obligation.
 WHEN INOFFICIOUS
• Second paragraph implies that the voluntary return of the title of
credit is presumed to be by reason of remission, unless the
contrary is proven.
• De Diego: this provision is absurd and immoral in that it authorizes
the debtor and his heirs to prove that they paid the debt, when
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the provision itself assumes that there has been a remission, which
is gratuitous.
Art. 1272. 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. (1189)
NATURE OF PRESUMPTION
 Implies the remission of the debt evidenced by such private document.
 This presumption is only prima facie.
PLURALITY OF SUBJECTS
 When the obligation is joint, and the private document evidencing a debt
is found in the possession of one of the debtors, the presumption of
remission can refer only to the portion of the debtor who is in possession of
the instrument. Only the share pertaining to him shall be deemed
remitted.
 If the obligation is solidary, remission must be considered total.
Art. 1273. The renunciation of the principal debt shall extinguish the accessory
obligations; but the waiver of the latter shall leave the former in force. (1190)
Art. 1274. 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. (1191a)
NATURE OF PRESUMPTION
 Prima facie
EFFECT OF REMISSION OF PLEDGE
 Extinguishes only the security; it does not affect the principal obligation.
SECTION 4. - Confusion or Merger of Rights
Art. 1275. The obligation is extinguished from the time the characters of
creditor and debtor are merged in the same person. (1192a)
CONCEPT OF MERGER
 Merger or confusion is the meeting in one person of the qualities of the
creditor and debtor with respect to the same obligation.
 It erases plurality.
 REQUISITES
1. It must take place between the creditor and the principal debtor.
2. The very same obligation must be involved.
3. The confusion must be total or as regards the entire obligation.
 CAUSES OF MERGER
 • Succession to credit  Offsetting
• Testate or intestate succession  DISTINGUISHED FROM PAYMENT
 REAL RIGHTS PAYMENT COMPENSATION
• Real rights, which do not involved the relation of the debtor and Capacity to dispose of the thing Such capacity is not necessary,
the creditor, may be extinguished by the merger of the real right paid and capacity to receive are because compensation operates
with the right of ownership. required for debtor and creditor by law and not by the act of the
respectively. parties.
REVOCATION OF MERGER Performance must be complete. There may be partial
 When the act which occasions the merger is susceptible of termination or extinguishment of an obligation.
revocation, the merger that has taken place is also terminated or 2 advantages:
revoked, and the obligation is recreated. 1. simple
2. there is more guaranty in
EFFECT OF MERGER making the credit effective.
 Extinguish the obligation
 DISTINGUISHED FROM MERGER
Art. 1276. Merger which takes place in the person of the principal debtor or MERGER COMPENSATION
creditor benefits the guarantors. Confusion which takes place in the person of Involves only one obligation There must always be two
any of the latter does not extinguish the obligation. (1193) obligations
There is only one person in whom the There are two persons who are
RELEASE OF GUARANTOR character of the debtor and mutually debtors and creditors.
 Extinguishment through confusion releases the guarantors, because their creditor meet
obligation is merely accessory.
 DISTINGUISHED FROM COUNTERCLAIM
MERGER IN GUARANTOR
SET-OFF OR COUNTERCLAIM COMPENSATION
 Obligation is not extinguished. His obligation as a guarantor is
Must be pleaded Takes place by operation of law.
extinguished, but the principal obligation subsists.
KINDS OF COMPENSATION
MORTGAGED PROPERTY
 EFFECTS
 Mortgagee acquires a part of such property, that part is released from the
• Total: when two obligations are of the same amount
encumbrance but the credit is not extinguished even in part.
• Partial: when the amounts are not equal
 Mortgagee acquires ownership of the entire mortgaged property, the
 ORIGIN
mortgage is extinguished.
• Legal: takes place by operation of law because all the requisites
are present
Art. 1277. Confusion does not extinguish a joint obligation except as regards
• Facultative: it can be claimed by one of the parties who,
the share corresponding to the creditor or debtor in whom the two characters
however, has the right to object to it – when period is for the
concur. (1194)
benefit of one party alone and who renounces the period to
make the obligation due.
SECTION 5. – Compensation
• Conventional: Parties agree to compensate
• Judicial: decreed by court.
Art. 1278. Compensation shall take place when two persons, in their own right,
 CONVENTIONAL COMPENSATION
are creditors and debtors of each other. (1195)
• By agreement of the parties
• It is intended to eliminate or overcome obstacles which prevent
DEFINITION OF COMPENSATION
ipso jure extinguishment of the obligations.
 Mode of extinguishing to the concurrent amount, the obligation of those
• Requisites:
persons who in their own right are reciprocally debtors and creditors of
1. that each of the parties can dispose of the credit he seeks to
each other.
compensate.
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OBLIGATIONS AND CONTRACTS | TOLENTINO SUMMARY | MADZ ONG
 2. that they agree to the mutual extinguishment of their credi
 FACULTATIVE COMPENSATION
• Can be set up only at the option of a creditor.
• Unilateral
 JUDICIAL COMPENSATION
• Takes place when the defendant, who is a creditor of the plaintiff
for an unliquidated amount, sets up his credit as a counterclaim
against the plaintiff, and his credit is liquidated by the judgment,
thereby compensating it with the credit of the plaintiff.
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the
same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if the
latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the debtor.
(1196)
MUTUAL DEBTORS AND CREDITORS
 The parties must be mutually debtors and creditors in their own right and
as principals.
 No compensation when one party is occupying a representative
capacity.
FUNGIBLE THINGS DUE
 Things of the same kind.
 Fungible not consumable.
 Fungible: things which can be substituted for each other.
 When the obligation refers to determinate or specific things, there can be
no compensation.
MATURITY OF DEBTS
 Both debts must be due to permit compensation.
DEBTS BOTH DEMANDABLE
 Debts are enforceable in court.
 Must be civil obligations
 An obligation is not demandable when:
1. There is a period which has not yet arrived
2. When there is a suspensive condition that has not yet happened.
3. When the obligation cannot be sued upon, as in natural obligations.
 PRESCRIPTION
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• If at the time when the two debts co-exist, neither has prescribed,
the prescription of one afterwards will not prevent compensation.
• If the requisites for compensation have co-existed, even if it be
only for one day, there will be mutual extinguishment.
 RESCISSIBLE OR VOIDABLE DEBTS
• The moment it is rescinded or annulled, the decree is retroactive,
and compensation can no longer take place.
 LIQUIDATED DEBTS
• A debt is liquidated when its existence and amount are
determined.
• Compensation can only take place between certain and
liquidated debts.
CLAIMS OF THIRD PERSONS
 When one of the obligations sought to be compensated is subject to a
suit between a third party and the party interested in the compensation,
each claiming to be the creditor in said obligation, there is a provisional
suspension of the possible compensation.
 If third party is adjudged the creditor, there will be no compensation.
PLURALITY OF PRESTATIONS
 When one obligation is simple, and the other is alternative, there can be
no legal compensation.
 Neither can compensation take place is one of the obligations is
facultative.
Art. 1280. Notwithstanding the provisions of the preceding article, the
guarantor may set up compensation as regards what the creditor may owe
the principal debtor. (1197)
REASON
 If the principal debtor has a credit against the creditor which can be
compensated, it would mean the extinguishment of the guaranteed debt
either totally or partially.
Art. 1281. Compensation may be total or partial. When the two debts are of the
same amount, there is a total compensation. (n)
Art. 1282. The parties may agree upon the compensation of debts which are
not yet due. (n)
VOLUNTARY COMPENSATION
 Not limited to obligations which are not yet due.
 Parties may compensate by agreement.
 Requisites for legal compensation are not necessary.
 The parties should have the capacity to dispose of the credits which they
compensate.
Art. 1283. 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. (n)
Art. 1284. When one or both debts are rescissible or voidable, they may be
compensated against each other before they are judicially rescinded or
avoided. (n)
EFFECT OF JUDGMENT
 The moment it is rescinded or annulled, the decree of rescission or
annulment is retroactive, and the compensation must be considered as
cancelled.
 Rescission or annulment requires mutual restitution.
Art. 1285. 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.
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.
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. (1198a)
ASSIGNMENT AFTER COMPENSATION
 There has already been an extinguishment of one or the other of the
obligations.
 A subsequent assignment of an extinguished obligation cannot produce
any effect against the debtor.
 EXCEPTION: when debtor consents to the assignment. This constitutes a
waiver, unless he reserved his right to compensation.
ASSIGNMENT BEFORE COMPENSATION
 Debtor: assignment does not take effect except from the time he is
notified thereof. If the notice is simultaneous to the transfer, he can set up
compensation of debts due prior to the assignment.
 If notice was given before the assignment, this takes effect at the time of
the assignment. Same rule applies if he consents to the assignment.
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 If debtor was notified and he did not consent, and the credit assigned
matures, the debtor may set up compensation when the assignee
attempts to enforce the assigned credit, provided that the credit of the
debtor became due before the assignment.
 If the assigned credit matures earlier than that of the debtor, the assignee
may immediately enforce it, and the debtor cannot set up compensation
because his credit is not yet due.
 If debtor did not have knowledge of the assignment, he may set up by
way of compensation all credits maturing before he is notified thereof.
Art. 1286. 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. (1199a)
APPLICATION
 Applies to legal compensation and not to voluntary compenstation.
Art. 1287. Compensation shall not be proper when one of the debts arises from
a depositum or from the obligations of a depositary or of a bailee in
commodatum.
Neither can compensation be set up against a creditor who has a claim for
support due by gratuitous title, without prejudice to the provisions of
paragraph 2 of Article 301. (1200a)
REASON FOR PROHIBITION
 Depositum or commodatum is based on justice.
 A deposit made or a commodatum is given on the basis of confidence.
DEPOSIT AND COMMODATUM
 Only the depositary and the borrower cannot set up compensation.
SUPPORT
 Not only legal support, but also including all other rights.
OBLIGATION IN FAVOR OF THE GOVERNMENT
 Debts in favor of the government cannot be extinguished by
compensation.
 But when debt in favor of the government is purely contractual, there is no
reason why compensation cannot take place.
Art. 1288. Neither shall there be compensation if one of the debts consists in
civil liability arising from a penal offense. (n)
REASON FOR ARTICLE
 Compensation would be improper
 • By paying the debt voluntarily, with knowledge that it has been
OFFENDER BARRED extinguished by compensation.
 The person who has a civil liability arising from crime is the only party who
cannot set up the compensation. NO COMPENSATION
 The offended party entitled to indemnity can set up his claim in  Even when all the requisites are present, compensation may not take
compensation of his debt. This is a case of facultative compensation. place in the ff. cases:
1. When there is a renunciation of the effects of compensation by a
Art. 1289. If a person should have against him several debts which are party.
susceptible of compensation, the rules on the application of payments shall 2. When the law prohibits compensation.
apply to the order of the compensation. (1201)

Art. 1290. When all the requisites mentioned in Article 1279 are present, SECTION 6. – Novation
compensation takes effect by operation of law, and extinguishes both debts
to the concurrent amount, even though the creditors and debtors are not Art. 1291. Obligations may be modified by:
aware of the compensation. (1202a) (1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
EFFECTCTIVITY OF COMPENSATION 3) Subrogating a third person in the rights of the creditor. (1203)
 Legal compensation takes effect from the moment that the requisites of
articles 1278 and 1279 co-exist. CONCEPT OF NOVATION
 Voluntary or conventional compensation takes effect upon the  Novation is the extinguishment of an obligation by the substitution or
agreement of the parties. change of the obligation by a subsequent one which extinguishes or
 Facultative compensation takes place when the creditor declares his modifies the first either by:
option to set it up. 1. Changing the object or principal conditions
 Judicial compensation takes place upon final judgment. 2. Substituting the person of the debtor
3. Subrogating a third person in the rights of the creditor.
EFFECTS OF COMPENSATION
1. Both debts are extinguished to the concurrent amount. CLASSIFICATION OF NOVATION
2. Interests stop accruing on the extinguished obligation or the part  NATURE
extinguished. • Subjective or personal: Change of subject; passive – substitution
3. The period of prescription stops with respect to the obligation or part of the debtor; active – third person is subrogated in the rights of
extinguished. the creditor.
4. All accessory obligations are extinguished. • Objective or real: substituting the object or changing the principal
conditions.
MUST BE SET UP • Mixed: combination of the subjective and objective novation.
 Must be alleged and proved by the debtor.  FORM
• Express: parties declare
RENUNCIATION OF COMPENSATION • Implied: there is such an incompatibility between the old and the
 Compensation can be renounced either at the time the obligation is new obligations that they cannot stand together.
contracted or afterwards. Compensation rests upon a potestative right,  EFFECT
and a unilateral declaration of the debtor would be sufficient • Partial: modification or change in some principal conditions of the
renunciation. obligation
 Compensation can be renounced expressly or impliedly. • Total: when the old obligation is completely extinguished
 Implied renunciation:
• Not setting it up in the litigation REQUISITES OF NOVATION
• By consenting to the assignment of a credit 1. Previous valid obligation
2. Agreement of all the parties to the new contract

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 3. The extinguishment of the old contract
4. Validity of the new one Art. 1293. Novation which consists in substituting a new debtor in the place of
the original one, may be made even without the knowledge or against the will
 ORIGINAL EXISTING OBLIGATION of the latter, but not without the consent of the creditor. Payment by the new
• Obligation must not only be valid, but also that it has not been debtor gives him the rights mentioned in Articles 1236 and 1237. (1205a)
extinguished.
 CONSENT OF PARTIES SUBSTITUTION OF DEBTOR
• There must be consent of ALL the parties.  2 forms:
 EXTINGUISHMENT OF OBLIGATION • Expromision: initiative for the change does not emanate from the
• May take place by express or by implication. debtor and may be made even without his knowledge. It requires
 NEW VALID OBLIGATION consent of this third person and the creditor.
• New contract must be valid and effective. A mere draft cannot • Delegacion: the debtor offers and the creditor accepts a third
annul a prior valid and effective contract. person who consents to the substitution. The consent of these
three is necessary.
Art. 1292. In order that an obligation may be extinguished by another which  RELEASE OF OLD DEBTOR
substitute the same, it is imperative that it be so declared in unequivocal • It is necessary that the old debtor be release from the obligation,
terms, or that the old and the new obligations be on every point incompatible and the third person or new debtor take his place in the relation.
with each other. (1204) • Without such release, there is no novation.
 CONSENT OF CREDITOR
NOVATION NOT PRESUMED • Consent of creditor to the change of debtors is an indispensable
 Novation is never presumed. requirement.
 It must be established that the old and new contracts are incompatible in • Consent may be express or implied.
all points or that the will to novate appear by express agreement or in • When the original contract authorizes the debtor to transfer his
acts of equivalent import. obligation to a third person, the novation by substitution of debtor
is effected when the creditor is notified that such transfer has
EXPRESS NOVATION been made.
 Novation takes place only when the parties expressly disclose their object • Consent of creditor cannot be presumed from his acceptance of
in making the new contract is to extinguish the old contract. payments by a third party.
 CONSENT OF DEBTORS
IMPLIED NOVATION • Expromision: consent of debtor is not necessary.
 No specific form is required. All that is required is incompatibility between • Delegacion: old debtor always consents because initiative comes
the original and the subsequent contracts. from him.
 Test of incompatibility: Whether they can stand together, each one • In both cases, consent of new debtor is necessary.
having an independent existence.  EFFECT ON DEBTORS
 ESSENTIAL CHANGES • Releasing the original debtor and making the new debtor liable.
• Change must refer to the object, the cause, or the principal • As between the old and the new debtors
conditions. o Donation cannot be presumed and the old debtor must
• There must be essential change. reimburse to the new debtor whatever benefit he derives
 ACCIDENTAL CHANGES from the novation.
• Accidental modifications in an existing obligation do not o Expromision: new debtor pays, the matter is governed by
extinguish it by novation. the rules on payment by third person.
• Changes refer to secondary agreements = no novation o Delegacion: Rule applicable to payment by a third
 DETERMINATION OF CHANGE person with the consent of the debtor should apply.
• Depend upon the facts and circumstances of each case.
• Courts should consider not only the nature, but also the intention
of the parties.

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Art. 1294. If the substitution is without the knowledge or against the will of the
debtor, the new debtor's insolvency or non-fulfillment of the obligations shall
not give rise to any liability on the part of the original debtor. (n)
SUBSTITUTION BY EXPROMISION
 No liability for the new debtor’s insolvency can be enforced against the
old debtor because the later did not have the initiative in making the
change.
Art. 1295. The insolvency of the new debtor, who has been proposed by the
original debtor and accepted by the creditor, shall not revive the action of the
latter against the original obligor, except when said insolvency was already
existing and of public knowledge, or known to the debtor, when the
delegated his debt. (1206a)
SUBSTITUTION BY DELEGACION
 Insolvency of the new debtor permits the creditor to sue the old debtor
when the insolvency was prior to the delegation and publicly known, or
when the old debtor knew of such insolvency.
 Some believe that there are other cases in which the old debtor will be
liable:
1. If the new debtor is only secondarily liable
2. If the third person is only an agent of the debtor.
3. Where the new debtor is bound solidarily with the old debtor.
Art. 1296. 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. (1207)
ACCESSORY OBLIGATIONS
 The extinguishment of the principal obligation by novation extinguishes
the obligation to pay interests, unless otherwise stipulated.
 The exception provided has reference to a stipulation in favor of a third
person which is subordinate to the principal obligation.
 It is in reality an distinct obligation in favor of a third person, and cannot
be extinguished without the consent of the latter.
Art. 1297. If the new obligation is void, the original one shall subsist, unless the
parties intended that the former relation should be extinguished in any event.
(n)
NEW VALID OBLIGATION
 Indispensable that the new contract be valid and effective.
NEW OBLIGATION VOIDABLE
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 If the new obligation is not entirely void, but only voidable, the novation
becomes effective.
 But if the action to annul is brought and the obligation was set aside, it will
be deemed as if there had been no novation.
CONDITIONAL NEW OBLIGATION
 If the intention is merely to attach the condition to the original obligation,
there is no novation.
EXTINGUISHMENT OF NEW OBLIGATION
 After novation has taken place, by the change of the object, the old
obligation can no longer be enforced.
 If new obligation is extinguished by the loss of its object, the creditor
cannot demand the object of the original obligation.
Art. 1298. 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. (1208a)
ORIGINAL OBLIGATION VOID
 When the original obligation is void, there can be no novation, because
one of the requisites would be lacking.
 An obligation which has already been extinguished is also inexistent.
Hence, it cannot be novated.
OLD OBLIGATION VOIDABLE
 When the original obligation has been ratified before novation, the
novation is effective.
 Even if there has been no previous ratification at the time of the novation,
if the nullity can only be claimed by the debtor, the consent of the debtor
to the novation will render the novation effective, because such consent
is impliedly a waiver of the action for nullity.
 PRESCRIPTION
• When debt is already barred by prescription, it cannot be
enforced by the creditor, but a new contract, recognizing and
assuming the prescribed debt, would be valid and enforceable.
• The prescription being available only to the debtor can be
waived by him.
Art. 1299. 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. (n)
OLD OBLIGATION CONDITIONAL
 The original obligation may be conditional and the new obligation pure.
 If the intention is merely to suppress the condition, there will be no
novation, but if it is to extinguish the original obligation, the new obligation
does not arise except from the fulfillment of the condition of the original
obligation.
 The reason is, if the suspensive condition of the original obligation is not
performed, that obligation does not come into existence and the cause
for the new obligation would then be wanting.
 If the condition is resolutory, its happening would resolved the old
obligation and place it in the same category as a void obligation or one
which has been extinguished.
BOTH OBLIGATIONS CONDITIONAL
 Old and new obligations are both conditional.
 If the conditions in the two obligations are not incompatible, they must all
be fulfilled in order that the novation may be become effective.
 If the conditions are incompatible, there is an obvious intention to
substitute the new conditional obligation for the old conditional
obligation.
Art. 1300. Subrogation of a third person in the rights of the creditor is either
legal or conventional. The former is not presumed, except in cases expressly
mentioned in this Code; the latter must be clearly established in order that it
may take effect. (1209a)
KINDS OF SUBROGATION
 Subrogation is the transfer of all the rights of the creditor to a third person,
who substitutes him in all his rights.
 It may be legal or conventional.
 Legal subrogation: takes place by operation of law. This is the subrogation
referred to in Art 1302.
 Conventional subrogation: takes place by agreement of the parties. This
requires the intervention and consent of three persons – the original
creditor, the new creditor, and the debtor.
CONSENT OF ALL PARTIES
 In conventional subrogation, consent of all the parties is essential.
CONVENTIONAL SUBROGATION AND ASSIGNMENT OF CREDITS
 Conventional subrogation is not identical to assignment of credit.
 In conventional subrogation, the debtor’s consent is necessary. This is not
required in assignment of credit.
 Subrogation extinguishes the obligation and gives rise to a new one.
 Assignment refers to the same right.
Art. 1301. Conventional subrogation of a third person requires the consent of
the original parties and of the third person. (n)
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Art. 1302. It is presumed that there is legal subrogation:
(1) When a creditor pays another creditor who is preferred, even without the
debtor's knowledge;
(2) When a third person, not interested in the obligation, pays with the express
or tacit approval of the debtor;
(3) 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 latter's share. (1210a)
PAYMENT WITH DEBTOR’S APPROVAL
 If a third person pays the creditor without the consent of the debtor, he is
only entitled to reimbursement from the debtor for the amount paid by
him.
PAYMENT BY INTERESTED PARTY
 Those who would be benefited by the extinguishment of the obligation.
 Co-debtors, guarantors, sureties, etc.
Art. 1303. Subrogation transfers to the persons subrogated the credit with all
the rights thereto appertaining, either against the debtor or against third
person, be they guarantors or possessors of mortgages, subject to stipulation
in a conventional subrogation. (1212a)
EFFECTS OF SUBROGATION
 Subrogation transfers to the third person or new creditor the entire credit,
with all the corresponding rights.
 If a suspensive condition is attached to it, that condition must be fulfilled.
SUBROGATION IN INSURANCE
 Upon payment of the loss, the insurer is entitled to be subrogated to any
right of action which the insured may have against the third person whose
negligence or wrongful act caused the loss.
Art. 1304. A creditor, to whom partial payment has been made, may exercise
his right for the remainder, and he shall be preferred to the person who has
been subrogated in his place in virtue of the partial payment of the same
credit. (1213)
 factor in contracts.
Law only has suppletory effect Law is the principal source of
rights and obligations

 OTHER TERMS
CONTRACT
PERFECT PROMISE Tends only to assure Establishes and
and pave the way for determines the
the celebration of a obligation arising
contract in the future. therefrom
IMPERFECT PROMISE Policitacion; A mere
Title II. – CONTRACTS unaccepted offer.
PACT Special part of a
CHAPTER 1 GENERAL PROVISIONS contract, sometimes
merely incidental and
Art. 1305. A contract is a meeting of minds between two persons whereby one separable from the
binds himself, with respect to the other, to give something or to render some principal agreement.
service. (1254a) STIPULATION Similar to a pact. When
a contract is an
CONCEPT OF CONTRACT instrument, stipulation
 Agreement on the declaration of a common will. refers to the essential
 Our code seems to limit the definition to cases, where one party binds and dispositive part, as
himself to perform a prestation in favor of another, excluding cases of distinguished from the
reciprocal prestations. exposition of the fats
 Better definition (Sanchez Roman) and antecedents upon
• A juridical convention manifested in legal form, by virtue of which which it is based.
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 NUMBER OF PARTIES
not to do.  The code requires “two persons” for the existence of a contract; obviously
 OTHER CONVENTIONS what is meant by the law is “two parties.”
• A contract is limited to agreements which produce patrimonial • HUSBAND AND WIFE
liabilities. o Art 1490: husband and wife cannot sell property to each
• Distinguished from other acts based on consent of two or more other unless there is a separation of property between
persons (marriage, donation, adoption, and succession): them.
CONTRACT OTHER o Prohibition is to protect the conjugal partnership.
Creates a more particular, • AUTO-CONTRACTS
concrete, and transitory o Contract where one person contracts with himself.
obligation, because it o Same person, acting in another’s capacity, and his own.
establishes a relation which is o Validity of auto-contracts is generally acceptable except
more limited by reason of when there is conflict of interest or a possibility of injury,
persons, effects, and and except when the law expressly prohibits it in specific
importance. cases.
Freedom to stipulate Meeting of the minds is o So long as there are two distinct patrimonies, even if they
predominated over the merely secondary are represented by the same person, a juridical relation
necessity of the act. Intention of can be created between them.
the parties is the determining
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 o (1) When a person, in his capacity as representative of 2. Special form
another, contracts with himself; (2) When as a Purpose 1. Transfer of ownership
representative of two different persons, he brings about a 2. Conveyance of use
contract between his principals Subject-matter 1. Things
• CONTRACTS OF ADHESION 2. Services
o When one party has already a prepared form of a Nature of obligation produced 1. Bilateral
contract, containing the stipulations he desires, and he 2. Unilateral
simply asks the other party to agree to them if he wants to Cause 1. Onerous
enter into the contract. 2. Gratuitous
Risk 1.Commutative
CHARACTERISTICS OF CONTRACTS 2.Aleatory
Obligatory Force Constitutes the law as between the parties Name 3. Nominate
Mutuality Validity and performance cannot be left to the will 4. Innominate
of only one of the parties
Relativity of Contracts It is binding only upon the parties and their
successors. Art. 1306. The contracting parties may establish such stipulations, clauses,
terms and conditions as they may deem convenient, provided they are not
ELEMENTS OF CONTRACT contrary to law, morals, good customs, public order, or public policy. (1255a)
 ESSENTIAL ELEMENTS
3. Consent FREEDOM TO CONTRACT
4. Subject matter  Save in limited and exceptional situations provided by the law itself, courts
5. Cause have no authority to prescribe the terms and conditions of a contract for
 NATURAL ELEMENTS the parties.
• Those which exist as part of the contract even if the parties do not
provide for them, because the law, as suppletory to the contract, VALIDITY OF STIPULATIONS
creates them (e.g. warranty in sale).  The contract is the law between the contracting parties.
 ACCIDENTAL ELEMENTS  TRUST RECEIPTS
• Agreed upon by the parties and which cannot exist without being • Partake the nature of a conditional sale. The importer becomes
stipulated. absolute owner of the imported merchandise as soon as he had
paid its price.
STAGES OF CONTRACT • Valid
PREPARATION, Period of negotiation and bargaining, ending at the  OTHER STIPULATIONS
CONCEPTION, moment of agreement of the parties. • Escalation clauses are valid.
OR GENERATION • COMPROMISES
PERFECTION The moment when the parties come to agree on the o The whole essence of a compromise is that by making
terms of the contract reciprocal concessions, the parties avoid litigation or put
CONSUMMATION Fulfillment or performance of the terms agreed upon in an end to one already commenced.
the contract.  QUALIFICATION OF CONTRACT
• The validity of the agreements is one thing and the juridical
CLASSIFICATION OF CONTRACTS qualification of the contract resulting therefrom is very distinctly
Dependence 4. Preparatory (agency) another.
5. Principal (lease or sale) • The law, not the parties, determine the juridical situation created
6. Accessory (pledge, mortgage) by the parties through their contract and the rights and the
Perfection 1. Consensual obligations arising therefrom.
2. Real • A contract is to be judged by its character, and courts will look to
Solemnity/form 1. Common form the substance and not to the mere form of the transaction.
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LIMITATIONS ON STIPULATIONS
 An act or contract that is illegal per se is one that by universally
recognized standards is inherently or by its very nature, bad, improper,
immoral or contrary to good conscience.
 CONTRARY TO MORALS
• Morals may be considered as meaning good customs; or those
generally accepted principles of morality which have received
some kind of social and practical confirmation.
• It is not contrary to morals or good customs to make and act
dependent upon money or some pecuniary value, when it is of
such nature that it should not depend thereon.
 CONTRARY TO PUBLIC ORDER
• Public order signifies public weal.
 ATTORNEY’S FEES
• A client has a right to dismiss his lawyer at any time, even if there is
a contract for professional services with a stipulated
compensation.
Art. 1307. Innominate contracts shall be regulated by the stipulations of the
parties, by the provisions of Titles I and II of this Book, by the rules governing
the most analogous nominate contracts, and by the customs of the place. (n)
INNOMINATE CONTRACTS: Contracts which do not have specific name
 Do ut des (I give and you give)
 Do ut facias (I give and you do)
 Facio ut des (I do and you give)
 Facio ut facias (I do and you do)
ANALOGOUS CONTRACTS
 Innominate contracts are, in the absence of stipulations and specific
provisions of law on the matter, to be governed by rules applicable to the
most analogous contracts.
 In contracts where one party renders services to another without express
agreement as to the compensation or price, it has been held that such
compensation or price can be determined wither in relation to a definite
thing, or under the usage and customs of the place, or by leaving it to the
judgment of the courts in case of disagreement or dispute.
Art. 1308. The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them. (1256a)
MUTUALITY OF CONTRACTS
1. That obligations arising from contracts have the force of law between the
contracting parties
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2. That there must be mutuality between the parties based on their essential
equality.
UNILATERAL CANCELLATION
 Once a contract is entered into, no party can renounce it unilaterally or
without the consent of the other.
 The unilateral act of one party in terminating the contract without legal
justification, makes it liable for damages.
 WHEN STIPULATED
• An agreement of the parties that either one of them may
terminate the contract upon a reasonable period of notice, is
valid.
 EXPRESS AGREEMENT
• It is perfectly licit to leave the fulfillment of the contract to the will
of either of the parties in the negative form of rescission.
Art. 1309. 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. (n)
Art. 1310. The determination shall not be obligatory if it is evidently inequitable.
In such case, the courts shall decide what is equitable under the
circumstances. (n)
Art. 1311. Contracts take effect only between the parties, their assigns and
heirs, except in case 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.
If a contract should contain some stipulation in favor of a third person, he may
demand its fulfillment provided he communicated his acceptance to the
obligor before its revocation. A mere incidental benefit or interest of a person
is not sufficient. The contracting parties must have clearly and deliberately
conferred a favor upon a third person. (1257a)
 PARTIES BOUND BY CONTRACT
• Contracts produce effect as between the parties who execute
them.
• THIRD PERSONS NOT BOUND
o A contract cannot be binding upon and cannot be
enforced against one who is not a party to it, even if he is
aware of such contract and has acted with knowledge
thereof.
• THIRD PERSONS AFFECTED
 o Although contracts do not bind third persons, juridical
situations may be created affecting them.
 A contract creating a real right affects third
persons who may have some right over the thing.
 A contract may reduce the properties of a
debtor and thus diminish the available security
for the claims of creditors.
 In some cases, as n composition in insolvency
and suspension of payments, certain agreements
are made binding by law on creditors who may
not have agreed thereto.
• ENFORCEMENT OF CONTRACTS
o Only a party to the contract can maintain an action to
enforce the obligations arising under said contract.
• ANNULMENT OF CONTRACT
o Since a contract is binding only upon the parties thereto,
a third person cannot ask for its annulment, although of
course, he may ask for its rescission if it is in fraud of his
rights.
• CONTRACT BIND HEIRS
o As a general rule, rights and obligations under a contract
are transmitted to the heirs of the parties.
o With the exception of money debts, obligations are also
transmitted to the heirs of the parties, and they may be
compelled to fulfill the same.
• INTRANSMISSIBLE CONTRACTS
o Those which are purely personal – partnership and
agency
o Contracts for the payment of money debts are not
transmitted to the heirs of a party, but constitute a
charge against his estate.
 STIPULATIONS FOR THIRD PARTIES
• First paragraph: only parties thereto and their privies acquire rights
and assume obligations thereunder.
• Second paragraph: exception to the first; it permits a third person
to avail himself of a benefit extended to him by its terms.
• Stipulations in favor of third persons may be divided into two
classes:
1. The stipulation is intended for the sole benefit of such third
person.
2. Those where an obligation is due from the promisee to the
third person and the former seeks to discharge it by means of
stipulation.
• REQUISITES:
1. There must be a stipulation in favor of a third person;
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2. That the stipulation in favor of a third person should be a part,
not the whole of the contract;
3. That the contracting parties must have clearly and
deliberately conferred a favor upon a third person, not a
mere incidental benefit or interest;
4. That the favorable stipulation should not be conditioned or
compensated by any kind of obligation whatever;
5. That the third person must have communicated his
acceptance to the obligor before its revocation;
6. Neither of the contracting parties bears the legal
representation or authorization of the third party.
 BENEFICIARIES
• A stipulation may validly be made in favor of indeterminate
persons, provided that they can be determined in some manner
at the time when the prestation from the stipulation has to be
performed.
 TEST OF BENEFICIAL STIPULATION
• A mere incidental interest of a third person is not within the
doctrine of stipulations pour autrui.
• The third person acquires a right to the prestation only when this is
in accordance with the intention of the contracting parties.
• To constitute a valid stipulation pour autrui, it must be the purpose
and intent of the stipulating parties to benefit the third person,
and it is not sufficient that the third person may be incidentally
benefited by the stipulation.
• So, the fairest test is to rely upon the intention of the parties as
disclosed in their contract.
 ACCEPTANCE BY THIRD PARTY
• A stipulation in favor of a third person has no binding effect in
itself before its acceptance by the party favored. Before such
acceptance, there is legally no “obligor.” Neither party can sue
the other for non-performance.
• The acceptance is optional to the third person and the
acceptance retroacts to the moment intended by the parties to
the contract.
• Acceptance must be absolute, unconditional, and identical with
the terms of the offer.
• Acceptance does not have to be in any particular form.
• Acceptance may be implied form the performance by third
person of his obligation under the stipulation.
• The law does not provide when the third person must make his
acceptance. There is no time limit, he has all the time until the
stipulation is revoked.
 RIGHTS OF PARTIES
• Before acceptance by the third person, the contracting parties,
by mutual agreement, may modify the contract or revoke it.
 • After acceptance and there is a failure of performance, he can
sue for specific performance or resolution with damages.
• Between the third person and the party who required the
stipulation, there certainly exists a juridical relation.
• DEPENDENCE ON CONTRACT
o The right of the third person does not exist if the contract
is void; it disappears if the contract is annulled or
dissolved.
 WHO MAY REVOKE
• The right to revoke does not pertain simply to the promisor. As a
general rule, it pertains to the other contracting party, or promise,
who may exercise it without the consent of the promisor. But it
may be agreed that the revocation should have the consent of
the promisor, and this agreement may be implied when the latter
has an interest, even if moral, in the fulfillment of the promise.
• Right to revoke may not be exercised by the heirs or creditors of
promise.
COLLECTIVE CONTRACTS
 Cases where the law authorizes the will of the majority to bind a minority
to an agreement notwithstanding the opposition of the latter, when all
have a common interest in the juridical act.
 Application of this is limited to specific cases provided by law.
• Suspension of payments, compositions in insolvency proceedings,
collective bargaining etc.
 Bases: co-ownership is legally presumed.
Art. 1312. In contracts creating real rights, third persons who come into
possession of the object of the contract are bound thereby, subject to the
provisions of the Mortgage Law and the Land Registration Laws. (n)
REAL RIGHTS IN PROPERTY
 A real right directly affects property subject to it.
 E.g. mortgage
Art. 1313. Creditors are protected in cases of contracts intended to defraud
them. (n)
CONTRACTS IN FRAUD OF CREDITORS
 Creditors may ask for rescission.
Art. 1314. Any third person who induces another to violate his contract shall be
liable for damages to the other contracting party. (n)
INTEREFERENCE BY THIRD PERSONS
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 A third person may be held liable for damages because he has induced a
party to the contract to violate the terms thereof.
 An injured party may recover damages.
 Malice in some form is generally supposed to be an essential ingredient.
But it is enough if the wrongdoer, having knowledge of the existence of
the contract relation, in bad faith sets about to break it up. Whether his
motice is to benefit himself or gratify his spite is immaterial.
 Malice in the sense of ill-will or spite is not essential.
 REQUISITES:
1. The existence of a valid contract;
2. Knowledge by the third person of the existence of the contract;
3. Interference by the third person in the contractual relation without
legal justification.
 EXTENT OF LIABILITY
• Stranger cannot be more extensively liable in damages or non-
performance of the contract than the party in whole behalf he
intermeddles.
• Their liability should be solidary.
Art. 1315. Contracts are perfected by mere consent, and from that moment
the parties are bound not only to the fulfillment of what has been expressly
stipulated but also to all the consequences which, according to their nature,
may be in keeping with good faith, usage and law. (1258)
PERFECTION OF CONSENSUAL CONTRACTS
 The perfection of a contract is the moment from which it exists; juridical tie
arises from that time.
 CONSENSUAL CONTRACTS: Perfected by mere consent. The consent need
not be made expressly.
 FORMAL CONTRACTS: Those in which compliance with special external
formalities is necessary for the validity of the contract, are no longer
recognized under our law, as distinct from the consensual contracts.
BINDING EFFECT OF CONTRACTS
 The binding force of a contract is not limited to what is expressly
stipulated, but extends to all consequences which are the natural effect
of the contract.
Art. 1316. Real contracts, such as deposit, pledge and commodatum, are not
perfected until the delivery of the object of the obligation. (n)
PERFECTION OF REAL CONTRACTS
 REAL CONTRACT: Not perfected by mere consent; delivery of the thing is
also required.
 It is the delivery of the object which forms the basis of the obligations
under the contract.

Art. 1317. No one may contract in the name of another without being
authorized by the latter, or unless he has by law a right to represent him.
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, 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. (1259a)
RATIFICATION NECESSARY
 Where a contract is entered into in behalf of another who has not
authorized it, such contract is not valid and binding as against him, unless
he ratifies the transaction and is estopped to question its legality.
 Nullity is permanent and will exist until contract is not ratified.
 Party is a minor, it can be ratified by him upon reaching maturity or by his
legal guardian.
 EXPRESS OR IMPLIED
• The ratification of an unauthorized contract may be either express
or implied.
 EFFECT RETROACTIVE
• The ratification of a contract validates the act from the moment
of its celebration.
STATUS BEFORE RATIFICATION
 The unauthorized contract produces a state of suspense; its effectivity
depends upon its ratification.
 Before ratification, the other party may not do anything which would
frustrate the rights of the former which may arise in the event of
ratification.
LIABILITY OF REPRESENTATIVE
 If the contract is not ratified by the person represented, the representative
becomes liable in damages to the other party, if he did not give notice of
the absence or deficiency of his power.
 The third party is not entitled to damages if he knew or should have known
that the authority does not exist.
CHAPTER 2
ESSENTIAL REQUISITES OF CONTRACTS
GENERAL PROVISIONS
Art. 1318. There is no contract unless the following requisites concur:
(1) Consent of the contracting parties;
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(2) Object certain which is the subject matter of the contract;
(3) Cause of the obligation which is established. (1261)
PARTIES TO CONTRACT
 There must be at least 2 parties.
 The number of parties should not be confused with the number of
persons.
 A single person can represent two parties and one party can be
composed of two or more persons.
CAPACITY OF PARTIES
 Legal capacity is an essential element.
 It is n indispensible condition for the existence of consent.
WANT OF CONSENT
 No consent and consequently no contract when the agreement is
absolutely simulated or fictitious, or when it is entered into in behalf of
another who has never given his authorization therefor, or when the
consent of a party is subject to a condition and the condition has not
been complied with.
SECTION 1. – Consent
Art. 1319. Consent is manifested by the meeting of the offer and the
acceptance upon the thing and the cause which are to constitute the
contract. The offer must be certain and the acceptance absolute. A qualified
acceptance constitutes a counter-offer.
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. (1262a)
CONCEPT OF CONSENT
 The essence of consent is the conformity of the parties on the terms of
the contract, acceptance by one of the offer made by the other.
 It is the concurrence of the minds of the parties on the object and the
cause which shall constitute the contract.
 ELEMENTS
1. Plurality of subjects
2. Capacity
3. Intelligence and free will
4. Express or tacit manifestation of the will
5. Conformity of the internal will and its manifestation
FORMS OF CONSENT
 Express or implied

MANIFESTATION OF CONSENT
 Consent is manifested by the concurrence of offer and acceptance
with respect to the object and the cause of the contract.
 OFFER BY ONE PARTY
o An offer is a unilateral proposition which one party makes to
the other fro the celebration of a contract.
o Must be: Definite, complete, and intentional.
o DEFINITE
 Offer must be definite, so that upon acceptance an
agreement can be reached on the whole contract.
o COMPLETE
 Indicating with sufficient clearness the kind of
contract intended and definitely stating the essential
conditions of the proposed contract, as well as the
non-essential ones.
o INTENTIONAL
 An offer without seriousness is absolutely without
juridical effects and cannot give rise to a contract.
 But if the offeree is induced to take it seriously, he
must be indemnified for damages.
o MENTAL RESERVATIONS
 There is a mental reservation when a party makes a
declaration but secretly does not desire the effects of
such declaration.
 The mental reservation of the offeror, unknown to the
other, cannot affect the validity of the offer.
 ACCEPTANCE BY OFFEREE
• An offer that is not accepted does not give rise to consent, and
the contract does not come into existence.
• It is necessary that the acceptance be unequivocal and
unconditional, and the acceptance and the proposition shall be
without any variation whatsoever, and any modification or
variation from the terms of the offer annuls the latter and frees the
offeror.
 AMPLIFIED ACCEPTANCE
• A mere amplification on the offer must be understood as an
acceptance of the original offer, plus a new offer which is
contained in the amplification.
 COMPLEX OFFERS
• In cases where a single offer involves two or more contracts, the
perfection where there is only partial acceptance will depend
upon the relation of the contracts between themselves.
• Where the contracts are inter-related, acceptance one will not
give rise to a perfected contract.
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• Not inter-related, acceptance of one gives rise to a contract
unless the offeror has made it clear that one is dependent upon
the other and acceptance of both is necessary.
 SIMULTANEOUS OFFERS
• Offer and acceptance must be successive in order that a
contract may arise.
• When there are cross offers, no contract is formed unless one of
the parties accepts the offer received by him.
 SUCCESSIVE AGREEMENTS
• The present article of the Code requires the concurrence of offer
and acceptance only as to the thing and the cause which are to
constitute the contract, and not as to all matters.
• If the intentions of one or both parties is that there be
concurrence on all points, the contract is not perfected if there is
a point of disagreement, even if there is already agreement on th
essential elements of the contract.
 KNOWLEDGE OF OFFEROR
• Even if there has been an unconditional acceptance of the offer
by the offeree, no contract will arise unless that acceptance is
made known to the offeror.
• THROUGH INTERMEDIARIES
o An intermediary who has no authority to contract, but is
limited to the transmittal of the offer, the acceptance, or
both, may be treated in the same light as the mail
service.
 BY CORRESPONDENCE
• When the offer to buy was written or prepared in Tokyo, and the
acceptance thereof n Manila was sent by the offeree by airmail,
the contract is presumed to have been entered into in Tokyo.
 BY TELEPHONE
• Considered as entered into at the place whete the offer was
made.
 EFFECT OF SILENCE
• When the circumstances imply a duty to speak on the part of the
person for whom an obligation is proposed, his silence can be
construed as consent.
• REQUISITES FOR SILENCE TO PRODUCE TACIT ACCEPTANCE:
1. that there is a duty or the possibility to express oneself
2. that the manifestation of the will cannot be interpreted in any
other way
3. that there is a clear identity in the effect of the silence and
the undisclosed will
• APPLICABLE DOCTRINE
o As between persons present: If silence is entirely
unconnected with any fact, there can be no contract.
 o As between persons absent: If there has been no
antecedent relation between the parties, silence will not
give rise to a contract.
WITHDRAWAL OF OFFER
 Both the offer and the acceptance can be revoked before the contract
is perfected.
 Offeror may withdraw his offer at any time before he learns of the
acceptance.
 LAPSE OF TIME
• An offer without a period must be considered as becoming
ineffective after the lapse of more than the time necessary for its
acceptance.
REVOCATION OF ACCEPTANCE
 The acceptance may be revoked before it comes to the knowledge of
the offeror.
NEW CONTRACT BEFORE ACCEPTANCE
 Pending the acceptance of an offer, the offeror can perfect a contract
over the same thing with another person.
 If the first offer is not revoked by him before it is accepted, then he
becomes liable for damages.
 The one whose acceptance perfected a contract first is given priority, the
other party only has an action for damages.
PUBLIC OFFERS
 A promise may be made publicly by advertising a reward, compensation
or prize for any person who performs or executes a particular act or
obtains a particular result.
 2 theories:
• An obligatory unilateral promise sufficient to create a valid legal
tie: reward can be recovered by one who performs the desired
act, even when he did not do it in consideration of the promise.
• An offer which gives rise to a contract upon acceptance: a
binding obligation arises only when the act is done with the
intention of accepting the promise.
 Equity dictates that nobody should make a fool of the public.
 If several persons who execute the act simultaneously: divide the
recompense equally. If division cannot be made, they shall determine
preference by lot.
 Our code however, gives only the 5 sources of obligations. A unilateral
promise is not recognized by our code as having obligatory force. There
must be an acceptance to convert it into a contract.
Art. 1320. An acceptance may be express or implied. (n)
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IMPLIED ACCEPTANCE
 May arise from acts or facts which reveal the intent to accept.
WAIVER OF ACCEPTANCE
 Offeror can waive the declaration of acceptance.
 Contract is perfected from the moment the intention to accept can be
inferred.
EFFECT OF SILENCE
 Silence is not equivalent to consent, but there are specific legal provisions
which make silence, under certain circumstances, amount to consent.
Art. 1321. The person making the offer may fix the time, place, and manner of
acceptance, all of which must be complied with. (n)
RIGHT OF OFFEROR
 The owner of the property offered for sale at auction has the right to
prescribe the manner, conditions, and terms of sale.
 PERIOD FOR ACCEPTANCE
• Acceptance, to become effective, must be known to the offeror
before the period lapses.
• Acceptance made beyond the time constitutes a new offer and
may be accepted or rejected by the original offeror.
 MANNER OF ACCEPTANCE
• An acceptance which is not made in the manner prescribed by
the offeror is not effective, but constitutes a counter-offer which
the offeror may accept.
Art. 1322. An offer made through an agent is accepted from the time
acceptance is communicated to him. (n)
CONTRACT THROUGH INTERMEDIARY
 Contract is perfected when intermediary communicates such
acceptance to the offeror.
Art. 1323. An offer becomes ineffective upon the death, civil interdiction,
insanity, or insolvency of either party before acceptance is conveyed. (n)
REASON FOR ARTICLE
 Contract is not perfected except by the concurrence of two wills.
 Disappearance of either party or his loss of capacity before perfection
prevents the contractual tie from being formed.
Art. 1324. 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 withdrawal, except when the option is founded upon a
consideration, as something paid or promised. (n)
PERIOD FOR ACCEPTANCE
 The offeree may accept at any time until such period expires.
 No period, and the offer is made to a person present, acceptance must
be made immediately.
 Reasonable tacit period: time normally necessary to enable the offeree to
know the proposal and to make known his reaction.
 3 points must be considered:
1. Under normal circumstances, how long will it take the letter to reach the
offeree?
2. How long will a person of ordinary prudence take to answer such an
offer?
3. How long will the offer reach the offeror.
 WITHDRAWAL OF OFFER
• Law permits the offeror to withdraw the offer at any time before
acceptance. Even before the period for acceptance has
expired.
• This does not mea that he can exercise this right absolutely
without regard to the rights of others.
• He must allow the offeree sufficient opportunity.
• If he disregards the right of the offeree and arbitrarily revokes the
offer, he must be held liable for the damages which the offeree
may suffer.
CROSSING OF REVOCATION AND ACCEPTANCE
 GR: expression of the will of a person, does not become effective except
from the time it is received.
 Distinctions may be made:
1. Intention is not to demand an express acceptance: Tacit acceptance
perfects the contract and the subsequent receipt of a letter of
revocation is ineffective.
2. Intention is that there should be an express acceptance, contract will
be perfected if the acceptance is the first to reach the offeror and it
will not be perfected if the revocation is the first to reach the offeree.
 If revocation and acceptance cross, that which arrives firs at its
destination is effective.
 EFFECT OF DELAY
• It is not the moment of sending but the time of receipt of the
revocation or acceptance which is controlling.
CONTRACT OF OPTION
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 This is a preparatory contract in which one party grants to the debtor, for
a period and under specified conditions, the power to decide whether or
not to enter into a principal contract.
 If the option is not supported by an independent consideration, the
offeror can withdraw the privilege at any time by communicating
withdrawal to the other party, even if the “option” had already been
accepted.
Art. 1325. Unless it appears otherwise, business advertisements of things for
sale are not definite offers, but mere invitations to make an offer. (n)
SALES ADVERTISEMENTS
 A business advertisement of things for sale may or may not constitute a
definite offer. It is not a definite offer when the object is not determinate.
 When the advertisement does not have the necessary specification of
essential elements of the future contract, it cannot constitute an offer.
DEFINITE OFFERS TO PUBLIC
 It is not necessary that the offeror should know the person who receives his
offer. A valid offer to the public can be made.
Art. 1326. 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. (n)
EFFECT OF BIDDING
 When in the advertisement it can be inferred with certainty that the best
bid will be considered as giving rise to a binding contract, each bid will
imply the perfection of a contract, although subject to the condition that
no better bid is made.
 If this is not especially provided in the advertisement, then each bid is
merely an offer, which the advertiser is free to reject.
JUDICIAL SALES
 This provision is not applicable to bids in judicial sales, where the highest
bid must necessarily be accepted.
Art. 1327. The following cannot give consent to a contract:
(1) Unemancipated minors;
(2) Insane or demented persons, and deaf-mutes who do not know how to
write. (1263a)
EFFECT OF INCAPACITY
 If both parties are incapable of giving consent, the contract is
unenforceable.
 If only one is incapable, it is annullable or voidable.
 EXCEPTION: Where necessaries (everything indispensable for sustenance)
are sold and delivered to a minor or other person without capacity to act,
he must pay reasonable price therefor.
UNEMANCIPATED MINORS
 Contracts entered into by them are not binding upon them UNLESS upon
reaching majority they ratify the same or the contract has been entered
into through a guardian and approved by the guardianship court.
 ESTOPPEL
• There is strong authority, with sound juridical reasoning, to the
effect that the misrepresentation of an incapacitated person
does not estop him from denying that he was of age, or from
asserting that he was under age, at the time he entered into the
contract.
INSANE PERSONS
 It is not necessary that there be a previous judicial declaration of mental
incapacity in order that a contract entered into by a mentally defective
person may be annulled.
 It is enough that insanity existed at the time the contract was made.
 In case of lunatics, it is possible that there are lucid intervals, and a
contract executed during such interval will be valid.
 The burden of proving such incapacity at the time of the execution rests
upon who alleges it.
DEAF-MUTES
 Being a deaf-mute is not by itself alone a disqualification for giving
consent.
 The law refers to the deaf-mute who does not know how to write.
Art. 1328. Contracts entered into during a lucid interval are valid. Contracts
agreed to in a state of drunkenness or during a hypnotic spell are voidable.
(n)
LUCID INTERVALS
 The presumption of insanity and mental incapacity in a person under
guardianship for mental derangement is only prima facie and may be
rebutted by evidence.
 A person under guardianship for insanity may still enter into a valid
contract and even convey property, provided it is proven that at the time
of entering into said contract, he was not insane or that his mental defect,
if mentally deranged, did not interfere with or affect he capacity to
appreciate the meaning and significance of the transaction.
LIQUOR AND DRUGS
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 The use of intoxicants does not necessarily mean a complete loss of
understanding. The same may be said regarding drugs.
 It has been held that drunkenness, if in such degree that obscures
completely the faculties and almost extinguishes the consciousness of
acts, may be a ground for annulment of a contract.
HYPNOTISM AND SOMNABULISM
 Article also applies to somnambulism.
Art. 1329. 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. (1264)
OTHER CAUSES OF INCAPACITY
 Rules of court provide for the guardianship of incompetents:
• Persons suffering from the penalty of civil interdiction
• Hospitalized lepers
• Prodigals
• Deaf and dumb who are unable to read and write
• Unsound mind
• By reason of age, disease, weak mind, cannot take care of
themselves and manage their property.
 Incompetence under the Rules of Court is not necessarily a
disqualification to give consent.
 Art 1327: Persons of unsound mind and deaf and dumb who are unable to
write are incapacitated to contract.
 Art 34 of the RPC: Persons under civil interdiction cannot enter into
contracts disposing or in relation to the management of their property.
 Other incompetents can enter into contracts only through their guardians.
 If they have not been placed under guardianship, there is a presumption
in favor of their capacity to contract.
 If there is no guardianship but it can be shown that at the time of the
contract, they do not have the necessary understanding of the nature
and consequences, then their contract is voidable.
SPECIAL DISQUALIFICATION
 Certain disqualifications provided by law to invalidate contracts:
• Incapacity of a person declared insolvent or bankrupt
• Incapacity of the husband and wife to sell property to each other
INCAPACITY DISQUALIFICATION
There is a restriction upon the There is a restriction upon the very
exercise of a right. right itself.
Contract is voidable Contract is void
Art. 1330. A contract where consent is given through mistake, violence, AS TO OBJECT
intimidation, undue influence, or fraud is voidable. (1265a)  Error must refer to the substance of the thing.
 NATURE OF CONTRACTS
REQUISITES OF CONSENT VITIATED BY • The error may refer to the very nature of the contract, in which
Intelligence Error case, it is an essential mistake.
Free Violence, Intimidation, or Undue • Where the error refers to the rights of the parties, the contract is
Influence not invalidated.
Spontaneous Fraud  PRINCIPAL CONDITIONS
• The principal condition of the thing is its essential or substantial
DEFECTS OF THE WILL character, without which the thing ceases to be what it is.
 A donation or a will, or a recognition of illegitimate children, could also be  ACCIDENTAL, ACCESSORY CONDITIONS
vitiated by these causes. • May exist in varying proportions, without the thing ceasing to be
what it is.
DISCRETION OF COURTS • The following mistakes do not in any manner affect the validity of
 Courts are given a wide latitude in weighing the facts or circumstances in the contract:
a given case. 1. Error with respect to accidental qualities
 PROOF NECESSARY 2. Error in the value of the thing
• Defect or lack of valid consent must be established by full, clear, 3. Error which refers, not to the conditions of the thing, but to
and convincing evidence and not merely by preponderance accessory matters
thereof.  EFFECT OF INTENT
• The fact of error must be determined largely by its
Art. 1331. In order that mistake may invalidate consent, it should refer to the influence upon the party. If the party would have entered
substance of the thing which is the object of the contract, or to those into the contract even if he had knowledge of the true
conditions which have principally moved one or both parties to enter into the fact, then the error does not vitiate consent.
contract.
ERROR AS TO PERSON
Mistake as to the identity or qualifications of one of the parties will vitiate  An error in the name, without error as to person, will not invalidate the
consent only when such identity or qualifications have been the principal consent. An error as to the person will invalidate consent when the
cause of the contract. consideration of the person has been the principal cause of the same.
 Mistake as to qualifications, even when there is no error as to person, is a
A simple mistake of account shall give rise to its correction. (1266a) cause vitiating consent, if such qualifications have been the principal
cause of the contract.
CONCEPT OF ERROR  An error as to the person will generally invalidate consent in gratuitous
 Ignorance: Complete absence of any notion about a particular matter. contracts, because affection, relationship, friendship and gratitude are
 Error or mistake: A wrong or false notion about such matter. determining causes of the act of liberality.
 Juridically, ignorance and mistake produce the same effect.  It will also invalidate consent in onerous contracts where the artistic or
 The concept of error under this article must be included both ignorance intellectual qualifications, moral character or integrity, and other personal
and mistake. In both cases, there is a lack of full and correct knowledge qualities of a party are the determining cause of the consent of the other.
about the thing.  Where the identity of the other party is not material to the contract, an
error as to person will not vitiate consent.
MISTAKE OF FACT OR LAW  SOLVENCY OF THE PARTY
 Error referred to in this article is an error of fact, and not an error of law. • An error as to the solvency of the other party is not a cause of
 An error of law is not a ground for annulment of contracts. nullity.
 Supreme Court has held that excusable ignorance of law can be the  MOTIVE OF PARTY
basis of good faith possession. • A mistake as to the motive of a party does not affect the
contract.

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 • When motive has, however, been expressed and was a condition
of the consent given, annulment is proper, because an
accidental element is, by the will of the parties, converted into a
substantial element.
ERROR AS TO ACCOUNT
 An error of account is purely a mistake in computation; it is a
mathematical error.
 It does not vitiate consent, but the intention of the parties is to accept the
amounts or quantities involved as they should be and not as what they
were erroneously computed to be.
 ACCOUNT AND QUANTITY
• Mistake as to quantity: there is a real mistake with the principal
conditions and the contract is vitiated.
• Mistake as to account: mistake can be corrected.
 CORRECTION OF ACCOUNTS
• Once there has been a liquidation of accounts between two
parties, and the accounts have been approved by those
affected, no revision or correction of said accounts may be
made at the instance of only one party.
• EXCEPTION: Unless it is proven that there was fraud or error in the
approval of said accounts.
• The burden of proving such deceit or error lies upon the party
seeking the revision.
ERROR AS TO BASIS OF CONTRACT
 A mistake as to the existence of some circumstances or the occurrence of
some event, which exerted a determining influence in the creation of the
contract, so that the contract would not have been entered without it
constitutes an error in the basis of the contract.
ERROR AS TO ESTIMATES
 Mistakes in estimating the results of a contract cannot vitiate consent
unless they were induced by fraud or deceit.
ERROR IN UNILATERAL DECISION
 When the error of a party is not in relation to the contract, but in a
decision unilaterally adopted, he cannot demand responsibility from
persons whomay have acted according to his decision.
LIABILITY FOR ERROR
 There is no provision making the party in error liable for damages which
the other party may have suffered relying on his declaration. However,
such liability can be based on the theory of fault or negligence.
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Art. 1332. 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. (n)
FRAUD OR MISTAKE ALLEGED
 The obligations to show that the terms of the contract had been fully
explained to the party who is unable to read or understand the language
of the contract, when fraud or mistake is alleged, devolves on the party
seeking to enforce it.
Art. 1333. There is no mistake if the party alleging it knew the doubt,
contingency or risk affecting the object of the contract. (n)
INEXCUSABLE ERROR
 To invalidate consent, the error must be excusable. It must be a real error,
and not one that could have been avoided by the party alleging it.
 The error must arise from facts unknown to him. He cannot allege error
which refers to a fact known to him, or which he should have known by
ordinary diligent examination of the facts.
Art. 1334. Mutual error as to the legal effect of an agreement when the real
purpose of the parties is frustrated, may vitiate consent. (n)
ERROR OF LAW
 Mistake of law is traditionally considered as having a different effect from
mistake of fact in relation to consent in contracts.
 It is permissible to excuse errors of law, and an excusable mistake of law
may be invoked as vitiating consent.
 LEGAL EFFECTS OF CONTRACT
• Error is limited to error on the legal effect of an agreement.
• 3 REQUISITES:
1. The error must be as to the legal effect of an agreement.
2. It must be mutual
3. The real purpose of the parties is frustrated.
ERROR AS TO NATURE OF CONTRACT
 An error as to the nature or character of a contract is always essential,
and makes the act juridically inexistent.
Art. 1335. 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 o A threat to enforce one’s right cannot annul a contract
or ascendants, to give his consent. made by the debtor in relation to the claim sought to be
enforced.
To determine the degree of intimidation, the age, sex and condition of the o WHEN IMPROPER
person shall be borne in mind.  One who uses illegal means to attain a legal
objective, by infusing fear, is guilty of intimidation.
A threat to enforce one's claim through competent authority, if the claim is just  There is intimidation when a party goes beyond
or legal, does not vitiate consent. (1267a) legal channels or takes the law into his own
hands.
VIOLENCE AND INTIMIDATION DISTINGUISHED  The threat to enforce a right should not be aimed
at a result which is contrary to law or morals or
DURESS: degree of constraint or danger actually inflicted (violence) or which is unjust and contrary to good faith.
threatened and impending (intimidation), sufficient to overcome the mind  SERIOUS EVIL OR WRONG
and will of a person of ordinary firmness. • The seriousness of the wrong or evil threatened must be
considered objectively and subjectively; objectively, by
VIOLENCE INTIMIDATION determining the degree of harm that the evil in itself is likely to
Physical force or compulsion Moral force or compulsion produce, and subjectively by determining the effect of the threat
External Internal - Influences the mind to upon the mind of the victim in view of his personal circumstances
choose between to evils and his relation to the author of intimidation.
• IMMINENCE OF EVIL
REQUISITES OF VIOLENCE o To be imminent, it is not necessary that the evil should
1. That the physical force employed must be irresistible, or of such degree follow immediately upon the refusal to do the act
that the victim has no other course, under the circumstances, but to demanded. It is enough that there be real danger.
submit. • OBJECT OF EVIL
2. That such force is the determining cause in giving the consent to the o The threatened evil must fall upon the party himself, or
contract. upon his spouse, ascendants or descendants. This is not
restrictive. It can be directed to a brother, lover, or close
REQUISITES OF INTIMIDATION friend.
1. Intimidation must be the determining cause of the contract, or must have • NATURE OF INJURY
caused the consent to be given. o A threatened evil upon liberty or honor can have the
2. The threatened act must be unjust or unlawful same moral effect as that upon person or property.
3. The threat must be real and serious, there being an evident disproportion Hence, the term “person” should not be limited to life and
between the evil and the resistance which all men can offer, leading to physical integrity, but should include liberty and honor.
the choice of the contract as the lesser evil.  REASONABLE FEAR
4. It produces a reasonable and well-grounded fear from the fact that the • The fear occasioned by the threat must be reasonable and well-
person from whom it comes has the necessary means or ability to inflict the grounded; it must be commensurate with the threat.
threatened injury. • RESPECT AND OBEDIENCE
o If in addition to fear of displeasing a person to whom
 UNJUST ACT obedience and respect are due, there is an imposition
• The intimidation that will annul a contract has to do with evil or upon the will, then the consent will be vitiated.
hard arising from an unlawful act.  CAUSE OF CONSENT
• The threat must be unjust, contrary to law or morals. • It must be proved that the consent was obtained through
• ENFORCEMENT OF CLAIM intimidation; the fear must be the direct and determining cause
o One who makes use of his right even if this be unpleasant which compelled the consent to be given.
to another, juridically does not prejudice the latter. • If the intimidation was only incidental, the contract is not
annullable.

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  A contract of adhesion is one in which one of the parties imposes a ready-
MORAL COERCION made form of contract, which the other party may accept or reject, but
 When a person is in grave danger, and he is made to promise to pay a which the latter cannot modify.
certain amount if he is saved the person to whom the promise is made,  There is such economic inequality between the parties to these contracts
the contract is not avoided, because there is no intimidation which that the independence of one of them is entirely paralyzed.
causes consent to be given.  A contract of adhesion is construed strictly against the one who drew the
same.
Art. 1336. 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. Art. 1338. There is fraud when, through insidious words or machinations of one
(1268) of the contracting parties, the other is induced to enter into a contract which,
without them, he would not have agreed to. (1269)
DURESS BY THIRD PERSON
 Even if the intimidation or threat had been employed by a third person CONCEPT OF FRAUD
who was not a party to the contract, the agreement is still null and void.  Fraud is every kind of deception, for the purpose of leading another party
into error and thus execute a particular act.
Art. 1337. There is undue influence when a person takes improper advantage  Error of one party is produced by the bad faith of the other contracting
of his power over the will of another, depriving the latter of a reasonable party; it presupposes an illicit act.
freedom of choice. The following circumstances shall be considered: the  INSIDIOUS WORDS AND MACHINATIONS
confidential, family, spiritual and other relations between the parties, or the • Constitutes deceit, includes false promises, exaggeration of hopes
fact that the person alleged to have been unduly influenced was suffering or benefits, abuse of confidence, fictitious names, qualifications or
from mental weakness, or was ignorant or in financial distress. (n) authority.
• Forms of deception.
UNDUE INFLUENCE
 Any means employed upon a party which, under the circumstances, he KINDS OF FRAUD
could not well resist, and which controlled his colition and induced him to  Article 1171: Fraud occurs in connection with the fulfillment of the
give his consent to the contract, which otherwise he would not have obligation.
entered into.  Article 1338: Fraud is prior or simultaneous to the consent or the creation
 Influence obtained by persuasion or argument or by appeals to the of the obligation. It has two classes: Dolo Causante and Dolo Incidente.
affections is not prohibited.
DOLO CAUSANTE DOLO INCIDENTE
UNDUE INFULENCE INTIMIDATION That which determines or is the That which does not have such a
There need not be an unjust or There must be an unlawful or unjust essential cause of the consent. decisive influence but refers only to
unlawful act. act which is threatened and which some particular accident of the
causes consent to be given. obligation.
THERE IS MORAL COERCION Ground for annulment of contract Only gives rise to an action for
damages
 CIRCUMSTANCES TO CONSIDER
• It is essential to ascertain the power of coercion on the part of COMPARED WITH ERROR
one party, and the susceptibility to its influence on the part of the  The result of fraud is error on the part of the victim.
other.  Fraud and error causes nullity of consent.
 EMPLOYED BY THIRD PERSON  Error will vitiate consent only when it refers to the matters mentioned in Art
• Undue influence employed by a third person may annul the 1331.
contract.  Mistake induced by fraud will always vitiate consent.

CONTRACTS OF ADHESION REQUISITES OF FRAUD

1. It must have been employed by one contracting party upon the other;
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2. It must have induced the other party to enter into the contract;
3. It must have been serious;
4. It must have resulted in damage or injury to the party seeking annulment.
EFFECTS OF FRAUD
 Effects of Dolo Causante:
1. Nullity of the contract
2. Indemnification of damages
PROOF OF FRAUD
 The misrepresentation constituting the dolo causante must be alleged
and proved, otherwise, contracts cannot be annulled on this ground.
Art. 1339. Failure to disclose facts, when there is a duty to reveal them, as
when the parties are bound by confidential relations, constitutes fraud. (n)
CONCEALMENT AS FRAUD
 The deceit which avoids the contract need not be by means of
misrepresentation in words. It exists where the party who obtains consent
does so my means of concealing or omitting to state material facts, with
intent to deceive, by reason of which omission or concealment the other
party was induced to give a consent which he would not otherwise have
given.
 There must be a special duty to disclose or according to good faith and
the usages of commerce the communication should be made.
 INNOCENT NON-DISCLOSURE
• The innocent non-disclosure of a fact does not affect the
formation of the contract or operate to discharge the parties
from their agreement.
Art. 1340. The usual exaggerations in trade, when the other party had an
opportunity to know the facts, are not in themselves fraudulent. (n)
TOLERATED FRAUD
 Minimizing the defects of the thing, exaggeration of its good qualities, and
giving it qualities that it does not have.
 This is lawful misrepresentation known as dolus bonus.
 Do not affect the validity of the contract, so long as they do not go to the
extent of malice or bad faith.
 OPPORTUNITY TO KNOW
• Where the means of knowledge are at hand and equally
available to both parties one will not be heard to say that he has
been deceived.
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Art. 1341. 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.
(n)
EXPRESSION OF OPINION
 The refusal of a seller to warrant his estimate should admonish the
purchaser that that estimate was put forth as a mere opinion.
 MADE BY EXPERT
• An opinion of an expert is like a statement of a fact, and if false,
may be considered a fraud giving rise to annulment.
• When the expert however, was employed by the party who was
misled, he cannot ask for annulment, because he is chargeable
with the acts and declarations of his employee.
Art. 1342. Misrepresentation by a third person does not vitiate consent, unless
such misrepresentation has created substantial mistake and the same is
mutual. (n)
FRAUD BY THIRD PERSON
 The fraud employed by a third person upon one of the parties does not
vitiate consent. It merely gives rise to an action for damages by the party
injured against such third person.
 If one party is in collusion with the third person, or knows of the fraud by
the third person, and he is benefited, he maybe considered as an
accomplice and the contract becomes voidable. Complicity makes the
third person and the party who knew of the fraud liable solidarily.
 MUTUAL ERROR
• Deceit by a third person, even without connivance or complicity
with one of the contracting parties, may lead to error on the part
of the parties to the contract, in this case, the consent is vitiated,
and the contract may be annulled.
 COMPARED WITH VIOLENCE
• Contract is annulled even if such violence or intimidation is
exercised by a third person.
• In fraud, act of third person does not annul the contract, unless it
produces substantial mutual mistake on the part of both
contracting parties.
• 2 reasons to justify the difference:
o That the party has nothing to do with fraud by a third
person and cannot be blamed for it.
o Intimidation can be more easily resisted than fraud.
Art. 1343. Misrepresentation made in good faith is not fraudulent but may
constitute error. (n)
Art. 1344. In order that fraud may make a contract voidable, it should be  There is a color of contract, without any substance thereof, the parties not
serious and should not have been employed by both contracting parties. having any intention to be bound.
Incidental fraud only obliges the person employing it to pay damages. (1270)
RELATIVE SIMULATION
MAGNITUDE OF FRAUD  The parties have an agreement which they conceal under the guise of
 The deceit must be serious. The fraud is serious when it is sufficient to another contract.
impress, or to lead an ordinarily prudent person into error.  Two juridical acts involved here:
 If they are sufficiently effective to induce the other party to enter into the • OSTENSIBLE ACT: Apparent or fictitious; which is the contract that
contract, they are serious; otherwise, they are not. the parties pretend to have executed.
 In case of tolerated fraud, even if it is the determining cause of the • HIDDEN ACT: Real; which is the true agreement between the
consent, it cannot be a ground for annulment. parties. If the concealed or hidden act is lawful, it is enforceable
 DETERMINING CAUSE of the essential requisites are present.
• Fraud must be the determining cause of the contract.
• Fraud must be dolo causante. Art. 1346. An absolutely simulated or fictitious contract is void. A relative
simulation, when it does not prejudice a third person and is not intended for
FRAUD BY ONE PARTY TO ANOTHER any purpose contrary to law, morals, good customs, public order or public
 In order to be a ground for annulment of a contract, the fraud must be policy binds the parties to their real agreement. (n)
exercised by one party upon the other.
MUTUAL FRAUD ABSOLUTE SIMULATION
 When both parties use fraud reciprocally, neither one has an action  Nullity is based on want of true consent.
against the other and neither can ask for annulment.  It is generally fraudulent and for the purpose of injuring third persosn.
 RECOVERY UNDER CONTRACT
PLURALTY OF SUBJECTS • If the absolute simulation does not have an illicit purpose, the
 If one party contracts with several persons and one of the latter employs parties to the contract may prove the simulation in order to
fraud on the former and the fraud has caused substantial error, the injured recover whatever may have been given under such simulated
party can ask for annulment against all of them under the rules on error. act.
• But if it has an illegal object, Art 1411 and 1412 will apply.
DOLO INCIDENTE  DISTINGUISHED FROM FRAUDULENT ALIENATION
 When the fraud is not the determining cause of the contract, it only gives
rise to an action for damages, but not for annulment of the contract. ABSOLUTE SIMULATION FRAUDULENT ALIENATION
There is no existing contract There is a true and existing transfer
Art. 1345. Simulation of a contract may be absolute or relative. The former or contract
takes place when the parties do not intend to be bound at all; the latter, when Can be attacked by any creditor Can be assailed only by creditors
the parties conceal their true agreement. (n) before the alienation
The insolvency of the debtor making The action to rescind, or acion
DEFINITION OF SIMULATION the simulated transfer is not a pauliana, requires that the creditor
 It is the declaration of a fictitious will, deliberately made by agreement of prerequisite to the nullity of the cannot recover in any other
the parties, in order to produce, for the purposes of deception, the contract manner what is due him
appearance of a juridical act which does not exist or is different from that Does not prescribe Prescribes in 4 years
which was really executed.
 It involves a defect in declaration.  SIMULATION PRESUMED
 Absolutely simulated contracts are known as simulados. • Article 1602 presumes as equitable mortgage a contract of sale
 Relatively simulated contracts are disimulados. with right to repurchase under the circumstances mentioned in
said article.
ABSOLUTE SIMULATION
RELATIVE SIMULATION
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 It is valid EXCEPT when it prejudices third persons or has an illicit purpose.
 Its validity is based on the freedom of contract.
 If the concealed contract is lawful, it is absolutely enforceable as long as it
has all the essential requisites.
 When the purpose is illicit, or to prejudice a third person, the true contract
cannot be enforced. It would be void and inexistent.
EFFECT AS TO THIRD PERSONS
 A third person may avail himself of the conduct of the parties to the
simulated contract which is most favorable to himself.
 The simulated contract will therefore be binding if it is favorable to him to
consider it so.
 ACQUISITIONS OF TITLE
• The declaration that a contract is simulated destroys the title of a
third person who has acquired it in bad faith.
• If the third person, however, has acted in good faith, he is given
the protection of the law. The declaration that the contract is
simulated does not prejudice hime.
SECTION 2. - Object of Contracts
Art. 1347. All things which are not outside the commerce of men, including
future things, may be the object of a contract. All rights which are not
intransmissible may also be the object of contracts.
No contract may be entered into upon future inheritance except in cases
expressly authorized by law.
All services which are not contrary to law, morals, good customs, public order
or public policy may likewise be the object of a contract. (1271a)
Art. 1348. Impossible things or services cannot be the object of contracts.
(1272)
Art. 1349. The object of every contract must be determinate 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. (1273)
SECTION 3. - Cause of Contracts
Art. 1350. In onerous contracts the cause is understood to be, for each
contracting party, the prestation or promise of a thing or service by the other;
in remuneratory ones, the service or benefit which is remunerated; and in
contracts of pure beneficence, the mere liberality of the benefactor. (1274)
Art. 1351. The particular motives of the parties in entering into a contract are
different from the cause thereof. (n)
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Art. 1352. Contracts without cause, or with unlawful cause, produce no effect
whatever. The cause is unlawful if it is contrary to law, morals, good customs,
public order or public policy. (1275a)
Art. 1353. The statement of a false cause in contracts shall render them void, if
it should not be proved that they were founded upon another cause which is
true and lawful. (1276)
Art. 1354. Although the cause is not stated in the contract, it is presumed that it
exists and is lawful, unless the debtor proves the contrary. (1277)
Art. 1355. Except in cases specified by law, lesion or inadequacy of cause
shall not invalidate a contract, unless there has been fraud, mistake or undue
influence. (n)
CHAPTER 3 FORM OF CONTRACTS
Art. 1356. Contracts shall be obligatory, in whatever form they may have been
entered into, provided all the essential requisites for their validity are present.
However, when the law requires that a contract be in some form in order that it
may be valid or enforceable, or that a contract be proved in a certain way,
that requirement is absolute and indispensable. In such cases, the right of the
parties stated in the following article cannot be exercised. (1278a)
Art. 1357. If the law requires a document or other special form, as in the acts
and contracts enumerated in the following article, the contracting parties may
compel each other to observe that form, once the contract has been
perfected. This right may be exercised simultaneously with the action upon the
contract. (1279a)
Art. 1358. The following must appear in a public document:
(1) Acts and contracts which have for their object the creation, transmission,
modification or extinguishment of real rights over immovable property; sales of
real property or of an interest therein a 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.
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. (1280a)
CHAPTER 4 REFORMATION OF INSTRUMENTS (n)
Art. 1359. When, there having been a meeting of the minds of the parties to a
contract, their true intention is not expressed in the instrument purporting to
embody the agreement, by reason of mistake, fraud, inequitable conduct or
accident, one of the parties may ask for the reformation of the instrument to
the end that such true intention may be expressed.
If mistake, fraud, inequitable conduct, or accident has prevented a meeting of
the minds of the parties, the proper remedy is not reformation of the instrument
but annulment of the contract.
Art. 1360. 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.
Art. 1361. When a mutual mistake of the parties causes the failure of the
instrument to disclose their real agreement, said instrument may be reformed.
Art. 1362. 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.
Art. 1363. 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.
Art. 1364. 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.
Art. 1365. 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.
Art. 1366. 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.
Art. 1367. When one of the parties has brought an action to enforce the
instrument, he cannot subsequently ask for its reformation.
Art. 1368. 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.
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Art. 1369. The procedure for the reformation of instrument shall be governed by
rules of court to be promulgated by the Supreme Court.
CHAPTER 5 INTERPRETATION OF CONTRACTS
Art. 1370. If the terms of a contract are clear and leave no doubt upon the
intention of the contracting parties, the literal meaning of its stipulations shall
control.
If the words appear to be contrary to the evident intention of the parties, the
latter shall prevail over the former. (1281)
Art. 1371. In order to judge the intention of the contracting parties, their
contemporaneous and subsequent acts shall be principally considered.
(1282)
Art. 1372. 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. (1283)
Art. 1373. 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. (1284)
Art. 1374. 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. (1285)
Art. 1375. Words which may have different significations shall be understood in
that which is most in keeping with the nature and object of the contract. (1286)
Art. 1376. 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. (1287)
Art. 1377. The interpretation of obscure words or stipulations in a contract shall
not favor the party who caused the obscurity. (1288)
Art. 1378. 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. (1289)
Art. 1379. The principles of interpretation stated in Rule 123 of the Rules of Court
shall likewise be observed in the construction of contracts. (n)
CHAPTER 6 RESCISSIBLE CONTRACTS
Art. 1380. Contracts validly agreed upon may be rescinded in the cases
established by law. (1290)
Art. 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) 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.
(1291a)
Art. 1382. Payments made in a state of insolvency for obligations to whose
fulfillment the debtor could not be compelled at the time they were effected,
are also rescissible. (1292)
Art. 1383. The action for rescission is subsidiary; it cannot be instituted except
when the party suffering damage has no other legal means to obtain
reparation for the same. (1294)
Art. 1384. Rescission shall be only to the extent necessary to cover the
damages caused. (n)
Art. 1385. Rescission creates the obligation to return the things which were the
object of the contract, together with their fruits, and the price with its interest;
consequently, it can be carried out only when he who demands rescission
can return whatever he may be obliged to restore.
Neither shall rescission take place when the things which are the object of the
contract are legally in the possession of third persons who did not act in bad
faith.
In this case, indemnity for damages may be demanded from the person
causing the loss. (1295)
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Art. 1386. Rescission referred to in Nos. 1 and 2 of Article 1381 shall not take
place with respect to contracts approved by the courts. (1296a)
Art. 1387. All contracts by virtue of which the debtor alienates property by
gratuitous title are presumed to have been entered into in fraud of creditors,
when the donor did not reserve sufficient property to pay all debts contracted
before the donation.
Alienations by onerous title are also presumed fraudulent when made by
persons against whom some judgment has been issued. The decision or
attachment need not refer to the property alienated, and need not have been
obtained by the party seeking the rescission.
In addition to these presumptions, the design to defraud creditors may be
proved in any other manner recognized by the law of evidence. (1297a)
Art. 1388. Whoever acquires in bad faith the things alienated in fraud of
creditors, shall indemnify the latter for damages suffered by them on account
of the alienation, whenever, due to any cause, it should be impossible for him
to return them.
If there are two or more alienations, the first acquirer shall be liable first, and so
on successively. (1298a)
Art. 1389. The action to claim rescission must be commenced within four years.
For persons under guardianship and for absentees, the period of four years
shall not begin until the termination of the former's incapacity, or until the
domicile of the latter is known. (1299)
CHAPTER 7 VOIDABLE CONTRACTS
Art. 1390. The following contracts are voidable or annullable, even though
there may have been no damage to the contracting parties:
(1) Those where one of the parties is incapable of giving 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. (n)
Art. 1391. The action for annulment shall be brought within four years. This
period shall begin:
In cases of intimidation, violence or undue influence, from the time the defect
of the consent ceases.
In case of mistake or fraud, from the time of the discovery of the same.
And when the action refers to contracts entered into by minors or other
incapacitated persons, from the time the guardianship ceases. (1301a)
Art. 1392. Ratification extinguishes the action to annul a voidable contract.
(1309a)
Art. 1393. Ratification may be effected expressly or tacitly. It is understood that
there is a tacit ratification if, with knowledge of the reason which renders the
contract voidable and such reason having ceased, the person who has a right
to invoke it should execute an act which necessarily implies an intention to
waive his right. (1311a)
Art. 1394. Ratification may be effected by the guardian of the incapacitated
person. (n)
Art. 1395. Ratification does not require the conformity of the contracting party
who has no right to bring the action for annulment. (1312)
Art. 1396. Ratification cleanses the contract from all its defects from the
moment it was constituted. (1313)
Art. 1397. The action for the annulment of contracts may be instituted by all
who are thereby obliged principally or subsidiarily. However, persons who are
capable cannot allege the incapacity of those with whom they contracted;
nor can those who exerted intimidation, violence, or undue influence, or
employed fraud, or caused mistake base their action upon these flaws of the
contract. (1302a)
Art. 1398. An obligation having been annulled, the contracting parties shall
restore to each other the things which have been the subject matter of the
contract, with their fruits, and the price with its interest, except in cases
provided by law.
In obligations to render service, the value thereof shall be the basis for
damages. (1303a)
Art. 1399. When the defect of the contract consists in the incapacity of one of
the parties, the incapacitated person is not obliged to make any restitution
except insofar as he has been benefited by the thing or price received by
him. (1304)
Art. 1400. Whenever the person obliged by the decree of annulment to return
the thing can not do so because it has been lost through his fault, he shall
return the fruits received and the value of the thing at the time of the loss, with
interest from the same date. (1307a)
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Art. 1401. The action for annulment of contracts shall be extinguished when the
thing which is the object thereof is lost through the fraud or fault of the person
who has a right to institute the proceedings.
If the right of action is based upon the incapacity of any one of the
contracting parties, the loss of the thing shall not be an obstacle to the
success of the action, unless said loss took place through the fraud or fault of
the plaintiff. (1314a)
Art. 1402. As long as one of the contracting parties does not restore what in
virtue of the decree of annulment he is bound to return, the other cannot be
compelled to comply with what is incumbent upon him. (1308)
CHAPTER 8 UNENFORCEABLE CONTRACTS (n)
Art. 1403. The following contracts are unenforceable, unless they are ratified:
(1) Those entered into in the name of another person by one who has been
given no authority or legal representation, or who has acted beyond his
powers;
(2) Those that do not comply with the Statute of Frauds as set forth in this
number. In the following cases an agreement 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 of 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.
Art. 1404. Unauthorized contracts are governed by Article 1317 and the
principles of agency in Title X of this Book.
Art. 1405. Contracts infringing the Statute of Frauds, referred to in No. 2 of
Article 1403, are ratified by the failure to object to the presentation of oral
evidence to prove the same, or by the acceptance of benefit under them.
Art. 1406. When a contract is enforceable under the Statute of Frauds, and a
public document is necessary for its registration in the Registry of Deeds, the
parties may avail themselves of the right under Article 1357.
Art. 1407. In a contract where both parties are incapable of giving consent,
express or implied ratification by the parent, or guardian, as the case may be,
of one of the contracting parties shall give the contract the same effect as if
only one of them were incapacitated.
If ratification is made by the parents or guardians, as the case may be, of both
contracting parties, the contract shall be validated from the inception.
Art. 1408. Unenforceable contracts cannot be assailed by third persons.
CHAPTER 9
VOID AND INEXISTENT CONTRACTS
Art. 1409. The following contracts are inexistent and void from the beginning:
(1) Those whose cause, object or purpose is contrary to law, morals, good
customs, public order or public policy;
(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.
These contracts cannot be ratified. Neither can the right to set up the defense
of illegality be waived.
Art. 1410. The action or defense for the declaration of the inexistence of a
contract does not prescribe.
Art. 1411. When the nullity proceeds from the illegality of the cause or object of
the contract, and the act constitutes a criminal offense, both parties being in
pari delicto, they shall have no action against each other, and both shall be
prosecuted. Moreover, the provisions of the Penal Code relative to the
disposal of effects or instruments of a crime shall be applicable to the things or
the price of the contract.
This rule shall be applicable when only one of the parties is guilty; but the
innocent one may claim what he has given, and shall not be bound to comply
with his promise. (1305)
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Art. 1412. If the act in which the unlawful or forbidden cause consists does not
constitute a criminal offense, the following rules shall be observed:
(1) When the fault is on the part of both contracting parties, neither may
recover what he has given by virtue of the contract, or demand the
performance of the other's undertaking;
(2) When only one of the contracting parties is at fault, he cannot recover
what he has given by reason of the contract, or ask for the fulfillment of what
has been promised him. The other, who is not at fault, may demand the return
of what he has given without any obligation to comply his promise. (1306)
Art. 1413. Interest paid in excess of the interest allowed by the usury laws may
be recovered by the debtor, with interest thereon from the date of the
payment.
Art. 1414. When money is paid or property delivered for an illegal purpose, the
contract may be repudiated by one of the parties before the purpose has
been accomplished, or before any damage has been caused to a third
person. In such case, the courts may, if the public interest will thus be
subserved, allow the party repudiating the contract to recover the money or
property.
Art. 1415. Where one of the parties to an illegal contract is incapable of giving
consent, the courts may, if the interest of justice so demands allow recovery of
money or property delivered by the incapacitated person.
Art. 1416. When the agreement is not illegal per se but is merely prohibited,
and the prohibition by the law is designated for the protection of the plaintiff,
he may, if public policy is thereby enhanced, recover what he has paid or
delivered.
Art. 1417. When the price of any article or commodity is determined by statute,
or by authority of law, any person paying any amount in excess of the
maximum price allowed may recover such excess.
Art. 1418. When the law fixes, or authorizes the fixing of the maximum number
of hours of labor, and a contract is entered into whereby a laborer undertakes
to work longer than the maximum thus fixed, he may demand additional
compensation for service rendered beyond the time limit.
Art. 1419. When the law sets, or authorizes the setting of a minimum wage for
laborers, and a contract is agreed upon by which a laborer accepts a lower
wage, he shall be entitled to recover the deficiency.
Art. 1420. In case of a divisible contract, if the illegal terms can be separated
from the legal ones, the latter may be enforced.
Art. 1421. The defense of illegality of contract is not available to third persons
whose interests are not directly affected.
Art. 1422. A contract which is the direct result of a previous illegal contract, is
also void and inexistent.

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